Lebanon pushed to the brink by the war next door

Reuters/Esa Alexander

Four months of near-daily airstrikes and shelling on the southern border of Lebanon, which was already reeling from a four-year economic crisis, have taken their toll on the country’s economy.

Analysts warn that Lebanon’s vulnerability means a serious escalation of fighting could wipe out half of GDP.

Output has plummeted and, according to the World Bank, the government’s budgeted spending has fallen by more than 80 percent.

Lebanon has only a caretaker government and capital flows from abroad now account for up to 90 percent of GDP, according to estimates by The Policy Initiative (TPI), a think tank in Beirut. 

The ultimate cost to Lebanon of Israel’s conflict with Hamas in Gaza could dwarf the impact of the month-long war in 2006, when Israel bombed Beirut and targets in the south of the country, according to TPI.

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The think tank’s study does not take into account the direct costs of war, physical damage caused or the loss of life and expertise.

The Lebanese government estimates that the war of 2006 caused $3.5 billion in damage to infrastructure while contributing to a long-term exodus of skilled labour. 

Now TPI estimates that the border conflict has already cost Lebanon at least $1.6 billion in inflows. It warns that if the war escalates significantly, that figure could jump to more than $7.7 billion, nearly half of Lebanon’s shrinking $16 billion GDP.

“I’m fairly confident the numbers we have gotten are some of the better numbers that have been thrown around since the war started,” says Sami Zoughaib, an economist who co-authored the report. 

Since the national government is apparently unable – and the international community potentially unwilling – to invest in reconstruction, Zoughaib says any post-war situation is likely to be “much, much worse” than that of 18 years ago.

After 2006, high levels of foreign direct investment helped maintain GDP growth of between 8 and 10 percent over the following four years. But Nasser Saidi, a former minister of economy and an AGBI columnist, says any reconstruction effort now is likely to be less successful.

“Remember that the country then had a functioning banking sector and financial system that was able to support recovery, along with supportive GCC allies aiding in reconstruction,” Saidi says.

“As it stands, there is a zombie banking sector in shambles and any GCC support will be linked to conditionalities, including economic policy and structural reforms.”

In four years of crisis, Lebanon’s government has enacted only minor reforms – although a “bail-in” plan to rebuild the banking sector has now been proposed. The absence of government, which has forced 80 percent of the population of 5 million nationals into poverty, has dulled international support among allies and lenders alike. 

In an effort to help balance the books, the government’s austerity budget for 2024 has matched its outgoings to revenue, slashing government spending from the equivalent of $16 billion in 2018 to the equivalent of just $3 billion. 

The bulk of the collapse in revenues is down to an absence of tourists. TPI estimates that if visitor numbers fall by 90 percent, as they did in 2006, the country would lose out on a potential $4 billion, assuming an average spend of $1,500 per person. 

Reuters/Mohamed Azakir

The report also predicts a $1.5 billion loss in remittances, although other experts say this figure is harder to quantify. 

Lebanese workers overseas send back between $6 billion and $7 billion a year, according to the central bank. This is equivalent to about 38 percent of GDP – the highest ratio in the Mena region. The central bank’s figure covers money arriving through unofficial as well as official channels, but analysts say the real total is probably higher.

“This is just an estimate,” says Simon Neaime, professor of economics and finance at the American University of Beirut. He believes it understates the amount of “dollars entering through the airport”.

The central bank also estimates that 70 percent of remittances could be entering the country outside the banking sector, as people avoid the high fees and perceived risk associated with the official channels. 

If the real total for remittances is $8 billion to $10 billion a year, as Neaime believes, this suggests that between $5 billion and $7 billion –  equivalent to 40 percent of Lebanon’s GDP – enters the country each year as cash dollars stuffed in pockets and suitcases.

If the events of 2006 are repeated and Beirut airport is bombed, this lifeline could be severed. 

“With a banking system that is already not functioning properly,” says Neaime, “and with a war on top of that, those remittances might struggle to reach those they are sent to. If that is the case, the economy will collapse.”