Upcoming FAFT deadline: Could a potential war between Israel and Hezbollah impact Lebanon's currency stability?

Report by Bassam Abou Zeid, English adaptation by Yasmine Jaroudi

The potential escalation of the conflict between Israel and Hezbollah raises concerns about the stability of the Lebanese lira, particularly given Israel's threats to launch destructive strikes on Lebanon's infrastructure and key facilities. 

Is Banque du Liban (BDL) equipped to handle such a scenario?

Currently, BDL's reserves stand at $10.3 billion, while the monetary mass in Lebanese lira circulating in the market equates to approximately $600 to $650 million of this reserve value. 

This indicates that BDL can prevent sudden speculative attacks on the Lebanese lira, especially since acquiring US dollars in the market is presently easier than acquiring the Lebanese lira.

Given these circumstances, BDL appears capable of intervening in the market to curb anticipated depreciation. Notably, significant events, such as the assassination of Hezbollah military commander Fouad Shokor and the subsequent developments, did not trigger speculative attacks on the Lebanese lira.

BDL had anticipated boosting its reserves through tourism revenues this season, which would have enhanced its intervention capacity. 

However, the tourism sector suffered a significant setback, thwarting these plans.

During the July 2006 war, the exchange rate of the dollar remained stable, primarily due to the fixed exchange rate policy then in place.

Additionally, Saudi Arabia supported BDL with a $1 billion deposit, and Kuwait contributed $500 million. 

Today, the fixed exchange rate policy is not in use; instead, there is market-driven stability in the exchange rate.

The issue of maintaining the dollar exchange rate's stability is critical for Lebanon, especially with an upcoming deadline in October. 

Lebanon faces the risk of being placed on the Financial Action Task Force's (FATF) gray list due to its cash economy and associated money laundering concerns. 

Nevertheless, BDL has received assurances that correspondent banks will not cease their dealings with Lebanese banks.