The banking crisis and the end of the peg

For more than twenty years the Banque du Liban held the Lebanese pound at 1,507.5 to the dollar, using high interest rates and deposits attracted from abroad to finance large public deficits. The system broke in 2019 when capital inflows dried up: banks restricted dollar withdrawals, the pound's market rate collapsed to tens of thousands per dollar by 2023, and annual inflation exceeded 100 percent in several years. The World Bank estimates that real output fell by more than a third between 2018 and 2021, among the sharpest peacetime contractions in modern history. The central bank introduced a series of multiple exchange rates, including the Sayrafa platform in 2021, and in February 2023 moved the official rate to 15,000 pounds per dollar. The long peg and its sudden loss explain the extraordinary breaks in Lebanon's exchange-rate, inflation and output charts.