A Currency Board Would Bring Lebanon Back from the Dead

Lebanese pound banknotes at a currency exchange shop in Beirut, Lebanon, June 15, 2020. (Mohamed Azakir/Reuterss)
It’s a necessary first step to facilitate needed reforms that can save Lebanon from becoming a failed state under Iran’s control.

Iran’s President-Elect Ebrahim Raisi has made it clear that the regime will continue to embrace its aggressive policy of regional destabilization, whether or not a nuclear deal is reached. Among its sphere of influence — Yemen, Iraq, Syria, and Lebanon — the latter is where Iran can most easily be countered.

Composed of nearly one-third each Christians, Sunnis, and Shiites who share power, albeit uneasily, in a rare Arab democracy with upcoming elections next year, Lebanon is the antithesis of the Iranian model. Iran’s Lebanese proxy, Hezbollah, the only heavily militarized political party in the state, controls the Lebanese Shiites through intimidation and the assassination of prominent figures who dare speak out against it. Hezbollah is opposed by the Sunnis and most Christians but has gained political power through its alliance with the Free Patriotic Movement (FPM), a Christian political party founded by President Michel Aoun.

Lebanon has been engulfed in a major currency crisis since October 2019. The Lebanese pound has lost 89 percent of its value, and bank deposits have been wiped out. Since then, Lebanon has been suffering from what the World Bank has called possibly one of the three worst global economic crises since the middle of the 19th century. Indeed, people’s purchasing power has collapsed, and a majority of what was once a prosperous middle-income nation has fallen below poverty levels. As a result, doctors, nurses, teachers, and engineers have begun to leave the country.

The U.S.-trained and equipped Lebanese Armed Forces (LAF) — a national institution respected by all Lebanese religious communities, and the only military counter-power to Hezbollah — is at the risk of imploding, with pay levels that no longer allow members to feed their families. The IMF remains unengaged, waiting for Lebanon to establish a new government, but the formation of that new government remains elusive. The FPM party, now led by Gebran Bassil, who has the distinction of being sanctioned by the U.S., has created obstacles to the formation of any government in which he is not a power broker. This delay is playing into Hezbollah’s hands, which is profiting handsomely by diverting subsidized fuel and other products, primarily to Syria. In turn, it is draining billions of Lebanon’s dwindling foreign reserves out of its central bank, the Banque du Liban.

The Banque du Liban is now trying to protect its remaining $15 billion in foreign reserves by stopping the subsidy scheme — an arrangement that is facilitated by Lebanon’s multiple-exchange-rate system — despite being under tremendous political pressure to allow it to continue. Even if a government is formed, nothing would stop Hezbollah and its allies from influencing the appointment of a new central-bank governor. This would only facilitate Hezbollah’s access to the reserves as well as to Lebanon’s $17 billion of gold reserves, and would do nothing to stop the collapse of the Lebanese pound and raging hyperinflation. Indeed, the continuous printing of Lebanese pounds would only further pauperize the population, weaken the LAF, and push Lebanon closer to a failed-state status. This, of course, would enhance Iran’s arc of influence in the eastern Mediterranean.

What can the U.S. and France do to avert such a catastrophe? They could use the threat of sanctions against powerful, corrupt individual politicians to urge the Lebanese Parliament to enact a new banking law that would neutralize the Banque du Liban and create a currency board, as proposed by the Johns Hopkins Lebanon Working Group. With a currency board, the Lebanese pound would be backed 100 percent by an anchor currency, such as the U.S. dollar, and be freely convertible into its anchor currency at an absolutely fixed rate of exchange. Currency boards have proven successful in other distressed countries, where they have stopped hyperinflations and established stability. Indeed, a currency board in Lebanon is just what the doctor ordered.

A stable, convertible currency would attract foreign capital — especially from thriving Lebanese expat entrepreneurs — revitalize the private sector, and revive GDP growth. Renewed growth based on a sound currency offers the prospects of reopening the debt markets for Lebanon and clawing back part of bank depositors’ losses. It would also ensure that the LAF is adequately financed and could support the families of its soldiers.

A currency board would stabilize Lebanon, a necessary first step to facilitate needed reforms. Lacking the power to print Lebanese pounds, Lebanese politicians would be forced to seek IMF and foreign support. And most important, they would be forced to put in place the reforms and transparent governance structures that would save Lebanon from becoming a failed state under Iran’s control.


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