Lebanon: Between a 9% Contraction and a $5 Billion Reconstruction Bill
Negative economic indicators in Lebanon continue to pour in at a sharp pace, amid the spread of “uncertainty” and the ongoing accumulation of financial and reconstruction losses resulting from skirmishes and military operations in the south. This occurs against a backdrop of rising concerns about the prospects of military escalation, linked to external electoral obligations, complexities in direct negotiation rounds, and the spillover effects of confrontations in the region.
The updated report issued by the international agency Standard & Poor’s featured notable signals of a reassessment by international financial institutions of near- and medium-term outlooks, based on an analysis of economic and financial indicators related to complex challenges tied to major policies, such as security risks, weak economic growth, limited public financial resources, and substantial reconstruction needs.
Among the updates from the international agency was the anticipation of a contraction in the Lebanese economy by 8 to 9 percent this year, a sharp reversal from previous projections that had anticipated 3 percent growth for the gross domestic product (GDP), which stood at approximately $35.8 billion at the end of the previous year. This downward revision was reinforced by local data showing a successful lowering of expectations for the summer tourism season, reflected in a decline in airport traffic and arrivals in July, thereby weakening its contribution to mitigating the economic downturn.
The adjustment in growth estimates, from moderate positive to sharply negative, resulted from an analysis of the repercussions of the recent war and its escalating impacts on the construction and tourism sectors, as well as on investor confidence. The government estimates the cost of reconstructing public infrastructure and damaged homes at around $5 billion, equivalent to 13 percent of the estimated GDP for the current year.
Conversely, the ratings agency anticipated that reconstruction efforts would contribute to supporting real GDP growth by 2 to 3 percent over the next three years, provided that the intensity of large-scale hostilities subsides. In this scenario, economic course correction would accelerate growth through the contribution of reconstruction to the recovery of diverse service sectors, increased consumption, improved liquidity levels, and inflows of remittances.
Simultaneously, a decline in the average inflation rate to 14 percent next year and 10 percent in 2028 is anticipated, driven by a significant increase in the dollarization of the economy and exchange rate stability.
