World Bank warns of Lebanon’s economic setback

After showing its strongest signs of recovery since the onset of the 2019 financial crisis, Lebanon’s economy has once again been thrust into recession by renewed conflict. According to the World Bank’s Summer 2026 Lebanon Economic Monitor (LEM), titled “A Conflict-Torn Economy,” the renewed armed conflict that began between Israel and Hezbollah in March 2026 has erased the fragile stabilization achieved during 2025, leaving the country facing another year of economic contraction, rising inflation, mounting reconstruction costs, and deepening humanitarian needs.

The report projects that Lebanon’s real gross domestic product (GDP) will contract by 6.4 % in 2026 after expanding by an estimated 4.2% in 2025; the fastest rate of growth recorded since the country’s financial collapse began more than 6 years ago.

A recovery interrupted

Lebanon entered 2026 with considerably stronger economic momentum than initially anticipated. Improved political stability, rising consumer spending, stronger private investment, and a rebound in tourism had driven an upward revision of 2025 GDP growth from 3.5% to 4.2%. High-frequency indicators reflected this improvement, with increased construction activity, higher passenger arrivals, stronger banking transactions, and greater economic activity across multiple sectors.

However, the renewed conflict that erupted on 2 March 2026 dramatically altered the trajectory of the economy. Military operations caused widespread destruction of housing and infrastructure, particularly across southern Lebanon, Nabatieh, and Beirut’s southern suburbs. According to official figures cited by the World Bank, more than 4,300 people were killed and over 12,000 injured between March and July 2026, while more than 1 million people, approximately one-fifth of Lebanon’s population, registered as internally displaced. Nearly 91,000 housing units were partially or completely destroyed within just a few months.

The conflict disrupted supply chains, weakened domestic demand, and severely affected tourism, one of the country’s principal sources of foreign currency earnings. Unlike the 2024 conflict, the World Bank warns that the current wave of displacement is likely to persist well beyond the cessation of hostilities, prolonging its economic consequences and delaying recovery.

Tourism and consumption bear the brunt

The World Bank identifies tourism and private consumption as the two sectors most severely affected by the renewed conflict. Tourism, which had been instrumental in supporting the 2025 recovery, suffered an abrupt collapse as insecurity, flight cancellations, and regional instability discouraged international travel. Although Beirut’s airport and seaports continued operating despite significant disruptions, most foreign airlines suspended flights, substantially reducing visitor arrivals.

Private consumption has also weakened sharply due to prolonged displacement, declining consumer confidence, and worsening security conditions. Together, these two demand channels account for most of the projected economic slowdown. According to the report’s Special Focus analysis, Lebanon’s GDP growth in 2026 is expected to be 10.4% points lower than it would have been under a scenario without renewed conflict.

The World Bank cautions that the long-term costs may prove even greater than the immediate losses. Continued displacement, damage to physical infrastructure, interruptions in education and healthcare, and the potential emigration of skilled workers all threaten Lebanon’s productive capacity and medium-term growth prospects.

Fiscal improvement under pressure

Despite the deteriorating security environment, Lebanon’s public finances entered 2026 in a relatively stronger position than in previous years. The government recorded an overall fiscal surplus equivalent to 3.9% of GDP in 2025, reflecting stronger tax compliance, improved customs administration, and increased value-added tax (VAT) collection. Government revenues reached $6.18 billion, while expenditures remained relatively contained.

The positive fiscal trend continued during the first months of 2026, with overall and primary fiscal surpluses maintained despite rising expenditures associated with the conflict. However, the World Bank expects fiscal performance to deteriorate during the second half of the year as humanitarian assistance, reconstruction costs, and pressures to increase public-sector wages place growing demands on public resources while economic activity, and therefore tax revenues, slows.

Although Lebanon’s debt-to-GDP ratio has fallen from its post-default peak, the report stresses that public debt remains fundamentally unsustainable. More than 6 years after Lebanon’s sovereign default, negotiations on comprehensive debt restructuring have yet to begin, leaving one of the country’s most pressing structural challenges unresolved.

Inflation, external risks, and banking sector challenges

The renewed conflict has also intensified pressures on Lebanon’s external accounts and monetary stability. Inflation is expected to accelerate to 17.5% during 2026 as supply chain disruptions, higher freight costs, and rising oil prices increase domestic prices in an economy heavily dependent on imports. The report warns that continued inflation will further erode already weakened household purchasing power.

While the Lebanese pound (LBP) has remained relatively stable through tighter liquidity management and the use of foreign exchange reserves, the World Bank cautions that exchange-rate stability could come under pressure if external inflows weaken or conflict-related shocks persist. Foreign currency reserves have already declined as authorities sought to preserve monetary stability amid heightened uncertainty.

Meanwhile, the banking sector remains deeply impaired despite recent legislative progress. Parliament approved important amendments to the Bank Resolution Law in August 2026, creating a modern legal framework for managing banking crises and restructuring financial institutions. The Cabinet had previously approved the Financial Stabilization and Depositor Recovery Law, although the World Bank notes that further amendments remain necessary to fully align the legislation with international standards and establish a sustainable framework for depositor recovery.

Reforms remain essential

Despite the worsening outlook, the World Bank argues that the current crisis should not delay Lebanon’s reform agenda. Instead, the report stresses that financial sector restructuring, stronger public financial management, and implementation of a credible medium-term fiscal framework are now more important than ever.

Authorities have continued advancing reforms despite the conflict, while simultaneously maintaining essential trade corridors, preserving macroeconomic stability, and responding to humanitarian needs. However, the World Bank warns that reconstruction financing and long-term recovery will depend heavily on restoring confidence among international partners and demonstrating sustained commitment to reform.

Therefore, lasting recovery will require more than reconstruction alone. Comprehensive banking reforms, sustainable fiscal management, debt restructuring, and continued institutional reform remain indispensable if Lebanon is to restore investor confidence, secure international financing, and rebuild an economy capable of delivering long-term stability and inclusive growth.