Data issued by the Bank of Lebanon revealed a decline in “foreign currency reserves” during the period between mid-February and the end of March, as they decreased from $12 billion to $11.5 billion, meaning a loss estimated at about $533 million.
In an article published in “Al-Akhbar” newspaper, Maher Salama wrote: “It is expected that the monetary supply in the local currency will increase as a result of the state or the central bank resorting to inflationary financing to cover expenses, or as a result of the increased demand for local liquidity, but what is happening now is the opposite after the Bank of Lebanon decided to partially absorb liquidity in the lira, in parallel with the depletion of dollar reserves. This path can be explained by the role of the Bank of Lebanon in intervening in the exchange market.”
The article adds that this decrease in reserves reflects the use of dollars in an attempt to control the exchange rate, by providing dollars to the market and preventing its escape under the current circumstances. On the other hand, the contraction of the monetary mass in circulation from 68.85 trillion liras to 66.2 trillion liras during the same period indicates that the central bank did not pump additional liras, but rather withdrew liquidity through various mechanisms, whether through platforms or through managing the cash mass at banks.
In other words, it can be said that the Bank of Lebanon has been pumping dollars into the market since the beginning of the war, with the aim of meeting the market’s need for hard currency in light of its shortage, and also to maintain the exchange rate, which is considered a priority for the current governor of the Bank of Lebanon, Karim Said, since he took office.
But continuing to deplete reserves is not possible, because it sets a time limit for this policy, especially in the absence of sufficient external flows to compensate for this bleeding. As for the decrease in the monetary supply in lira, it may be the result of the decline in economic activity itself and the decrease in the need for cash circulation due to the slowdown in economic operations during the war.
Part of this stability may also be due to increased reliance on the dollar in transactions, which reduces the use of the lira in the market. Since the use of the lira has become mainly limited to paying taxes to the state, the contraction in liquidity may reflect the postponement of payment of obligations to the state during the war, and thus the demand for the lira becomes less.
In more precise terms, the Bank of Lebanon intervenes with dollars to control the market, and in return, the economy shrinks or moves towards dealing in dollars, which reduces the pressure on the monetary supply in the lira. This equation may temporarily succeed in maintaining apparent stability, but underneath it hides a gradual erosion in foreign reserves, which are considered one of the most important lines of defense. Ultimately, these numbers reveal that current monetary stability is managed at high costs. As the war continues, the basic question becomes: How long can the current monetary model be financed, especially in light of the circumstances the Lebanese economy is going through?
In another article in Al-Akhbar newspaper, the following was stated: Reports collected by government officials and Western embassies in Lebanon indicate that Saeed is considering taking an immediate decision to liberalize the exchange rate of the lira in the markets, and that he is in the process of announcing this step, and letting the market determine the lira’s ability to withstand. This step, if it happens today, means that the dollar will jump from 89,000 liras to 200,000 liras immediately, and then make its way towards a ceiling that may touch 500,000 liras within a few weeks.
