In the early 1970s, Lebanon was at the height of its financial and banking prosperity. Beirut had become a regional business center and market liquidity reached unprecedented levels. Lebanese banks financed institutions and governments abroad—including Algeria, Renault and the International Bank for Reconstruction and Development—reflecting the confidence then placed in the Lebanese lira and banking sector.
Despite the abundance of funds, the Lebanese state refused to embrace a policy of borrowing. Banks reportedly tried to persuade President Suleiman Frangieh to issue Treasury bonds to absorb excess liquidity, but he refused, saying that he lived within his means and had no need to borrow.
Warning signs were growing beneath the prosperity. By the end of 1974, banks’ consolidated balance sheets were equivalent to about 110 percent of GDP, a scale beyond the real economy’s capacity. Banque du Liban Governor Elias Sarkis feared that a more turbulent period was approaching.
As political tensions rose, Banque du Liban considered moving its gold reserves to a safer location. The plan was postponed because of logistical difficulties and concern that moving the gold would undermine confidence in the Lebanese lira.
Civil war erupted in spring 1975 and quickly destroyed the country’s image of stability. Beirut’s commercial center was devastated, tax collection stopped, ports and public institutions were damaged, and GDP fell from $3.4 billion in 1974 to about $2.1 billion in 1976. The fiscal deficit reached unprecedented levels.
Although Banque du Liban’s building stood in West Beirut and militias targeted it during the fighting, the central bank remained outside the direct conflict. Political and security contacts prevented it from being stormed, protecting the gold and foreign-exchange reserves that represented the country’s last pillars of financial stability.
Elias Sarkis was elected president in 1976 after years leading Banque du Liban. Together with Prime Minister Salim Hoss and Finance Minister Farid Roufael, he formed a team that worked to protect the banking sector and keep it operating despite the war.
By 1977, Banque du Liban had launched what became known as the “second financial correction,” following the reforms adopted after the Intra crisis. It granted banks exceptional credit, lowered discount and mandatory-reserve rates, and facilitated debt rescheduling in an effort to support the economy, finance reconstruction and preserve the lira’s exchange-rate stability.
Michel Khoury became governor of Banque du Liban in September 1978 and faced renewed war, Israel’s invasion of the south and escalating internal conflict. As speculation in the lira and property expanded, the central bank raised the mandatory reserve ratio to 15 percent and used Treasury bonds to absorb excess liquidity and curb currency speculation.
Despite the war, the banking sector continued to record striking growth. Deposits rose from about $3 billion in 1976 to nearly $12 billion in 1982. Banque du Liban’s gold and foreign-currency reserves exceeded $2 billion, while Lebanese banks expanded their networks at home and abroad.
Israel’s June 1982 invasion dealt the economy a severe blow. Extensive infrastructure was destroyed and major economic and banking centers were damaged. Banque du Liban intervened to protect its branches, preserve account secrecy and prevent interference with accounts during the military operations.
Bachir Gemayel’s election as president briefly revived hopes of ending the war, but his assassination weeks later returned the country to violence. Under President Amine Gemayel, Banque du Liban maintained reserves above $2.6 billion and transferred substantial profits to the Treasury. Yet the cost of the Israeli invasion, rising public debt and deteriorating state finances had already placed Lebanon on a new economic path that would lead gradually toward the collapse of the 1980s.
The years from 1974 to 1982 therefore carried Lebanon from the height of financial strength to the beginning of its erosion under the weight of war. They formed the final chapter of the age of prosperity and the opening of a long period of economic and monetary challenges.
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