What happened to the Lebanon currency: can the pound be saved?

Many frontier and emerging market currencies have lost their value in the past few years. Some of the most notable ones are the Argentina peso, Zimbabwe dollar, Kenya shilling, Turkish lira, and the Nigerian naira among others. The Lebanese currency has also plunged to a record low, pushing many banks to close their doors. 

Why the Lebanese pound crashed

Lebanon has had a dramatic fall from grace in the past few decades. At its peak, the country was considered one of the most successful places in the world. Beirut, its capital city, was one of the best places to go.

Today, Lebanon is a shadow of its former self. The government has collapsed, inflation has surged, the currency has depreciated, and migration from the country has increased. Hard currency, especially US dollars, have become extremely rare while the unemployment rate has surged to the highest level on record.

The main reason why the Labanon pound has crashed is politics, with the country having no president as tensions between Hezbollah and Christians have risen. Without a government, it has become difficult for the economy to recover. A major explosion in 2021 and the Covid-19 pandemic made things worse.

At the same time, Lebanon’s economy does not have major exports. Like many frontier markets, the country depends mostly on remittances from foreigners. With banks being shut, these remittances have dropped in the past few years. 

There have been other causes of the plunge of the Lebanese pound. For example, the war in Syria pushed many foreign investors to pull their money away from Lebanese banks, leading to a major dollar shortage. As a result, people with dollar accounts saw significant withdrawal restrictions. Lebanon has also failed to pay its foreign debt.

Can the Lebanese currency be saved?

At this stage, I believe that it is difficult to save Lebanon’s currency, especially now that there is no effective government. Also, unlike countries like Saudi Arabia and Qatar which sell billions of commodities, Lebanon does not have vast natural resources.

Further, even if there is a major rescue, say by the IMF, it is hard to see how that would stabilise the currency. For one, people in Lebanon have already seen their local currencies devalue within a few years. Most of these people will never save or invest in the local currency ever again.

We saw a similar situation in Zimbabwe, where the government introduced a new version of the local currency. Today, the Zimbabwe dollar has lost over 50% of its value, as we wrote here. Therefore, it is hard to predict what will happen to Lebanon in the near and long term.

A likely solution would be for the country to adopt a foreign currency like the US dollar. That is impossible for now since the country needs to first buy billions of dollars and it does not have those resources.