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IMF report argues for alternative to dollar currency peg - Euro suggested as an option (Daily Star)

A senior researcher at the International Monetary Fund (IMF) independently recommended Lebanon and Jordan not to peg their currencies to the US dollar only.

Rina Bhattacharya, a senior researcher at the IMF, based her working paper on many economic factors in Lebanon and Jordan.

The IMF stressed, however, that the study does not necessarily represent the official position of the organization.

“Given the prevailing trade patterns in both countries and the need for Lebanon and Jordan to penetrate new export markets, the arguments and counter-arguments for a peg to the euro or for the peg linked to a basket of currencies, as opposed to a peg to the US dollar, should be carefully considered,” the author said in her paper, released earlier this month.

Lebanon traditionally pegs its local currency to the US dollar, in what seems a logical approach as the bulk of bank deposits are in dollars.

In addition, 90 percent of bank loans to the private sector are in dollars. But Lebanon imports most of its goods from Europe, increasing the argument that the country should peg its local currency to the euro.

This argument has gained momentum in recent months after Lebanon signed the Euro-Med partnership agreement in June of last year
Although the Lebanese pound is classified as independently floating, in effect the Central Bank has been intervening to keep the pound around the mid-point parity of LL1,507.5 against the US dollar since October 1999.

Bhattacharya said that over the past few years the exchange rate peg helped to maintain stability in both Lebanon and Jordan in the face of nominal shocks, and to withstand several shifts in domestic money demand.

She added that the nominal stability offered by the peg to the dollar has helped to increase confidence in the national currencies of both countries over the past few years while securing inflationary levels. “However, both Lebanon and Jordan are vulnerable to a number of real and external shocks, which may increase in importance over time,” Bhattacharya wrote.

She added that Lebanon and Jordan are also vulnerable to regional effects of oil price changes, regional political developments, movements in labor remittances, and grants from official donors.

But some bankers argued that its too early to peg the pound to the euro.“Its too early to talk about pegging the pound to the euro because there is no real reserve for this currency,” Joe Sarrouh, the advisor to the chairman of Fransabank, told The Daily Star.

He added that this suggestion should not be excluded in the long term.

Beirut 01-08-2003
Osama Habib
The Daily Star

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