Lebanon's central bank budgets during the first half of November have shown stability in key monetary indicators, reflecting a halt in the absorption of cash dollars from the parallel market. This largely explains the stability of the dollar exchange rate in recent days. In this context, the central bank has effectively fulfilled its prior promise made in the last week of October, stating that the Sayrafa platform would not be a buyer of dollars "until further notice." However, all indicators suggest that the current situation is merely a limited monetary lull that will precede an anticipated storm in the coming weeks due to a series of decisions that may necessitate the expansion of the monetary mass circulating in lira.
According to the budgets, the central bank's reserves did not experience any significant change between the beginning and the middle of November, remaining stable at around $10.3 billion. In this sense, these numbers did not reflect any purchases of dollars from the parallel market, in contrast to what occurred between mid-September and the end of October, when the central bank increased its reserves by approximately $653 million due to direct dollar purchases from the market. It should be noted that these operations had negatively pressured the exchange rate of the lira by reducing the supply of hard currency in the market.
The volume of the monetary mass circulated in Lebanese lira mirrored the same trend, stabilizing in mid-November at approximately 70.99 trillion lira, a slight decline from the beginning of the month when it was around 75 trillion lira. This indicates that the central bank has ceased printing cash and injecting it into the market to finance dollar purchases. It is worth noting that this liquidity had rapidly increased earlier from 45 trillion lira in mid-September to 75 trillion lira by the end of October, due to cash injections in lira to buy dollars from the market during that phase. At that time, these developments contributed to the increase of the dollar exchange rate against the lira, as any additional liquidity in lira in the market quickly transformed into immediate demand for dollars, given the loss of confidence in the local currency.
It is clear today that the central bank's halt, since the beginning of this month, on dollar purchases from the market has led to a cessation of cash injections in lira and has slowed the expansion of the circulating lira monetary mass, which has also reflected in a reduction of pressure on the Lebanese lira in the parallel market over the past two weeks. At the same time, the budgets also reflected a stop in the expansion of the "other assets" item, which includes accumulated losses in the budget.
### Upcoming Monetary Storm
Everything mentioned above precedes an anticipated monetary storm, with the enactment of the 2022 budget, including increases in social assistance for salaries and wages. The cost of the salaries and wages item in the public budget, including the addition of the social assistance provision approved in the budget, will rise from 1.3 trillion lira to approximately 3.3 trillion lira (a threefold increase, with retroactive effect covering the past ten months). While it was expected that the primary funding for this increase would come from increased revenues, which would be accompanied by adjustments to the customs dollar, it has become clear that the budget included exaggerations in estimating many revenue items, while the timing for the implementation of the customs dollar adjustment remains uncertain.
In this regard, it is clear that the increases in expenditure items, primarily the salaries and wages item, will come at the expense of the size of the monetary mass and the value of the cash printed by the central bank to lend to the state and finance its expenses. This means increased pressure on the monetary policy tools used by the central bank to control the exchange rate of the local currency and the volume of lira liquidity in the market. It should be noted that this negative development is not inherently related to the approval of social assistance, which came as a natural and necessary result of the depreciation in public sector salaries, but rather highlights the lack of a comprehensive approach to managing and correcting public revenue alongside the decline in the exchange rate.
Additionally, the factor of an increase in the exchange rate for withdrawals from banks will be added, which will be raised from 8,000 lira to 15,000 lira per dollar, along with increases in current expenditure allocations across all public administrations. Once again, all of these factors combined will contribute to increased monetary pressures in the coming months, particularly due to imbalances in the supply and demand for hard currency in the market. Above all, this will be compounded by the most critical factor, which is the complete lack of trust resulting from the paralysis of all financial solution pathways amid the presidential and governmental vacuum and the suspension of the implementation of IMF reforms.
In summary, the monetary calm that Lebanon has experienced over the past two weeks is the exception rather than the rule. The primary and ultimate rule will remain the deepening of all repercussions and dimensions of the collapse, as long as the Lebanese state lacks a comprehensive financial vision for addressing the situation, precisely applicable to the foreign exchange market and the status of the Lebanese lira within it.
