The Lebanese pound (LBP), pegged for over 22 years at an exchange rate of 1,500 LBP to the dollar, hit an all-time low of 33,000 LBP to the dollar on January 11. Shortly afterwards, the central bank introduced Basic Circular 161. Circular 161 has allowed the banks, and by extension, the Lebanese people, to exchange LBPs into US dollars without a cap at the 20,000 LBP rate using the central bank’s exchange platform called Sayrafa. This move not only managed to strengthen the Lebanese pound, but also stabilized it at 20,000 LBP to the dollar throughout February.

LIMS explained that the central bank’s intervention is meant to unify the black-market rate with the Sayrafa platform rate, to give the impression that the numbers from the 2022 government budget reflect reality. Exchange rate stability is also devised to facilitate negotiations with the IMF. LIMS highlighted the inability of this policy to anchor expectations. Consumer prices did not go down with the exchange rate, because businesses have no trust that the new level is sustainable and expect more depreciation in the nearby future. Foreign exchange reserves are in fact diminishing, thus leaving less room for the pursuit of this policy.

LIMS expects the extension of Circular 161 until May at the very least, to sidestep a potential social and economic meltdown on the eve of parliamentary elections. Subsequently, the exchange rate is bound to plummet again by the end of the year for 2 main reasons: (1) a 7 trillion LBP budget deficit that will be covered through money supply and inflation, as Lebanon lost access to financial markets, and (2) the plan to partly convert US dollar deposits stuck in the banks to LBPs, to reduce their bank’s losses.

LIMS reiterated that the ongoing managed float exchange rate regime is not suitable for countries plagued by political instability, security issues, and irresponsible monetary and fiscal authorities like Lebanon. Circular 161 shed light on the benefits of a full dollarization and showed that low-income individuals are the main beneficiaries of a currency substitution. LIMS stated that a full dollarization or a currency board would protect employees’ salaries from devaluation, and would make economic calculations easier for businesses, as well as paving the way for more transparent pricing. Prolonging the managed float, however, will only serve to erode what remains of people’s purchasing power and to throw them into the pits of poverty and hunger.

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