Lebanon faces reconstruction costs potentially exceeding $25 billion as a new ceasefire agreement with Israel offers hope for recovery, though experts warn that political reforms and institutional stability remain crucial prerequisites for economic rehabilitation.
The truce, now in its third day, ends more than a year of hostilities that began when Hezbollah launched strikes at Israel in October 2023 following Hamas’s attack on Israel. It requires both sides to withdraw from southern Lebanon within 60 days.
“The need to restore confidence imposes on political authorities the imperative challenge of safeguarding the ceasefire, promptly filling the institutional constitutional gap, restoring the firm cohesive role of the State and the army,” Marwan Barakat, Group Chief Economist and Head of Research at Bank Audi, told Arabian Business.
The war-torn nation, already grappling with what the World Bank termed one of the worst global financial crises since the mid-19th century, has seen its economy further devastated by more than a year of conflict, with real GDP now projected to contract by 5.7 percent this year, compared to pre-conflict growth estimates of 0.9 percent.
While the ceasefire creates an encouraging environment for addressing Lebanon’s political deadlock, significant challenges remain, according to Imad Salamey, senior Middle East policy advisor and associate professor at Lebanese American University.
“The ceasefire represents a unique opportunity for Lebanon to break the cycle of instability and foster long-term growth,” Salamey told Arabian Business. However, he cautioned that “while Lebanon’s economy is likely to see some rebound due to reduced conflict-related risks, the recovery will be slow and modest.”
According to a recent World Bank report, the cost of physical damages and economic losses due to the conflict has reached $8.5 billion in the past 12 months, with damage to physical structures alone amounting to $3.4 billion and economic losses hitting $5.1 billion.
The scale of destruction has been particularly severe in key urban centres. Important cities like Tyre and Nabatiyeh in south Lebanon, and Baalbek in the east, which serve as crucial regional and national tourist and commercial hubs, have been heavily impacted by Israeli strikes.
Political barriers
The main obstacle to recovery, according to Salamey, is “the lack of political will within Lebanon’s entrenched political establishment.”
He noted that reforms required for IMF assistance have stalled due to resistance from parties benefiting from the current system.
“To overcome these barriers, the international community must create incentives—such as conditional aid packages or economic guarantees—that encourage the political class to enact necessary reforms,” Salamey said.
The commerce sector has borne the brunt of the economic impact, suffering losses worth $1.6 billion, followed by agriculture at $1.1 billion, while tourism and hospitality losses have reached $1 billion, according to World Bank data.
Lebanon recovery scenarios
Looking ahead, Bank Audi outlines three potential scenarios for 2025. Barakat said the most optimistic case, which has a 40 percent probability of occurring, depends on the ceasefire persisting throughout 2025, alongside an end to the political deadlock, presidential elections, and the launch of long-awaited reforms.
Under this scenario, “real GDP growth would jump to above 8 percent, inflation would go down to global levels, BDL reserves would be significantly reinforced and the balance of payments would turn into a surplus of no less than US$ 4 billion,” Barakat explained.
Even under a middle scenario, which Barakat gives a 40 percent probability, where the ceasefire persists but political deadlock continues, “real GDP growth would be close to 2 percent, inflation would revolve around 30 percent, BDL reserves would stabilize after fallout and the balance of payments would be in quasi-balance.”
However, Salamey suggests that achieving even the middle-case scenario will require significant changes.
“Putting Lebanon back on track will require a stabilised southern border, a functioning presidency, and economic reforms tied to tangible international support,” he said.
The reconstruction challenge appears particularly daunting when compared to previous conflicts. The 2006 war between Hezbollah and Israel resulted in reconstruction costs of about $3 billion, but current damage estimates far exceed that figure.
The country has yet to enforce critical structural and financial reforms required to unlock $3 billion of assistance from the International Monetary Fund, as well as billions in aid from other international donors. Lebanon defaulted on about $31 billion of Eurobonds in March 2020, with its currency subsequently losing more than 90 percent of its value against the dollar on the black market.
“Only such a confidence revival can make the Lebanese get out of their political woes, frustrations and distress and bet on a promising economic future,” Barakat noted, highlighting the need for political stability to support economic recovery.
Salamey echoed his sentiment and added that it would require a “genuine commitment from both local and international stakeholders to prioritise governance reforms and rebuild trust” in the country’s institutions.
“The coming months will be critical in determining whether this ceasefire is a temporary pause or the foundation for a new era of stability and development,” said Salamey.
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