Currency in circulation dips
for the first time in two years

LL8.9 trillion decline

since beginning of 2022

Currency in circulation outside the Central Bank (BDL) decreased last January registering the first decline since the outbreak of the crisis in October 2019. It has dropped by LL8.9 trillion since the beginning of the year to stand at LL36.9 trillion by mid-March.

The fall in currency in circulation is mainly driven by BDL’s Circular 161 that allows banks to provide lira liquidity to the Central Bank in order to buy dollars which they are required to sell at the Sayrafa exchange rate to customers who want to withdraw cash from their accounts, according to Marwan Barakat, Chief Economist and Head of Research at the Bank Audi group.

“The first quarter of this year witnessed a double effect of a decline in BDL’s foreign assets and a decline in currency in circulation. The decline in BDL’s foreign assets is mainly tied to the intervention of the Central Bank on the foreign exchange market, namely on the Sayrafa platform within the context of Circular 161, which has contributed to the quasi-stability of the lira exchange rate since the beginning of the year,” Barakat said.

While sucking lira liquidly from the banking system, BDL is simultaneously injecting dollar liquidity in the market by using its foreign assets. Its net foreign assets have declined by a monthly average of $600 million since the beginning of the current year. The average monthly decrease in its net foreign assets was $288 million in the last quarter of 2021 following the removal of most of BDL’s foreign exchange subsidies for imports of basic goods.



Source: Central Bank

Currency in circulation had surged by LL38.5 trillion from the end of October 2019 to its peak of LL45.8 trillion at the end of December 2021. This represents an increase of more than six times in just two years and two months. If these figures are converted into US dollars at prevailing exchange rates in each period (around LL1,507 at the end of October 2019 and LL27,500 at the end of December 2021), currency in circulation drops by 66 percent over the same period to $1.7 billion. The decrease in the dollar value of money in circulation remains lower than the decline of the lira which lost 95 percent of its value over the same period.

The increase in currency in circulation is attributed to the monetization of public deficit by BDL which is creating money to finance the government, according to Barakat. Withdrawals in lira from foreign currency bank deposits, as required by BDL’s circulars 151 and 158 have also contributed to the rise in currency in circulation, he said. According to the ‘Lebanon Economic Report’ of Bank Audi for the fourth quarter of 2021, the public budget should be accompanied by a long-term fiscal adjustment vision of at least five years that aims to gradually decrease public financing needs through significant fiscal deficit cuts. “[Fiscal deficit] represents the main vulnerability for the State, especially that it is monetized by BDL, which sparks large money creation and price increases,” the report said.