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While the war between Israel and Hamas is causing global economic instability, Lebanon’s foreign exchange market remains surprisingly stable. The exchange rate of the Lebanese pound against the US dollar is holding steady at around LBP90,000, even as the conflict rages on the southern border of Lebanon. Notably, Lebanon is now left to its own devices without international or Arab financial assistance, unlike in 2006 during the Israeli offensive when Saudi Arabia deposited one billion dollars and Kuwait $500,000 with the Central Bank of Lebanon to bolster foreign currency reserves. This stability in the foreign exchange market raises questions about the role of Lebanon’s dollarization in this situation.
There is a de facto dollarization of the Lebanese economy, with the US dollar being widely adopted as a means of exchange, unit of account and store of value. Even government employees are paid in cash US dollars, and the Central Bank of Lebanon (BDL) obtains greenbacks through the interest rates earned on its foreign accounts and by purchasing some of them on the local market.
Additionally, the total amount of Lebanese pounds in circulation has been drastically reduced by the BDL to prevent speculators from acting with total impunity. However, the most significant factor is the BDL’s decision to cut off the political establishment’s access to public funds for political and personal gain.
In the event of aerial Israeli strikes causing infrastructure damage, the state and the BDL would not be able to finance reconstruction. They lack the means and capacity to do so. Nevertheless, the state could manage to secure essential needs like wheat imports, as stated by an anonymous source close to the BDL.
Contrary to circulating rumors, the state has sufficient funds in its accounts with the central bank to self-finance for the time being. It appears that the BDL is working to convert some of the state’s Lebanese pound income into US dollars, which could support its financial obligations for a while. In September, the Treasury’s revenues amounted to LBP22 trillion and $44 million in cash, which will cover various state obligations, including salaries in the public sector, until the end of the year.
In the worst-case scenario, Lebanese people are aware that they can rely on the private sector to help navigate the crisis, as this sector has proven itself on numerous occasions in the past.
