From the illusion of recovery to contraction

Source: Nida Al Watan

The crisis in Lebanon is no longer about how to restore growth or restart the economy. It is now about how to prevent further collapse. This is the prevailing impression among most experts. War does not strike a single sector, it shifts the entire Lebanese economy from a state of “fragile recovery” to one of an “emergency economy.” In this state, incomes erode, state revenues decline, and both market stability and purchasing power weaken, while any external support remains conditional on confining weapons to the hands of the state.

Economic Activity Contracts

Today’s war appears harsher than the last, largely because the Lebanese economy had not recovered from the previous conflict or from its accumulated structural crises. The wounds left by the 2024 war have become permanent scars, and the current war is adding burdens that exceed the state’s ability to manage in the short and medium term. In practical terms, Lebanon is entering this new phase of escalation without real fiscal or monetary buffers, without a public sector capable of absorbing shocks, and without a productive base able to offset losses.

Declining State Revenues and Widening Deficit

The first blow hits state finances. Estimates suggest that government revenues could drop significantly, by as much as 50%, leading to an immediate deficit in the 2026 budget. This effectively reduces the state’s capacity for operational and service spending, making it increasingly difficult to fund any social response, reconstruction efforts, or even maintain basic institutional functioning and public sector salaries.

Pressure on Reserves

From there, the impact extends directly to monetary and financial stability. War puts pressure on the Central Bank’s liquidity and accelerates the depletion of usable foreign currency reserves. If this trend continues, the central bank’s ability to stabilize markets, support the exchange rate, and contain inflation will become increasingly limited. This opens the door to a new cycle of monetary instability and exchange rate volatility, despite reassurances from the central bank about its capacity to manage supply and demand.

Declining Remittances

Here lies the most dangerous link: war hits incomes from two directions at once. On one hand, domestic consumption and economic activity decline. On the other, remittances, especially from the Gulf, enter a zone of risk. These transfers, which have been a key pillar of Lebanon’s economic resilience, may already be decreasing, or at least entering a phase of acute uncertainty. If this trend holds, Lebanon could lose its most important safety valve, one that has kept a large segment of households from total collapse since the crisis began.

A Livelihood and Food Crisis

The effects of war extend beyond fiscal and monetary pressures to markets, goods, and food security. Disrupted supply chains, rising food prices, and increased demand driven by displacement all intensify pressure on markets. The danger is not limited to inflation; it also includes potential disruptions in distribution and declining stock levels in certain areas. In this sense, war does not only produce general economic contraction, it transforms it into a daily livelihood crisis that directly affects access to food.

Weapons First

With a weakened state, unstable markets, and declining purchasing power, reliance on external support does not appear immediately viable. The international approach, particularly from the United States, does not treat Lebanon’s economy as a standalone issue that can be addressed through numbers alone. Instead, it is viewed as contingent on de-escalation, a ceasefire, and the consolidation of weapons under state control. Lebanon is participating in the World Bank and IMF Spring Meetings in Washington with a delegation led by Finance Minister Yassine Jaber, but no breakthroughs are expected as long as the war in southern Lebanon continues.

This war does not strike the Lebanese economy as mere figures in reports, it targets its last remaining pillars: trust, remittances, import capacity, market stability, and the prospect of external support. The question is no longer how much growth Lebanon will lose, but whether the economy can withstand another war when it has yet to recover from the last.

All indicators suggest that Lebanon has already entered a phase of damage control, not recovery, and that each additional day of war raises the cost of returning to financial and social stability.