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After the terminology of forensic auditing became popular, and then endorsed, a new term entered the “arena” open to verbal experimentation, called “criticism board.” It is a term that the Lebanese began to hear strongly in recent days, and it is being presented as the magic solution that will restore the shine to the Lebanese pound and protect the country from the promised “hell”.
While the political scene continues its complex course, things advance in their mortal order, and the country remains without a government despite the delicacy of the situation, which has reached a point where it is allowed to say that Lebanon is in danger of disappear, the void is filled with proposals and ideas that do not rise to the levels of the stage. These ideas, despite their importance at times, come in a separate context from the comprehensive solution whose roadmap has been released, and is based on an independent government undertaking the development of a comprehensive rescue plan that is identified with the requirements of the local and international community, and passes judgment in the International Monetary Fund.
Outside of this framework, some go out of their way to present ideas and suggestions, that the local community yearns for a tree of salvation that can bring it out of the drowning situation of months. The last and most recent proposal that is being discussed relates to the formation of a currency board that would take over the process of pulling the lira out of its collapse and fix its exchange rate to avoid a further fall in its value in the future. . Enthusiasts of the idea give advance figures of the price that can be adopted to fix the pound, which is between 5,000 or 5,500 pounds per dollar. (The exchange rate currently on the black market is 8,300).
What is the history of this currency board, which is capable of working miracles, and is it true that it is the sure step towards a fixed exchange rate in these difficult circumstances, with which the Lebanese fear that the exchange rate of their national currency continues to deteriorate in the next stage, leading to serious inflationary figures similar to those achieved by countries? Were you exposed to financial collapse and an economic lockdown?
Before reaching a final judgment on the role and importance of the critical board that is being promoted, it is necessary to present a brief overview of what this institution is, how does it work? where did you work? What was the results? Consequently, the following observations and facts can be made:
First: throughout history, currency councils only existed in colonized countries. And it spread, in particular, in the countries that Great Britain colonized and remained under its authority. And every time a country achieved its independence, it left the currency board and established a central bank. Thus, the existence of a central bank became an indicator of the economic and financial independence of the state. Therefore, it is not possible to evaluate the results of the experiences of these councils and compare them with the current situation of the countries, after the end of the colonial era in the world.
Second – In the modern era, there are several experiences on the subject of the critical board, some of which were considered unsuccessful, such as the Argentine experiment that began in 1991 and ended in 2002. Some of them are considered successful by some, although it needs more scrutiny, like the Bulgarian experience. Lithuania, Estonia, and Bosnia also experienced the currency board experience. All these experiences are still subject to an evaluation process to know their true consequences on the economy, especially since this type of monetary policy requires a long period of time to judge its results.
Third – There are no developed and stable countries that have a monetary council in their policies. These councils exist only in countries suffering from crisis and exceptional situations. Therefore, the term CBA currency board arrangement is used to denote the exceptional and transactional nature of establishing this type of institution.
In the end, it should be known that the almost exclusive role of the currency board is to maintain a fixed exchange rate by linking the currency of the target country to the currency of another developed country. This principle is based on the idea of a complete link between two currencies: one subordinate and one subordinate. This principle cannot be applied without relying on the hedge in the currency chosen by any currency board to form the reserve that can be relied upon to print the currency and determine the size of the money supply. The principle is simple and does not consist of printing any banknote whose cover is not covered by hard currency. The objective of this measure continues to be to curb the growth of inflation and to set a low interest rate.
But this principle, despite its simplicity, cannot be applied with simplicity per se, and the success or failure of the monetary council experience is almost like the success and failure experiences of countries’ cooperation with the IMF. Some succeed and others fail, the criterion here in general is the correct application of plans and laws, and the situation in each country.
Do the criteria for the success of the Monetary Council experience apply to the Lebanese situation?
Many questions that must be safely answered to find the answer, including:
First: What is the difference between the experience of fixing the exchange rate of the Lebanese pound that the Currency Board could handle and the stabilization experiment that the Bank of Lebanon undertook for twenty years?
Second – What is the hard currency cash reserve on which the currency board will be based to determine the lira exchange rate, and the remaining mandatory reserve at the central bank is fixed for approval, or is it mobile and is it available to the authority that is considering using it to complete support, even under the name of streamlining?
Third – What is the impact of the existence of a monetary council in the banking sector, which will count, despite the current loss of confidence in it, to move the country forward again when the time comes to implement the plan rescue?
Fourth – What is the opinion of the International Monetary Fund in this regard and can this option be adopted without its approval?
There are additional questions to be asked before expressing enthusiasm for the creation of a critical council, and the matter needs deep and silent study, not offers to present proposals, in the manner of “I suggest that I am present.”
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