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Understand and Track the Lira Parallel Exchange Rate

Understand and Track the Lira Parallel Exchange Rate

Understand and Track the Lira Parallel Exchange RateUnderstand and Track the Lira Parallel Exchange RateUnderstand and Track the Lira Parallel Exchange Rate

Exchange Houses syndicate commits to buying $ at 2,000LL on 22 Jan 2020 but didn't specify the ask price. will it hold?

Lebanese Lira

Background (Source: www.bdl.gov.lb , Lebaneselira.net)

The Lebanese Lira started taking shape in 1924 and settled at around 3 Lira for one USD in the 1960s. It started as a currency pegged to the French Franc then was floated as of 1949. After severe devaluation in the second half of the 80s, it was pegged to the USD as of 1993 following the end of the civil war and the beginning of the reconstruction.

Floating Exchange Rate Currency Regime

Lebanon had a floating currency exchange system before the end of the civil war. The Lira reached its strongest value in June 1975 at 2.22 Lira for one USD. Despite the civil war which started in 1975, the flow of USD to fund the war kept it strong until it crossed 4 Lira/USD in 1981. The following intense events took it to 7 Lira/USD in 1984 then to 18 Lira/USD by end of 1985. It depreciated sharply to 70Lira/USD in 1986 and then collapsed completely to 500Lira/USD towards the end of the war in 1989 and then to 900Lira/USD in 1991. While the political system was being re-calibrated, it witnessed a deep devaluation reaching 2800Lira/USD in 1992 causing a change in government and Central Bank board which decided to adopt a fixed exchange rate system in 1993.

Fixed Exchanged Rate Currency Regime

The Central Bank of Lebanon (BDL) adopted a fixed exchanged rate system by pegging the Lira to the USD in 1993. The peg was in the 1700s LL/USD the first year until it settled at 1507.5Lira/USD by end of 1997. The objective of the peg is to create economic and social stability, and to attract investments. Fixed exchange rates systems in a free capital flow system like Lebanon allow investors to take back their profits and their initial investments  at the same rate anytime they decide to exit the country. For fixed exchange rate regimes to be successful, there needs to be proper economic and fiscal policies that support the currency. Proper economic policies improve exports and hence keep attracting the dollars needed to keep the peg. Proper fiscal policies ensure the government does not go into deficit and use up the dollars in the reserves of the central bank and jeopardizing the peg. Lebanon failed to implement the right policies to protect its peg and hence the current crisis.