Fixed Rate

The debate whether to preserve the exchange system in Lebanon in its fixed form or change it to floating is still under discussion. The currency currently is fixed at 1500 Lebanese Lira to 1 Dollar. The Central Bank tends to sell the foreign reserves currency to sustain the Lebanese Lira to that value of the dollar. If the value of the Lebanese depreciates, then the Lebanese Government will have serious issues regarding the economic crisis that will take place, specially experience showed that when the dollar peaked to 3000 L.L. in the early 90s how the whole nation was in turmoil and overloaded with demonstrations which led to the downfall of the government then.

In the past, prior to 1973, the Breton Woods Agreement was the effective exchange rate currency system, which stressed on fixed rates and even adapted by the International Monetary Fund (IMF). The two who carved out the system where the United States and the United Kingdom in the middle of the World War II in order to build a new world order. In the early 1970s, President Nixon shocked the world with his announcement of the end of the Breton Woods Agreement, while the U.S. administration's allies the Brits only knew 30 minutes prior to the announcement. The free floating system has been afterwards an instrument of pressure on plenty of advanced nations that never submitted 100% to the U.S.'s interests. Actually the U.S. Treasury allowed intervention only whenever the advanced nations never submitted to the restructuring of their domestic economical structures to U.S. interests. Back in the 1970's and 1980's, the two who most opposed U.S. monetary policies on the International Arena were Japan and West Germany.

Keeping this in mind, Lebanon has serious problems with the free floating exchange system. Already the Central Bank attempts to sustain the Lebanese Lira to avoid a gigantic recession to strike the nation. If the Lebanese Lira depreciates to that extent, the central bank has to raise the interest rate to a very high rate on the Lebanese currency in order people to preserve their bank holdings in the Lebanese Lira. Already the interest rate in the banks is supposed to be higher than the dollar to encourage confidence on the domestic currency.

The floating system does not only impact the banking sector. The banking system is simply an indicator for the consumers' confidence in the domestic currency. If the consumers' confidence decreases, then the government's role in manipulating the economy for the welfare of the people through the interest rate declines. The government can not control efficiently the flow of the money supply in the market, especially through the interest rate, since consumers' confidence plays a role in that efficiency. There can be no control over the money multiplier if people lose their confidence in the domestic currency.

The depreciation of the currency economically implies that exports increase; however, the case in Lebanon is totally different. Lebanon does not have the competitive industrial products to compete with the rest of the region. If the currency depreciates naturally due to the floating system's interaction, then Lebanon will not attain increased revenue from exports. It means Lebanon is trapped with a depreciated currency, while all investors' calculations have to be re-calculated.

Already the political arena in Lebanon is unstable, and the free floating system will put Lebanon at the mercy of the market. Corporations are profit-seekers at minimum costs; hence they invest in anything that brings forth profit. With the political assassinations and unstable riots occurring, the investors would lose interest in Lebanon. The currency would slump, and investments would leave Lebanon wrecked economically. With