Key Findings:
- Financial and banking laws have historically enabled Lebanese commercial banks to offer accounts and services denominated in foreign currencies, initiating early financial dollarization.
- Pegging the LBP to the USD from 1997 to 2019 contributed to real dollarization – in which USD is used as a unit of account and pricing – of the economy. Maintaining this peg required the Central Bank to attract foreign currency to back up the value of the LBP, through a financial arrangement that proved to be unsustainable by 2019. The economic crisis accelerated dollarization from partial dollarization to full dollarization.
- From 2019, import subsidies of key commodities supported by Central Bank-issued USD lines of credit drove import dependency, nearly emptied the Central Bank’s foreign currency reserves, and delayed the real dollarization of domestic consumption.
- Recent policy changes signal a shift toward official, de jure, dollarization, such as allowing civil servants to exchange their LBP salaries for USD through the Sayrafa platform, allowing retailers to display prices in USD, and budgetary discussions around the dollarization of taxes and tariffs.
- By September 2023, inflation, as measured by the rate of change in the LBP consumer price index, had reached almost 5,000%. This is an alarming inflation rate for LBP-earning households, whose salaries have not kept pace with inflation.
- The exchange rate pass-through effect, essentially a measure of the elasticity of import prices to a change in the exchange rate, is a useful measure of the extent of dollarization. The passthrough effect on the food Survival Minimum Expenditure Basket (SMEB) reached 100% in June 2022, indicating an alarming price sensitivity to the LBP-USD parallel market exchange rate.
By Crisis Analytics Team, Mercy Corps Lebanon
