Dollarization in Lebanon

Abstract

Partial or total, official or unofficial dollarization reflects a lack of monetary credibility and confidence in the countries concerned. In Lebanon, the irreversible high partial dollarization since the 1980s concerns deposits, credits, and even public debt. The accumulated deficits of the balance of payments since 2011 with the maintenance of the exchange rate peg USD/LBP have gradually depleted the USD reserves of the Central Bank of Lebanon. The collapse in 2019 is reflected in the fall of the pegged exchange rate regime, the default on payment of the public debt in USD, and the inability of banks to meet withdrawal requests and deposit transfers in USD. The scientific literature and empirical studies show that, in a situation of very high partial dollarization, this is incompatible with a free float regime. The stabilization based on the exchange rate anchor cannot be repeated after the loss of confidence in the ability of the Central Bank to maintain it. The choice of a hard peg regime (currency board or full dollarization) seems dominant although it is difficult to consider it as an optimal solution. However, the Lebanese economy seems to be moving currently toward full dollarization even if only unofficially at the beginning.