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So @PaulaYacoubian suggested a Currency Board. While in theory it's a nice idea, it would simply not work in #Lebanon now.
Why?
So @PaulaYacoubian suggested a Currency Board. While in theory it's a nice idea, it would simply not work in #Lebanon now.
Why?
1) It requires that every LBP is 100% backed with USD. The exchange rate at which the LBP would need to be fixed now under a currency board would likely be too damn high for people to bear
2) Under a currency board, LBP printing will have to literally stop for as long as the country's BOP is negative/zero. This has the advantage of forcing fiscal discipline on governments, which can no longer borrow from BDL.
3) But, govts have been consistently running double-digit budgetdeficits for years. While this is something that has to be managed downwards, a currency board would likely require an upfront & extremely painful fiscal adjustment from circa 12% to near-zero. Not socially feasible.
4) One can argue that much of our deficit is waste & corruption, which is very valid. However, you are assuming too much good faith from the politicians if you think they will reduce the deficit by cutting corruption. Deficit reduction will likely be through painful austerity.
5) So, a currency board may make sense later, but under a totally different & competent political order. Otherwise, expect a currency board to trigger misery through a deep upfront devaluation and deep upfront austerity.
6) Most importantly, it can give new life to the political class. A fixed exchange rate was the key monetary tool that helped maintain the stability of this political order since the peg started.
7) Exchange rates are a reflection of how good/bad the economy is doing, and a fixed exchange rate gives the misimpression that things are fine when they are not. That's precisely what happened since 1997.
8) Had the exchange rate not been fixed, I doubt the political order would have survived for so long. Omar Karami's govt in 1992 is a classic example of the kind of accountability that a floating rate imposes. People know that things are bad when the exchange rate is dropping.
9) So, while a Currency Board may be a decent idea in the long-run, now is not the time for it. An adjustment period of several years during which fiscal deficits & the exchange rate are managed downwards to sustainable levels while beefing up reserves is a likely prerequisite.