Lbp

What Is LBP?

LBP refers to the Lebanese Pound, the official currency of Lebanon. As a national currency, the LBP falls under the broader financial category of Currency and Monetary Policy. It is issued and managed by the Banque du Liban, Lebanon's central bank. The LBP's value and stability are crucial indicators of Lebanon's economic health, reflecting its unique challenges and the impact of domestic and international financial pressures. Its exchange rate against major foreign currencies, particularly the U.S. dollar, is a key economic barometer.

History and Origin

The Lebanese Pound has a history marked by periods of both stability and profound instability. After gaining independence, Lebanon established its own national currency. For decades, the LBP maintained a relatively stable fixed exchange rate against the U.S. dollar, particularly from 1997 through late 2019, where it was pegged at LL 1,507.50 per US dollar. This peg was a cornerstone of Lebanon's economic stability following the civil war (1975-1990), aiming to instill confidence and attract foreign investment²¹.

However, this stability proved to be unsustainable. Decades of fiscal mismanagement, high public debt, and a reliance on dollar inflows to maintain the peg created vulnerabilities. A severe economic crisis erupted in late 2019, leading to an acute shortage of foreign currency, a breakdown in the banking sector, and a rapid depreciation of the LBP²⁰. The International Monetary Fund (IMF) has noted the unprecedented nature of this crisis, with the Lebanese lira losing approximately 90 percent of its value by 2021¹⁹. By March 2023, the LBP on the parallel market had plummeted to 100,000 against the U.S. dollar, a stark indicator of the ongoing financial distress¹⁸.

Key Takeaways

• The LBP is the national currency of Lebanon, issued by the Banque du Liban.
• It maintained a fixed peg to the U.S. dollar from 1997 until the financial crisis began in late 2019.
• The LBP has experienced severe devaluation and hyperinflation since 2019 due to a profound economic crisis.
• Multiple exchange rates for the LBP emerged in the wake of the crisis, complicating economic transactions.
• The instability of the LBP has led to a significant increase in poverty and a collapse of essential public services in Lebanon.

Interpreting the LBP

Interpreting the LBP's value primarily involves observing its exchange rate against major global currencies, particularly the U.S. dollar. Prior to the 2019 economic crisis, the LBP's interpretation was straightforward, based on its officially pegged rate. However, since the crisis, the LBP's interpretation has become far more complex due to the emergence of multiple exchange rates. These include an official rate, a central bank platform rate (like Sayrafa, which was later phased out), and a parallel market rate¹⁷.

The dramatic depreciation of the LBP, sometimes losing over 98% of its value since 2019, signifies severe inflation and a collapse in purchasing power¹⁶. For individuals and businesses within Lebanon, a rapidly depreciating LBP translates directly into higher costs for imported goods, reduced ability to save, and a general decline in living standards. The International Monetary Fund continues to urge Lebanon to unify its official exchange rates at the market exchange rate to stabilize the currency and economy¹⁵.

Hypothetical Example

Consider an individual, Maria, living in Beirut before and during the LBP crisis.

Pre-Crisis (e.g., Early 2019):
Maria earns a salary of LL 3,000,000. At the official pegged rate of LL 1,507.50 to 1 USD, her salary was equivalent to approximately USD 1,990. She could comfortably pay her rent, purchase groceries, and save a portion of her income in a bank, where her deposits were stable.

During the Crisis (e.g., March 2023):
Maria still earns LL 3,000,000, but the LBP on the parallel market has plummeted to LL 100,000 to 1 USD¹⁴. Her salary is now effectively worth only USD 30. This drastic reduction in real income means her purchasing power has collapsed. Basic necessities like bread, which once cost LL 1,500, could now cost over LL 30,000¹³. Her savings in Lebanese Pounds in the bank are severely diminished in value, and accessing even those funds has become extremely difficult due to bank restrictions. This scenario illustrates the severe impact of LBP devaluation on ordinary citizens.

Practical Applications

The LBP's behavior has significant implications across various aspects of Lebanon's economy and beyond:

• International Trade: The unstable LBP complicates imports and exports, as pricing becomes volatile. Businesses face immense challenges in managing costs and revenues when the local currency is in flux. A weak LBP makes imports more expensive, contributing to inflation.
• Investment Decisions: Both domestic and foreign investors are deterred by LBP volatility, which introduces extreme uncertainty into returns. The collapse of the LBP has severely hampered the country's ability to attract and retain capital, impacting Gross Domestic Product (GDP).
• Government Finance: The government's ability to manage its public debt and fiscal policy is severely compromised when its own currency is losing value rapidly. The central bank's actions to stabilize the LBP, such as ending monetary financing of the fiscal deficit, are critical but insufficient without broader reforms, as highlighted by the International Monetary Fund¹².
• Personal Finance: For Lebanese citizens, the LBP crisis has led to a dramatic erosion of purchasing power. Many have seen their life savings trapped in banks or devalued by over 90%¹⁰, ¹¹. The influx of remittances from the Lebanese diaspora has become a vital source of foreign currency for many households.

Limitations and Criticisms

The primary limitation of the LBP, as experienced since 2019, is its extreme volatility and loss of value, rendering it largely ineffective as a stable store of value or a reliable medium of exchange for larger transactions. This has led to a widespread "dollarization" of the economy, where many transactions occur in U.S. dollars, particularly in the parallel market⁹.

Critics point to the decades-long fixed exchange rate policy as a significant factor contributing to the eventual collapse. While intended to provide stability, the peg was maintained by unsustainable practices, including attracting dollar deposits through high interest rates to finance a persistent trade deficit⁷, ⁸. This created a "Ponzi scheme"-like structure in the financial system, where new deposits were needed to pay off older ones, ultimately collapsing when dollar inflows dried up⁶. The lack of comprehensive reforms to address the insolvent banking sector and unify exchange rates has been a major point of criticism from international bodies like the IMF and World Bank⁴, ⁵. The Lebanese government and parliament's inability to find a solution to the banking crisis, which has frozen deposits, continues to prevent economic recovery³.

LBP vs. Capital Controls

The LBP, as the national currency, is distinct from Capital Controls, though the two became inextricably linked during Lebanon's financial crisis. The LBP's rapid devaluation and loss of purchasing power were a direct symptom of the crisis. In response to severe foreign currency shortages and a failing banking sector, Lebanese banks imposed informal capital controls starting in late 2019.

These controls were restrictions on the movement of money, specifically limiting withdrawals of foreign currency and converting dollar deposits to LBP at unfavorable rates, essentially locking depositors out of their savings². While the LBP itself is the medium of exchange, capital controls are the policy measures (or lack thereof, as they were largely informal in Lebanon) that restrict the flow of that currency or foreign currencies. The imposition of these controls exacerbated the LBP's woes by eroding trust in the financial system and further depressing its value on the parallel market.

FAQs

What caused the LBP to devalue so severely?

The severe devaluation of the LBP was caused by a combination of factors, including decades of unsustainable fiscal policies, high public debt, a large current account deficit, alleged corruption, and the eventual drying up of foreign currency inflows. This led to a collapse in confidence in the banking sector and the national currency.

Is the LBP still officially pegged to the US dollar?

For many years, the LBP was officially pegged at LL 1,507.5 to the US dollar. However, this peg became effectively obsolete during the 2019 financial crisis. In February 2023, Lebanon formally devalued its official exchange rate to LL 15,000 to the U.S. dollar, a significant change but still far from the parallel market rate¹.

Can I use LBP for transactions in Lebanon?

While the LBP remains the official currency, its severe devaluation and instability have led to widespread "dollarization" of the Lebanese economy. Many transactions, especially for larger purchases or imported goods, are now commonly conducted in U.S. dollars, particularly in the parallel market.