No Bailout in Sight: Lebanon’s Economic Balancing Act

The outbreak of war in Lebanon in March closed off a rare opening for an economic turnaround before it could even begin. That opening had been taking shape at the start of this year: After six years of stringent austerity measures, the government had begun to cautiously expand public spending, leveraging improvements in tax revenues. At the same time, Lebanon was preparing to complete the legislative framework required to address the banking sector crisis, as a prelude to negotiating a new agreement with the International Monetary Fund (IMF). These developments created an opportunity to restore essential state functions, provide social protection, and build infrastructure after years of deterioration. The war fundamentally altered this trajectory. Instead of advancing toward economic recovery, Lebanon was hurled into a deepening structural crisis. Public expenditures surged abruptly due to the mounting costs of displacement and humanitarian relief. Government revenues declined sharply as economic activity contracted across large parts of the country. External inflationary pressures also became more pronounced, with the rise in the cost of imported goods increasing the demand for foreign currency to finance imports. The repercussions of these developments quickly materialized, notably in terms of the decline in foreign currencies reserves. Instead of advancing toward economic recovery, Lebanon was hurled into a deepening structural crisis The Lebanese state needs to urgently rethink its spending plans for this year with the goal of prioritizing essential needs—war-related and otherwise—while keeping the currency stable. Achieving this dual objective will necessitate a comprehensive policy locally, alongside sustained support from the international community. Safeguarding social stability in Lebanon and maintaining the functioning of state institutions are not only national imperatives but also matters of regional and international concern. From a path to recovery to renewed crisis Prior to the outbreak of war in early March, Lebanon was already grappling with persistent tensions stemming from ongoing Israeli attacks. From a security standpoint, large parts of the country remained in a state of sustained uncertainty, with no clear transition to stability. Large segments of society continued to suffer from long-term displacement, due to the destruction that affected wide areas of the country, draining their savings and investment capacities. However, at the macroeconomic level, certain indicators had begun to show modest improvement. In January, the Lebanese Parliament approved the 2026 state budget, with total expenditures of about $6 billion, a 20 percent annual increase. This expansion was made possible by higher public revenues, allowing for increased spending without projecting a fiscal deficit. One third of the increase in expenditures in the 2026 budget was allocated to social priorities. At the same time, Lebanon’s economy grew by an estimated 4 percent, marking a tentative recovery following a contraction of 7.5 percent in the preceding year. This growth was driven by the gradual recovery of tourism, remittances, services, and limited reconstruction-related investment. In December 2025, the government approved the draft Financial Regularization and Recovery Law, known as the Gap Law, which sets out how losses from the banking sector’s collapse would be allocated. By February, Parliament had begun deliberations on it, in a concrete step toward addressing Lebanon’s banking losses and laying the legal groundwork for a credible recovery plan. The onset of war in early March, however, fundamentally reversed this trajectory. Within that month alone, public revenues declined by approximately 40 percent, severely constraining the government’s ability to finance the ambitious expenditure plans outlined in the 2026 budget. This sharp contraction was largely driven by the displacement of more than 20 percent of the population, disrupting economic activity, reducing household spending, and weakening the state’s revenue base as many displaced individuals and businesses were no longer able to pay taxes, fees, or utility bills. Simultaneously, the Lebanese state faced mounting war-related emergency expenditures to provide essential services, healthcare, food in shelters for the displaced, and infrastructure in host communities. That amounted to an estimated additional monthly cost of $100 million. This was compounded by the fact that external humanitarian assistance remains well below the levels received during the 2024 war, amid economic disruptions in both Western and Arab donor countries. These pressures risk translating into even higher prices for goods, weaker public services and social spending, and greater uncertainty over the state’s capacity to perform its necessary functions Beyond fiscal pressures, significant monetary challenges also emerged. The rise in global oil prices, as well as shipping costs, led to a sharp increase in the price of the imports that Lebanon relies on for most of its consumption needs. Annual inflation rose above 20 percent in April compared to about 12 percent in February. Additionally, rising import prices led to a corresponding increase in demand for US dollars to finance external trade. This was reflected in a 5 percent decline in foreign currency reserves (about $627 million) between mid-February and the end of May. At the same time, financial markets signaled growing concern over Lebanon’s outlook. Lebanese Eurobonds—sovereign debt instruments denominated in foreign currency—lost approximately 11.5 percent of their value since March. In an internal note, Goldman Sachs said that the “escalation of conflict” has undermined prospects for economic and financial reforms, which would delay the process of restructuring and eventually repaying the debt. For the Lebanese people, these pressures risk translating into even higher prices for goods, weaker public services and social spending, and greater uncertainty over the state’s capacity to perform its necessary functions. If sustained, the depletion of reserves and public deposits could also narrow the authorities’ ability to stabilize the exchange rate, protect purchasing power, and support recovery. Urgent policy decisions required Unlike in previous wars, Lebanon cannot assume that external actors will be able to inject large-scale financial assistance, especially as Gulf, Western, and other donor countries are themselves facing economic pressures and competing fiscal priorities. This is why it is essential for the Lebanese government to prioritize the fiscal dimension of the crisis. This requires an immediate reassessment that targets lowering the expenditure ceilings set under the 2026 budget framework, in order to align them with current realities. A key component of this review should include freezing non-essential or deferrable projects that do not directly impact the government’s emergency response, such as low-priority infrastructure works and administrative building renovations. Such measures would allow for a reduction in overall spending pressures while simultaneously freeing up resources to meet urgent humanitarian needs. Unlike in previous wars, Lebanon cannot assume that external actors will be able to inject large-scale financial assistance In parallel, the Ministry of Finance, in coordination with the Central Bank, should formulate an emergency financing plan to assess the scope of the resources that can be mobilized. This plan must clearly define the maximum level of liquidity that can be utilized from available foreign currencies reserves without triggering instability in the foreign exchange market. Notably, Lebanese authorities are currently placing high priority on maintaining exchange rate stability, given its critical role in preserving the real value of tax revenues collected in local currency. At the same time, the plan should explicitly identify how additional resources can be directed toward social spending and emergency response, particularly for displaced households, low-income families, and communities facing rising costs. Without such support, the war’s impact could translate into deeper poverty, weaker public trust in state institutions, greater social tensions, and a longer-lasting contraction in economic activity. Additionally, Lebanese authorities should undertake a comprehensive review of all committed but undisbursed loans from foreign partners. The objective would be to reallocate a portion of these funds toward addressing urgent needs arising from the war. It is worth noting that unused financing committed by the World Bank currently amounts to approximately $1.4 billion. During the IMF and World Bank Spring Meetings in April, Lebanon signed a $200 million World Bank agreement to strengthen its emergency social safety net, while also exploring the reprioritization of existing World Bank loans and emergency financing instruments to meet urgent war-related needs. Lebanese authorities should therefore move quickly to integrate this financing into a broader emergency response plan, ensuring that available funds are directed transparently toward displaced households. Finally, government action must extend beyond immediate humanitarian relief. This includes strengthening market monitoring to prevent price gouging increases and profiteering. Moreover, the state should reinforce strategic reserves of essential goods—such as fuel, wheat, and basic food items—to mitigate risks related to potential disruptions in supply chains. This requires activating existing tools more systematically, including consumer protection inspections, coordination with importers and suppliers, and regular tracking of stock levels for essential goods. The economic impact of this war is undoubtedly massive, and cannot be fully averted, especially that it came on top of years of financial collapse. The government, however, has a realistic path to soften the blow for ordinary Lebanese, while attempting to prevent the economic shock from turning into a lasting crisis. Ali Noureddeen is a Senior Inclusive Economies Associate at TIMEP, focusing on issues related to fiscal policies, socioeconomic inequalities, and social protection in Lebanon.