A Double-Edged Sword – Can a Currency Board Help Stabilise the Lebanese Economy?

Uwe Böwer

No 68, European Economy - Economic Briefs from Directorate General Economic and Financial Affairs (DG ECFIN), European Commission

Abstract: Lebanon is not defying gravity anymore. After a long period of surprising economic resilience, the Lebanese economy fell into a severe crisis in 2019, triggered by a sudden stop in life-sustaining capital inflows. The undercurrents of unsustainable public debt and twin deficits amid a weak institutional environment, however, had long been in the making. Drastic devaluation in parallel markets, high inflation and strong real GDP contractions reflect Lebanon’s deep crisis, which has only been aggravated by the COVID-19 pandemic and the devastating Beirut port explosions. The government is facing a momentous task to address the devaluation-inflation nexus, improve public governance, rebuild the electricity sector, restore sound public finances, repair the financial system and reinvigorate the private sector. This paper discusses the potential contributions of a currency board arrangement as a possible external anchor that could help stabilise Lebanon’s economy. Indeed, a currency board could end devaluation and rein in inflation, enhance discipline and governance, and, if accompanied by a broader reform agenda, help incentivise a return of capital inflows and improve private sector conditions. However, a currency board severely restricts certain macroeconomic adjustment mechanisms, requires a careful transition management and involves sizeable fiscal adjustments. While the stabilisation benefits of a currency board could be significant at Lebanon’s current juncture, getting the accompanying reforms in place, cushioning the social impact of the adjustment and ensuring solid implementation all present major challenges to make a currency board sustainable. Lebanon’s international partners stand ready to help. However, meeting these challenges first and foremost requires strong ownership by Lebanon itself.

Keywords: Lebanon; currency board; exchange rate regime; monetary policy; inflation; Böwer. (search for similar items in EconPapers)
JEL-codes: E52 E58 O53 (search for similar items in EconPapers)
Pages: 16 pages
Date: 2021-12
New Economics Papers: this item is included in nep-ara, nep-ban, nep-cba, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:euf:ecobri:068

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