The Faculty of Business Administration and Economics (FBAE) at Notre Dame University-Louaize (NDU), hosted leading economist Steve Hanke, a currency reformer and Professor of Applied Economics at the Johns Hopkins University, in a webinar titled “How to End Lebanon’s Economic Nightmare.”
Once a stable nation, Lebanon is facing since 2018 an economic downturn that has reached a state of crisis, characterized by a high public debt, hyperinflation, a staggering deterioration of the Lebanese currency, and a financial sector that is crippled with informal capital controls imposed by banks, severely limiting withdrawals and transfers, hence reducing approximately 80% of the population into poverty. Furthermore, the political instability thus described created an environment of widespread insecurity and uncertainty.
Given this background, and before setting recommendations to navigate out of this economic nightmare, Hanke argues that stability, especially monetary, is key to Lebanon's recovery. Lebanon's currency has been extremely volatile, making it an unreliable store of value and unit of account.
He begins by scrutinizing the role of central banking, and particularly points out that its function often contributes to economic instability and income inequality in emerging markets like Lebanon. The real source of instability comes from the fact that the Banque Du Liban engages and abuses monetary discretion and goes beyond normal policy operation by extending credits to fiscal authorities, instead of imposing hard budget constraints that limit fiscal spending. This mismanagement of operations implicates Bauque Du Liban and the fiscal authorities in what resembles a large Ponzi scheme, thereby aggravating the crisis.
To counter these challenges, Hanke highlights his extensive and real-world experience in various countries and proposes several alternative solutions:
1. Adoption of a Foreign Currency: He suggests replacing the Lebanese pound with a more stable foreign currency, like the US dollar. This move would establish a hard budget constraint and eliminate the central bank's ability to extend credit to the government.
2. Establishment of a Currency Board: Hanke supports the implementation of a currency board where the local currency is backed 100% by foreign reserves. This would provide greater stability and restore confidence in the national currency.
3. Central Bank Reform: He proposes modifying the operations of the central bank to function more like a currency board, ensuring the Lebanese pound is backed by foreign reserves and traded at a fixed rate with an anchor currency, hence stabilizing its value.
4. Parallel Currency System: Hanke introduces the idea of a parallel currency system where a new Lebanese pound, aligned with an anchor currency, circulates alongside the old pound to free deposits from the banking system, driving the old pound out of existence over time, and offering a transitional pathway to economic stability.
5. Fiscal Rule Implementation: He recommends enforcing fiscal discipline through a rule requiring a supermajority vote in parliament for any increase in government debt or changes in tax structures. This would restrain governmental spending and borrowing, therefore, curtailing fiscal irresponsibility.
In summary, Hanke's analysis and proposals present a clear and structured roadmap for Lebanon to emerge from its economic nightmare. By focusing on monetary reforms, fiscal discipline, and the adoption of alternative central banking models, Hanke provides a pragmatic and hopeful perspective.