Single title

The Dollarization Curse

Hard Peg Choices to Cure the Currency

A report incorporating and building upon economic-empirical research that economists, including scientist at the International Monetary Fund (IMF) has undertaken on exchange rate regimes, forms and effect of each regime currency type. However, this report is not only theoretical-academic as it takes into account the globally unique, institutional and political specificities of Lebanon in the past 50 years.

Lebanon is one of the most highly dollarized countries in the world. The experience of the past two years of its multi-tiered economic crisis – already notorious as a crisis of historic proportions – leaves no doubt that any rescue attempt undertaken at this critical junction will need to hinge upon a solution to the problem of the Lebanese lira and its explosive depreciation over the past two years. It is a survival issue to design the exchange rate regime at the greatest possible speed and with the greatest possible diligence.

In the first part of this paper, the pertinent aspects of dollarization have been discussed. Then different de-dollarization scenarios and exchange rate regime options have been extensively developed in part two. In the third part the author presents her arguments for a hard peg last resort solution. In the fourth part of this paper, the author played the devil advocate and asked critical questions she encountered during discussions of the currency crisis. The conclusion presents economic and behavioural arguments in condensed reiteration.

In sum, this report represents a plea to urgently institute the most responsible currency regime for the sake of Lebanon. It aims to spread awareness of how incompatible and dangerous it could be for Lebanon to de-dollarize by adopting a floating exchange rate regime, as it is suggested by the IMF. The report stresses upon adopting a currency regime of a hard peg, and more precisely the currency board as the solution that best fits Lebanon’s dollarized economy, advocating for adoption of a currency board as the first step towards economic reforms and recovery.