Lebanon: Boom in money supply offers economic hope
Branded the riskiest state in the world by investors, Lebanon saw its money supply swell fivefold in a single month, according to Bloomberg on April 3rd.
The sharp increase in money supply offers hope for its ongoing financial crisis, amid uncertainties over Israel’s war in Gaza. Despite the economic upturn, further steps must be taken to secure vital International Monetary Fund (IMF) assistance, analysts warn.
The country’s notes in circulation and bank accounts jumped 439% in January 2024, from December 2023, following a decision by policy makers to unify multiple exchange rates and move to one closest to the parallel market, according to Banque du Liban.
While such financial expansion typically fuels inflation, the move may prove a step towards rescuing the nation from its worst economic crisis in history and to unlocking a $3bn IMF loan.
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In mid-February Lebanon’s central bank set the pound at 89,500 per USD, replacing the official rate of 15,000. The Lebanese pound has traded at 89,000 for over six months on the black market.
While the move normalized the currency market, the IMF deal would require authorities to take further measures before disbursement can begin, including the adoption of capital controls and restructuring and auditing of the banking sector.
Lebanon is in the grips of a financial crisis rooted in decades of corruption and mismanagement, having seen its economy collapse in March 2020 after defaulting on $30 bn in international debt.
Investors in the dollar-bond market demand a sovereignty risk premium of over 35,400 basis points above treasury yields to by the country’s notes, the highest in the world.
IMF managing director Kristalina Georgieva said the organization is worried about the impact of the Israel-Gaza war on Lebanon, with the risk of conflict spreading throughout the region.
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Lebanon’s Iran-backed Hezbollah militia has been locked in almost daily, cross-border exchanges of fire with Israeli forces since the outbreak of the Gaza conflict on October 7th, 2023. Lebanon’s economy, which heavily depends on tourism revenue, would be “negatively impacted most dramatically” if the war expands in the Middle East, Georgieva said.
A February 11th IMF report stated a number of Middle East economies to be lagging below growth projections amid oil production cuts and the Gaza conflict, according to Reuters. However, Georgieva claimed that “the global economy has been surprisingly resilient” despite uncertainties.
Bloomberg / Reuters
