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

Lebanese Central Bank Drains Valuable Foreign Exchange Reserves

15:27 | 30 June 2022LIMS output
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Lebanese Central Bank Drains Valuable Foreign Exchange Reserves

In late May, the Lebanese pound (LBP) devaluation reached a record high, leading the central bank to vigorously inject US dollars in the market using Circular 161. Circular 161 allows people to convert a certain amount of Lebanese pounds into US dollars at a preferential exchange rate set by the central bank on Sayrafa platform. In mid-June, the central bank also renewed Circular 158 for an additional year. Circular 158 is an exception to the de-facto capital controls imposed on US dollar accounts deposited at Lebanese banks before November 2019—also called “old dollars”. It allows people who have “old dollars” at the banks, to withdraw $400 in US dollars, not in LBP.

LIMS explained that the two circulars are tools used by the central bank to inject US dollars into circulation in a bid to reduce the exchange rate volatility when sharp swings occur. Yet draining foreign exchange reserves in this managed float arrangement will not reverse the continuous LBP devaluation trend for three reasons: (1) Lebanon has been suffering from a negative economic growth for the third consecutive year; (2) the central bank has continued to finance fiscal deficit and bank withdrawals; and (3) the population has lost all confidence in the local currency. Draining foreign exchange reserves may stabilize the currency in the short run, but will lead to severe problems down the road, since it reduces the LBP coverage in foreign currencies. Therefore, the central bank should stop the discretionary interference in the foreign exchange market and switch to a new monetary arrangement namely, a full dollarization or a currency board. 

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  • Why Renew Central Bank Circular 158? June 24,2022: Al Jadeed, TV Interview AR
  • About The Dollar’s Price And Its “Madness”…. Economist Patrick Mardini For LebTalks: Expect To See Continuous Devaluation, Due To Draining Dollars Covering The Market, June 6,2022: Leb Talks, Article AR
  • Who’s Manipulating The Exchange Rate?  June 3,2022: Free Lebanon, Radio Interview AR
  • How Does The Lebanese Citizen Apply The Law In A Country That Does Not Apply Them? June 6,2022: OTV, TV Interview AR