--- title: "The Balance Between Supply and Demand for the Dollar in the Money Market | Ghazi Mahmoud" url: https://ghazimahmoud.com/en/articles/2023-10-19-227940/ lang: en description: "The stability of the pound amid the storm: As tensions escalate in occupied Palestine in the wake of the heroic Operation Al-Aqsa Flood, carried out this October 7 by the Palestinian resistance in the occupied territories, and the growing atrocity of the massacres committed by the Israeli enemy against civilians, and while the winds of escalation sweep across Lebanon's southern border, the exchange rate of the Lebanese pound against the US dollar has held steady for the third consecutive month despite all of the above, transcending the presidential vacuum and the inability of the caretaker government to take measures to prevent the continuation of the financial and economic collapse." --- [All articles](https://ghazimahmoud.com/en/articles/) # The Balance Between Supply and Demand for the Dollar in the Money Market [Brig. Gen. (Ret.) Dr. Ghazi Mahmoud](https://ghazimahmoud.com/en/about/) 19 Oct 2023 · 8 min read [Banking and money](https://ghazimahmoud.com/en/articles/money/) The stability of the pound amid the storm: As tensions escalate in occupied Palestine in the wake of the heroic Operation Al-Aqsa Flood, carried out this October 7 by the Palestinian resistance in the occupied territories, and the growing atrocity of the massacres committed by the Israeli enemy against civilians, and while the winds of escalation sweep across Lebanon's southern border, the exchange rate of the Lebanese pound against the US dollar has held steady for the third consecutive month despite all of the above, transcending the presidential vacuum and the inability of the caretaker government to take measures to prevent the continuation of the financial and economic collapse. It goes without saying that the reasons for the rise in the exchange rate of the pound against the US dollar are confined to the financial and economic crisis gripping Lebanon, especially since speculation against the pound played a major role in accelerating the collapse of the national currency's value. Meanwhile, the transfer abroad of foreign-currency deposits by officials and well-connected insiders served as the coup de grace to the national currency, even as a large portion of Banque du Liban's reserves was being squandered on indiscriminate subsidies for consumer goods imports, rather than being used to maintain exchange rate stability and curb speculation. The pound's exchange rate had begun a gradual decline at the end of last March after reaching its highest level, crossing the threshold of 140,000 Lebanese pounds in the second third of that month, before stabilizing at roughly 90,000 pounds since the end of last July. At the same time, many "experts" had been predicting that the exchange rate would rise to dramatic levels as soon as the summer season ended and tourists returned to their countries and expatriates went back to their jobs abroad, even though military developments had been ruled out. Exchange rate stability persisted contrary to the expectations noted above, even during the period preceding the failure to appoint a new governor of Banque du Liban to succeed former Governor Riad Salameh, despite the disputes and bickering that marked that phase, and despite threats by the deputy governors to resign if the government did not appoint a full-fledged governor for the bank. Indeed, the uncertainty that characterized the run-up to Dr. Wassim Mansouri assuming office as acting governor of Banque du Liban would on its own have been enough to shake the fragile stability of the exchange rate. While it had been feared that paying the salaries of public sector employees, military and security personnel, and retirees in US dollars would trigger a deterioration in the exchange rate, Banque du Liban managed to overcome this threat and continue paying salaries in dollars at the end of last August and the end of last September. At the same time, it preserved both exchange rate stability and its reserves, according to a press interview given by the acting governor of Banque du Liban on the sidelines of the International Monetary Fund meetings held in the Moroccan city of Marrakesh (from October 9 to 15); on the contrary, state revenues in foreign currencies helped increase them. Perhaps the stability witnessed by the exchange rate of the national currency under the current political, economic, and even security conditions is the clearest proof that the game of speculating against the national currency has exhausted its tools and pretexts, especially after Banque du Liban reduced the money supply in Lebanese pounds. While the reduction in the size of the Lebanese-pound money supply was initiated by former Banque du Liban Governor Riad Salameh, he undermined the effectiveness of that reduction by pumping part of that money supply back into the market to collect dollars from the parallel market in order to meet demand on the Sayrafa platform. Whereas the Sayrafa platform had been counted on to curb speculation against the national currency and stabilize the exchange rate of the Lebanese pound, it turned into a platform enabling speculation on the pound and profit-making through the price spread between Sayrafa and the parallel market. That spread, which was covered by Banque du Liban and caused a drain on its foreign-currency reserves, would never have ended without halting the Sayrafa platform. Here too, shutting down Sayrafa did not prevent the exchange rate from remaining stable within the same margins, thanks to the balance achieved between supply and demand for the dollar in the money market. On the other hand, the increase in fees and taxes boosted the revenues of the Lebanese state, which came to cover a large portion of the state's current expenditures and curtailed its need for financing from Banque du Liban. In the interview mentioned above, the acting governor of Banque du Liban confirmed the growth in state revenues, noting that cooperation between the central bank and the government yielded revenues of around 20 trillion pounds in August, rising to around 25 trillion in September, with positive results expected to be recorded in this month of October. Even the decline in Banque du Liban's liquid foreign-currency external assets, as reported in the bank's statement issued on September 18, which was attributable to the drop in the euro's exchange rate against the dollar, along with a slight increase in external liabilities resulting from inflows of certain funds from abroad, as well as the requirements of complying with the implementation mechanisms of Circular 158, left no negative repercussions on the exchange rate given the decision by the acting governor of Banque du Liban not to touch reserves and to refrain from financing the state, whether in pounds or in dollars. As for those who argue that exchange rate stability is bound to end with the close of the tourist season and a drop in the supply of cash dollars and remittances, ignoring the fact that dollar supply in the local market is not confined to the tourist season, such a view oversimplifies the mechanisms of dollar supply and demand in the Lebanese market. A closer look at the volume of funds in circulation shows that they are not limited to the summer season, but are distributed throughout the year. This becomes especially clear considering that expatriate remittances flowing into Lebanon, according to World Bank estimates, reached $6.4 billion in 2022, placing the country third regionally, behind only Egypt ($28.3 billion) and Morocco ($11.2 billion). Moreover, what falls under the heading of remittances is not restricted to formal transfers, but includes the cash carried by expatriates and tourists arriving in Lebanon at various times of the year. While formal transfers take place year-round in fairly even amounts, the cash brought in by visitors to Lebanon is spread across the seasons of the year, from the summer season to the Christmas and New Year holidays and the winter ski season, in addition to Eid al-Fitr, Eid al-Adha, and other holidays that likewise bring expatriates home carrying whatever foreign-currency cash they can. Conversely, there are also those who believe that escalating tension on Lebanon's southern border and the prospect of wider confrontations with the Israeli enemy will drive Lebanese citizens to flee their national currency for foreign currencies, leaving inevitable repercussions of one kind or another on the exchange rate. Yet that wave of flight already took place as the financial and economic crisis intensified from late 2019 onward, and was entrenched and made all the more pervasive by the dollarization of consumer goods prices, which spilled over into services that too came to be priced in dollars. Rather, the pressure feared on the exchange rate lies in panic buying and hoarding of goods, which translates into rising demand for foreign currencies and consequently a higher exchange rate, given that most consumer goods are imported. Growing demand for goods also drives up their prices and not merely the exchange rate, bearing in mind that even dollar-denominated prices were raised when the exchange rate fell, whereas today both goods prices and the exchange rate remain in relative stability. In light of all the above, it can be said that the prospects for keeping the exchange rate of the Lebanese pound stable against the US dollar remain strong if Banque du Liban persists in safeguarding its foreign-currency reserves and refuses to be drawn once again into financing the public budget deficit out of what remains of depositors' funds. It is worth noting that Banque du Liban's recent, albeit limited, intervention to preserve exchange rate stability demonstrates that sustaining stability does not rest solely on refraining from squandering reserves, but requires a set of complementary measures and steps, above all a review of all circulars issued by Banque du Liban's governorship from the onset of the crisis to the present day. Nevertheless, this exchange rate stability remains fragile amid the continuing presidential vacancy and deepening divisions among the political factions holding sway over the fate of the country and its people, factions indifferent to the dictates of the national interest and to confronting the perils stalking the nation and its citizens. Compounding the fragility of exchange rate stability is the fact that it is not anchored in an economic plan with defined priorities and objectives, while no less consequential are the erosion of the state's role, the ineffectiveness of its institutions, and the deterioration of its services. The gravest threat to exchange rate stability, however, lies in the possibility that escalating confrontation in southern Lebanon with the Israeli enemy could lead to a regional war converging with Operation Al-Aqsa Flood. Such an outcome could derail every effort to preserve the stability of the pound's exchange rate against the US dollar, and indeed wipe out whatever foundations remain of the national economy. Is there anyone, then, to spare Lebanon the danger looming over the country, its currency, and its economy? Translated from Arabic with AI. [Read it in Arabic](https://ghazimahmoud.com/articles/2023-10-19-227940/) ## Published in - [Radar News](https://www.radar-news.net/التوازن-بين-العرض-والطلب-على-الدولار-ف/) ## More on banking and money [All articles on this subject](https://ghazimahmoud.com/en/articles/money/) [22 Sep 2023 · Sayrafa's Mistakes and the Risks of "Bloomberg" · Lebanon Files, OZ Arab Media ](https://ghazimahmoud.com/en/articles/2023-09-22-b2fc1b/) [24 Aug 2023 · Shedding Light on the Alvarez & Marsal Report · Channel 23, Lebanon Files ](https://ghazimahmoud.com/en/articles/2023-08-24-7bb9ca/) [10 Aug 2023 · Banque du Liban and the Desired Change · Channel 23, Lebanon Files ](https://ghazimahmoud.com/en/articles/2023-08-10-5824dc/)