An employee shows Lebanese money at an exchange office in Beirut, Wednesday, Nov. 8, 2017. (The Daily Star/Mohammad Azakir)
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With fixed exchange rates and some of the world's worst debt and balance-of-payment ratios, Lebanon risks serious economic crisis next year should worsening relations with Gulf states choke off the capital flows sustaining its currency's dollar peg. Lebanon's ability to dodge financial disaster has for years confounded critics, whose warnings of debt defaults, balance of payments crises and a collapse of the pound currency, have all come to nought.The point around which all this could unravel is Lebanon's currency, which is pegged at a rate of 1,500 per dollar.Instead, the country relies on deposit inflows to Lebanese banks from its diaspora, which vastly outnumbers the 4 million Lebanese at home, to fund the government and maintain Central Bank defenses.With a pegged currency, authorities must hold sufficient dollar buffers to maintain faith in the exchange rate, while ensuring steady inflows to keep coffers topped up.During November's turmoil, some Lebanese rushed for dollars; data shows central bank foreign assets fell by $1.6 billion last month, with traders citing interventions to support the pound.Steady deposit growth has allowed banks to fund the government, while the central bank also leverages this cash; it offers banks attractive interest rates and exchange rates for dollar deposits.
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