By Jack Percival
At the start of January 2025, Joseph Aoun became president of a state in crisis. His inauguration speech fell just under ten minutes, but the no-nonsense former general had no shortage of issues to attend to. After addressing thorny topics such as the Israeli occupation and relations with Arab nations, the issue of Lebanon’s woeful economic situation was finally broached, consigned to a footnote at the end of the address. Only a couple of sentences were offered up, promising a free economy, transparency, and the protection of citizens’ bank deposits.
Aoun’s conciseness is understandable. The fiscal situation in the country was complex enough when it came to a head in the crisis of 2019, but recent geopolitical developments have complicated Lebanon’s recovery efforts further, and a detailed plan outlining how to tackle an economic mire that has caused citizens to resort to armed bank robbery to withdraw funds from accounts has yet to surface.
Economic troubles first became clear in 2019. By the year in question, Lebanon’s debt was 178% of its GDP, and in March 2020 the government defaulted on its sovereign debt, stating it could not pay a $1.2 billion bond without rendering the country as a whole completely illiquid. Hyperinflation and the collapse of the Lira in 2023 soon followed, as citizens’ deposits were frozen. Capital flight skyrocketed as Lebanese elites saw the writing on the wall and withdrew wealth from Lebanon.
These events were the result of decades of corruption, fiscal mismanagement and failure to build a sustainable, productive economy. The Lebanese central bank, bloated with politically appointed yes-men, had long engaged in dubious financial engineering to maintain an artificially strong exchange rate and keep the Lira pegged to the US Dollar. This resulted in huge public debt as banks failed to combat existentially low liquidity levels, exacerbated by a trade deficit that meant Lebanon was not attracting a sustainable amount of foreign currency. The Beirut port explosion in 2020 is both causative and indicative of the financial situation. It caused massive infrastructure damage and represented a major blow to Lebanon’s international reputation, but it also functions as an allegory for the country’s disfunction – the blast was a result of unchecked negligence and corruption, and an explosion parallel to the one in Beirut that claimed 218 lives has been occurring in slow motion in the economic sphere for the past seven years.
Hope seems to have briefly re-emerged following the November 2024 ceasefire, with GDP up 4% in 2025. However, any momentum achieved was halted by the renewal of hostilities between Hezbollah and Israel in March of this year, compounding financial woes with security and humanitarian crises, with these considerations moving structural reform down the list of the government’s priorities. The area along the southern border has been devastated by Israeli shelling, with around 1 million inhabitants being displaced by the fighting.
Despite Aoun pledging to reform state institutions, little progress has been made in this regard. Far from being politically neutral, Lebanon’s civil service is composed in large part of political appointees who act in line with sectarian interests, or with a view to personal financial enrichment. Dredging out corrupt or compromised parts of the country’s economic departments is complicated further by chronic political fragmentation – the confessional governmental system maintains a careful balance between Maronite, Sunni and Shia factions, often at the expense of oversight and fairly contested elections.
Thus reforms aiming to satisfy IMF and foreign donor demands for transparency and an overhaul of corruption often do not get past parliament. Quoted in the FT last year, a Lebanese media watchdog accused “specific actors in the banking sector who had the most to lose and the most to hide” of investing “in supporting a certain [anti-IMF] narrative in the media.” A successful restructuring plan would allow depositors to finally be repaid by deciding how much of the damage commercial banks would have to absorb in relation to the state.
Aoun and Lebanon are therefore stuck in a fiscal catch-22; foreign creditors demand reform before capital is committed (US 2020: “broader assistance is conditional on fundamental change”), but for sustainable long-term reforms to hold their shape before an increasingly frustrated electorate, capital is needed in the early stages to ease the transition. As Lebanon’s new central bank governor warned foreign powers in May: “without a bridge, even well-designed reforms risk exhaustion before they take hold.”
And so, last month, Aoun found himself meeting with the one man who could prove influential enough to get investment flowing. The visit to the White House went smoothly, with Trump vowing to ensure Lebanon was treated “with the respect it deserves”, and reaffirming US commitment to a June framework agreement to disarm Hezbollah and withdraw Israeli troops from the country’s embattled southern region. Aoun will also take heart at Marco Rubio’s words, whom he also met during the trip – the Secretary of State seemed to endorse investment in infrastructure as a means to counter Hezbollah: “How do you replace Hezbollah? You defeat and replace them with a government that is strong enough to be the sole force of arms in the country.”
Economic recovery, it seems, is inextricable from Lebanon’s Hezbollah problem. As long as the nation is a zone of armed conflict, investment will not be attracted at a level sufficient to dig it out of its fiscal hole. This dynamic is clear in a recent win for Aoun’s government, as Saudi Arabia opted in June to lift a near half-decade embargo on Lebanese exports, citing “positive steps” taken towards rebuilding state institutions. The ban was instated in 2021 in response to Hezbollah’s influence in Lebanon,
specifically the group’s alleged role in the trafficking of drugs into the kingdom. In 2024 Lebanese security forces undertook unprecedented operations against the country’s drug smugglers.
Beyond trading considerations, Israel’s war with Hezbollah has caused eye-watering destruction in southern Lebanon to the tune of billions of dollars. The World Bank estimates that $3.4 billion in damages has been caused since September 2024, while speculative economic losses are said to be around $5.1 billion.
Countering Hezbollah’s influence in the country is a dauntingly complex task; the group is effectively part of Lebanon’s DNA. Many in the south of the country rely on them for social and financial services, including schools and hospitals. Many Shiite Muslims in the country support Hezbollah, and the group oversees a large voting bloc of parties with aligned interests in the legislature – in the 2022 elections said bloc won 62 of the 128 parliamentary seats available.
The new wave of hostility in the region has once again thrust Lebanon into the middle of a war it does not wish, and cannot afford, to be in. The country is still a passive actor whose fortunes are tied to the whims of nations it cannot influence. It seems all too clear that Lebanon’s economic recovery will only occur in the context of a peaceful Middle East, a chimeric notion in today’s chaotic landscape.
The views expressed in this article are the author’s own and may not reflect the opinions of The St Andrews Economist.
Image Credit: Wikimedia Commons
