How regional conflict pushed Lebanon back into recession

Source: Nida Al Watan

After the Lebanese economy entered 2026 with relatively positive momentum, as preliminary indicators, particularly during January and February, showed a noticeable improvement in economic activity and market confidence, continuing along the path of gradual recovery, the picture changed following the outbreak of the “Iran Support War” in March 2026. The country then entered a phase of recession and declining GDP. The year 2025 had previously witnessed positive developments outlined by Banque du Liban in its recently issued report, which examined all the economic indicators characterizing the national economy last year.

Lebanon’s real economy recorded moderate positive growth in 2025. Indicators from the real sector and the business survey conducted by Banque du Liban point to a gradual recovery in economic activity amid an improvement, albeit still fragile, in macroeconomic and institutional conditions.

Based on the institutional developments observed during the first half of 2025, additional measures contributed to restoring a degree of confidence and improving public sector performance. The transition from a caretaker government to a fully empowered executive authority enabled the establishment of long-awaited regulatory bodies in the electricity and telecommunications sectors, alongside renewed border control measures and institutional appointments. All of this allowed for the gradual resumption of essential government functions after a prolonged period of administrative paralysis.

These developments slightly strengthened Lebanon’s governance framework and contributed to improving the business environment for economic activity, indicating a commitment by local and international stakeholders to addressing structural challenges. In parallel, the resumption of cooperation with international partners (particularly the International Monetary Fund and members of the Gulf Cooperation Council) reinforced cautious optimism regarding prospects for external financial assistance and renewed investment inflows. Nevertheless, economic recovery remains constrained by persistent structural weaknesses. The absence of a comprehensive economic recovery strategy and delays in implementing key reforms, including the approval and adoption of a financial gap framework, continue to undermine confidence in financial and public institutions, while the cash-based economy remains dominant.

Real GDP growth

In addition, escalating regional tensions, particularly those involving Iran and the United States, as well as the fragile security situation in southern Lebanon, have negatively affected investor sentiment, limiting the recovery of private investment and foreign direct investment. In this context, the following sections examine recent developments in economic activity and price dynamics and assess the key factors shaping Lebanon’s macroeconomic conditions.

Banque du Liban estimates real GDP growth at 3.8% in 2025, indicating a return to positive, though still fragile, expansion after marginal or negative growth rates during the 2022-2024 period.

Following a sharp contraction of 6.4% in 2024, this growth is expected to increase nominal GDP from US$27.7 billion in 2024 to US$33 billion in 2025.

Economic activity

Economic activity witnessed a significant rebound during the first half of 2025, reflecting the normalization of economic conditions following the end of the armed conflict in November 2024. Optimistic expectations regarding political stability and potential economic reforms contributed to a temporary recovery in business and consumer confidence. As the year progressed, however, optimism stemming from post-conflict dynamics and political trends declined, as progress in implementing key structural reforms and financial sector measures proved slower than expected. This deterioration in sentiment was also reflected in the sovereign Eurobond market toward the end of the year.

Sovereign bonds

After the price of Lebanese sovereign bonds rose from US$13.1 in December 2024 to US$22.5 by the end of September 2025 on the secondary market, prices saw only a slight increase to US$23.6 by the end of December. Quarterly gains slowed to 4.8% in the fourth quarter of 2025, compared to 25% in the third quarter of the same year.

Lebanese sovereign bonds continue to suffer from the repercussions of the government’s March 2020 decision to default on its external financial obligations, as well as from the absence of negotiations since then with domestic and foreign bondholders regarding restructuring or refinancing the bonds. Nevertheless, the recovery of the tourism sector during the second half of the year helped offset part of the slowdown in growth, supported by improved regional security conditions following a reduction in tensions between the United States and Iran. Tourism inflows were further boosted by international events, including the pastoral visit of Pope Leo XIV at the end of 2025. Overall, real sector indicators confirm the recovery in domestic activity during 2025, as imports of petroleum derivatives rose by 24%, while electricity production by the national electricity company increased by 24.6%.

Compared to 2024, public revenues improved significantly, with customs revenues increasing by 96.0%, while collected real estate fees rose by 118.8% compared to 2024. Construction activity also improved similarly, with cement deliveries rising by 36.0%, building permits by 29.3%, and construction starts by 52.9%. The total number of arriving passengers at Beirut Rafic Hariri International Airport increased by around 30%, driven mainly by developments during the second half of 2025, while incoming shipments to the Port of Beirut rose by 12.1% in 2025.

Finally, payment and transaction data supported this trend, as the issuance of new checks increased significantly. The value of checks denominated in Lebanese pounds rose by 149% to reach US$503.7 million, while the value of dollar-denominated checks increased by 229% to US$993.1 million.

This reflects a sharp increase in transactions during 2025, although the amounts remain modest. Overall, the recovery in 2025 remains fragile and largely cyclical, driven primarily by a rebound from a low base. Structural constraints, weak financial intermediation, and declining private investment continued to negatively affect the sustainability of growth and Lebanon’s economic potential over the medium term.