Overview of the Recent Monetary, Banking, and Financial Developments in Lebanon
2023

The Lebanese economy has been facing significant challenges for the fourth consecutive year, grappling with a multifaceted crisis exacerbated by global and regional economic instabilities. This crisis, which has been brewing for years due to regional turmoil and public finance difficulties, has been further aggravated by factors including the Syrian refugee influx, government debt defaults, the COVID-19 pandemic, the Beirut Port explosion, energy shortages, and political paralysis. These compounding issues have led to a collapse in the local currency, a surge in unemployment, and severe disruptions to the delivery of public services, placing immense strain on an already fragile economy. Additionally, Lebanon has been without a president or an empowered government for over a year, severely impeding decision-making and reform efforts.

The Lebanese economy has plunged into a severe contraction across all sectors, coupled with an unprecedented surge in prices. This reality is reflected in significant declines in key economic growth indicators such as foreign trade, tourism, investment, consumption and government spending. Since the onset of the crisis in October 2019, the economy has contracted by nearly 40%, while the average inflation rate for 2023 is forecasted at 221.3%, compared to 171.2% in 2022.

Amidst the crisis and political deadlock, a transition in Banque du Liban (BDL)’s monetary policy has been initiated with the appointment of the first vice Governor as acting Governor in August 2023. The new acting Governor, along with BDL’s Central Council, has proposed a recovery plan to parliament, hinging on wide-scale policy shifts and reforms that political leaders have avoided for years.

BDL’s comprehensive transitional roadmap endorses the following financial adjustment measures and structural reforms: (1) commitment to issue feasible annual budgets within constitutional deadlines; (2) implementation of the Capital Control Law; (3) restructuring of the banking sector through the Lebanese Banks Restructuring Law; and (4) enactment of the Gap Resolution Law. These reforms aim to correct financial and fiscal imbalances, reduce the current account deficit, place the public debt on a firm downward path, restore financial sector stability, and rebuild confidence. 

As part of this plan, BDL has ended the fiscal dominance that persisted for years. Capitalizing on its independence, BDL stopped all funding activities to the Government of Lebanon in August 2023, pushing the government to seek balanced budgets and limit its expenditures to its revenues. 

Furthermore, the new BDL leadership committed to setting rules and regulations to move the exchange rate into a floating system with the ability to intervene when necessary. To facilitate this, BDL formed a task force with the caretaker government to coordinate the transition to a unified and floating exchange rate environment. Specifically, BDL advised the government on building a floating rate-based fiscal budget to improve its revenues and achieve a balanced budget. In the absence of reforms, this allows BDL to limit its costly monetary policy actions and protect its foreign currency reserves.

Based on this decision, BDL discontinued the Sayrafa platform and opted to use the auction mechanism on the International Provider Platform, adopted in cooperation with the American “Bloomberg” network, to respond to speculative attacks on the local currency. This platform will inform about the real value of the Lebanese pound against the US dollar, replacing the parallel market that has caused erratic rate fluctuations since 2019. Consequently, the exchange rate in the Lebanese economy will be determined by market forces of supply and demand. BDL will set rules and requirements for banks and licensed money dealers to qualify for listing on the Bloomberg platform. Due to the unstable political and security conditions in the country, the negotiations with the service provider(s) are still ongoing until date. 

Since August 2023, monetary policy has achieved positive results, particularly in stabilizing the exchange rate of the Lebanese pound and building up foreign currency reserves. Coordination with fiscal authorities has facilitated this achievement.

The Lebanese pound experienced its most significant depreciation in the first quarter of 2023, losing over 98% of its value against the US dollar. However, in the second quarter of 2023, the currency managed to hold its ground, achieving stability since July 2023, with a rate hovering around 89,500 Lebanese pounds per US dollar. 

In parallel, BDL's foreign currency reserves have finally turned a corner after experiencing a prolonged period of decline due to the crisis, particularly the subsidy policy, which BDL ended in January 2023. These reserves started recording a surplus in August 2023, steadily climbing from a low of $8.573 billion at the beginning of the period to reach a more robust $9.326 billion by the end of December 2023, representing a significant 8.8% increase over those five months.

To achieve this stability, BDL has relied on the sole remaining effective traditional tool amidst the crisis: controlling the money supply in Lebanese pounds to ensure it aligns perfectly with demand. As a result, currency in circulation in Lebanese pounds plummeted by 27% during 2023, a stark contrast to the 75% increase in 2022, ultimately reaching about LBP 58 trillion (USD 649 million) by the end of December 2023. 

Moreover, the Lebanese economy has been partially moving to dollarization to maintain a minimum level of stability in prices. This pragmatic shift has seen the private sector increasingly transact in US dollars, while the public sector continues to operate primarily in the Lebanese currency. Though far from ideal, this delicate equilibrium has succeeded in preserving baseline stability in prices and transactions.

On the banking sector level, overall activity continued to decline amidst persistent economic challenges. Since the onset of the crisis in late 2019, the sector has been undergoing a significant contraction in both deposits and loans, reflecting its ongoing adjustment in response to the broader economic context. Over the past four years, customer deposits have shrunk by around 45%, reaching USD 94 billion by the end of 2023. This was mainly driven by resident withdrawals of local currency deposits, partial disbursements of foreign currency deposits under BDL circulars, and loan redemptions through banks’ checks, particularly during the crisis initial phase.  Additionally, this contraction is linked to the payment of taxes, fees and various bills via banking channels. The adoption of the new official exchange rate of LBP 15,000 per USD in February 2023 further accelerated this trend, with the deposit dollarization ratio rising to 95.8% by December 2023. 

In parallel, Lebanese banks have undergone substantial deleveraging since the crisis began, with their loan portfolios shrinking by roughly 85% due to early repayments and loan redemptions, to reach USD 8.1 billion at the end of December 2023. Consequently, the loan dollarization ratio surged to 90.88%. Notably loan redemptions have been the largest contributors to deposit contractions over the past four years, while banks have stopped granting new loans to individuals and businesses. For the banking sector to resume its vital role in lending, a revival is necessary, but this hinges on the implementation of reform laws by the state that safeguard the rights of both lenders and borrowers.   

To remain electronically dynamic while reducing the risks emanating from an economy highly dependent on cash, BDL continued its efforts in 2023 to develop and modernize the domestic payment infrastructure, stressing compliance with international norms and standards to promote safety and efficiency. Specifically, BDL oversees the Real-Time Gross Settlement system (BDL-RTGS) and the retail payment system (BDL-Clear), in addition to managing the clearing house and the accounts of the Central Bank's clients, particularly those of the public sector.

In April 2023, BDL started implementing Circular 165 related to the clearing and settlement of checks and cash transfers using "fresh funds". As a result, the use of transfers and checks in fresh US dollars increased, becoming an essential, safe, and alternative payment method to cash payments, thus reducing exposure to money laundering and terrorist financing risks.

BDL also amended Circular 69 related to “Electronic Financial and Banking Operations”, particularly electronic wallets (mobile wallets). BDL has granted licenses to several electronic wallets that meet the required conditions, allowing users to transfer funds between each other, whether merchants or individuals, immediately and securely, in accordance with relevant laws and regulations.
Despite all the efforts exerted by BDL to reestablish financial and monetary stability, which are needed as a transitory phase, high uncertainty in the Lebanese outlook remains tied to other critical factors such as fiscal adjustment and structural reforms. These measures are necessary to complement monetary policy in maintaining macroeconomic stability, setting sovereign debt on a sustainable path, and promoting sustainable economic recovery.