ERASE, Currency Crisis, Inflation and Currency Devaluation, Economic Update

Lebanese Pound Temporary Stability Amidst Concerns over Central Bank Leadership

12:03 | 30 April 2023LIMS output
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Lebanese Pound Temporary Stability Amidst Concerns over Central Bank Leadership

In a surprising turn of events, the Lebanese pound (LBP) witnessed an unexpected appreciation in late March, strengthening from 140,000 LBP to the US dollar to 94,000 LBP to the dollar by April 5. Exchange rate stability around 95,000 LBP lasted longer than previous instances as April progressed. Meanwhile, concerns emerged regarding the leadership vacuum at the head of the central bank, given that the current governor’s term is set to end in July 2023, and the challenges surrounding the appointment of a new governor ahead of the presidential elections.

LIMS provided insights into the factors contributing to the local currency’s appreciation. It attributed the appreciation to a reduction in the money supply, with the total LBP in circulation decreasing from around 83 trillion in early 2023 to 65 trillion in April. To bolster the pound, the central bank injected dollars into the market and repurchased Lebanese pounds. However, this approach, while providing short-term stability, comes at the expense of depositors, as the dollars used for the repurchase represent the remaining funds of depositors, placed by the banks at the central bank. Such a move risks exacerbating the overall banking crisis, as it depletes available dollars and leaves fewer resources for future interventions. To prevent further depreciation and loss in foreign exchange reserves, it is imperative to cease the printing of LBPs.

LIMS further warned that the current exchange rate stability is transitory as the government will end up borrowing LBPs from the central bank to finance the budget deficit, particularly in light of the decision to increase wages fourfold. Another factor that could contribute to future devaluation is the decision to print higher denomination currency notes. LIMS highlighted that the current hyperinflationary environment has rendered many circulating denominations more expensive to produce than their actual value. This situation makes printing money a losing operation. However, the plan to introduce new banknotes with additional zeros would unleash the ability to increase money supply even further.

Regardless of the identity of the incoming central bank governor, LIMS emphasized that the primary priority should be to halt the expansion of the money supply to prevent a further collapse in the value of the Lebanese pound. Concurrently, it is crucial to safeguard and prevent any further depletion of foreign currency reserves. The continuous intervention by the central bank, printing LBP then buying it back with foreign exchange reserves must come to an end. A more sustainable approach would involve halting the printing altogether and adopting policies that address the root causes of the crisis.

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