Speculation, Foreign Reserves, and Exchange Rates: A Note on Lebanon

It is no exaggeration that one of the most pressing questions in Lebanon now is whether the exchange rate peg at 89,500 LBP per USD – that has stabilized since July 2023 — will hold. This is mostly because, given the reductions in remittances and goods and services exports due to the war, the fall in the supply of FX and in BDL’s accumulation of foreign reserves could jeopardize the peg, and will primarily be driven by a speculative attack on the Lebanese pound. We want to explore the possibility this happening in the near future. And this is no idle thought, as the Lebanese economy has painfully experienced such outcomes in its recent past when BDL’s foreign reserves fell beyond critical levels.

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