The impending conclusion of Riad Salameh’s tenure as the governor of Banque du Liban—the country’s central bank—marks a significant juncture for Lebanon’s ailing economy. Having held the position for three decades and garnering accolades in the past, Salameh now finds himself under siege from various quarters. Widely regarded as a primary culprit behind the prevailing banking and economic crisis, he stands accused of employing intricate financial engineering maneuvers to conceal a Ponzi scheme, whereby he persuaded banks to deposit their clients’ funds with the central bank, only for those funds to subsequently disappear. Furthermore, allegations of personally benefiting from certain money laundering operations tied to commissions generated from the sale of government securities have further tarnished Salameh’s reputation. Nonetheless, the closing months of Salameh’s mandate have witnessed a stability for the Lebanese pound exchange rate hovering around 93,000 Lebanese pounds (LBP) to the US dollar after three years of incessant devaluation.

According to LIMS, the present stability owes itself to the central bank’s reduction of the Lebanese pounds in circulation to below 70 trillion, down from over 84 trillion at the commencement of the year. This reduction in money supply was achieved through the central bank’s acquisition of LBP from the markets, further depleting its USD reserves in the process. However, LIMS posits that the growth of the money supply is expected to accelerate, resulting in further devaluation of the LBP for two key reasons. Firstly, the quantity of foreign exchange reserves remains limited, constraining the central bank’s ability to intervene. Secondly, the surge in public sector employees’ salaries lacks sufficient revenue backing, leading the government to resort to borrowing from the central bank. Such borrowing would only perpetuate the harmful wage-price spiral.

LIMS underscored the potential escalation of pressure and erosion of confidence in the Lebanese pound should uncertainties on the future of transitioning to a new central bank governor remain. The incoming governor must inspire trust in their capacity to curtail the unrestrained printing of Lebanese pounds and restrict the central bank’s funding of the fiscal deficit. Financing the salary increments of the public sector by expanding the money supply will merely perpetuate the detrimental wage-price spiral, exacerbating the country’s economic woes.

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