- 16:15
Once again, Lebanon pays a steep price for yet another war. The conflict between Israel and Hezbollah is poised to have severe repercussions for the economy in both the short and medium term, and these effects could escalate if the war prolongs or intensifies.
This conflict will inflict particularly harsh consequences on the Lebanese economy in both the short and medium term. Already struggling with a dire economic crisis, Lebanon may experience further deterioration, characterized by rising inflation and increasing unemployment. The heightened tensions have also created a climate of uncertainty that severely impacts both foreign and local investments, which are already at historic lows. The war is likely to drive investors and professionals to flee the country, thereby consigning any hopes for economic recovery to oblivion. Additionally, Lebanon's once-thriving tourism sector is expected to suffer a significant decline in tourist arrivals, which are vital for sustaining the economy.
Nassib Ghobril, Chief Economist at Byblos Bank, explains that the repercussions began on October 7, when his 2023 growth forecast of 2% was based on an exceptionally strong tourist season. The agricultural, industrial, and service sectors were also showing positive growth. Furthermore, the private sector had managed to absorb the shock of the economic and financial crisis, returning to a relatively normal operating state in 2023. Concurrently, the purchasing power of some Lebanese people improved due to salary adjustments in the private sector and partial dollarization. The stability of the Lebanese pound's exchange rate further supported these growth forecasts. However, the October 7 events have dramatically shifted this outlook. “The outbreak of war and the confrontations in southern Lebanon have unleashed a negative shockwave, halting this economic recovery. As a result, instead of the anticipated 2% growth in 2023, we now project only 1%, with bleak prospects for the private sector,” highlights Ghobril.
10% Decline in Growth
Regarding the economy, he emphasizes that a lack of visibility is a significant concern, pointing out that the much-anticipated summer season of 2024 began to decline by the end of July, leading to mass cancellations and the hurried departure of expatriates and tourists. “We were facing an economic slowdown until the end of August. My initial forecast predicted a contraction of 1% for 2024, but everything changed after September 17, bringing us to the scenario everyone feared: the escalation of the war. Given the level of destruction and the displacement of over a million Lebanese people, I now anticipate an economic contraction of approximately 6 to 7% for 2024,” he asserts.
In terms of lost opportunities for the Lebanese economy in 2024, this represents a potential growth loss of 10% compared to a mere 1% in 2023, excluding the destruction caused by Israeli bombardments. In fact, projections suggested a growth rate of 3%. “Therefore, instead of achieving a 3% growth, we are now heading toward a contraction of 6 to 7%,” says the economist.
Public finances will also be significantly impacted, despite improvements seen in 2023. The budget had recorded a surplus of 1.9% of GDP, and the Ministry of Finance’s forecasts on September 15 predicted a surplus of 2% of GDP for 2024. Ghobril believes that this surplus is now unlikely given the current situation, as the war and economic contraction will lead to declining treasury revenues, while public expenditures are inevitably expected to rise. He underscored the challenge of providing an updated figure for the budget and public finances, stating that, at best, it could remain at 0% of GDP or even result in a deficit of 1%.
Concerning the financial situation, he stresses that, so far, the Banque du Liban (BDL) has successfully maintained the stability of the Lebanese pound through its policy of absorbing a substantial portion of the monetary supply from the market. In 2023, the BDL withdrew 22 trillion Lebanese pounds, resulting in a 30% contraction of the money supply. Furthermore, the dollarized economy significantly contributes to market stability. However, he insists that making forecasts, even in the medium term, is impossible, as the State will need to spend considerably more than initially planned.
On the other hand, Ghobril points out that the public sector holds a total of $5.8 billion in its accounts at the BDL, though the exact amount in fresh dollars remains uncertain. Will the State utilize these funds? Will the BDL be forced to finance the government again? Will the State push to access foreign reserves? Many questions remain unanswered for the time being. Ghobril believes that while the BDL will cooperate with the State, it will do so without jeopardizing the stability of the Lebanese pound.
As for the unemployment rate, the World Bank (WB) reported it at 11% for both 2022 and 2023. However, due to the negative impact on most sectors in the country, it is expected to rise in 2024 as companies implement operational cost reductions. Furthermore, during wartime, consumption tends to focus on essential goods, which will likely affect certain segments of retail trade. Other sectors are also experiencing slowdowns, if not complete halts, with investments nearly at a standstill.
Ghobril underscores that this situation has significantly undermined confidence, and restoring it requires ending the war. Moreover, it is crucial to learn from this experience by adhering to constitutional deadlines, ensuring the separation of powers, safeguarding judicial independence, combating the parallel economy, addressing tax and customs evasion, and tackling smuggling.
As for 2025, Ghobril believes it is extremely challenging to make projections, expressing hope that the war will not extend into that year.
Monthly Losses of $1.5 Billion
Fouad Zmokhol, Dean of the Faculty of Management and Business at Saint Joseph University of Beirut (USJ) and President of the International Movement of Lebanese Business Leaders (Midel), characterizes the repercussions of this conflict on productive sectors as “dramatic” on different levels. The financial toll is staggering, with estimates indicating losses of $3 to $4 billion for the tourism industry alone and a monthly shortfall of approximately $1.5 billion, based on projected GDP figures of around $18 billion for the year. He emphasizes that these sectors have been severely impacted, particularly the industrial sector, which had previously demonstrated the strongest recovery post-crisis but is now facing rising production costs.
Furthermore, exporters have lost the trust of their clients, who are increasingly turning to alternative suppliers out of concern for potential delivery delays. Regarding the commercial sector, Zmokhol expresses significant doubts about the allocation of substantial budgets for the forthcoming holiday season, as this period is critical for holiday orders, with reservations already being made.
The agricultural sector, predominantly based in the Beqaa and southern Lebanon, has sustained a substantial blow from the devastating phosphorus bombings.
On an international scale, an escalation of the conflict could trigger adverse reactions in financial markets and disrupt trade, especially in the Mediterranean, jeopardizing the import and export of goods. Furthermore, this may lead to a significant spike in oil prices, resulting in widespread repercussions for global economies.
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