How the Iran war is hitting Lebanon’s economy

Lebanon’s economy is already incurring significant losses from the Israel–Iran war. The country is currently losing an estimated $60 to $80 million per day, according to Lebanon’s Ministry of Economy and Trade, as disruption spreads across trade, production, and consumption.

To understand how the conflict is impacting Lebanon’s economy, The Beiruter spoke to two Lebanese economists, Mounir Rached, president of the Lebanese Economic Association and former IMF official, and Nassib Ghobril, chief economist at Byblos Bank.

Their analysis makes clear that this is not a contained shock. What begins with rising oil prices is cascading across multiple fronts of the economy, from household spending and domestic production to public finances and foreign currency flows.

From global prices to domestic contraction

Rached identifies elevated fuel prices as having the most immediate impact at the household level.

“The rise of fuel price has three impacts,” he said. “Since demand for fuel is inelastic, it reduces disposable income for households. With less disposable income, overall demand in the economy drops and businesses reduce their production.”

This effect is reinforced by Lebanon’s household spending patterns. According to the 2024 World Bank Lebanon Economic Monitor and data from Lebanon’s Central Administration of Statistics, fuel, transport, and electricity generation account for a significant share of household spending, particularly in a system reliant on private generators.

At the same time, inflation is being driven by rising costs rather than demand. Higher global oil prices, shipping costs, and insurance premiums are increasing the cost of imported goods, while disruptions to transport and production within Lebanon are constraining supply. The World Bank finds that inflation in Lebanon is highly sensitive to import prices and exchange rate movements, allowing external shocks to pass rapidly into domestic prices.

“It affects every aspect of the economy,” Rached said.

GDP will go down, inflation will go up, consumption will go down, unemployment will go up.

Internal disruption and loss of output

Beyond external pressures, the war is also disrupting domestic production.

Public finance data indicates that overall economic activity has declined by as much as 50 percent since the escalation began. Rached explained this reflects the near-total shutdown of activity in parts of southern Lebanon due to displacement and damage.

In towns like Khiam, every activity has stopped.

The economic impact operates on two levels. Businesses that have ceased operations no longer generate daily output, while physical assets such as machinery, shops, and infrastructure have been damaged or destroyed.

Rached distinguished between these effects. The loss of a bakery, for example, is not limited to the value of its equipment but includes the ongoing loss of daily production.

These disruptions extend beyond the south. According to Rached, interruptions in transportation have affected the supply of goods such as flour and food, while large-scale displacement has increased pressure on housing markets and public services, including education and healthcare.

Pressure on imports and reserves

At the macroeconomic level, the war is feeding into Lebanon’s external accounts.

Ghobril noted that Lebanon’s import bill reached approximately $21 billion last year, with about 25 percent allocated to hydrocarbons. Rising oil prices and higher transportation and insurance costs are expected to increase that bill further.

Even if imports of non-hydrocarbon products decline because of the war, the higher costs of transportation and insurance will keep the import bill elevated.

Foreign currency inflows are already weakening, Ghobril said, noting that tourism, a key source of foreign exchange, has effectively stopped, while remittance flows may also face uncertainty as Lebanese abroad reassess their income prospects. Foreign currency reserves, which had been recovering since 2023, have also begun to decline again, falling by about $230 million in the first months of the year, largely after the onset of the war. Combined with rising import costs, these pressures are tightening constraints on the financial system and the availability of foreign currency.

These dynamics are unfolding within an economy heavily reliant on external flows. According to the 2024 World Bank Lebanon Economic Monitor, imports have consistently exceeded exports by a wide margin, while remittances reached 33.3 percent of GDP in 2023, making Lebanon highly sensitive to disruptions in trade routes, exchange rates, and regional stability.

Dollarization and its limits

Lebanon’s high level of dollarization shapes how these shocks are transmitted.

Ghobril noted that a stronger U.S. dollar can provide some relief by lowering the relative cost of imports for those holding dollars. However, he emphasized that this effect is limited compared to the broader pressures generated by the war.

“The strengthened US dollar is a marginal benefit to the Lebanese economy,” he said.

But there are much bigger challenges to monitor, such as output losses, declining revenues, reconstruction needs, and the availability of goods.

A widening economic downturn

Looking ahead, Ghobril expects a significant contraction in economic activity. Preliminary forecasts, he said, suggest that GDP could decline by between 6 percent and 12 percent, depending on the duration of the conflict and the extent of physical damage.

Public finances are also likely to come under renewed pressure. With tax revenues heavily dependent on consumption, declining economic activity is expected to reduce government income while increasing spending needs tied to social support and reconstruction. “2026 will be the first year in four years that the budget will post a deficit,” Ghobril said, “and the question is how deep that deficit will be.”

As the war extends into its second month, its impact is unfolding not as a single shock but as a series of interconnected pressures affecting households, businesses, and the state simultaneously.

“Every aspect of life has been affected, social, economic, aspirations, and outlook,” Rached said.