S&P predicts more lira collapse
but data shows monetary strength

Dollar reserves are 16 times local money in circulation

The exchange rate is expected to gradually deteriorate in the next three years and reach LL152,000 to the dollar in 2027 registering a 70 percent decline of the lira compared to the current rate, according to a semi-annual report about Lebanon recently released by the global rating agency Standard & Poor’s (S&P). The exchange rate is projected at LL92,000 at the end of the current year.

Notwithstanding its forecast of a further weakening of the lira, S&P said: “Following several years of [the lira's] sharp depreciation and very high inflationary pressure, we expect some gradual monetary stabilization due to already high dollarization and base effect.”


Source: S&P

The agency also expects the economy to contract this year and in 2025 and to record a modest growth of 0.5 percent in 2027. GDP per capita for 2024 is estimated at $3,000 compared to about $8,000 in 2017. It said: “Partly because of heightened security risks but also the continued domestic political paralysis, we now expect the Lebanese economy to contract over 2024-2025 by an average one percent annually, owing to subdued investor confidence, disruptions in business activity, the impact of internally displaced people, and reduced tourism inflows.”

The pessimistic outlook is justified by the current war in the South and Gaza, and by the paralysis that the State has been experiencing for years.

The money supply in circulation of the lira has shrunk to LL59.6 trillion (equivalent to $666 million), or six percent of the $10.4 billion in dollar reserves at the Central Bank. This means that reserves in dollars at BDL are equivalent to 16 times the value of liras circulating outside the Central Bank. This enables BDL to easily purchase all liras in the market. This was the result of steady liquidity absorption operations conducted by the BDL which actually increased its reserves by nearly $2 billion in the past year. As a result, the Central Bank now holds a leverage that it can use when necessary to intervene by purchasing liras, curbing any rise in the dollar exchange rate, and controlling potential speculation.

BDL purchases dollars from the market to cover public sector salaries to the tune of $120 million per month, and another $100 million for various activities.

This leaves one factor that could affect the size of money in circulation and therefore potentially the exchange rate. The government is looking into potentially converting dollar deposits into lira, which could increase the money supply by about LL80 trillion annually, potentially weakening significantly the exchange rate.

External factors may pressure the lira upwards or downwards. Continuing or escalating the war in the South and in Palestine, failure to combat smuggling and money laundering, and joining the grey list of the Financial Action Task Force (FATF) may pressure the lira negatively. On the other hand, reforms and implementing a deal with the International Monetary Fund, coupled with the election of a President, formation of a credible government, and launching a comprehensive economic plan with sufficient backing from political parties and the private sector may actually improve the exchange rate.

The exchange rate is also greatly influenced by the Balance of Payments (BoP). Remittances currently amount to around $7 billion annually, and the seasonal tourism movement is believed to generate around $3 billion annually, in addition to aid from multinational organizations and some international NGOs. However, the large trade deficit, impossible to accurately estimate because official figures are not reliable, may cause the BoP to slide into negative territory, and therefore siphon off dollars from the market.

“Resumption of foreign bilateral and multilateral concessional debt servicing and adjustment to the public sector payroll through social allowances will keep expenditure higher than 2023, leading us to project a balanced budget for 2024. We forecast a fiscal deficit of average 0.2 percent of GDP over next three years. Since mid-2022, the BDL has not participated in government debt auctions. We think these funding constraints will continue, with only minimal funding from public pension funds,” S&P said.