| Year Annual: July to July | Inflation % | Exchange Rate Depreciation % | Ratio of Import to GDP % | Pass-through Effect % | World Inflation % |
| 2019-2020 | 112.4 | 401.6 | 33.8 | 135.7 | 1.9 |
| 2020-2021 | 123.5 | 137.4 | 52.8 | 72.5 | 3.4 |
| 2021-2022 | 168.5 | 65.2 | 80.1 | 52.2 | 8.5 |
| 2022-2023 | 251.5 | 199.0 | 82.4 | 164.0 | 5.8 |
| 2023-2024 | 35.4 | -0.3 | — | — | 3.5 |
Sources: CAS; WB; LiraRate
The pass-through effect captures the effect of exchange rate depreciations on the price level, primarily through changes in the price of import of goods and services. Lebanon, of course, witnessed severe depreciations in its exchange rate between 2019 and 2023. So what was the pass-through effect like during its crisis years?
The table above shows data for the 2019 to 2024 period of the relevant variables. The pass-through effect is estimated as the depreciation in the exchange rate as a percentage of the ratio of the imports of goods and services to GDP[1]. As we can see, only in 2020 was the inflation rate less than the pass through effect: 112.4% against 135.7%, most likely as a result of initial government subsidies. But for the 2021 to 2023 period, the inflation rate was way higher than the pass through effect. Particularly in 2022, the difference was a huge 116.3% (168.5% – 52.2%); with a corresponding figure of 51% for 2021 and 87.5% for 2023[2]. These are definitely very large mark-ups, and they can’t be explained by world inflation as the rate of world inflation didn’t exceed 8.5% during the period! And they can’t be explained by higher labor costs either, as for example the minimum wage actually fell from $450 in 2019 to $200 in 2024!.
So the explanation for the ‘excess inflation’ lies elsewhere. Perhaps, it has mostly to do with the imperfect nature of the market for goods and services and poor regulation, as reflected in monopoly pricing, price gauging, and no adequate official oversight and control. And, less significant but just as important, with higher operational and utilities costs.
[1] It is better to estimate the pass-through effect as depreciation in the exchange rate as a percentage of the ratio of imports of goods and services to final consumption, especially as inflation is measured in terms of the consumer price index; but no data exists for final consumption for the entire period. However, using GDP instead of final consumption involves no loss of explanatory power, as the two variables move very closely to each other.
[2] Clearly the difference will be higher than 35.4% in 2024, as the exchange rate actually improved by 0.3% in 2024.