Lebanon’s Pivotal Moment: Can the New Government Reverse Economic Collapse?
Lebanon finds itself at a critical juncture with the appointment of a new president and a fresh cabinet. The question on everyone’s mind is whether this government can reverse the ongoing economic collapse and restore trust among its citizens and international partners.
The Financial Crisis: A Deepening Abyss
Since 2019, Lebanon has been grappling with a financial crisis that has led to an astounding $80 billion deficit in its banking sector. Political disputes have stalled debt restructuring efforts, exacerbating the situation. The national currency has plummeted in value, losing 90% of its worth since the onset of the crisis. An International Monetary Fund (IMF) delegation, which visited Lebanon in May, found the country’s proposed economic reforms insufficient to warrant financial aid, resulting in an overreliance on dwindling foreign reserves.
New Leadership, New Promises
Nawaf Salam, appointed as prime minister in January, has taken the helm with a commitment to “rescue, reform, and rebuild” Lebanon. Alongside President Joseph Aoun, Salam faces immense pressure to implement deep structural reforms. Fadi Nicholas Nassar, a senior fellow at the Middle East Institute, emphasizes that Lebanon is emerging from a financial collapse compounded by the trauma of the Beirut port blast and years of conflict. He warns that while trust can be quickly lost, it is not easily regained.
The Call for Transparency and Accountability
Economist Jassem Ajaka argues that the first steps towards recovery must include full transparency and an independent audit of Lebanon’s financial sector and public finances. “We have not had such an audit since 2003, which is unacceptable,” he states. Without this crucial step, the fair distribution of losses remains impossible.
Ralph Baydoun, founder of the research firm InflueAnswers, highlights that Lebanon’s ability to secure economic aid and investments is closely tied to the shifting geopolitical landscape. He stresses the need for decisive reforms to regain international trust and reintegrate into the global financial system. Key priorities include robust anti-money laundering measures, an independent audit of the Banque du Liban and commercial banks, and a clear framework for distributing financial losses.
The Burden on Depositors
The financial crisis has placed a heavy burden on Lebanese depositors. Banks had invested the majority of their funds with the central bank, which relied on financial engineering schemes to support government spending and maintain an unsustainable currency peg. Political deadlock over how to distribute financial losses has only deepened the crisis.
Ajaka suggests that a deep restructuring of the banking sector is necessary, including mergers based on economic benefits and asset sales where needed. “This restructuring should prioritize both depositors’ interests and the Lebanese economy,” he explains. Meanwhile, adviser Mohammad Farida proposes a phased recovery roadmap that prioritizes small depositors while holding financial elites accountable for the economic collapse.
The Role of Hezbollah and Geopolitical Dynamics
One of the significant obstacles to reform is Hezbollah’s influence over the state. The group’s political and military entrenchment has deterred international investment and hindered Lebanon’s reintegration into the regional economy. Nassar argues that restoring full sovereignty requires dismantling Hezbollah and shifting governance from patronage to competence.
Baydoun notes that Hezbollah is now in a more precarious position due to financial strains from ongoing conflicts and a decline in Iranian support. The weakening of Iran’s regional network and the Assad regime in Syria could create opportunities for Lebanon to align more closely with Western interests and regain donor confidence.
The Humanitarian Crisis and Economic Outlook
The humanitarian situation in Lebanon has worsened alongside the economic crisis. The World Bank estimates that damages from the Hezbollah-Israel conflict could reach $8.5 billion, with the economy projected to shrink by 10% in 2024. Over 875,000 people have been displaced, and key sectors are facing billions in losses.
The estimated $10 billion required for reconstruction is likely to come from international donors, primarily from the Gulf Cooperation Council (GCC), rather than Iran. President Aoun has reaffirmed the government’s commitment to reforms, emphasizing the need to draft necessary legislation to facilitate recovery.
The Energy Sector: A Double-Edged Sword
Energy policy expert Laury Haytayan emphasizes the need for private sector investment in renewable energy, cautioning against unrealistic expectations regarding Lebanon’s offshore gas reserves. While these reserves could be seen as a potential economic game-changer, the lack of active hydrocarbon discoveries makes them an unreliable catalyst for recovery.
Haytayan calls for regulatory reforms, including the appointment of an electricity regulator and the enforcement of a long-standing electricity law mandating the unbundling of Electricite Du Liban. Ajaka argues that privatization is crucial for state-owned enterprises, particularly in the electricity sector, given Lebanon’s history of overspending without results.
Legislative Challenges and the Path Forward
Farida points out that the primary challenge in implementing reforms lies in the need for legislative updates, which require parliamentary approval. He stresses that any plan must gain parliamentary backing to have a real chance of success.
As Lebanon navigates this complex landscape, the new government faces the daunting task of proving its legitimacy through tangible results. Nassar asserts that “the damage cannot be undone by words alone,” emphasizing that only material deliverables can restore trust both locally and internationally.
The Road Ahead: A Complex Journey
Moody’s has projected that economic activity could begin to recover later this year, contingent on political stability and the implementation of reforms. However, Lebanon’s road to recovery remains uncertain. International donors, including those from the Gulf, are skeptical and demand real action rather than mere political rhetoric.
Ajaka highlights that attracting foreign direct investments hinges on two key conditions: Lebanon must implement ceasefire agreements with Israel and establish an independent judiciary to combat corruption. If these conditions are met, Lebanon could leverage its high return on investment potential to become a key regional player.
Baydoun warns that Lebanon’s exclusion from key regional trade routes stems from political instability and shifting alliances. To avoid further marginalization, Lebanon must actively lobby for integration and position itself as a strategic trade hub. The reconstruction of Beirut Port, aligned with regional trade networks, is a priority to ensure Lebanon does not risk permanent exclusion from the evolving global supply chain.
In this intricate web of challenges and opportunities, Lebanon stands at a crossroads. The actions taken by its new leadership in the coming months will determine whether the nation can emerge from its economic crisis and restore faith in its institutions.