The mechanism behind the Lebanese pound's recovery
With the eruption of Lebanon's economic, financial, and monetary crisis in 2019, the long-standing exchange rate peg of 1,500 Lebanese pounds to the US dollar collapsed, sending the foreign exchange market into turmoil. The Lebanese pound came under severe depreciation pressures, pushing the exchange rate from approximately LBP 1,507 per dollar at the end of 2019 to a peak of around LBP 125,000 per dollar in March 2023, before stabilizing at approximately LBP 89,500 per dollar in July 2023.
The collapse was driven by several factors, most notably a fundamental shift in the role of Banque du Liban (BdL). Rather than supplying the market with foreign currencies, particularly US dollars, to meet economic needs ranging from daily transactions to the financing of imports, the central bank began purchasing dollars from the market itself.
As demand for US currency intensified, BdL bought dollars from financial companies, currency exchange dealers, and other parties, some of whom relied on currency speculators to collect as many dollars as possible. While former Central Bank Governor Riad Salameh had previously maintained control over both the exchange rate and the money supply, the market eventually became fragmented, with more than five different exchange rates circulating simultaneously.
In response, a mechanism was introduced that allowed Banque du Liban to reclaim its role as the primary regulator of the Lebanese pound money supply. Instead of buying dollars, the central bank effectively became a seller of Lebanese pounds. This process contributed to stabilizing the exchange rate at around LBP 89,500 per dollar as of July 2023.
How the mechanism works
A central bank's primary responsibility is to regulate the national currency's money supply in order to preserve exchange rate stability and contain inflation. Following the collapse of the Lebanese pound, this role had largely been lost.
During the crisis, Banque du Liban relied on mandatory reserves while facing a constant need for dollars to finance government expenditures, subsidies, the Sayrafa platform, and several other obligations. The result was monetary instability and the emergence of numerous exchange rates.
The stabilization mechanism emerged as a partnership between Banque du Liban, Salim Khalil Financial Company, and a number of commercial banks. Its objective was to restore the central bank's core function as the sole regulator of the Lebanese pound money supply and help move the country from a fragmented exchange rate system toward a more stable and rather unified market rate.
The mechanism serves companies and individuals who use Lebanese pounds, particularly for the payment of taxes and government fees. Lebanese pounds are obtained through the central bank and then sold to eligible participants for these purposes.
The exchange rate used within the mechanism is determined within the current margin jointly agreed upon by Banque du Liban and the Ministry of Finance and approved by the Lebanese government. It serves as the basis for calculating public expenditures, taxes, and fees.
Why the mechanism matters
According to the World Bank's Lebanon Economic Monitor (LEM) of Fall 2024, residents earning wages in Lebanese pounds, or those holding their savings in the national currency, experienced cumulative inflation of 5,970.7% since the beginning of the crisis in 2019, effectively erasing their purchasing power.
Triple-digit inflation persisted between July 2020 and April 2024 as a direct consequence of the currency collapse.
A significant decline in inflation
Following the stabilization of the exchange rate, particularly from August 2023 onward, inflation began to slow noticeably, according to the World Bank report. Inflation rates declined sharply compared to previous years, when imported inflation was compounded by currency speculation against the Lebanese pound.
As exchange rate stability returned in the summer of 2023, the traditionally strong link between currency depreciation and inflation weakened. Cumulative inflation between August 2023 and March 2025 stood at approximately 45%.
Supporting public sector salaries and strengthening reserves
The mechanism currently secures the dollar funding required to pay monthly salaries and wages for employees in the public sector. This has helped restore 50% of the value of public sector wages compared to their pre-crisis levels.
It also covers government expenditures denominated in foreign currencies while allowing Banque du Liban's mandatory reserves to increase steadily. These reserves have surpassed USD 12 billion, with the mechanism contributing more than USD 3 billion to their growth.
Reducing tax and customs evasion
Before the introduction of the stabilization mechanism, taxpayers often delayed settling their obligations while waiting for the Lebanese pound to depreciate further, allowing them to pay taxes and fees at a lower effective cost.
With the exchange rate now remaining stable, taxpayers have less incentive to postpone payments and are more likely to meet their obligations on time.
Protecting the Central Bank from suspicious funds
Beyond its role in stabilizing the exchange rate and containing inflation, the mechanism provides an important safeguard regarding the origin of the dollars entering Banque du Liban.
Previously, dollars were collected from the market in a highly disorganized manner to replenish the central bank's foreign currency reserves. Under the current framework, however, Banque du Liban sells Lebanese pounds exclusively to companies, institutions, and individuals for clearly identified purposes, primarily the payment of taxes and fees.
As a result, Lebanese pounds are purchased by entities operating within the formal economy through Lebanese banks participating in the mechanism in coordination with the central bank. Both the banks and the mechanism itself implement strict anti-money laundering and counter-terrorism financing requirements to prevent sanctioned individuals or entities from accessing the Lebanese banking system.
Requests for Lebanese pounds undergo four separate levels of screening designed to identify any company or individual appearing on international sanctions lists or prohibited from conducting financial transactions due to involvement in money laundering or terrorism financing activities.
The framework reflects the adoption of the highest standards of transparency in risk management, anti-money laundering compliance, and counter-terrorism financing controls, while helping prevent sanctioned individuals and entities from gaining access to the Lebanese financial system, particularly Banque du Liban.
