In a matter of days, the Lebanese pound experienced a dramatic decline, transforming from a once-stable currency into one that is largely rejected by its own citizens. Its value, now weakened against the dollar, has made it scarce in the market, and what is available is highly prized, offering banks hefty interest rates as incentives for investments. The Lebanese pound, once seen as a reliable currency, has become a commodity that is now both in short supply and increasingly costly.

This drastic shift in the financial landscape stems from a recent liquidity crisis in Lebanon’s banking sector. Some banks found themselves unable to meet the growing demand for Lebanese pounds, prompting them to offer high interest rates, sometimes as much as 45%, on fixed deposits. These rates are being offered to customers who are willing to lock in their funds for a few months. This solution came after banks struggled with exorbitant interbank lending rates that spiked to as much as 100% overnight.

The surge in interest rates has raised alarms within Lebanon’s Central Bank. Sources within the bank told Annahar that the situation is sensitive, emphasizing that it cannot continue for long. Despite the current volatility, the Central Bank maintains that the country’s monetary stability remains solid. The Bank is confident that it can control fluctuations in the exchange rate and manage liquidity in the market. High interest rates on the Lebanese pound, such as those seen in Turkey, where interest rates on the Turkish lira have reached 50%, are unsustainable and not conducive to long-term stability.

Yet, despite these warnings, a growing number of Lebanese citizens have shown interest in investing their Lebanese pounds in the banking sector, enticed by the high returns being offered. In a country ravaged by financial uncertainty, the sudden uptick in confidence in the pound and the banking system may be short-lived.

If the current trend of high interest rates continues, it may create an even bigger problem in the future. The banks offering such lucrative rates may soon find themselves unable to meet their obligations. Unable to secure enough liquidity to pay the promised interest, these banks could face defaults, which would only deepen the public’s mistrust in the banking sector. Lebanon’s financial system, already struggling under the weight of economic crises, cannot afford any more shocks.

Although the banks may be able to meet these obligations in the short term, there are growing concerns over their ability to sustain this in the coming year, especially with lending at a standstill. In the context of a banking system that is already unable to return deposits, the question arises: where will the money come from to pay these high interest rates? The current behavior is economically dangerous, signaling potential issues with the solvency of the banks. The need for intervention from the Central Bank is becoming more urgent.

Will the Central Bank of Lebanon remain passive in the face of this mounting crisis? Sources close to Wassim Mansouri, the acting governor of the Central Bank, have affirmed to Annahar that the bank is already planning to intervene. It is expected to restore stability by reducing interbank lending rates and capping interest rates on the Lebanese pound at 12%. The Bank is prepared to take action to avoid further escalation and to prevent any more risky maneuvers by the banks.

To address the current situation, the Central Bank's governing board is scheduled to meet on Monday to discuss potential measures, including the possibility of extending the terms of Circulars 158 and 166, which have been in place for the past three months. These circulars allow beneficiaries to withdraw two installments per month, rather than one, and there is also the potential for these provisions to be made permanent. Additionally, the board will discuss strategies to control rising interest rates and prevent them from spiraling further out of control.

The growing concerns over liquidity and high interest rates were compounded by recent events involving Lebanon’s Social Security Fund. Sources close to the Central Bank also told Annahar that during the initial stages of the war in September, officials at the Bank suggested that the Social Security Fund move its funds from commercial banks to the Central Bank to prevent any destabilizing effects on the Lebanese pound.

Although the Central Bank denied making any official request, sources confirmed that the move took place without direct intervention from the Central Bank. This step was reportedly taken to prevent speculation and ensure that the Fund’s assets would not contribute to the depreciation of the Lebanese pound.

The issue resurfaced when it became clear that the funds withdrawn by the Social Security Fund had significantly depleted the liquidity of some of the commercial banks. As a result, these banks were forced to raise interest rates to attract holders of Lebanese pounds and ensure that they could cover the withdrawal demands. While the number of banks affected is relatively small—mainly “Alpha Banks” and other smaller institutions—the situation has sparked concern throughout the sector.

The Central Bank has emphasized that it does not plan to release all of its deposits from commercial banks. Instead, the Bank intends to provide loans to these institutions at a carefully calculated interest rate, which would restore balance to the market and mitigate the risks of further defaults on high interest rates.

In the event that lending takes place, the Central Bank plans to use the large amounts of Lebanese pounds it holds in its reserves—acquired through its efforts to curb inflation and stabilize the exchange rate over the past year and a half. By limiting the supply of Lebanese pounds in the market, the Bank successfully reduced inflation and kept the exchange rate relatively stable, with the money supply now at approximately 55 trillion Lebanese pounds, or about $600 million.