Lebanon: From Dollars to Lollars

Abstract

What were the policies that created one of the world's largest financial and economic crisis (as a percent of GDP) in Lebanon in the early 2020s? An artificially strong currency peg created a consumption boom financed by government debt and international capital flows/remittances, exposing both the public and private sector to classic currency mismatch vulnerabilities. Moreover, a volatile deposit growth through international remittances created banking risks that both a government and a central bank needed to manage. High deposit growth resulted in large banks that invested in high interest-bearing USD deposits at the central bank. The central bank financed government debt, exposing the banking sector to sovereign debt. A worsening international economic environment and political fractionalization in a geopolitically sensitive region exacerbated the classic delays arising from taking difficult burden-sharing, distributional decisions to address the financial crisis.