Interest Rate Determination in Lebanon

Abstract

This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. This paper seeks to understand how interest rates are formed in Lebanon, by focusing on the pass-through from benchmark rates, prevailing liquidity conditions, and the main characteristics of the Lebanese economy, notably its open capital account, fixed exchange rate, high government borrowing requirement, large public debt, and high degree of deposit dollarization. We find that international interest rates are an important element in the determination of interest rates in Lebanon. In particular, the pass-through of global benchmark rates to interest rates on sovereign bonds is about 70 percent. The less-thancomplete pass-through could be attributed to a home-bias effect reflecting a relatively stable and dedicated investor base. The study also shows that interest rates in Lebanon are affected by liquidity conditions as well as perceived sovereign risk.

Reason for Reserve? Reserve Requirements and Credit

“…Then, the conclusion of the “Paris II” donor conference in November 2002 and its agreement of financing support produced a positive signal (e.g., the Eurobond spread decreased from over 1,000 bps in October 2002 to 860 by end‐November 2002; the interbank rate dropped from 8.3% to 5.5% over the same period). In response, capital inflows surged and net foreign assets at the BDL reversed course as shown in the 2002Q4 figure in Panel B (also see Poddar et al , Schimmelpfennig and Gardner , Schnabl and Schobert ).…”

“…Note: The benchmark international rate shown is the 1‐month Eurodollar deposit rate because the majority of deposits in Lebanon have a maturity of 1 month or less (Poddar et al ). Note the Paris II Donor Conference concluded in November 2002.…”

“…To better understand the central bank's policy stance in 2001, Poddar et al () discuss the BDL's two main targets: (i) the spread between foreign currency deposit rates offered domestically and those in international markets and (ii) the spread between local currency and foreign currency deposit rates domestically. The first target is to attract sufficient capital inflows into the country and the second target is to encourage local currency deposits with adequate compensation for currency risk.…”

Interest Rate Pass-Through and Monetary Transmission in Lebanon Loan Market

“…The data cover the monthly span from January 1998 to June 2016, over which the country adheres to the $de jure$ and $de facto$ fixed exchange rate system. The rate on central bank certificates of deposit serves as the main reference interest rate for the economy [28].…”

“…The paper conducted by Poddar et al (2006) examined the monetary transmission for Jordan. Various transmission channels have been investigated, focusing on the central bank operating target, i.e.…”