Lebanon’s central bank Banque du Liban has achieved 12 months of exchange rate stability. Foreign currency reserves have recently clawed back above $10 billion. At the one-year mark of Wassim Mansouri’s reign as acting governor, economist Layal Mansour lauds his disciplined implementation of a quasi-currency board solution but urges this solution’s full and formal adoption.
The Lebanese aptitudes for international trade and money dealings have been developed since Phoenician times. Today, however, it borders on delusion to defend the Lebanese pound as a national currency with strong exchange value. As a matter of fact, in recent rankings of 180 fiat currencies in the world, the Lebanese pound (LBP) was the least valued in terms of how many units of a currency it takes to obtain one US dollar (USD).
As everyone living in our country experiences on daily basis throughout the past year, it requires more than 89,500 LBP to buy a single USD. But Lebanon’s residents also remembers that the pound had passed through several months of even lower value against the USD.
The strength of a currency is not solely determined by its numerical value, but by a range of economic variables. For instance, in the same report that raps the LBP as the world’s weakest currency in 2024, the Kuwaiti dinar is cited as the world’s strongest currency, with one Kuwaiti dinar equaling 3.25 USD. However, the USD remains the most widely traded currency globally and is universally recognized as the world’s reserve currency.
Inherent to every currency, even the strongest, are risks that affect its acceptance, tradability, and demand. Currencies weaken due to factors such as the effectiveness of central bank interventions, monetary policies aimed at stabilizing prices and inflation, the confidence of international and domestic economic actors in holding a currency, and expectations regarding its future value depreciation.
The above risks and expectations, allowed to compile over decades, have proven devastating for Lebanon. Lebanon’s residents are painfully aware that although the once stable LBP has undergone massive depreciations, devaluation, and the turmoil of multiple officially applied exchange rates due to poor monetary and fiscal policies, no serious actions have been taken against those responsible. Additionally, there have been no significant legal measures to restore confidence in the Lebanese pound or to restructure the banking sector, which is meant to play a crucial role in boosting the economic activity through creating money from granting loans.
Mansouri’s method
However, since Wassim Mansouri assumed the role of acting governor at the helm of Lebanon’s central bank, Banque du Liban (BDL), at the end of July 2023, the rapid deterioration of the Lebanese pound on a daily or hourly basis has abruptly halted. Mansouri, known for his vigilant legal approach, chose not to intervene in central bank monetary policy and opted to maintain a cautious stance. He refused to lend funds to the government for any expenses, including salary increases, infrastructure maintenance, or loans.
As an economist specialized in monetary policy issues in dollarized countries, who has published in academic journals and proposed (with MP Paula Yaacoubian) the Currency Board draft law No.967/2020 very early in the country’s economic crisis, I have over the past year commended Mansouri several times in newspaper articles and radio interviews for this decision. By adopting an “incomplete” or “fake” currency board arrangement system, Mansouri demonstrated immediate success with exchange rate stability.
It is remarkable but also concerning that this exchange rate stability of the past 12 months, albeit with the above noted detriment of the LBP being the world’s least valuable currency, has been achieved with a monetary solution that is incomplete. In two sentences, a currency board is a monetary system where a country’s new currency is pegged to a foreign currency at a fixed exchange rate, and the domestic currency is fully backed by foreign reserves in a strict 1:1 ratio. The key feature of a currency board is the removal of central bank’s monetary policy including the role of being the lender of last resort or the discretionary power of issuing credit to the government. The country gives up the central bank and replaces it with a currency board. This sacrifice imposes immediate trust nationally and even internationally on the new currency because of the impossibility of future devaluation or the impossibility of having discretionary inefficient monetary policy.
An “incomplete” currency board approach
In my analysis over the past months, I have referred to Mansouri’s approach as an “incomplete” currency board. While he adopted some elements of a currency board system, such as maintaining a fixed exchange rate and restricting lending, it was not a strict implementation according to legal definitions, which require a currency board to be adopted as a law or set of laws. parliament.
Nonetheless, Mansouri’s approach forced the government, particularly the Ministry of Finance (MoF), to enhance revenue collection through VAT and customs adjustments, such as aligning the customs dollar rate with market exchange rates. These measures helped reduce the estimated fiscal deficit for 2023 to nearly zero. Additionally, collaborative efforts between BDL and MoF contributed to the accumulation of foreign reserves. These achievements were acknowledged during an IMF visit to Lebanon in May 2024.
The term “incomplete” or “fake” is also made in reference to another risk factor. The policy taken by Mansouri (not to lend the government) was taken on the Lebanese pound and not a new currency. According to many research studies on economic behaviors, in a system of continued use of a discredited old currency, people will will still prefer saving, earning, and spending using the US dollar.
This effect of clinging to the US dollar as the preferred currency is known in economics as dollarization hysteresis. This means that when a country used to foreign currency suffers from severe hyperinflation and currency crash several times and for years and becomes dollarized (either unofficially or partially), it will continue demanding dollars even if the inflation rate and the exchange rate stabilize. That is why, in this unique situation, economists recommend replacing the local currency with a new one: either by fully adopting the foreign currency such as the dollar, or by imposing a new currency under a Currency Board Arrangement (CBA).
Officially, Lebanon is adopting a pegged exchange rate regime (although with an official rate six times smaller than the market rate), with Mansouri attempting to mimic a currency board arrangement on its own. However, maintaining a pegged exchange rate regime in a dollarized country is generally unsustainable and inevitably leads to a crisis sooner or later. This is why economists propose extreme solutions in such scenarios: either full dollarization/CBA, or alternatively, allowing the currency to float in a free float or managed float (see my previous article).
The latter option, a floating exchange rate regime, is not feasible in countries lacking transparency, trust, good governance, and democratic institutions and diversified local production. Even the Gulf countries, among the wealthiest globally, have refrained from adopting a floating exchange rate regime due to the stringent legal/economic frameworks required.
Turning temporary measures into long-term progress
In Lebanon, where transactions are predominantly conducted in dollars, Mansouri’s individual success with his vigilant decision has to be seen as temporary. Despite the exchange rate stability witnessed in the past 12 months, the Lebanese pound remains precarious, as Mansouri’s cautious approach is personal and not officially endorsed. The widespread rejection of the Lebanese pound is evidenced by its high dollarization rate, indicating that about 90% of transactions are conducted in dollars by Lebanese nationals. In another indication of risks associated with the current situation, Lebanon heavily relies on an often untraceable cash economy that facilitates money laundering, predominantly denominated in foreign currencies.
Should the country implement measures to discourage the cash economy, tighten transaction controls, or face international sanctions or oversight, Lebanon would likely face a shortage of circulating dollars, resulting in significant economic strain.
Lebanon’s heavy reliance on foreign currencies is such that its sovereign political decisions remain constrained. The country cannot afford any disruptions from powerful nations that could restrict or sanction money transfers. This dependency on foreign currencies undermines Lebanon’s ability to assert independent political decisions and makes it vulnerable to external pressures and influences.
The paradox of the Lebanese pound lies in its stability despite lacking hope, trust, or demand. Economic agents routinely substitute the Lebanese pound with the dollar for daily transactions such as salaries, utilities, healthcare, education, shopping, and fuel. Consequently, people have grown indifferent to the stability or instability of the Lebanese pound. They only pay attention and react with panic, as seen in 2020, when they are forced to use Lebanese pounds and must convert them to dollars through platforms or exchange offices.
As long as economic agents continue to avoid using the Lebanese pound, the exchange market appears stable and successful. However, beneath this facade, the Lebanese pound is effectively obsolete and was immediately replaced with a better alternative.
Since Mansouri demonstrated courage in effectively imposing an incomplete currency board and confronting the government by refusing to finance it, I strongly urge him to continue this initiative and formalize it into law, or alternatively, consider the currency board Law proposal No. 967/2020 from June 2020. He possesses the power and skills necessary to negotiate with the IMF for a well-implemented currency board—a softer version of full dollarization that preserves sovereignty and seigniorage.
Completing his vision requires sacrificing a central bank monetary policy and introducing a new currency to replace the Lebanese pound. For instance, if the central bank’s foreign reserves to base money (M0, not M2) currently total USD/LBP 90,000, each 1 USD under the CBA would equate to 1 unit of the new currency, which could be designed with an allusion to the trusted national symbol, the cedar.
The currency board would oversee the conversion of USD to the new currency and vice versa. Like last year’s enhancements in the Ministry of Finance’s performance and deficit reduction, a currency board is widely acknowledged as the most disciplined program a government can adopt. It would promptly improve the fiscal performance of the MoF and enhance international trust in the currency, ensuring no future devaluation, lower interest rates, absence of discretionary monetary policy, independence from political interference, and ultimately attracting foreign investments. Additionally, it would foster competition among private banks, operating free from central bank or political interventions.
I will refrain from concluding with “it is now or never,” because as long as the Lebanese Pound is dead, there is no expiration date for Lebanon to adopt a CBA or even full dollarization. What we need is the will, alongside the courage.
