Lebanon taps dollar reserves to support battered currency as conflict extends

Lebanon’s foreign-exchange reserves dropped for the first time in more than a year as the central bank spent dollars to prop up the pound after weeks of war.

Banque du Liban’s reserves fell by more than $400mn in October, the first decline since July 2023, according to central bank data. Total liquid reserves now stand at about $10.3bn, excluding the $5bn in eurobonds on which the Lebanese state defaulted.

Israel launched a ground invasion of southern Lebanon in September, seeking to degrade Hezbollah that had been firing rockets and drones into Israel for the more than a year. That, combined with sustained air strikes across much of Lebanon, had cost the economy $20bn by late October, Economy Minister Amin Salam told Bloomberg at the time.

Prior to the ground war, Lebanon had managed to keep expanding its reserves and inflation in check, in part thanks to the extensive Lebanese diaspora returning home for the summer. The central bank had also generated an additional $1.7bn of reserves through foreign exchange transactions, according to a central bank official, who asked not to be identified because of the sensitivity of the matter.

The draw-down of reserves marks a reversal from when Wassim Mansouri became acting central bank governor in July 2023. He stopped the central bank financing the government and moved instead to dollarise the economy. That helped stabilise the pound at about 89,500 to a dollar.

About 1.2mn people have been displaced in Lebanon in the past two months and more than 2,000 killed. Hezbollah started firing on Israel in support of Hamas amid the war in Gaza.

Lebanon’s economy was in crisis even before the current conflict began. The pound crashed and the government defaulted on about $30bn of Eurobonds in 2020. Many lost their life savings, inflation hit triple digits and the economy shrank by 30%. The UN has warned that Lebanon’s economy could contract by as much as 9.2% by the end of the year if the fighting continues.

“The fear is for the central bank to keep using the reserves, especially if the war goes on longer,” said Marwan Barakat, group chief economist at Lebanon’s Bank Audi.