The optimism that accompanied the beginning of President Amine Gemayel’s term after his election in 1982 did not last. Security and political pressures quickly weighed on Lebanon’s economy again while the country was still emerging from the effects of the Israeli invasion.
The Mountain War, displacement and emigration placed major pressure on the economy and the lira. GDP fell by about 25 percent in 1983, while the balance of payments recorded a $950 million deficit—the first since 1976. The lira weakened from roughly 3.80 to the dollar at the end of 1982 to 5.50.
Pressure increased when the Palestine Liberation Organization left Lebanon and more than $1.5 billion departed with it. The economy thereby lost foreign-currency inflows that had entered the country indirectly in support of the Palestinian resistance.
The state, meanwhile, continued spending foreign currency on essential and military needs. It paid around $900 million to arm the military, and foreign-currency payments for weapons, wheat, fuel and other purchases totaled about $2.03 billion in 1983 and 1984. Banque du Liban’s reserves consequently fell below $650 million by the end of 1984.
A growing dispute emerged over the boundaries between the state and Banque du Liban. Critics argued that the government treated the central bank as a readily available source of financing, while Governor Michel Khoury warned of the consequences of continuing on that path.
Dr Edmond Naim was appointed governor of Banque du Liban on January 15, 1985. Taking office during an exceptionally difficult financial period, he began by insisting on compliance with the Code of Money and Credit and limits on uncontrolled financing of the state.
The leadership of the monetary authority also changed when Dr Hussein Kanaan became first vice-governor, the first member of the Shiite community to hold the position, reflecting the political and sectarian changes taking place across the country.
The financial crisis was inseparable from political collapse. The national unity government disintegrated, state institutions became paralyzed and no general budget was in force. The dollar reached 18 lira by the end of 1985, while state revenue covered no more than 14 percent of expenditure.
Faced with this deficit, the government again turned to Banque du Liban, seeking the transfer of revaluation gains on gold and foreign currencies and financing for its needs. Naim refused to treat exchange-rate differences as real, spendable profits, warning that further liquidity would increase pressure on the lira and deepen its depreciation.
Banque du Liban had financed about 78 percent of the state’s needs, but Naim refused to raise the lending ceiling. He relied on the Code of Money and Credit, which permits the central bank to finance the state within limits that do not harm monetary stability but does not require it to do so.
The dispute extended to fuel, whose subsidized prices consumed resources exceeding twice the state’s revenue. As the crisis escalated, Prime Minister Rashid Karami brokered a compromise under which Banque du Liban agreed to finance only public-sector salaries and essential supply needs.
By the mid-1980s, Banque du Liban had entered a new phase. Protecting the lira from war was no longer its only challenge; it also had to draw clear boundaries between the state’s financing needs and the independence of monetary policy. This confrontation between fiscal and monetary authorities became one of the defining chapters of Lebanon’s crisis in the second half of the decade.
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