Lebanese Pound or US dollar?

Dr. Walid Marrouch is an associate professor of economics and assistant dean of Graduate Studies & Research at LAU.

Can a single currency policy help the economy? Is pegging the currency to the dollar a wise move or should our country follow the example of foreign countries and impose its currency on citizens and perhaps the outside world?

Lebanon has been pegging the Lebanese Pound (LBP) to the US dollar (USD) at an average rate of 1507.5 LBP per USD since 1997. During this long period of fixed exchange rate regime, the structure of the Lebanese economy became adapted to the peg, which came to be seen as a bedrock to financial stability. The Lebanese economy thus became a largely dollarized economy where both the LBP and USD are used interchangeably as currency.

For instance, in 2018, the dollarization rate of bank deposits exceeded 70 percent. However, the peg also promoted imports financed largely by remittances in foreign currencies from the Lebanese diaspora. This led to a structural trade deficit where imports exceed exports seven-fold, while our exports are not competitive on the international markets. As such, abandoning the peg abruptly would result in a severe reduction in the purchasing power of the Lebanese population, which will negatively affect living standards across the board.

Nevertheless, removing the peg in the long run would make the Lebanese economy more attractive to foreign investors seeking to produce in and export from Lebanon. This would also promote tourism, as the sector would become more affordable to regional and international visitors.

This interview has been edited and condensed.