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 choosing the exchange rate regime, the main economic factors to consider are factors such as dollarization, government temptation to inflate (which is in line with the prediction of political economy theories), and exposure to exchange rate risks. Considering the implications of Lebanon’s extreme dollarization, which not only exceeds today a rate of 80 percent, but which also has for several decades been rooted in this country, is of utmost importance. Any exit strategy that seeks resolution of Lebanon’s economic crisis underutilization of a soft pegged arrangement or flexible exchange rate regime will indubitably lead to a more severe financial crisis that could last forever, unless the country adopts a hard peg as a “normal next step following dollarization” [92]. The present report incorporates and builds upon economic-empirical research that economists, including scientists at the International Monetary Fund (IMF), have undertaken on exchange rate regimes, forms, and effects of each currency regime type. However, it is not a mere paper in the field of theoretical-academic economics as it takes into account the globally unique, institutional and political specificities of Lebanon in the past 50 years. In the first part of this paper, I discuss the pertinent aspects of dollarization, which plays a decisive but rarely discussed role in the genesis of the current crisis. This is followed by an examination of different de-dollarization scenarios and exchange rate regime options in part two and my arguments for a hard peg last resort solution in part three. In the fourth part of this project, I played the devil advocate to ask critical questions that I have encountered in discussions of the currency crisis and in addressing the hard peg as last resort solution for Lebanon. The conclusion presents economic and behavioral 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. Layal Mansour, PhD

 

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