The Dollarization and Collapse of the Lebanese Financial System
8 viewsAbstract
In evolving economies, financial dollarization is often adopted as a shield against inflation and currency volatility. However, the case of Lebanon demonstrates that this perceived protection can mask deep-seated structural vulnerabilities that become catastrophic during systemic shocks. This study investigates the dual role of dollarization in Lebanon, tracing its evolution from a post-civil war recovery tool to a primary driver of the 2019 financial collapse. Through a statistically driven analysis of the "sovereign-bank nexus," the research explores how the Lebanese banking sector leveraged high-interest, dollar-denominated deposits to finance government deficits, creating a precarious dependency on continuous capital inflows. The methodology examines the critical currency mismatches and liquidity risks that emerged when the central bank (Banque du Liban) lost its capacity to act as a lender of last resort in foreign currency. Results indicate that while the fixed-peg regime initially restored institutional trust, it ultimately paralyzed monetary policy and amplified the 2019 crisis by accelerating capital flight and depleting reserves. The paper concludes by offering policy lessons for other emerging economies, emphasizing that without robust fiscal discipline and diverse growth models, dollarization acts not as a stabilizer, but as a "crisis amplifier" that erodes monetary independence and systemic resilience.
Keywords
Banking Sector Collapse, Capital Inflows, Currency Mismatch, Emerging Economies, Financial Dollarization, Fixed Exchange Rate, Lebanon Financial Crisis, Liquidity Risk, Monetary Policy Constraints, Sovereign-Bank Nexus