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Lebanon’s Central Bank (BDL) is easing the pressure to appease the foreign exchange market, amid a “neither war nor peace” climate that only heightens its volatility.

The decision by the BDL’s Central Council, dated November 26, 2024, reflects clear intent to implement a “flexible monetary policy” even though this approach might prove more costly for the economy as a whole. This strategy hinges on an additional injection of dollars to increase the supply of US currency circulating in the market. Such a move would allow the BDL to achieve two objectives simultaneously. On the one hand, it seeks to give eligible depositors better access to their savings under “emergency circumstances,” as mentioned in the decision. On the other hand, it aims to stabilize the foreign exchange market by preventing sharp fluctuations while keeping the Lebanese pound’s monetary supply under control.

Circulars 158 and 166

The latest decision from the BDL introduces two adjustments for depositors covered by Circulars 158 and 166:

1. Advance Payment in December: Eligible depositors will be allowed to withdraw two monthly installments during December, as was the case in November, whereas in October, they were permitted to withdraw three installments.

2. Easier Transition Between Circulars 158 and 166: Depositors who have exhausted their allocations under Circular 158 (which follows an annual cycle from July to June) can now transition to Circular 166 immediately after using up their quota—potentially as early as February—without having to wait until July to complete the cycle. Furthermore, they no longer require specific approval from the BDL, simplifying administrative procedures.

The BDL’s Challenges

The Central Bank has been grappling with significant challenges arising from the war initiated by Hezbollah against Israel. At the end of September, many Lebanese, caught off guard, stopped paying taxes and fees, waiting for greater clarity on the situation. At the same time, they opted to exchange Lebanese pounds intended for these payments into US dollars, resulting in a slight increase in demand for the American currency.

Amid these challenges, the BDL has engaged in a delicate balancing act while avoiding direct intervention in the foreign exchange market. Instead, it has relied on recapturing dollars indirectly injected through Circulars 158 and 166, as well as salaries paid to public sector employees.

The volume of these dollars has reached approximately $340 million, distributed as follows:

• $200 million from the two monthly installments withdrawn by depositors ($100 million per month).

• $140 million from the salaries of public sector employees.

These payments, made at the beginning of each month, inject a significant amount of dollars into the market. This is particularly impactful, as the total money supply in Lebanese pounds circulating in the market is estimated at around $600 million. Such injections directly contribute to stabilizing the exchange rate.