The Determinants of Foreign Reserves in Lebanon: An Applied Approach

Introduction

Foreign Reserves at Lebanese Central Bank were significantly depleted starting late 2019 due to several inappropriate decisions taken by the Government and the Central Bank. This has led to a systemic and structural shift in the trust of the country’s citizens in the government and the banking system, effectively changing the underlying behavioral and economic mechanisms of the foreign reserve dynamics. For the purpose of assessing the determinants of foreign reserves in the Lebanese Central Bank, we ran a few regression models to figure out the determinants of foreign reserves, along with diagnostic tests to validate the results. We eventually found that the change in Net Other Investments, the 1-month lagged percentage change in the flow of the trade balance, and the change in FDI had significant effects on the percentage (natural log) change in reserves. On the other hand, the changes in portfolio investment and remittances were initially significant but the results were later shown to be completely false and distorted. In this paper, we will discuss the regression models and the tests we performed and interpret the results from both a statistical and economic framework.

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