The money supply of an economy is the local currency and other liquid instruments in a country’s economy on the date measured. The money supply roughly includes both cash and deposits that can be used almost as easily as cash. The money supply in Lebanon has drastically increased in 2020 and the Lebanese Lira lost 80% of its value in a crisis which sees more than 55% of the Lebanese population living under poverty in may 2020 compared to 28% in 2019. How is the money supply linked to the devaluation of the Lebanese lira?
As seen in the graphs below (refer to figure 1.1 and 1.2), the devaluation of the Lebanese Pound is directly related to the money supply which more than doubled from November 2019 to July 2020.
The bankrupt lebanese government keeps on printing and injecting billions of LBP in the market which devalues the Lebanese Lira. This devaluation rate drastically increased the inflation rates in Lebanon which is now 2nd in the ranking for most hyperinflation in the world according to Professor Hanke of the Johns Hopkins-Cato Institute. The crazy inflation rate forces the Lebanese people to spend more even for basic needs further devaluing the LBP.
However, there are other factors and reasons explaining the devaluation of the LBP. One of those factors is the lack of influx of US$ into Lebanon. Remittances from expatriates to Lebanon totalled $1.57 billion in the first quarter of 2020, the lowest quarterly level for nearly 13 years. According to the World Bank, inflows are likely to plunge 17% in 2020 as coronavirus, oil price hits the GCC countries where 400,000 Lebanese live and work. The illegal capital control imposed by the banks scares expatriates who lost confidence in the Lebanese banking sector. In addition, a lot of Lebanese expats lost their jobs because of the pandemic which also explains the low expatriate remittance.
These factors clearly affected the USD/LBP exchange rate but they are out of the country’s control in the short-term as the restoration of confidence in the banking sector will take time.
There are many methods that the Central Bank of Lebanon could take in order to reduce the money supply and it should focus on doing so since the increase of the money supply is directly linked to the devaluation of the LBP. The main way central banks control the money supply is buying and selling government debt in the form of short-term bonds. By selling government debt to banks or investors, people would hand money over to buy that debt and the money is subsequently taken out of the economy which would reduce the money supply. Another way would be to reduce government spending as a big part of it is used for the benefit of the corrupt Lebanese politicians instead of the economy.
As seen above, the central bank can undertake measures in order to reduce the money supply and therefore stop this fast devaluation of the Lebanese Lira which makes us wonder: Is the Central Bank really doing everything in its power to help Lebanon? Or is it just watching while Lebanon plunges deeper and deeper into its financial woes?
Title : Money Supply in Lebanon (in billion LBP)
Data source: https://tradingeconomics.com
Title: Average USD/LBP black market rate
Data source: Lira exchange (app)
Engineering student at King’s College London