Lebanon confronts change and the legacy of collapse

The Middle East is entering a period of rapid and unsettling change. Alliances are shifting, former allies are turning on one another, and new conflicts are emerging even as old enemies quietly reopen channels of dialogue. The region appears to be operating under new rules. These transformations are far from ordinary. They affect every country, and Lebanon, inevitably, is caught in their wake.

Lebanon is both shaken by regional instability and pushed towards difficult conversations. On one front lies Israel, still engaged in conflict with Hezbollah, yet signaling an interest in peace and normalization with Beirut. On another lies Syria, where no leadership has ever taken power without viewing Lebanon’s western border as a persistent nuisance. Many unresolved issues remain between the two states, most notably the long-delayed demarcation of their shared border.

As a result, Lebanon continues to face a succession of what many describe as “bitter cups”. In recent months, the country has witnessed intense diplomatic activity aimed at containing crises and searching for compromises. Some demands were met only rhetorically. Lebanon made commitments that few believe it is either able or willing to fully honour, including the disarmament of Hezbollah north of the Litani River and the confrontation of entrenched corruption at the top of the state.

Other measures were implemented more decisively, despite internal tension. Hezbollah’s visible armed presence was removed south of the Litani. A civilian diplomat, Ambassador Simon Karam, was appointed to the ceasefire monitoring committee, and steps were taken to address financial governance at the central bank and the fate of depositors’ funds.

Yet a new source of anxiety looms large: Iran’s deepening internal crisis. Protests are expanding, lethal force is increasingly used against demonstrators, and fears of civil conflict are growing. The consequences of such turmoil would not stop at Iran’s borders. They would reach Hezbollah and Lebanon itself.

Tehran’s funding & the Leb eco

For years, Iranian financial support for Hezbollah exceeded $700m to $1bn annually, at times resembling an open-ended commitment, particularly after the 2006 war and during the Syrian conflict. This funding was not limited to military purposes. It functioned as a parallel economic system within Lebanon.

Thousands of families depended on it: fighters, administrators, healthcare workers, teachers, and beneficiaries of monthly aid. Any serious reduction would sharply weaken purchasing power in Hezbollah’s support base, directly affecting trade and retail activity in areas under its influence, from Beirut’s southern suburbs to the south and the Bekaa Valley.

The risk extends to Hezbollah-affiliated institutions that substitute for the absent state, providing healthcare, loans, and social services. Funding disruptions, already emerging due to intensified US sanctions on Tehran and Israeli pressure on Lebanon, would place further strain on Lebanon’s fragile public institutions.

Iran’s shift: Will Hezbollah retreat?

Following the collapse of the Assad regime and the rise of a transitional government in Damascus, Syria ceased to be a reliable corridor for Hezbollah. Instead, it became a barrier to security. The new Syrian leadership moved to convince Washington and Tel Aviv that it could police its border with Lebanon and prevent the smuggling of missile and drone components, with the aim of gradually exhausting Hezbollah’s arsenal.

Smuggling did not end, but it diminished. Alternative routes, including through Turkey, allowed limited flows of money and weapons to continue, at a far lower level than before.

The economic roots of Iran’s unrest may now force Tehran to scale back funding for allied militias in Lebanon, Yemen, and Iraq, curb foreign interventions, and prioritise domestic stability. Iran’s long-standing policy of brinkmanship abroad increasingly risks igniting an internal conflict of unpredictable scale, while external pressure -especially from the United States- continues to mount.

As Iranian resources shrink and political influence wanes, Hezbollah may find itself increasingly isolated. Stripped of regional backing, it could be forced to seek legitimacy within Lebanon itself rather than through its place in a wider axis.

The “rescue” government

Until parliamentary elections are held, expectations remain cautiously pinned on the government led by Nawaf Salam. It brings together technocrats, yet remains constrained by party representatives and sectarian power-sharing.

The cabinet secured confidence on the basis of four stated priorities: halting financial collapse, restoring judicial independence, addressing the refugee crisis, and implementing UN Resolution 1701, implying Hezbollah’s disarmament and Israel’s withdrawal from remaining contested border points. Even so, deep divisions persist within the government over weapons, financial reform, and electoral rules.

Lebanon’s economy remains locked in what officials describe as “fragile stability”. Central bank measures and fiscal restraint have slowed the collapse but failed to generate durable growth. World Bank estimates indicate a 1% contraction in GDP in 2025, bringing the cumulative economic decline since 2019 to nearly 40%.

Under new management, the central bank moved to unify exchange rates, suppress the black market, and shut down institutions under US sanctions. Exchange rates stabilised, the Sayrafa platform was dismantled, and more transparent market mechanisms were introduced. Speculation eased, but the economy became almost fully dollarised.

Cash transactions remain widespread, benefiting illicit networks, while efforts to expand electronic payments -crucial for curbing money laundering- have faltered.

Inflation, meanwhile, remains stubbornly high. Consumer prices rose by 16.4% in October 2025, driven by the removal of subsidies on electricity and telecommunications, higher customs duties, and new taxes. Rent prices surged by 55%, while electricity costs more than doubled.

The government passed a budget nominally targeting a zero deficit, with spending and revenues set at around 445tn Lebanese pounds. Critics dismissed it as a “wage-and-pensions budget”, with salaries and retirement payments consuming more than half of total expenditure in an attempt to restore public-sector purchasing power.

The financial gap law

The estimated $72bn in losses has deepened disputes between the government and the banking sector. Banks pushed to shift responsibility onto the state through a sovereign fund backed by public assets, while the IMF insisted losses must first be absorbed by bank capital, followed by large depositors.

Despite legislative progress, depositors have seen little improvement. Banks continue to impose harsh, informal capital controls, allowing monthly withdrawals of only $400–$ 500. A proposal to guarantee deposits up to $100,000 has been announced, but its funding remains opaque.

Lebanon continues to rely heavily on private generators and solar energy. Although electricity supply improved slightly in summer 2025, generators remain essential, despite their severe environmental and health costs.

Water shortages reached historic levels during the worst drought in recent memory, compounded by sewage and industrial pollution, particularly in the Litani River. Waste management remains equally unresolved. The destruction of sorting facilities during the war led to illegal dumping and open burning, worsening air pollution and respiratory illness. Limited donor-funded projects addressed rubble from urban destruction, but sustainable solutions remain elusive.

Education, justice, and prisons

The education sector is in severe distress, especially public schooling. International assessments revealed a stark performance gap between private and state schools. Teachers’ strikes over wages persist, and dropout rates are high: more than one in ten Lebanese children and over half of refugee children are out of school.

Prisons are widely described by humanitarian groups as a “ticking time bomb”. Overcrowding at Roumieh prison exceeds 360%. Shortages of food and medicine, coupled with funding failures, have led to deaths and outbreaks of disease.

Borders and shifting frontlines

Despite the ceasefire declared in November 2024, southern Lebanon remains highly volatile. Israel continues to strike Hezbollah positions north and south of the Litani, targeting strategic border points to prevent military reconstruction.

Hezbollah emerged from the conflict militarily and logistically weakened, yet organisationally intact. Under international pressure, it showed tactical flexibility by withdrawing visible armed units from the south. It has nevertheless refused broader disarmament, tying its fate to Iran’s regional calculations and warning of civil conflict should the state attempt to seize its weapons.

Resilience in the storm

The fallout from Iran’s unrest is likely to deepen, particularly for Lebanon, which already lives under the shadow of a potential new Israeli war. Arms smuggling continues through multiple routes, despite intensified monitoring.

Yet Lebanon’s much-invoked “phoenix” narrative has not been entirely hollow. Despite relentless crises, the private sector has demonstrated unexpected resilience. Businesses continue to open and reinvest, even under harsh conditions. The purchasing managers’ index edged up in late 2025, supported by tourism driven by expatriate visits.

At peak summer and winter periods, Lebanon welcomed more than 20,000 travellers per day. Hotel occupancy in Beirut approached 90%, injecting vital fresh dollars into an economy still fighting for breath.