ABSTRACT
In 1993 Lebanon started a stabilisation programme that ended the inflationary period of the 1980s and early 1990s. The programme was one of the main economic policy pillars of the post-war reconstruction programme which formally started in 1992 in the aftermath of the 15 year long civil war that lasted from 1975 to 1990. Disinflation was achieved through the stabilisation of the Lebanese currency, using the exchange rate as a nominal anchor in a typical exchange rate-based stabilisation programme (ERBS). Now, 17 years after the start of the programme, Lebanon is still maintaining the stabilisation of the Lebanese pound, an exceptional feat in the record of ERBS programmes around the world which have had much lower survival rates. The interesting aspect of this long-term success is not that Lebanon was doing the right things, which other countries did not, to avoid the unwinding of its ERBS programme. Other countries that have abandoned these programmes early on or even at much later stages, such as Argentina and Uruguay, did so as a result of unsustainable real currency appreciation and/or fiscal indiscipline. These are considered by most observers to be the Achilles’ heels of ERBS programmes which eventually lead to their collapse. Compared with other countries that implemented such programmes in the aftermath of high inflation, Lebanon fared no better in terms of real appreciation between 1993 and 2002, or in terms of fiscal indiscipline throughout the period except for 2007-2009. In addition, the ERBS programme had adverse effects on economic growth in the post-war period. The ERBS combined with fiscal expansion during the early period of the reconstruction process formed a monetary-fiscal policy mix that led to a real interest rate shock which caused a recession in 1998 that effectively ended the early post-war reconstruction boom (Dibeh, 2008).
