Lebanon's already struggling economy cannot survive a war with Israel

Inflation is running at 250%. Any large-scale conflict would further decimate the Lebanese pound.

Ewan White

Memories of death and destruction during the 2006 war between Hezbollah and Israel are still ripe among Lebanese people who have yet to recover. Meanwhile, it's in a deep economic crisis.

Lebanon's already struggling economy cannot survive a war with Israel

Khaled Kassar

last update on 27 Oct 2023

"If only I knew". These were the famous words of Hezbollah’s Secretary-General Hassan Nasrallah, spoken in regret at his failure to anticipate the heavy cost of the July War in Lebanon in 2006.

They are now taking on a new and fearful resonance in a country that shares a border with Israel and is run by an armed group backed by Iran, as war rages again in Gaza to the south.

The conflict 17 years ago has echoes with the latest violence. The July war began with a cross-border raid by Hezbollah, which included the kidnap of two Israeli soldiers, who were used to demand the release of prisoners from the group held by Israel, including Samir Kuntar.

In the 33 days of conflict that followed, some 1,200 people, overwhelmingly civilians, were killed. There were around 4,000 physical injuries. Thousands more people were psychologically damaged, and tens of thousands left their homeland, never to return.

Direct economic losses were estimated at $3bn, with tens of billions more in indirect losses and diverted investment. Tens of thousands of jobs were lost. Over 125,000 apartments, houses, and shops were destroyed.

Wider infrastructure was wiped out or damaged, including hospitals and schools, bridges and runways, water and electricity mains, factories and other industrial facilities. Repair costs became debts, adding to the burden of previous borrowings.

shutterstock — One of the examples of destruction in the July 2006 war.

The war also killed 156 Israeli soldiers and 41 Israeli civilians.

That war did not affect Israel’s economy. It achieved leaps in growth and tremendous industrial and technological development.

While Israel moved on, Lebanon continued to pay the cost of war. And it was very high — on a humanitarian basis — as well as politically, socially and economically. The repercussions lingered in the country for years despite the flow of Gulf aid. That came most strongly at the time. Promises of subsequent support at the Paris III Conference in 2007 were later aborted.

The effects of the war are still being felt. The sheer scale of financial and political degradation led to Lebanon’s protracted and comprehensive political and economic collapse. It accounts, in part, for the country’s long list of problems, including corruption, lack of services, weak growth, the depletion of financial resources and Hezbollah’s dominance.

And the slogan that came with the group’s dominance – "No voice is louder than the sound of battle" – has only increased the corruption and destruction in the country.

Lebanon is much less likely to be able to emerge from it as a viable state should another war with Israel unfold.

The effects of the 2006 war are still being felt. The sheer scale of financial and political degradation led to Lebanon's protracted and comprehensive political and economic collapse.

A potential new hell

As the country heads toward similar dangers, once again, it is still reeling from other crises. It has yet to recover from the devastation caused by the huge explosion at the Port of Beirut – which has yet to be fully repaired, cutting national revenue – and the wider, four-year-long national financial crisis.

Since the outbreak of the Gaza war, Hezbollah has been signalling that it could escalate that conflict, by intensifying hostilities against Israel at its border with the country.

AFP — Lebanese soldiers and bystanders stand on a road overlooking the border area with the northern Israeli town of Metulla on October 8, 2023, after Lebanon's Hezbollah and Israel said they traded cross-border fire.

There are growing fears that Lebanon could slide into a new hell. And that could deal a fatal blow to what remains of it as a national entity if there is to be a new war.

The Lebanese people are haunted by the potentially apocalyptic economic and social consequences that may follow – not least of the availability of medicine and hospital care – if Hezbollah plunges the country into a new and devastating war.

Experts and children alike are asking questions about the country's ability to absorb yet another shock, if conflict pulls living standards lower, undermines what stability there is and puts security into doubt.

The days before Hezbollah rule – when Lebanon was a country with the kind of economic growth and political stability that meant it could survive shocks, such as the tragic assassination of former Prime Minister Rafik Hariri in 2005 – seem distant.

The days before Hezbollah rule – when Lebanon was a country with the kind of economic growth and political stability that meant it could survive shocks, such as the tragic assassination of former Prime Minister Rafik Hariri in 2005 – seem distant.

Planes moved and fuel stockpiled

War has not come to Lebanon. But there are signs of wider worries that it might. Tourism and visits home from the diaspora are already in decline.

Tens of thousands of reservations for the winter season and New Year have been cancelled, at a time when many families re-unite. And Middle East Airlines, the national carrier, has moved some of its planes to safe airports in Cyprus and Turkey after insurance companies reduced war risk coverage by 80%, and an increase in the risk premium in the region to 34%.

AFP — Lebanon fears new destruction for its planes and airport, and some planes were transferred to other airports last week after the outbreak of the Gaza war.

In the south, thousands of families have been displaced, amid bombardment that has been underway for over two week.

People are stocking up on fuel, food, and medicines in anticipation of any sudden escalation. Many Lebanese are leaving, taking yet more skilled young people out of the country. People of other nationalities are also leaving.

Foreign companies are moving their Lebanese operations to other, more stable countries. This is denying the country a desperately needed foreign currency source and cutting the number of jobs.

Tens of thousands of reservations for the winter season and New Year have been cancelled, at a time when many families re-unite. Middle East Airlines, the national carrier, has moved some of its planes to safe airports in Cyprus and Turkey after insurance companies reduced war risk coverage by 80%.

Even more destruction

Any war between Hezbollah and Israel could mean destroying what remains of Lebanon's infrastructure, adding to the already bleak conditions in the country.

State-generated electricity is supplied only around five hours a day, making it almost non-existent. Water supply is scarce. Public buildings, including schools and hospitals, are dilapidated. Roads are in a similar state.

In the public sector, the average income of state employees – including security force members – is now around $100 a month.

According to some sources, the country is already home to over 1 million Syrian refugees, who fled the civil war there, meaning they make up around 30% of the population. This adds to the pressure in Lebanese society.

Most of the population lives around the poverty line. Around 80% of Lebanon's people suffer very difficult living conditions. There is little domestic or international aid for anyone.

Inflation is running at 250%. Any large-scale conflict would further decimate the Lebanese pound. An even weaker exchange rate would worsen all the economic and social dangers already faced.

A further currency collapse could make Lebanon's financial and banking crisis – already the worst since the 19th century – even deeper and more dangerous.

AFP — A Lebanese depositor chants slogans as he protests in front of a local bank branch whose entrance was set on fire in Beirut.

People are already without savings, or access to them at the banks, where accounts remain frozen after the Banque du Liban (BdL) used deposits to prop up its own currency reserves.

And the measures taken by the central bank since last March to stabilise the currency, after it lost over 90% of its value since 2019, will not be sufficient during wartime.

Any further stability for the Lebanese pound would depend on the country's access to foreign hard currency. Meanwhile, the cash economy on the streets of Lebanon depends on notes and coins coming in along with traffic through Beirut Airport.

On its part, the central bank is reluctant to finance the state already, let alone in time of war, and has said the country does not have the financial resources to fund fighting.

Nor are there national medical facilities to treat the victims of any aggression. Many doctors and nurses from the private sector have already moved abroad. Hospital budgets are meagre and can barely support the needs of the peacetime population. Few people can afford private medical coverage.

Lebanon's civil defences are operating at just 10% of capacity and lost some of its best men and women in the explosion at the Port of Beirut.

Inflation is running at 250%. Any large-scale conflict would further decimate the Lebanese pound. An even weaker exchange rate would worsen all the economic and social dangers already faced

The aftermath

The existing state of Lebanon's national finances are creating big questions over its ability to handle the reconstruction that would need to follow war, should it arrive.

State revenues are not enough to cover the salaries of public employees. Financial aid from the Gulf states is currently interrupted and was vital to recovery after the July War back in 2006.

Hezbollah no longer has a central bank governor who can use costly financial engineering to navigate crises. Neither does the country have the $30bn in reserve as it had in 2018. It likely has only $7bn to pay for the food, fuel and medicines it imports.

Neither does Hezbollah have a prime minister who can seek help from international donors – Arab or non-Arab – amid a lack of confidence in the country's rulers and the default on Lebanon's outstanding and non-outstanding debts. All the while, everyone is waiting for the International Monetary Fund's verdict on the country.

With the Port of Beirut still damaged, Lebanon is more vulnerable to war. The remaining ports and the airports are an economic lifeline. Without them, it faces total economic collapse and an even bleaker state for all of Lebanon's people.

AFP — An aerial view shows the massive damage at Beirut port's grain silos and the area around it on August 5, 2020, one day after a massive explosion hit the heart of the Lebanese capital.

Even without war, Lebanon needs at least $30bn to bridge just a fraction of the gap in its national finances and the banking sector. Then it will need to try and boost the exchange rate of the Lebanese pound, by as much as possible in the year ahead.

Back in 2006, most Lebanese stood in solidarity with the July War. Displaced people from the regions directly affected by conflict – who numbered over 800,000 – were welcomed across the country and in Syria.

With the Port of Beirut still damaged, Lebanon is more vulnerable to war. The remaining ports and the airports are an economic lifeline. Without them, it faces total economic collapse and an even bleaker state for all of Lebanon's people.

Exhaustion, even in the south

But since then, support for Hezbollah has declined. In place of national unity then, there are now risks to internal social cohesion and even overall security. People are exhausted all over the country, even in the south, a region once known as an "incubator" for supporters of the so-called "Party of God".

For two weeks, people have been leaving towns and villages near the border. Now people just want to live in peace and security and protect what is left of their savings.

Hezbollah has shown little respect for Lebanon's constitution and institutions. It has cost the country tens of billions of dollars.

That will pale into insignificance against the price of what is to come if it looks away from the national interest and helps spread war at Iran's behest.

+ / -