Money Aggregates in the Last Three Years: M3

In this economic digest, we will discuss the path of M3 from June 2021 to September 2024. The formula of M3 is as well known:

M3 = M2 + Deposits in Foreign Currency = Currency in Circulation + Demand Deposits in LBP + Other Deposits in LBP + Deposits in Foreign Currency

The money supply M3 is an estimate of the entire money supply within the economy and is used, mainly along with interest rates, to direct monetary policy in order to control inflation, liquidity, and growth over medium and long-term horizons.

In the period under study, two major dates should be considered when analyzing M3. First, February 2023 when BDL changed the official exchange rate from LBP 1,507.5 per 1 USD to LBP 15,000. The other date is January 2024, when BDL changed the exchange rate again LBP 89,500 LBP. In both cases, BDL and commercial banks prepared their financial statements based on the new rates. As such, these exchange rate changes significantly affected M3 as it included deposits in foreign currencies and was released in its LBP counter value. Thus, this period will be divided into three sub periods:

• Sub-period 1: June 2021 – January 2023 (exchange rate of LBP 1,507.5 per 1 USD)
• Sub-period 2: February 2023 – December 2023 (exchange rate of LBP 15,000 per 1 USD)
• Sub-period 3: January 2024 – September 2024 (exchange rate of LBP 89,500 per 1 USD)

The graph below shows the progress of M3 in the three sub-periods mentioned above (in LBP Billions).

Sources: ABLand BDL

Several findings can be derived from the above graph:

1. In sub-period 1 (June 2021 – January 2023), M3 fluctuated between a low of LBP 190,707 bn in March 2022 and a high of LBP 229,572 bn in December 2022. In September 2019, M3 recorded LBP 209,290 bn.
2. In sub-period 2 (February 2023 – December 2023), M3 fluctuated between a minimum of LBP 1,161,337 bn in October 2023 and a maximum of LBP 1,228,968 bn in February 2023.
3. In sub-period 3 (January 2024 – September 2024), M3 fluctuated between LBP a low of 6,216,334 bn in September 2024 and a high of LBP 6,400,309 bn in January 2024; and, no doubt, the decline was driven by the uncertainty arising from the war in the South.
4. Starting in February 2023, deposits in foreign currencies became the major determinant of M3 since M2 is originally in LBP, and deposits in foreign currencies are calculated on the new exchange rates.
5. More striking, between September 2019 and September 2024, M3 in USD fell from USD 138.87 bn to USD 69.45 bn, exactly by half! However, GDP fell roughly from USD 54 bn to USD 18 bn during the period, implying a decline in the velocity of circulation (GDP/M3) from 0.39 to 0.26, as more USD M3 was hoarded by the public and siphoned out of circulation.

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