In a surprising economic twist, demand for the Lebanese pound (LBP) has surged dramatically over the past two weeks, creating a shortage of the currency among local money exchangers. The driver behind this phenomenon? A new banking product offering depositors annual interest rates as high as 45% for fixed-term accounts in LBP.

A New Product Revives Demand for the Lira

Lebanese banks, reeling from years of crisis and struggling with liquidity constraints, recently introduced high-interest deposit accounts in LBP. These accounts, which require depositors to freeze their funds for periods ranging from one month to a year, promise returns that start at 25% for a one-month term, climbing to 30% for three months, 35% for six months, and up to 45% for a full year.

This offer has ignited a frenzy among depositors eager to capitalize on the lucrative rates. The surge in demand for LBP has led to notable shortages at currency exchange offices, particularly in areas like Hamra.

A banking insider told Nidaa al-Watan that even the institutions offering these accounts were caught off guard by the response, noting that the popularity of this product was unexpected given the current climate of mistrust towards the local currency and banks.

Behind the High-Interest Strategy

Speaking to Nidaa al-Watan, economic expert Michel Kozah explained the rationale for this new banking product. He noted that many banks had accrued significant liabilities with the Central Bank of Lebanon in 2023 when they borrowed LBP at interbank rates of up to 100% to purchase U.S. dollars. Recently, the Central Bank began demanding repayment of these obligations in LBP, forcing banks to find creative solutions.

With limited options, banks chose the most cost-effective strategy: offering depositors high interest rates of up to 45% on new LBP accounts. This move allowed them to attract fresh liquidity while avoiding the even steeper costs of interbank borrowing.

Optimism Fuels Depositor Participation

Despite lingering skepticism about the banking system and local currency, many depositors have responded to these offers with cautious optimism. Kozah attributes this shift to improved political and economic sentiment in both Lebanon and Syria, coupled with hopes for the election of a new Lebanese president on January 9.

“People are betting that the LBP will either maintain its stability or even improve against the dollar, similar to recent developments in Syria,” Kozah explained.

He drew a comparison with the 1990s when then-Prime Minister Rafik Hariri successfully encouraged investment in treasury bonds with 40% interest rates, generating a wave of confidence in the financial system.

Currency Stability Despite Increased Demand

Interestingly, despite the recent surge in demand for LBP, its exchange rate has remained stable. Kozah noted that this is largely due to the Central Bank’s intervention to keep the rate at current levels.

Kozah also predicted that the Central Bank’s upcoming financial statements would likely show a boost in foreign currency reserves. This increase is attributed to the conversion of U.S. dollars into LBP by depositors eager to secure high returns on their investments.

Additionally, the Central Bank appears to be using this opportunity to tighten monetary policy. By encouraging the freezing of LBP in banks and the conversion of dollars into local currency, it is ensuring that the volume of LBP in circulation remains steady, reportedly at around $500 million.