Lebanese Lira: Is it Time for a New Exchange Regime?

The Lebanese Lira has lost 98% of its value since the start of economic meltdown in Lebanon. A virtually useless currency that no longer functions as a currency, it doesn’t have much of a future. Financial expert Mike Azar believes the damage is irreparable. With this in mind, the question is, should Lebanon give up on monetary sovereignty and adopt a hard peg, like dollarization or a currency board?

Many believe that dollarization with a stable currency would bring the confidence of the economic agents back to Lebanon, and it would attract investment and capital. But, it is vital to accompany dollarization with a reform plan that includes complete restructuring of the banking system since this policy will force the banks to recognize bankruptcy once their balance sheets are dollarized. In Ecuador, 20 banks had to close when a similar policy was implemented.

Another form of hard pegs is currency boards or fixed exchange regimes that require a new Lebanese currency to be created and pegged at a fixed exchange rate. Nikolay Nenovsky, one of the architects of the currency board in Bulgaria, pressed for a Lebanese version during a Lefmi organised webinar. Hard pegs, though, are not without their challenges. For the system to work, Lebanon would need to find a stable inflow of dollars. And the central bank can no longer print money to finance government deficits. This requires strict budgetary rigor that affects the entire economy.

Lebanese banks’ foreign currency liabilities are listed in Lebanese Lira, forcing them to liquidate their debts slowly by converting them into the Lira from US dollars. The government’s excessive money printing contributes to debasing the Lira and a rampant dollarization with a disastrous socio-economic cost. Workers whose incomes are in Lira have become excluded from the socio-economic tissue of restaurants, shopping malls, big hospitals and touristic venues in favor of USD holders.

Lebanon needs a new exchange rate regime to put an end to the current chaos. The options are a hard peg that includes dollarization where the Lira is entirely replaced by the Greenback, or a currency board with the introduction of a new national currency guaranteed by foreign exchange reserves. Although giving up on the national currency and monetary sovereignty is never ideal, it may be inevitable. Experts agree that it requires political will, but there seems to be very little incentive for the ruling elite to change the current system.

In summary, Lebanon’s crisis has become a deliberate crisis, and it seems that no matter what exchange regime is adopted, it requires restructuring and reform to achieve sustainability in the public finances or financial system.