Lebanon, a country once revered as the Switzerland of the Middle East, has found itself on a tumultuous economic journey, marked by severe challenges and critical opportunities for development.
Over the past decade, Lebanon’s economy has endured multiple crises that have compounded its vulnerabilities—political instability, financial collapse, and the explosion in Beirut’s port are just a few defining moments that have drastically shaped its economic narrative.
The nation is currently struggling with economic stagnation, while facing potential for growth through international aid, economic reforms, and sectoral diversification.
A Snapshot of Lebanon’s Economy
Lebanon’s economic decline began long before the crises of the past few years. Traditionally a service-oriented economy, Lebanon relied heavily on banking, tourism, and trade. It was not uncommon to hear of Beirut as the “Paris of the Middle East,” a cultural and financial hub that attracted tourists and investors alike. Yet, beneath the vibrant surface, there were systemic weaknesses in governance, reliance on foreign remittances, and political divisions that hindered effective economic management.
The Lebanese Civil War (1975-1990) left a massive void in the country’s infrastructure and institutional foundation, and even after its conclusion, Lebanon’s political structure struggled to adapt. The resulting economic framework depended heavily on the banking sector, real estate, and foreign currency inflows—particularly from the vast Lebanese diaspora. The reliance on a fixed currency peg and years of borrowing ultimately created an untenable situation, with debt levels soaring to over 150% of GDP by the end of the 2010s.
Lebanon’s current economic malaise reached a crescendo in October 2019, as anti-government protests erupted across the country, driven by public frustration with perceived government corruption, stagnant wages, rising unemployment, and a sense of economic inequity.
These mass protests, termed the “October Revolution,” demanded sweeping reforms and the end of Lebanon’s sectarian-based political structure, which many blamed for widespread graft and mismanagement.
Amid the turmoil, Lebanon’s banking sector faced a liquidity crisis. The central bank (Banque du Liban) had maintained the Lebanese pound’s peg to the US dollar for decades, but the country’s dollar reserves were rapidly depleting. Banks began to impose severe withdrawal limits on both Lebanese pound and dollar accounts.
This created panic and led to a parallel black market for foreign currency, with the Lebanese pound quickly losing value against the dollar. Inflation soared as the local currency depreciated by over 90%, resulting in a sharp rise in the cost of basic goods and services.
The financial collapse led to severe economic dislocation, with over half of Lebanon’s population now estimated to live below the poverty line. The official exchange rate, initially pegged at 1,500 Lebanese pounds to the dollar, became meaningless as the black-market rate reached as high as 90,000 pounds per dollar. This devaluation destroyed household savings and decimated purchasing power.
Beirut Port Explosion and Its Fallouts
Adding to Lebanon’s economic misery was the catastrophic explosion at the Port of Beirut on August 4. The blast, which claimed over 200 lives and caused billions of dollars in damages, became a grim symbol of the country’s deep-seated institutional failures.
Investigations revealed that the explosion was caused by the improper storage of over 2,750 tonnes of ammonium nitrate in the port’s warehouse, a reflection of bureaucratic incompetence and negligence. The blast not only caused physical destruction but also contributed to a profound public distrust in Lebanon’s governing institutions.
The explosion exacerbated the already dire economic situation. Many businesses were destroyed, foreign investors pulled back, and the inflow of tourists—once a crucial source of income—dwindled further.
With Lebanon already grappling with a collapsing currency and limited public resources, the Beirut explosion deepened Lebanon’s financial woes, making recovery an even more arduous task.
Key Challenges Facing Lebanon’s Economy
Lebanon’s sectarian political system continues to be a major impediment to meaningful reform. The power-sharing mechanism, designed to ensure representation of different religious communities, has often led to political gridlock. This inability to form a functioning government has resulted in a lack of clear economic policy, stalling reforms that are necessary to secure international aid.
Once one of the key pillars of the economy, Lebanon’s banking sector has lost credibility. The collapse of trust between depositors and financial institutions has paralysed domestic and foreign investment. In addition, banks’ heavy exposure to the government’s debt made them vulnerable, and their insolvency has further eroded the prospects of a quick economic turnaround.
The collapse of the Lebanese pound and soaring inflation rates have impoverished the population. Prices of essential goods—such as food, medicine, and fuel—have skyrocketed, leading to a humanitarian crisis. The UN estimates that food insecurity affects a large segment of the population, while shortages of fuel and electricity have become the norm.
Lebanon has one of the world’s highest levels of public debt, estimated at over 180% of GDP. Servicing this debt is challenging given the depreciation of the Lebanese pound, leading to increased debt burdens in terms of local currency. Without a clear debt restructuring plan, Lebanon remains stuck in a cycle of borrowing and default.
Opportunities and Developments
Despite the bleak outlook, Lebanon’s economy possesses certain opportunities for development and recovery. To capitalise on these opportunities, the country must embark on a comprehensive reform agenda.
In the wake of the financial collapse, Lebanon has been negotiating with the International Monetary Fund (IMF) for a bailout package. However, progress has been slow due to the political stalemate and disagreements over the scale of reforms needed. The IMF has insisted on structural reforms, including audits of the central bank, electricity sector reforms, and anti-corruption measures. If Lebanon can meet these conditions, it may unlock crucial funding to stabilise the economy.
Lebanon has an opportunity to diversify its economy beyond banking and real estate. Agriculture and agro-industry, for instance, could be developed to improve food security and create jobs in rural areas. The tech startup scene has also shown promise, with many young Lebanese entrepreneurs seeking opportunities despite the challenging environment. Attracting investment into non-traditional sectors could lay the foundation for a more resilient economy.
The Lebanese diaspora, spread across the world, has long played a significant role in supporting the domestic economy through remittances. Engaging the diaspora for direct investments, entrepreneurial initiatives, and even expertise sharing could provide a much-needed boost. The challenge lies in restoring confidence among expatriates that their funds and efforts will not be lost to corruption or inefficiency.
Reforming Lebanon’s corrupt institutions is key to restoring economic stability. Anti-corruption measures and judicial independence are crucial to ensure that international aid reaches its intended beneficiaries. The Lebanese people have shown a willingness to push for these changes, as evidenced by the widespread protests against corruption. However, translating this public sentiment into political action remains challenging.
Lebanon’s electricity sector is notoriously inefficient, running consistent deficits that drain public resources. Reforming Electricite du Liban (EDL) and encouraging investments in renewable energy could significantly cut costs and create jobs. Addressing the energy crisis is critical to providing stable electricity—a necessity for both businesses and households.
If Lebanon’s political elites can harness the collective will of the people, engage effectively with international stakeholders, and commit to deep institutional reforms, there is hope for a brighter future. For now, Lebanon remains a nation grappling with deep scars—both economic and social—but also one with a proud history and an enduring spirit that yearns for recovery.