Lebanon’s Eventual Transition to a Floating Exchange Rate System
Balancing Flexibility with Stability
Lebanon’s longstanding fixed exchange rate regime collapsed in the wake of the country’s 2019 financial crisis. This paper examines the underlying causes of the collapse, offering a new policy framework based on a floating exchange rate system and detailing its superior qualities. However, the paper cautions against a hasty transition without strengthening economic fundamentals. Instead, it argues that transition should proceed first by adopting a managed float, during which the country can increase its fiscal space to enable increased investment in idle capacity and the productive sectors, balancing flexibility with financial stability. Further economic imperatives must be addressed before a fully floating regime can be adopted. The paper concludes by outlining a roadmap for a smooth transition from the fixed exchange rate to a managed float and finally to a fully floating system.