Lebanese Pound: A Fragile Stability Dependent on Central Bank’s Policies

Stability

Lebanon has witnessed more than a year of relative monetary stability, with the exchange rate holding steady at around 90,000 Lebanese pounds to the dollar, despite the country’s deepening economic crises, heightened tensions in the south, and concerns over a potential expansion of regional conflict.

According to LIMS, this monetary stability is largely attributable to the central bank’s stringent monetary policy, particularly its refusal to extend credit to the government in either Lebanese pounds or US dollars. By sharply reducing the money supply from over 80 trillion Lebanese pounds to an estimated 55-60 trillion pounds, the central bank has played a pivotal role in curbing inflationary pressures and maintaining exchange rate stability. This carefully managed monetary environment is expected to persist as long as the central bank continues to keep the money supply within these limits.

However, LIMS has cautioned that this stability is fragile and could be undermined if the Lebanese government reverts to relying on central bank financing. Should the government seek to increase public sector salaries, fund wage hikes, or finance fuel imports through the central bank, it may be forced to print additional money. This would likely trigger inflation and a subsequent depreciation of the Lebanese pound, or alternatively, it could lead to a depletion of foreign currency reserves, exacerbating the country’s financial crisis.

The warnings from LIMS underscore the delicate balance that currently exists in Lebanon’s monetary landscape, where any shift in fiscal policy could have severe repercussions. As the country navigates its ongoing crises, the central bank’s commitment to maintaining a tight monetary policy remains crucial to preventing further economic destabilization.

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