The Lebanese Central Bank has exceeded the money creation limit set by the law, a study by the Beirut-based firm, Information International, has revealed.
The study indicated that according to Article 69 of the Code of Money and Credit, the central bank “must keep in its assets funds of gold and foreign currencies that safeguard the coverage of cash, equivalent to at least 30% of the value of the cash it issued and the value of its demand deposits, provided that the value of the gold and the currencies mentioned is no less than 50% of the value of the issued cash.”
Between the end of 2011 and the end of 2020, the value of the issued cash in Lebanon rose from 3,284 billion LBP to 29,450 billion LBP, an increase of 26,116 billion LBP (796%).
According to the study, the largest increase took place between September 2019 and the end of 2020, reaching 1,656 billion LBP per month on average.
Currently, demand deposits are at 45,834 billion LBP, which puts demand deposits and issued cash together at a total of 75,284 billion LBP.
The study points out that the central bank does not have a special reserve of foreign currency, except for the $16 billion in bank deposits.
As such, the only remaining coverage for cash is in gold reserves, whose value is currently about 24,000 billion LBP, or 32% of demand deposits and issued cash.
Therefore, the study concludes, “the Central Bank of Lebanon has exceeded the specific ceiling (at least 30%) and hence cannot continue issuing cash.”
It notes that creating more money would be possible if the central bank considers bank deposits as reserves to be added to gold.