The war has exerted significant pressure on Lebanon’s fiscal and monetary landscape, with growing calls for government intervention to address the escalating crisis caused by displacement and widespread destruction. While inflation is on the rise, the currency remains stable and Lebanon’s government bonds have seen a surprising uptick, rising from 6.5 to nearly 9 cents on the dollar.

Despite this recent increase, LIMS cautioned that the bond rally may be driven more by speculation than by any real economic recovery. While investors may be hopeful for a turnaround, it remains uncertain whether this optimism will endure. The future of Lebanon’s bonds hinges largely on the inevitable debt restructuring.

LIMS also opposed using foreign exchange reserves or expanding the monetary base under the guise of aiding the displaced. The relative stability of the Lebanese pound can be preserved, provided the Central Bank refrains from financing government expenditures through money printing. Should the Central Bank resort to printing currency to cover budget deficits, it would trigger an immediate devaluation of the pound. Even a drain on foreign exchange reserves would delay the devaluation, but it would still occur, with particularly severe consequences for the displaced population. Their livelihoods, already strained by displacement, would be further undermined by soaring inflation.

LIMS contended that the current mild inflation is largely driven by the increasing cost of maritime transportation as the economy adjusts to the geopolitical pressures in the red sea. LIMS strongly advises against reintroducing price controls to combat inflation. Drawing on lessons from the 2021 subsidies program, when price controls led to shortages and worsened inflation, LIMS warned that such measures would exacerbate the scarcity of essentials and hinder economic recovery. Rather than trying to control prices artificially, the government and central bank must focus on maintaining currency stability through sound monetary policies during this time of crisis.

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