Confidence: the underlying driver behind every market’s boom or bust. Currencies are no strangers to this concept; pegged or free-floating, a strong currency is one that has a vote of confidence. In Lebanon, establishing confidence in the LBP was not always a given or an easy feat. Historically, the LBP has seen its times of gloom with the value of the LBP tumbling during the Lebanese civil war from $/LBP 3.43 to $/LBP 1,621.33 in 1995. However, for a little over two-decades, the Central Bank of Lebanon has maintained the Lebanese Pound’s peg against the dollar stable and at the official conversion rate of $/LBP 1,507.5. With that, the Central Bank’s monetary policy would have met an essential goal of its mandate.
In a country as politically-driven as Lebanon, the importance of confidence is even greater. The main political event in 2017 was the surprise resignation of Prime Minister Saad al Hariri, announced from Saudi Arabia in November 2017. The ambiguity of this move rattled depositors and sparked manageable but sizeable capital flight and demand on the dollar (reflected in the increased dollarization ratio of resident private sector deposits in the graph below). Capital outflows in the month of November amounted to $2.59 billion, given that non-resident private sector deposits slid by $1.13 billion and $1.46 billion of resident private sector deposits fled the country. Despite the heavy demand on the dollar and some pressure on the peg, the situation was contained; on the one hand, the Central Bank of Lebanon’s foreign assets stood at a healthy $41.9 billion in November and on the other commercial banks are well capitalized and were able to meet the demand on the dollar by selling some of their Eurobonds holdings.
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