Monetary policy in Lebanon

Abstract

This study is focused on the application of the monetary policy instruments in Lebanon throughout the 1993-2002 period and their impact on the Lebanese economy, namely the business cycle. Theoretically, we survey the techniques of monetary control and identify the process whereby these techniques might affect the macroeconomic behavior. Theories of how to conduct the monetary policy view the latter as an economic instrument which uses money supply and interest rates as intermediate objectives to help achieve a healthy business cycle-growth in output, low unemployment and low inflation. Empirically, we identify the techniques of the monetary policy applied in Lebanon during the years 1993-2002 and analyze their impact on the macroeconomic situation. We provide evidence that neither economic growth nor unemployment reduction were considered as ultimate targets for the monetary authority in Lebanon. Since 1993, the Lebanese monetary policy has been targeted at maintaining strength and stability in the exchange rate, controlling the inflation rate, and most importantly, financing the current expenses of the public sector. Moreover, interest rates that are supposed to be consequences of the application of the monetary policy instruments were artificially manipulated by the Lebanese Government to achieve its targets. High interest rates on treasury bills discouraged private investment in the productive sectors of the Lebanese economy. Most foreign and local capital was invested in highyield government bonds rather than in high-value economic growth and employment-promoting activities. This was the major contributor to the decline in lending opportunities to the productive sectors and to the allocation of larger national resources to bondholders-the majority from wealthy and high-income classes. Monetary policy in Lebanon constituted a major obstacle to productive investment and consequently to economic growth and unemployment reduction. This study provides evidence in favor of this argument confirming that the recent economic crisis in Lebanon is the result of the bad application of the monetary policy instruments throughout the 1993-2002 period.