ERASE, Debt Crisis, Currency Crisis, Public Debt, Economic Update, Currency Board and Dollarization

Lebanon’s Twin Deficits Revives the Case for a Currency Board

15:56 | 30 June 2026LIMS output
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currency board

Lebanon’s economic indicators for 2026 point to the re-emergence of twin deficits, both in the public finances and the balance of payments, reversing the monthly surpluses recorded throughout 2025 and raising fresh concerns about macroeconomic stability.

According to LIMS, the fiscal deterioration reflects higher government spending linked to the recent conflict, including reconstruction in damaged areas and support for displaced populations, alongside weaker economic activity that has reduced tax revenues. At the same time, the conflict in the Strait of Hormuz has pushed up import costs through higher shipping costs, insurance premiums, and fuel prices while dampening financial inflows from Gulf countries, contributing to a widening external deficit.

LIMS argues that the return of Lebanon’s twin deficits exposes the structural weaknesses that precipitated the country’s 2019 financial collapse. Persistent fiscal and external imbalances depleted foreign exchange reserves, undermined confidence in the Lebanese pound and ultimately triggered a severe currency depreciation. Without institutional safeguards, the same dynamics could re-emerge.

For LIMS, the appropriate safeguard is the establishment of a currency board. Unlike a conventional central bank, a currency board is legally required to maintain 100 per cent foreign currency backing for every unit of domestic currency in circulation at a fixed exchange rate. This arrangement effectively eliminates the risk of currency devaluation.

Equally important, a currency board prevents governments from financing deficits by drawing on the foreign reserves backing the currency. By placing those reserves beyond the reach of fiscal authorities, it protects the banking system from the emergence of another financial gap, one of the defining failures of Lebanon’s crisis, when central bank reserves were used to finance public spending and subsidise imports at the expense of depositors.

While restoring fiscal discipline remains indispensable, a currency board imposes a hard budget constraint, preventing monetary financing of government deficits and anchoring confidence in the national currency.

  • War Costs Bring the Twin Deficit Back Into the Economic Picture. June 15, 2026: Aljadeed, Video interview (AR)