The stability of the Lebanese pound is increasingly under strain, as the currency’s value becomes entwined with two simultaneous conflicts: Israel’s war on Lebanon and the broader U.S.-Israeli confrontation with Iran, which has evolved into a regional crisis impacting Gulf economies.

The pound currently trades around 89,500 to the U.S. dollar, a level that analysts say does not reflect genuine economic equilibrium. Instead, it represents fragile stability maintained through central bank policies, even as domestic and external pressures intensify. How long this balance can hold amid the overlapping domestic and regional conflicts is highly uncertain, and largely depends on Banque du Liban’s management of monetary policy in the context of two ongoing, unpredictable wars.

Regionally, currencies in Turkey and Egypt have already suffered significant shocks. In Lebanon, although the pound has lost roughly 98% of its pre-crisis value and dollarization exceeds 95%—which theoretically mitigates the impact of further depreciation—risks remain high. Observers warn that without a reduction in war-related pressures, the country could face a full-scale monetary crisis.

Warnings are mounting over the pound’s vulnerability, which, despite recent stabilization, remains dependent on central bank measures. Banque du Liban has largely managed liquidity by removing excess Lebanese pounds from circulation, curbing government spending, and balancing money flows against dollar inflows from expatriate remittances and tourism.

This balance, sustained since August 2023, could have persisted pending deeper monetary reforms. However, the combined effect of declining foreign inflows and rising domestic expenditures now threatens to destabilize the currency. In short, the current conditions run counter to the monetary balance the central bank has sought to maintain over recent years.

Roughly a month into the dual conflicts—the U.S.-Israeli confrontation with Iran and the Israeli offensive in Lebanon—financial inflows to Lebanon have already declined by an estimated 5%, according to preliminary banking assessments. Analysts expect further reductions if the regional conflict continues.

The two wars are closely connected, especially as the majority of Lebanese expatriate remittances come from Gulf countries, whose economies are under pressure due to oil sector disruptions. Transfers have become increasingly complex and sensitive, influenced by heightened caution over wartime uncertainty, a roughly 30% surge in regional living costs, and stricter banking controls. As a result, Lebanese expatriates have reduced transfers to family members, except during the initial phase of the conflict, when remittances surged to cover immediate living and displacement costs.

Tourism, previously Lebanon’s second-largest source of foreign currency, has also collapsed. Visitor flows, largely from Lebanese expatriates, have disappeared entirely due to both the local conflict and broader regional instability, coupled with global concerns over rising oil prices and economic uncertainty.

Declining foreign inflows have coincided with rising domestic expenditures, placing additional strain on the government. Spending in Lebanese pounds has increased to provide shelter, cover essential needs for displaced populations, expand healthcare for the wounded, and address other urgent wartime demands.

The imbalance between the domestic money supply and dwindling foreign currency inflows is expected to further pressure the exchange rate, particularly if the conflicts persist. Rising import costs, driven by higher global oil prices and shipping fees, have also increased Lebanon’s import bill, effectively draining more dollars from the domestic market and exacerbating the monetary imbalance.

Banque du Liban retains only limited tools to manage the currency, mainly balancing domestic expenditure against declining inflows and rising import costs.

A banking source cited by Al-Modon warned that the central bank may struggle to maintain the current exchange rate if the war continues for an extended period, as its capacity is constrained and policy options are narrowing. The central dilemma lies in choosing between defending the pound or preserving foreign currency reserves.

For now, Banque du Liban is still managing to balance the monetary supply and stabilize the currency. However, sustaining this position over several months appears unlikely under current conditions.

Samir Hammoud, adviser to the finance minister and former head of Lebanon’s Banking Control Commission, told Al-Modon that the market remains under the central bank’s control because the volume of Lebanese pounds in circulation is not yet high enough to generate real pressure.

“But the future carries significant risks,” Hammoud said. “The combination of displacement, economic stagnation, and declining state revenue is driving up public spending. If the money supply in pounds grows, Lebanon will face a choice between maintaining the exchange rate and preserving foreign currency reserves. Maintaining both simultaneously will be extremely difficult, and prioritizing the exchange rate at the expense of foreign reserves would not be prudent.”

Lebanon’s economic survival hinges on a swift end to the war and renewed external support; both of which appear unlikely in the near term.

Without these interventions, the country faces another battle: preserving the stability of the Lebanese pound, even if only superficially, in what economists warn is a losing fight against the dollar.