when the level of hostilities in the country reached new highs. Over the subsequent decade, the economy and the stability of the Lebanese pound were shattered, as the Lebanon Central Bank was called upon to fund the operations of the government through one of the most harrowing episodes imaginable for any country.
Prior to 1984, the fundamental principle of the Lebanese monetary system had been a freely convertible Lebanese pound. Additionally, Lebanese citizens were free to hold foreign currency accounts in their banks, and remittances received from abroad could be processed with relative ease through Lebanese banks. As both the value and the stability of the Lebanese pound deteriorated, the importance of foreign currencies in the Lebanese economy increased, and a so-called "twin currency" economy developed. In the twin currency economy, foreign cash and drafts on bank accounts held outside of Lebanon became increasingly commonplace. As a consequence, it became all but impossible to determine how much foreign cash was entering the country once transfers began to bypass the banking system. Living standards in Lebanon deteriorated rapidly.
The devastation to Lebanon's economy caused by the almost continuous state of hostilities that began in 1974 may be illustrated through a consideration of inflation rates over time in the country. As the data presented in Table 1, below, indicate, a relatively reasonable pre-1974 rate of inflation of 5.8 percent per annum quickly escalated through the years of hostilities, reaching an average rate of 138 percent per annum for the 1985-1990 period.
Source: Bank of Lebanon Annual Report, 1991, 1992, 1993.
Lebanon's international trade deficit also deteriorated through the period of heightened hostilities, as the value of the Lebanese pound deteriorated. Trad
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