Lebanon

Still on the edge of the precipice

After contracting by 7.5% in 2024 which brought the cumulative GDP decline since 2019 to nearly 40%, the Lebanese economy may see a slight recovery, but is expected to continue struggling through 2026 due to the negative spillovers of regional geopolitical conflicts. In the aftermath of the 12-day war between Iran and Israel in June 2025, an elevated risk to the Lebanese economy subsists, primarily due to the fragility of the ceasefire between Israel and Iran, and the ensuing security concerns. A resumption of hostilities would pose a severe threat to Lebanon's fragile economy, given Hezbollah's involvement and the country's geographic exposure. Conversely, if the Lebanese government can address the disarmament of Hezbollah prior to elections planned in May 2026, as requested by the US, Gulf countries and other Western nations, the improvement of the security conditions will be able to support growth perspectives. Should the conflict escalate and the disarmament fail, a risk exists of further physical damage to infrastructure, mostly in southern Lebanon. This could lead to another significant displacement of the population and a further decline in economic activity across various sectors, including tourism, trade and retail.

Financial conditions are expected to remain precarious with annual inflation hovering around 14% in May 2025, down from crisis-era highs (around 220% in 2023), but still eroding real incomes. The Lebanese pound has stabilised in the parallel market at around 89,500–90,000 per one US dollar since July 2023 (compared with 111,000 in March 2023), though access to dollars remains restricted, even if withdrawal limits have increased. Foreign currency reserves are limited (standing at USD 11 billion at the end of June 2025 despite an increase of USD 2.75 billion since July 2023), and monetary stabilisation has relied more on limiting local liquidity than rebuilding buffers. Despite suspended service on public debt estimated at around 150% of GDP, the country continues to run a significant fiscal deficit. Meanwhile, efforts to revive tourism, historically accounting for 20% of GDP, have gained some ground, particularly after Kuwait and the UAE lifted travel bans in May 2025, but the sector remains vulnerable to renewed hostilities. Lebanon also faces an estimated USD 14 billion in conflict-related damage, while reconstruction needs for 2025–2026 exceed USD 11 billion. Crucially, any escalation of tensions would delay systemic reforms demanded by the IMF and other partners, deter investment and prolong high inflation, unemployment and economic stagnation into 2026 and beyond.

In 2025, the US introduced a 10% tariff on imports from Lebanon as part of its wider global trade adjustment. While this move will slightly increase the cost of exporting to the US, its overall effect on the Lebanese economy is expected to be minimal. Lebanon's exports to the US account for less than 1% of GDP and are largely made up of niche products, often aimed at the diaspora, such as processed foods, textiles and crafted goods. These exports are not highly sensitive to price changes and demand is unlikely to drop sharply. Regarding the broader economic outlook, tariffs are likely to have a negligible impact on growth and trade balances. Should global oil prices weaken, this could result in a potential indirect benefit for Lebanon in the form of a reduced energy import bill. However, the viability of this outcome is contingent upon prevailing market conditions. Overall, the measure is more symbolic in nature and does not pose a serious threat to Lebanon's already restricted external sector.

Unsustainable twin deficits and debt stock

The current account deficit will continue to be sizeable (around 15% GDP), mainly on structural weaknesses, crisis-driven distortions, and external shocks. The country's trade balance is always heavily in the red, with imports far exceeding exports. This is due to a reliance on foreign goods, such as fuel, food and consumer products. Exports will continue to be limited as the country is characterised by its narrow and uncompetitive base, due to weak infrastructure, limited industrial capacity and chronic political instability. While the currency has depreciated dramatically, this has not translated into improved export performance, as productive capacity has collapsed and essential imports remain inelastic. The traditional sources which are used to finance this deficit such as remittances, tourism, capital inflows from the diaspora and funding from multilateral and bilateral partners such as the Gulf states have declined significantly since the 2019 financial crisis and subsequent sovereign default. The lack of foreign investment and donor support, exacerbated by political deadlock and the increased regional threats has further restricted external financing.

In March 2025, Lebanon’s new government passed the state budget for the year by cabinet decree, a move seen as necessary to restore fiscal control after years of institutional deadlock. The budget projects a relatively small deficit of around 1.1% of GDP (approximately USD 196 million based on expected revenues of USD 4.6 billion and expenditures totalling USD 4.8 billion). This modest gap reflects a significant increase in revenue collection, supported by stronger enforcement and higher tax receipts, including notable gains in VAT and income tax revenues. Expenditures have also been kept in check, reflecting efforts to limit public spending. However, the budget excludes costs related to post-conflict (with Israel) reconstruction and other emergency needs, and it has been criticised for lacking a forward-looking investment strategy, particularly in infrastructure. The outlook for 2026 will largely depend on the government’s ability to implement structural changes, such as improving tax compliance, reforming the public sector wage bill and broadening the revenue base, while also securing support from international donors and the IMF. Failing progress on these fronts, the risk of renewed widening of Lebanon’s deficit and its fiscal strain will subsist.

Fragmented political scene will weigh on reforms

Lebanon’s political outlook is cautiously hopeful but is nonetheless fragile. Following thirteen failed attempts, the Parliament elected Joseph Aoun as the country’s 14th President, who, in turn, appointed Nawaf Salam as Prime Minister. The formation of a new government ended a prolonged institutional vacuum and marked a return to basic state functioning. The incoming administration has begun reengaging with the IMF, instituted some legal reforms in banking and public finance, and taken steps to address international concerns. That said, the political environment is far from stable. Deep divisions persist within the political elite and Hezbollah’s continued influence over security and decision-making remains a major sticking point for Western and Gulf donors, limiting the scope for broad-based financial support.

The security situation in the southern region (but not only there) remains one of the most volatile areas of the country’s political and economic landscape despite recent efforts to ease tensions. Despite the US-mediated ceasefire reached between Hezbollah and Israel in November 2024, sporadic clashes have continued between the pair and the risk of renewed escalation remains high. Under US pressure, the Lebanese government is seeking to disarm Hezbollah. However, the group has refused to do so unless Israel ceases its attacks, which is a seemingly impossible task.

The government’s ability to push through meaningful reforms, restore public trust and prepare for the 2026 parliamentary elections will be critical. If the government continues to make progress, Lebanon may begin to restore international credibility and build the foundations for longer-term recovery. Failing this, the risk is that the country will slide back into paralysis and aggravate its economic and institutional decline.

Last updated: August 2025