Lebanon's economy could collapse completely if Israel–Gaza war spreads, warn analysts

Military confrontation with Israel would worsen already high inflation, increase poverty and destroy the country's fragile infrastructure

Lebanon's currency is expected to come under pressure and its value against the dollar will plunge if the war is extended to Lebanon. EPA

The spillover of the Israel-Gaza war into Lebanon would push its economy into an abyss and severely damage the country’s fragile infrastructure, analysts have warned.

Poverty is expected to surge in the country, which is already in the grip of a severe economic crisis after it defaulted on about $31 billion of Eurobonds in March 2020 and the banking sector suffered heavy losses.

“The economic situation and all the indicators will rapidly deteriorate as a result of the security crisis and the Hamas-Israel war which can spill over into Lebanon,” Nasser Saidi, a former economy minister and vice-governor of Lebanon's central bank, told The National.

An escalation of the conflict into Lebanon, he said, would lead to “potential destruction of its remaining infrastructure, including ports and the airport which are the economic lifeline of the country given its high dependence on the Lebanese diaspora.”

Fears have grown that the Israel-Gaza war, which is in its second week, could engulf the entire region. Israel and Hezbollah have exchanged gunfire and shells this week, leading to the deaths of five militants.

Lebanon’s Middle East Airlines has moved five of its planes to Turkey in case the conflict worsens and airports are targeted.

Swiss International Airlines has also suspended flights between Switzerland and Beirut amid the continuing tensions.

Lebanon “could experience complete collapse” if the fighting continued to spread, added Mr Saidi, president of Nasser Saidi and Associates.

“Already we have seen population displacement from the south of the country, while we are witnessing an accelerated exodus of skilled professionals.”

Lebanon is grappling with what the World Bank has called one of the worst global financial crises since the middle of the 19th century.

The banking sector is facing more than $70 billion in losses and the currency has lost more than 90 per cent of its value since 2019 when Lebanon defaulted on its debt for the first time in its history.

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, due to a lack of consensus among the political ruling class.

It has a caretaker cabinet led by Prime Minister Najib Mikati, but with limited powers. It also needs to elect a president after the six-year term of Michel Aoun finished at the end of October, but this requires the agreement of the political elite.

“The implications of Hezbollah’s intervention in the current conflict will have devastating economic and political consequences for Lebanon as a whole and southern Lebanon in particular,” Pat Thaker, regional director for Middle East and Africa at the Economic Intelligence Unit, said.

“Economically, the country cannot withstand a wide military confrontation with Israel, the intensity of which will far exceed the 2006 Israel-Lebanon War.

“It would worsen Lebanon's already high inflation rate, currently around 250 per cent per year, increase poverty, which currently hovers around 80 per cent, and further erode the purchasing power of the Lebanese population.”

An Israeli soldier adjusts an artillery shell in the upper Galilee region. Israel and Hezbollah have exchanged gunfire and shells this week, leading to the deaths of five militants. AFP

Inflation in Lebanon hit an annual 230 per cent in August, amid stalled economic reforms and the political vacuum around the country's leadership, according to the official data.

The increase in the cost of living was led by the soaring cost of housing, water, electricity, gas and other fuels, as well as a surge in the price of food, non-alcoholic beverages and transport, the Central Administration of Statistics' Consumer Price Index showed.

A predicted economic recovery in 2024 would be delayed if the country gets involved in the conflict, Maya Senussi, lead economist of the Middle East at Oxford Economics, said.

“The Lebanese economy is vulnerable to downsides stemming from a potential escalation of the war after years of decline,” she said.

Lebanon would also struggle to pay for the massive damage a war would inflict. The central bank's foreign exchange reserves currently stand at $7 billion, compared to $30 billion in 2018.

“There is also the fear that should Hezbollah become involved, America’s response will be strong, including imposing harsh sanctions,” Ms Thaker said.

“Damage to infrastructure could also occur at Beirut's International Airport, the country’s only airport. This would negatively impact one of the few sectors that managed to function this year in Lebanon – the tourism sector,” she added.

The country's currency is expected to come under pressure and its value against the dollar will plunge if the war is extended, analysts say. The Lebanese pound was trading slightly lower at 15,030.5 against the US dollar at 3.40pm UAE time on Wednesday. It is trading at around 90,000 in the parallel market.

“Various rates set by the BdL [Banque du Liban] have been realigned multiple times in 2023 alone, although the official peg has been left at 15,000 Lebanese pounds to the US dollar since a belated devaluation from 1,507.5 Lebanese pounds in February 2023,” Ms Thaker said.

“Although the exchange rate has been more stable since mid-2023, we expect these multiple parallel rates to come under intermittent pressure, in line with continuing political instability.”