Official full dollarization is the main monetary crisis exit key for Lebanon - by Pr. Siham Rizkallah (University Saint Joseph – Beirut – Faculty of Economic Sciences)
Since 2019, Lebanon has experienced a multi-dimensional collapse of its economy marked by the budgetary-monetary-banking crisis. The section explored in this article concerns the liquidity crisis, particularly in foreign currencies, in a highly importing and highly dollarized economy, where partial and unofficial dollarization since the crisis of the 1980s has made any stabilization based on the money supply and led to the current exchange rate peg regime.
During an international webinar organized in March 2023 by the “Laboratory of Economics, Finance Management and Innovation” (LEFMI), UR 4286 UPJV in collaboration with the Interdisciplinary Seminar of Economic History (SIHE) as an international two-way conference, Professor Jean-François PONSOT (from Grenoble University of the Alps) and I, as Associate Professor at Saint Joseph University in Beirut, presented a paper showing alternatives to the fall of the exchange rate peg regime in Lebanon (soft Peg LBP/USD) emphasizing the priority of the transition to the Hard Peg regime (Currency Board or Full Official Dollarization). We had even predicted that the Dual Currency which reigns on the Lebanese market would lead to a creeping dollarization leading to an almost full unofficial Dollarization when the exchange rate would be around 100,000 LBP/USD with a possibility of then tapping all liquidity in LBP on the market and to cover the Monetary Base with nearly 5 billion USD on condition of accompanying it with capital controls to limit the tendency of withdrawals of all deposits converted into “Fresh Dollars/Fresh Dollars”. USD) at the reference rate which will be retained after a free floating of the exchange rate for at least one month. This constitutes a strategic step in the mechanism of Professor Hausmann (from Harvard University) who recently published a detailed study with several economist researchers from the Harvard Laboratory leading to the same results of our prior studies on the irreversibility of Dollarization in Lebanon. Knowing that this irreversibility of Dollarization in Lebanon was already foreseen in an IMF publication by Muller (1994).
The Lebanese economy sought to achieve at the same time the three pillars of the triangle of incompatibilities: through perfect capital mobility, a fixed exchange rate and an announcement of independence of the monetary policy of the Central Bank which was impossible in practical given on the one hand the continued recourse of public authorities to financing from the Central Bank (whether by direct advances or by purchase of Treasury Bonds and Eurobonds by the BDL) and given on the other hand the dollarization constraint which required of the Central Bank the adoption of an exchange rate anchor regime which required its continuous intervention in the foreign exchange market by drawing on its foreign currency reserves requiring a continuous surplus of the Bank of Payments to be able to bail them out...
Indeed, until before the 1975-1990 war in Lebanon, at the end of 1974, foreign currency deposits (823 million USD) did not exceed 18% of the country's total monetary mass and were significantly lower than the external foreign currency assets of the banking system ($2.11 billion). This means that the majority of foreign currencies entering Lebanon were transformed into Lebanese pounds (LBP), leading to the appreciation of the national currency.
From the outbreak of the civil war in 1975, conversions of USD into LBP gradually decreased, eventually reversing with the triggering of the process of partial unofficial dollarization resulting from the free choice of the private sector following the sharp deterioration of national currency purchasing power. During the monetary crisis of the 1980s, especially with the hyperinflation of 1987 followed by the sharp depreciation of the LBP against the USD, the peak of which was reached in 1992. The increase in deposits in currencies roughly followed the balance of payments surplus to reach, at the end of 1992, 63% of the total money supply. During this period, the USD began to replace the LBP with its three functions: unit of account, intermediary of exchanges and store of value. The exchange rate, which before the war was 3 LBP/USD, rose to more than 2,850 LBP/USD at the end of 1992.
From 1993, Lebanon abandoned the free floating exchange rate regime to adopt a crawling peg regime from 1993 to 1997, making it possible to gradually reduce the exchange rate until the application of the conventional peg to one currency regime linking the LBP to the USD at the rate of 1501-1514 with a median rate of 1507.5 from 1997.
At the same time, since 1993 the growth gap between foreign currency deposits and the external assets of the banking system has started to gradually widen. In an attempt to regain confidence in the LBP, the BDL then undertook a policy of stabilizing its value, but which had the perverse effect of generalizing the use of the dollar in internal payments, especially after the creation of a chamber clearing of checks in USD and permission to fill automatic teller machines (ATM) with USD notes. Currency then ensures the third function of all money which is to be an instrument of exchange. This trend is accentuated with the fixing of the exchange rate at 1507.5 LL from the end of 1997. From then on, payments in dollars are made not only by means of payment cards or checks drawn on deposits, but also using banknotes. In addition to the automatic conversion operations of the LBP into USD, the use of currency as a payment instrument has developed the granting by banks to the private sector of credits denominated in USD for the internal market, which are at their turn sources of monetary creation by “credit multiplier”…
This situation was maintained as long as the balance of payments was in surplus, that is to say until 2011, from which the balance of payments began to record an accumulation of deficits (except in 2016 and 2017 due to " Financial engineering” which made it possible to attract capital in USD from abroad to invest it in eurobonds and certificates of deposit in USD at the BDL).
From 2011, the gap widened in an accentuated manner like a “funnel effect” between deposits in USD which increased at an accelerated rate and the external assets of the banking system which began to decline, gradually reducing the capacity to satisfy all requests to withdraw customer deposits in foreign currencies in 2019, which highlighted the collapse of the 2019 system, knowing that the BDL cannot print dollars to supply the banks and started knowing a depletion of its foreign currency reserves (due to the continued intervention on the exchange market to preserve the anchoring of the exchange rate, its involvement in the financing of the State whether through Eurobonds or the continued financing of the purchase of fuel for electricity or to secure dollars for various imports at the official exchange rate.
It remains to be said that the empirical experiences of transition to “Hard peg” (full dollarization in Ecuador, currency board in Bulgaria, etc.) took place when the foreign currency reserves of the Central Bank were no longer sufficient to cover only 6 months of imports. … Currently, the BDL announces that the remaining foreign currency reserves in its balance sheet no longer exceed 9 billion USD, which is exactly equivalent to 6 months of imports… Dollarization has already become almost complete unofficially, all that remains is to officially recognize it.
*Professor Siham RIZKALLAH (Professor at Saint Joseph University-Faculty of Scientists)
For more information on this subject see my links:
My interview with the French newspaper Les Echos:
https://www.lesechos.fr/finance-marches/marches-financiers/le-dollar-ses...
My interview with The National News
https://www.thenationalnews.com/mena/lebanon/2023/10/31/lebanese-currenc...
My interview to L’Orient Today
https://today.lorientlejour.com/article/1355397/why-has-the-lira-remaine...
My scientific article in the International Review of French-Language Economists: The independence of the BDL and the determinants of the economic crisis in Lebanon.
Siham Rizkallah (2022)
International journal of French-speaking economists – RIELF
https://rielf.aielf.org/wp-content/uploads/2023/02/RIELF-2-2022-ibuk-cal...
My interview with the newspaper Le Figaro
https://www.lefigaro.fr/conjoncture/l-etonnant-boom-touristique-dans-un-...
My article in the Revue de la Défense Nationale:
https://www.lebarmy.gov.lb/fr/content/quelles-alternatives-%3F-l%E2%80%9...
My interview to The National News
https://www.thenationalnews.com/mena/lebanon/2023/09/11/lebanons-2024-bu...
My article in L’Orient Le Jour
https://today.lorientlejour.com/article/1334352/would-lebanon-gain-by-ab...
My interview to The National News
https://www.thenationalnews.com/mena/lebanon/2023/03/14/is-there-life-af...
My interview with the French newspaper Le Figaro
https://www.lefigaro.fr/conjoncture/liban-la-dollarisation-a-marche-forc...
Video link to the webinar on the two-way conference on Dollarization in Lebanon by Professor Jean-François PONSOT and Professor Siham Rizkallah https://www.transfernow.net/dl/LEFMI_Dollarisation_Liban
My article at National Defense
https://www.lebarmy.gov.lb/fr/content/les-d%C3%A9terminants-de-la-crise-...
My interview with The National News
https://www.thenationalnews.com/mena/2023/08/07/lebanons-central-bank-to...
My interview to Lebanon Today
Where do the dollars circulating in Lebanon come from?
An estimated sum of $4 to $5 billion is circulating in the Lebanese market, creating a surplus of dollars. What is truly happening? https://today.lorientlejour.com/article/1342513
My interview with l’Orient le Jour
https://www.lorientlejour.com/article/1341973/toujours-precieux-mais-min...
My article at National Defense
https://www.lebarmy.gov.lb/fr/content/l%E2%80%99ind%C3%A9pendance-de-la-...
My interview to L’Orient Today
https://today.lorientlejour.com/article/1334352/would-lebanon-gain-by-ab...
My article in the National Defense Review
https://www.lebarmy.gov.lb/fr/content/l%E2%80%99hyperinflation-r%C3%A9p%...
