Plans to establish a currency board in Lebanon in a bid to help resolve the ongoing financial crisis has been met with division among economists.
Opponents of the proposal, promoted by Steve H Hanke, a professor of applied economics at the Johns Hopkins University in Baltimore, believe that this model does not apply in all countries while supporters see the experiment as the best solution for “countries without credibility” like Lebanon.
Hanke, a world leading expert on measuring and stopping hyperinflations, told Arabian Business Lebanon should do exactly Bulgaria did in 1997 when he was president Petar Stoyanov’s chief adviser.
A hyperinflation was raging at 242 percent per month and he designed a currency board system, which the Bulgarian government proposed to the International Monetary Fund.
“Inflation was crushed and stability was established from one day to the next,” Hanke, pictured below, said.
He explained that the currency board would issue a domestic currency that is freely convertible at an absolutely fixed exchange rate with a foreign anchor currency. Therefore, under a currency board arrangement, there are no capital controls.
In total, there have been over 70 set up around the world. Today, the largest and most notable currency board is in Hong Kong.
“Lebanon would be a perfect place to install a currency board. A Lebanese currency board would establish confidence and stability immediately. And while stability might not be everything, everything is nothing without stability. It became apparent that the government’s mountain of debt had become so large that the dollar-denominated portion could not be repaid in full,” Hanke added.
“The game is over. Confidence in the pound’s peg vanished. All those yield chasers were running for the exits, and as they did, the pound collapsed in the black market,” he said.
But Marwan Barakat (pictured above), chief economist and head of research at Bank Audi, told Arabian Business that a currency board would face the difficulty of providing the initial reserves that are needed to establish itself “in addition to the risk of the sudden abandonment of the system”.
“Therefore, disregarding whether Lebanon establishes a currency board or not, the main challenge is to increase the size of its FX reserves in relation to its monetary base. For that sake, what is needed, first and foremost, is to get international assistance, which is in turn linked to the formation of a credible government in the eyes of the international community and the enactment of needed structural and financial reforms,” he said.
Nicolas Chikhani, former CEO of the Arab Bank in Switzerland, urged to unify the exchange, saying a floating-adjusted monetary system must be adopted or through the establishment of a currency board.
He told Arabian Business: “The establishment of a currency board remains the best solution despite its delay, as it obligates the government to make the necessary reforms. This proposal must be discussed with the International Monetary Fund to be approved within a reform plan, knowing that the IMF has agreed to establish similar boards in other countries.”
Dan Azzi, a former executive at Standard Chartered Bank, said the establishment of a currency board was needed in Lebanon, but added that now it is “too late”.
“Hanke has been calling to establish a currency board in Lebanon since 1998, if we had listened to him and applied his recommendation, the monetary conditions would not have reached such a degree of deterioration,” he told Arabian Business.
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