It is pretty standard in monetary economics that changes in the monetary base MB, which is equal to the sum of currency in circulation CC and banks’ reserves R (or financial sector deposits at the central bank), arise mainly from interventions in the FX market, monetization of public deficits, and loans to financial institutions through the discount window. In the context of Lebanon, this would imply:
Change in MB = Change in foreign assets + Change in securities portfolio + Change in loans to financial institutions
In other words, the MB will increase when: BDL buys FX in the market to shore up its foreign assets FA, increases its TBs portfolio to fund public deficits, and extends loans to elevate liquidity at banks mostly. But it is clear from the table that the two main items that witnessed notable and significant changes in March 2023 are CC on the liabilities side and FA on the assets side, specifically CC falling by 18.37 T LBP but FA falling by 4.90 T LBP only. How do we account for these changes and what are the factors behind them?
For the Full paper, please click on the below link:
BDL’s Changes in Foreign Reserves and Currency in Circulation A Numerical Relationship