Money Aggregates in the Last Three Years: M2

In this economic digest, we will tackle M2 from June 2021 to September 2024. The formula of M2 is as follows:

M2 = M1 + Other Deposits in LBP = Currency in Circulation + Demand Deposits in LBP + Other Deposits in LBP.

The M2 money supply is a significant economic indicator. It provides signs regarding the economy’s overall health, influencing inflation and economic growth. An increase in M2 can result in inflation and affects the purchasing power if it outperforms economic growth, as more money pursue the same amount of goods and services. A case in point is Lebanon, M2 increased rapidly while GDP decreased since 2019, as detailed thereafter.  Development of M2, when managed properly, can fuel economic growth through rising lending and spending.

Central banks can manage M2 through several tools such as open market operations in which it injects or withdraws liquidity by buying or selling government securities. Another tool is adjusting reserve requirements. This tool influences banks’ ability to lend more money if reserve requirements were decreased, enhancing the growth of money supply. A third tool is adjusting interest rates – the discount rate — which will also affect borrowing and spending and accordingly money supply.

Sources: M1 and M2 from ABL Key Indicators and BDL Money Supply Releases

The graph above shows the change in M2 between June 2021 and September 2024 (in LBP Billions). A few findings can be drawn from it:

1. M2 fluctuated between LBP 73,618 bn and LBP 79,798 bn between June 2021 and August 2022 and then increased rapidly since September 2022 to reach a maximum of LBP 131,927 bn in June 2023. In September 2019, M2 recorded LBP 70,441 bn.
2. M1, especially money in circulation, was the main factor affecting the increase and fluctuation of M2.
3. LBP deposits decreased from LBP 23,766 bn in June 2021 to reach a minimum of LBP 14,991 bn in March 2024 and then increased to LBP 21,355 in September 2024; compared to LBP 58,749 in September 2019. This clearly reveals the loss of confidence in the Lebanese lira, which was regained later in the period due to the concurrent stability in the exchange rate
4. The increase in M2 since September 2019 along with a decrease in GDP as shown in the above table resulted in an increase in inflation. This can be illustrated by the table below:

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