Lebanon, 2023–2026: War on Top of Economic Collapse

Most wars in this book hit economies that were working before the shooting started. Lebanon is different. When cross-border fighting between Hezbollah and Israel began in October 2023, Lebanon was already four years into a financial collapse. Its banks had frozen deposits, its government had defaulted, and its currency had lost almost all of its value. This chapter shows what happens when a war lands on an economy that has no buffers left. It also shows what happened when a short recovery in 2025 was cut off by a new war in 2026.

1. Background: how the war began

Lebanon’s story since 2019 has two layers. The first is an economic and financial collapse that began in late 2019. The second is armed conflict between Hezbollah and Israel in 2023–24 and again in 2026. To understand the economics of the war, we need both layers.

The financial collapse. For about 25 years before the crisis, Lebanon’s central bank, Banque du Liban (BDL), kept the Lebanese pound fixed at 1,507.5 to the US dollar.^[4] A fixed exchange rate like this is called a peg. Keeping the peg needed a steady inflow of dollars, which came largely from deposits and remittances. When the inflows slowed in 2019, the system broke. Banks stopped letting savers withdraw hard currency, and depositors have been largely unable to do so ever since.^[4] In March 2020 the government said it would not pay a $1.2bn Eurobond due that month. This was the country’s first-ever sovereign default. Public debt at the time was “nearly 170 percent” of GDP.^[3]

In January 2022 the World Bank described the collapse as a “deliberate depression”. It argued that the country’s leaders had delayed the reforms needed to stop it.^[2] In 2022 the government estimated the losses of the financial system at about $70bn.^[26]

The Beirut port explosion. On 4 August 2020, large quantities of ammonium nitrate stored at a warehouse in Beirut’s port exploded.^[16] UNFPA reported in September 2020 that the death toll had reached 190, with three people still missing, more than 6,000 injured and more than 300,000 displaced.^[16] The World Bank estimated physical damage at $3.8–4.6bn and economic losses at $2.9–3.5bn.^[15]

The 2023–24 conflict. On 8 October 2023, the day after the Hamas-led attack on Israel, Hezbollah began firing across the border into Israel, and Israel responded. The exchanges escalated sharply in September and October 2024.^[19] A US–French brokered ceasefire took effect on 27 November 2024. Under it, Israel was to withdraw in phases within 60 days, and the Lebanese army and security forces were to be the only armed groups south of the Litani River.^[19][42]

The 2026 war. On 28 February 2026, the United States and Israel launched strikes on Iran. On 2 March, Hezbollah fired projectiles into northern Israel for the first time since the 2024 ceasefire. Israel struck back, and on 16 March it began a ground operation in southern Lebanon.^[27][44] Hezbollah said it had resumed fighting to force Israel to stop its “aggression” and to leave Lebanese territory.^[27]

2. Where things stand now

As of October 2026, Lebanon is in an uneasy and partial ceasefire. A US-brokered truce took effect on 16 April 2026 for an initial ten days. It was extended by three weeks on 23 April and by 45 days on 15 May.^[31][51][52] On 19 June a US official said Israel and Hezbollah had agreed to a ceasefire. An Israeli official said Israeli forces would remain in southern Lebanon.^[30] On 26 June the US Secretary of State announced a framework deal that included the disarmament of Hezbollah.^[53] Hezbollah rejected it.^[45] In July, the United States said Israel had handed sections of its buffer zone to the Lebanese government, and the Lebanese army began deploying in some villages.^[45]

Violence has continued. On 7 September 2026, Israeli strikes in southern Lebanon killed 13 people after “weeks of relative calm”. Israel said it was responding to Hezbollah violations of the ceasefire.^[41] The Lebanese army reports about 7,700 violations since the June deal was signed.^[32] According to Lebanon’s Health Ministry, Israeli attacks since 2 March 2026 had killed 4,383 people and wounded 12,406 by 10 September.^[32][40] Israel’s toll by mid-June included at least 32 soldiers and four civilians.^[30]

Diplomacy continues. Seven rounds of US-sponsored talks between Lebanon and Israel had taken place by mid-September, and an eighth was set for October. On 11 September, President Aoun ruled out new negotiations “for the time being”. He named Israeli withdrawal, the return of prisoners and displaced people, and reconstruction as national principles.^[32] The most recent reliable reports found for this chapter date from mid-September 2026. Readers should check the news for later events.

On the economic side, the IMF said in September 2026 that activity would contract “significantly in 2026”. It noted double-digit inflation and a wider current account deficit, largely due to higher energy costs.^[38] Talks on an IMF programme are still going on. The IMF planned to resume technical meetings in Beirut in September.^[35]

3. The economy before the war

Before 2019, Lebanon was a small, open, service-based economy. It relied on banking, tourism, real estate and money sent home by Lebanese people working abroad. In 2018 its GDP was about $54.9bn in current dollars.^[10] Tourism was large for a country of its size. Lebanon received about 1.94 million international visitors in 2019, and tourism receipts were about $8.7bn.^[12][13] Growth was already weak, however. Real GDP grew by just 0.9% in 2017 and shrank by 1.9% in 2018.^[9]

Then the collapse came. Real GDP fell by 6.9% in 2019 and by 21.4% in 2020, according to World Bank data.^[9] In current dollars, GDP dropped from about $51.6bn in 2019 to about $20.1bn in 2023.^[10] Part of this fall reflects the collapse of the currency, which shrinks GDP when measured in dollars. But real output also fell a great deal. The World Bank estimated gross public debt at 183% of GDP in 2021, the fourth-highest ratio in the world. Government revenue was just 6.6% of GDP, the third-lowest in the world.^[2]

Living standards fell sharply. The World Bank found that poverty in the areas it surveyed rose from 12% in 2012 to 44% in 2022. Among Lebanese nationals, the poverty rate tripled to 33%. Among Syrian refugees, almost nine in ten were poor.^[17] The economy became heavily “dollarised”: many prices and wages moved into US dollars and cash. Households that earned dollars kept their purchasing power, while those without dollar income suffered from rising prices.^[17]

By 2023 there were small signs of stabilisation. Real GDP fell by only 0.6% in 2022 and 0.8% in 2023.^[9] Remittances, the money sent home by workers abroad, became a lifeline. They rose from 14.3% of GDP in 2019 to 33.3% in 2023.^[11] Part of that rise is a “denominator effect”: GDP itself had shrunk, so the same remittances were a larger share of it.^[17] This was the fragile base on which the 2023–24 war landed.

4. The economic impact: indicator by indicator

4.1 Output and GDP

The World Bank’s damage assessment covers 8 October 2023 to 20 December 2024. It found that real GDP contracted by 7.1% in 2024. Had there been no conflict, the World Bank projected growth of 0.9%. The gap between the two, about 8 percentage points, is a rough measure of the war’s cost in lost output for that year. By the end of 2024, the cumulative fall in GDP since 2019 was approaching 40%.^[20]

The ceasefire and a new government brought a rebound. The World Bank estimates growth of 4.2% in 2025, the highest since the 2019 collapse.^[35] This was revised up from the 3.5% it had estimated earlier. In January 2026, it expected another 4% rebound in 2026.^[36]

The 2026 war reversed that. In its Summer 2026 Lebanon Economic Monitor, the World Bank projected a 6.4% contraction in 2026. It blamed “the collapse in tourism, weaker consumption, disrupted supply chains, heightened insecurity, and prolonged displacement”.^[35] It estimated that growth would be 10.4 percentage points lower than in a no-conflict scenario.^[36] Lebanese officials were more pessimistic. Finance Minister Yassine Jaber projected a contraction of 7% to 10% in May 2026,^[33] and Economy Minister Amr Bisat earlier put it at 7%.^[37] In March 2026, BLOMINVEST Bank’s research department estimated that each month of war at 2024 intensity could cut about 4% off real GDP.^[34]

4.2 Inflation and the currency

The pound’s collapse is the clearest sign of the crisis. In February 2023, the official rate was moved from 1,507.5 to 15,000 pounds per dollar, a devaluation of about 90%. Even then, the parallel (black-market) rate was around 60,000.^[4] In March 2023 the pound hit a record low of 143,000 to the dollar on the black market.^[5] In early 2024 the authorities removed the old official rates from tax calculations, and BDL’s rate of 89,500 was described as “aligned with the market”.^[6] The pound has since stayed at around 90,000 to the dollar.^[37] The World Bank says it has lost 98% of its value since 2019.^[39]

Inflation followed the currency. Average consumer price inflation was 3.0% in 2019, 84.9% in 2020, 154.8% in 2021, 171.2% in 2022 and 221.3% in 2023.^[8][7] Once the exchange rate stopped falling, inflation dropped quickly, to 45.2% in 2024 and 14.6% in 2025.^[8][39] This is an important lesson. In Lebanon, most inflation came from the currency collapse, not from the war itself.

The 2026 war pushed inflation up again, mainly through supply-side shocks. Annual inflation rose to 17.3% in the first half of 2026. Food inflation averaged 20%. Water, electricity, gas and fuel prices were 25.3% higher than a year earlier, and transport costs were up 29.5% by mid-year.^[38] The World Bank expects inflation of 17.5% in 2026, citing supply disruptions, higher shipping costs and volatile fuel prices.^[35] The IMF linked the wider current account deficit largely to higher energy costs, a heavy burden for an energy importer like Lebanon.^[38]

4.3 Public finances, debt and the banks

Lebanon’s public finances are unusual. The state has been in default since 2020, so it cannot borrow on international markets.^[3] This forced it to run tight budgets. In 2025 the government recorded primary and overall surpluses on a cash basis, with revenues up 49% and spending up 27%. The approved 2026 budget targets a balanced budget.^[39] Up to the end of May 2026, the public finances showed a surplus of $1bn, or 2.5% of GDP.^[38]

A surplus sounds healthy. But it partly reflects how little the state spends. In 2026 the government had expected a surplus, but it instead set aside $50m to support more than 1 million displaced people. “We are depending on loans today,” the finance minister said. “We are not getting a lot of grants.”^[33] The World Bank still calls public debt “unsustainable”, and it notes that talks to restructure the debt have yet to begin.^[37]

The banking system is the heart of the problem. The 2022 government estimate put the financial system’s losses at about $70bn, a figure Reuters says is likely to be higher now.^[26] Enterprise, a regional business publication, puts the losses at $70–80bn.^[25] Who should bear these losses — the state, the central bank, commercial banks or large depositors — is the key political question. BDL’s foreign currency reserves fell from $12.1bn in mid-February 2026 to $11.6bn in mid-August, enough to cover about 6.6 months of imports.^[38]

4.4 Trade and key sectors: tourism, housing and commerce

The World Bank’s 2025 assessment found that housing was the hardest-hit sector in 2023–24, with $4.6bn of damage. Commerce, industry and tourism together lost $3.4bn.^[20] The worst-affected areas were the Nabatiyeh and South governorates, followed by Mount Lebanon, which includes Beirut’s southern suburbs.^[20]

Tourism matters because it brings in foreign currency. In 2019 receipts were about $8.7bn. In 2020, with the pandemic and the blast, they fell to about $2.4bn.^[13] Comparable World Bank figures for later years are not published. What we do know is that in 2026 the World Bank listed a “collapse in tourism” as the first cause of the projected contraction.^[35] The finance minister had said that the summer tourist season would decide the war’s final economic impact.^[33]

Trade also weakened in 2026. By the end of July, the trade deficit had widened by 8.8% to $10.2bn. Exports fell by 16.6% and imports rose by 4.2%. The value of energy imports rose by 9% to about $3bn in the first seven months, even though the volume fell by 31%. In other words, Lebanon paid more for less fuel.^[38] This is a classic terms-of-trade shock: the price of what a country imports rises relative to the price of what it exports.

4.5 Labour market and remittances

Reliable, up-to-date labour statistics for Lebanon are scarce, so this section relies on indirect evidence. The World Bank found that since 2019, more Lebanese workers have moved into low-skilled jobs, partly because skilled and better-paid jobs have disappeared. Most employed Syrians hold low-paying, informal jobs.^[17]

The war added to this. OCHA reported in March 2026 that many displaced people living outside shelters had lost homes, jobs, livelihoods and small businesses, leaving them without income.^[28] Large areas were emptied of people: Israel’s evacuation orders covered the whole area south of the Litani from 4 March, and all of Lebanon south of the Zahrani River from 27 May.^[46][47][48]

Remittances have been the main shock absorber. They averaged 13% of GDP between 2012 and 2019 and reached about 30% in 2022.^[17] World Bank data put them at 33.3% of GDP in 2023.^[11] The 2026 war created a new risk, because the regional war also hit the countries where many Lebanese work. “This time, the regions where the Lebanese work are themselves affected,” the finance minister said.^[33]

4.6 Poverty, displacement and human capital

Displacement in 2026. The 2026 war displaced people even faster. By 11 March 2026, nine days after the fighting began, about 816,700 people had registered as displaced. OCHA said the true figure was “likely much higher”. More than 78,000 Syrians and over 7,700 Lebanese had crossed into Syria.^[28] Over 1 million people were displaced in total.^[49][33] By 29 June, 704,445 people were still internally displaced and 52,243 were living in 479 collective shelters.^[29]

Casualties. Lebanon’s Health Ministry reported 634 killed by 11 March, 4,247 by 28 June and 4,383 by 10 September 2026.^[28][29][32] In the 2023–24 conflict, more than 4,000 people were killed in Lebanon, according to AP’s reporting of Lebanese figures.^[21] On the Israeli side, the toll by June 2026 included at least 32 soldiers and four civilians.^[30] Each death is a human tragedy. In economic terms, it is also a permanent loss of labour and skills.

Poverty and food. Measured more broadly, 73% of Lebanese live in “multidimensional poverty”, meaning they are deprived in areas such as health, education or housing, not only income.^[18] In the World Bank’s survey area, the poverty rate in Akkar reached 70%.^[17] Food insecurity peaked at 24% of the population in late 2024 and fell to about 13% in early 2026, before the new war.^[39] In 2026 the number of people in crisis or emergency food insecurity rose to about 1.24 million, from 874,000 in 2025.^[38]

Human capital. Households cut spending on food, health and other essentials during the crisis. The World Bank warned this “may have long-term consequences”.^[17] In 2026, schools were also hit. By late June, media reports documented more than 30 schools destroyed and more than 25 damaged.^[29] The humanitarian response was underfunded. The 2026 Lebanon Flash Appeal had received about $237m of the $639.9m it needed, or 37%, by the end of June.^[29]

4.7 Special indicator: damage and the cost of the wars

Two different numbers are often quoted, so it helps to separate them. Damage is the value of physical assets destroyed, such as homes, roads and power lines. Losses are the flows of income that do not happen because of the war, such as lost sales, lost harvests and extra operating costs. Adding them gives the total economic cost. Needs are the money required to rebuild and recover, which is different again.

Estimates for the 2026 war are less firm. As of the latest sources found, no World Bank damage assessment for 2026 had been published. In May 2026 the finance minister estimated direct and indirect damage from both wars at up to $20bn, but he said this was provisional until the World Bank released its own figures.^[33] By September, official estimates of direct and indirect losses since autumn 2023 exceeded $27bn, according to Asharq Al-Awsat.^[38] These figures come from the Lebanese government and have not been independently checked.

5. What went well and what went wrong

What went well

• The currency stabilised. After the exchange rate was unified at about 89,500 in early 2024, the pound held at around 90,000 to the dollar, even through the 2026 war.^[6][37] This brought inflation down from 221% in 2023 to 14.6% in 2025.^[8]
• Fiscal discipline. The government ran cash surpluses in 2025, and revenues grew faster than spending.^[39]
• Political unblocking in 2025. A president was elected on 9 January 2025 and a new cabinet was formed on 8 February 2025.^[43][22] The World Bank described it as a “reform-committed government”.^[39]
• Key laws passed. Parliament amended the bank secrecy law in April 2025, giving auditors and other authorised bodies access to ten years of bank records. The IMF had judged earlier versions insufficient.^[23] In August 2026 parliament amended the bank resolution law, which the IMF called a “major step”.^[26]
• A quick rebound. Growth of 4.2% in 2025 showed that the economy could recover fast once fighting stopped.^[35]
• External support. The World Bank announced $250m for reconstruction in June 2025 and approved $350m for social protection and digital transformation in January 2026.^[39]

What went wrong

• Years of delay. The IMF reached a staff-level agreement in April 2022, conditional on eight “prior actions” such as bank restructuring, a new bank secrecy law and exchange-rate unification.^[14] More than four years later, no full programme has been approved.^[35] The World Bank called this a “deliberate depression”.^[2]
• Depositors still locked out. Many savers still cannot withdraw their foreign-currency deposits.^[35] The IMF says the draft gap law falls short of international standards, especially on depositor protection and the order in which losses are absorbed.^[25]
• No debt restructuring. Talks to restructure the defaulted debt have yet to begin.^[37]
• Thin social protection. Means-tested programmes reach only about one-fifth of the population, according to Human Rights Watch.^[18]
• Renewed war. The 2026 conflict erased the 2025 recovery and pushed the economy back into recession.^[35][38]
• Underfunded aid. Only 37% of the 2026 Flash Appeal was funded by the end of June.^[29]

6. The economics behind it

6.1 A twin crisis: banks and currency

Economists call a banking crisis and a currency crisis that happen together a twin crisis. In Lebanon, banks had lent much of their dollar deposits to the central bank, which in turn financed the state and defended the peg. When confidence broke, depositors wanted dollars that did not exist. The peg could not be held, and the currency collapsed. Because the banks’ losses were never formally recognised, credit to the private economy dried up. Without credit, firms cannot invest, and growth stalls. This is why the IMF’s first prior action was a bank restructuring strategy “that recognizes sector losses upfront while protecting small depositors”.^[14]

6.2 War as a supply shock

Both wars reduced Lebanon’s ability to produce. Homes, roads and farms were destroyed, workers were displaced or killed, and supply chains were broken. In the AD/AS model, this is a negative supply shock.

6.3 The production possibility curve shifts inward

The production possibility curve (PPC) shows the maximum combinations of two goods an economy can produce with its resources. Physical damage of $6.8bn in 2023–24 destroyed part of Lebanon’s capital stock.^[20] Deaths, injuries and emigration reduced its labour force. Both shift the PPC inward. Displacement adds another effect. Even resources that still exist, such as farmland south of the Litani, cannot be used under evacuation orders. That pushes actual output to a point inside the PPC.

6.4 Opportunity cost and reconstruction

Opportunity cost is the value of the next-best alternative given up. Every dollar Lebanon spends rebuilding destroyed homes is a dollar not spent on schools, power plants or paying back depositors. With reconstruction needs of $11bn from the 2023–24 war alone,^[20] compared with a GDP of about $26bn in 2024,^[10] the opportunity cost is very large. That is why grants matter so much, and why the finance minister’s comment that Lebanon is “depending on loans” is worrying.^[33]

6.5 Remittances as automatic insurance

Remittances usually rise when the home country is in trouble, because relatives abroad send more help. This makes them counter-cyclical: they move against the domestic business cycle. In Lebanon they rose from 14.3% of GDP in 2019 to 33.3% in 2023.^[11] But this insurance only works if the senders are safe. When the 2026 regional war also hit the economies where Lebanese emigrants work, the insurance itself was at risk.^[33]

6.6 Institutions and hysteresis

Hysteresis means that a temporary shock leaves lasting damage. Lebanon shows this clearly. Skilled workers who emigrate, children who miss school and firms that close do not come back automatically when fighting stops. Institutions matter too. The World Bank’s 2021 report argued that “policy responses by Lebanon’s leadership to these challenges have been highly inadequate”.^[1] Weak institutions made the financial collapse deeper. They also made it harder to raise money for reconstruction after each war.

7. Outlook and the way forward

Lebanon’s outlook depends on three things: whether the ceasefire holds, whether banking reform is completed, and whether money for reconstruction arrives.

Reconstruction costs. The only full independent assessment is the World Bank’s $11bn figure for the 2023–24 war.^[20] The 2026 war will add to this, but no World Bank estimate had been published in the sources found. Lebanese officials put combined direct and indirect losses since 2023 at more than $27bn.^[38]

Banking reform and the IMF. The draft Financial Stabilisation and Deposit Recovery law sets out how the gap would be closed. Under the version reported by Enterprise in May 2026, depositors with up to $100,000 would get their savings back gradually over four years. Larger depositors would receive $100,000 in cash, with the rest converted into long-term BDL-backed bonds of 10, 15 and 20 years. Banks would cover 40% of the cost of recovering deposits.^[25] Lebanese economist Nassib Ghobril warned that the early repayments, about $22bn over four years, are “sums neither Banque du Liban nor commercial banks are currently able to finance”.^[25] The IMF is still in talks to align the draft with international principles.^[26] The World Bank says that “advancing reforms, particularly on banking sector restructuring and fiscal management, will be critical” to restoring confidence.^[35]

Risks. The main risks are a return to full-scale fighting, a wider regional war that hits oil prices and Gulf remittances, and political deadlock over who pays for the banking losses. A smaller risk is legal delay. Even after parliament passed the bank resolution amendments, Reuters noted that a challenge before the constitutional council could cause further delay.^[26]

The bigger lesson. Lebanon shows that the cost of a war depends heavily on the economy it hits. A country with frozen banks, no market access and few grants has little room to respond. The 2025 rebound also shows the reverse: when fighting stops and policy improves, recovery can be quick. The challenge is to make that recovery last.

8. Exam-style questions

Glossary

• Currency peg: a policy of fixing the exchange rate of the domestic currency against another currency, such as the US dollar.
• Devaluation: an official cut in the value of a pegged currency.
• Parallel (black) market rate: the exchange rate on the unofficial market, which may be far from the official rate.
• Dollarisation: the widespread use of a foreign currency for prices, savings and payments in a domestic economy.
• Sovereign default: when a government fails to make a payment due on its debt.
• Twin crisis: a banking crisis and a currency crisis happening at the same time.
• Financial gap: the difference between what banks and the central bank owe depositors and the assets they hold.
• Haircut: a reduction in the value that a creditor or depositor receives compared with what they are owed.
• Remittances: money sent home by people working abroad.
• Damage and losses: damage is the value of destroyed physical assets; losses are output and income forgone because of the shock.
• Supply shock: an event that changes the economy’s capacity or costs of production, shifting the aggregate supply curve.
• Hysteresis: lasting damage to an economy’s potential output from a temporary shock.

References

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2. World Bank (2022). “Lebanon’s Crisis: Great Denial in the Deliberate Depression”. Press release, 25 January 2022. https://www.worldbank.org/en/news/press-release/2022/01/24/lebanon-s-crisis-great-denial-in-the-deliberate-depression
3. The New Arab (2020). “Lebanon to default on Eurobond debt as government decides not to pay”. 7 March 2020. https://www.newarab.com/news/lebanon-default-eurobond-debt-says-pm
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27. Al Jazeera (2026). “Israel kills 31 in Beirut strike following Hezbollah rocket attack”. 2 March 2026. https://www.aljazeera.com/news/2026/3/2/israel-bombs-beirut-after-hezbollah-launches-rocket-attack
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32. Shafaq News (2026). “October date set for next Lebanon-Israel talks”. 13 September 2026. https://shafaq.com/en/Middle-East/October-date-set-for-next-Lebanon-Israel-talks
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34. BLOMINVEST Bank Research (2026). “Initial Estimate of the Impact of the Current War on Lebanese GDP”. 13 March 2026. https://blog.blominvestbank.com/wp-content/uploads/2026/03/Initial-Estimate-of-the-Impact-of-the-Current-War-on-Lebanese-GDP.pdf
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53. Al Jazeera (2026). “What is the framework agreement signed by Israel and Lebanon?”. 26 June 2026. https://www.aljazeera.com/news/2026/6/26/what-is-the-framework-agreement-signed-by-israel-and-lebanon

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