The recent escalation between Israel and the Iran-Hezbollah axis has significant ramifications for the Lebanese economy. As military operations intensify in the south, the economy faces unprecedented pressures, compounding existing challenges. Lebanon was already grappling with a crippling debt crisis, a struggling banking sector, and rising dollarization before these developments.
The current military escalation has dealt a severe blow to critical sectors such as agriculture and tourism, further exacerbating economic hardship and deteriorating living conditions within the country. Moreover, the conflict has triggered a significant wave of displacement, with thousands fleeing towards Syria. This exodus imposes new financial and social burdens on Syria, evident in increasing inflationary pressures and strain on public services. The consequences of this military escalation extend far beyond Lebanon's borders, impacting neighboring economies as well.
Lebanese Economy Pre-War
The World Bank's declaration that "the economic and financial crisis in Lebanon ranks among the worst crises globally since the mid-19th century" underscores the severity of Beirut's economic challenges. This assessment is supported by the Lebanese economy's five-year downturn, characterized by stagnation across most sectors, particularly in services such as tourism.
The economic decline has been stark: between 2018 and 2022, Lebanon's economy contracted by 38%, plummeting from $54.9 billion to approximately $21 billion. This negative trend persisted into the following year, with the economy shrinking by 0.2% in 2023, following zero growth in 2022.
Compounding these issues, a foreign currency shortage in the exchange market has led to a catastrophic devaluation of the Lebanese pound. Since 2019, the currency has lost over 98% of its value in the parallel market, drastically eroding citizens' purchasing power. Consequently, the country's poverty rate has soared from 12% in 2012 to 44% in 2022.
Lebanon's financial woes are further exacerbated by its mounting debt problems. The crisis reached a critical point on March 9, 2020, when the Lebanese government defaulted on $1.2 billion in foreign bond payments. The country's debt burden has now reached alarming levels, standing at three times its GDP. According to the World Bank, Lebanon's total external debt in 2022 amounted to $67.1 billion, equivalent to a staggering 309.2% of that year's GDP.
Increasing Losses
The military escalation between Israel, Hezbollah, and Iran has exacerbated Lebanon's existing structural crisis, further crippling its already suffering economy. The impact of military operations in southern Lebanon has been particularly devastating, causing widespread damage to two crucial sectors: tourism and agriculture. The latter, accounting for approximately 9% of Lebanon's GDP, plays a vital role in the country's economic landscape.
Agriculture's significance is even more pronounced in many southern towns, where it constitutes up to 80% of total yearly local output. Since the outbreak of the Gaza War in October 2023 until September 12, the agricultural sector has suffered extensive losses. These include the partial or complete destruction of agricultural assets, the loss of about 1,879 acres of farmland, and the decimation of forests and livestock.
The Israeli military operations have forced farmers to flee their land, severely impacting agricultural production. This has been especially detrimental to tobacco cultivation, the region's primary cash crop. The Lebanese Ministry of Economy has estimated that losses in the agricultural sector from the start of the Gaza War until June have surpassed $3 billion. Given the recent military escalation, this figure is expected to double.
The Lebanese tourism sector, which was on the verge of recovery after years of contraction, now faces significant challenges. These obstacles stem primarily from the cessation of flights by many foreign airlines to and from Lebanon, coupled with travel warnings issued by several foreign governments against entering the country.
Recent data paints a picture of initial growth followed by a sharp decline. In 2023, Lebanon welcomed over 1.6 million tourists, marking a 13.7% increase from the previous year's 1.4 million visitors. However, this positive trend was short-lived. By the first half of the following year, tourist numbers had fallen to approximately 630,000, representing a 16.1% decrease compared to the same period in 2023.
The escalating security tensions are expected to further dampen tourism activity by year's end. These circumstances have had severe repercussions on the hospitality industry. Hotels and restaurants across Lebanon, particularly in the south, have been forced to close their doors. According to Pierre Achkar, President of the Lebanese Hotel Federation for Tourism Industries, the occupancy rate in Lebanese hotels has plummeted to around 7%.
The economic impact of these developments is substantial. Industry experts estimate that these recent setbacks could cost the tourism sector between $3 to $4 billion in annual income, dealing a significant blow to an industry that was poised for recovery just a short time ago.
A Snowball Effect
According to preliminary estimates by the United Nations Development Programme (UNDP), Lebanon's economy is projected to shrink by 7.2% by the end of 2024 due to the halt in tourism, agricultural activities, and other sectors. This rate is likely to increase by the end of the current year, with potential losses exceeding $10 billion (nearly half of Lebanon's GDP) when indirect costs such as damaged infrastructure are factored in.
The severity of these economic losses is directly correlated with the duration of the conflict. As the situation persists, Lebanon can expect a further decline in the exchange rate of the Lebanese pound and a rise in inflation. Moreover, the deteriorating security situation is likely to exacerbate poverty, unemployment, and declining living standards.
To mitigate this crisis, the optimal solution would be to provide sustainable financing for Beirut. This financial support would enhance the Lebanese government's ability to address the urgent economic crisis and provide basic humanitarian needs for those displaced from southern Lebanon to the northern regions. Without sufficient financial assistance, the country will be unable to finance essential imports of food, fuel, and other basic commodities, further deepening the economic turmoil.
The Syrian Neighborhood
Syria was already grappling with significant economic challenges stemming from over a decade of ongoing war. These challenges included currency depreciation, inflation, a lack of investment, and other structural issues. The recent crisis in southern Lebanon has further exacerbated Syria's economic woes, as indicated by estimates from international economic institutions.
According to the International Organization for Migration, approximately 235,000 people fled Lebanon to Syria by land between September 21 and October 3. This increasing wave of displacement is likely to put additional pressure on Syria's commodity and real estate markets, potentially leading to heightened inflationary pressures within the country.
While the Syrian government may be able to contain inflation caused by limited displacement waves, the situation could become more challenging if the influx of Lebanese refugees into Syria continues to grow as the conflict persists.
The closure of the Masnaa crossing between Syria and Lebanon is another negative consequence of the conflict on the Syrian economy, as it is vital for supplying Syrian markets with goods and foreign currency through Lebanese intermediaries. Its closure, even if temporary, could lead to goods shortages and price increases. Furthermore, the economic situation in Syria may deteriorate further with the continued influx of displaced persons, complicating humanitarian relief efforts and increasing the challenges of securing basic needs.
However, the movement of Lebanese refugees towards Syria may boost hard currency flows in the Syrian exchange market. In response, Damascus has taken measures to facilitate the work of Syrian banks through border crossings with Lebanon. These actions could support the exchange rate of the Syrian pound, albeit slightly, given the large foreign exchange gap that Syria has been suffering from for many years.
Nevertheless, the potential gains for the Syrian economy from the recent military escalation seem to be insufficient to mitigate expected losses. According to preliminary calculations by the UNDP, Syria's GDP is likely to lose approximately 4.8% of its value in 2024 due to the loss of commercial activity, in addition to the burdens of providing public services and the inflationary pressures resulting from the influx of displaced persons.
The military escalation in southern Lebanon will impose economic pressures not only on the Lebanese economy but also on the rest of the region, especially Syria. To avoid a worse economic scenario and humanitarian situation in Lebanon, it is crucial for international institutions and governments to provide urgent and sustainable aid to the Lebanese government to support its economy during the current conflict.
