Israel’s war on Gaza, following Hamas’ attack on October 7, 2023, immediately spilled over to Lebanon, where a steadily escalating war is being fought by Hezbollah and Israel alongside the southern border areas. While tit-for-tat strikes have been largely confined to the border region, there is an increasing risk of an even more destructive war engulfing all of Lebanon.  

Lebanon has been hard hit for 128 days. At least 26 civilians have been killed by Israeli occupation forces, more than 771 have been injured, and over 87,161 people have been displaced from their villages in the South, particularly Bint Jbeil, Marjayoun, and Sour.¹ According to the Beirut Urban Lab, Israel conducted more than 2,600 strikes inside Lebanese territory within 10 Km of the border, and continues its illegal use of phosphorous munitions, which is causing serious environmental damage and threatening the country’s fragile agricultural sector and the regional ecosystem.

Despite being largely contained to the South, the ongoing conflict’s impact is felt across the country. The number of inbound passengers at Beirut Airport dropped by 23% in October 2023 compared to the year prior and, consequently, the number of customers in the hospitality sector has shrunk, reducing business volume for hotels and restaurants.  

Amid continued fighting, there has yet to be a thorough assessment of how the conflict is negatively affecting the Lebanese economy and infrastructure. The South Lebanon conflict could very well lead to a marked reduction in hard currency inflows – primarily from tourism, foreign investments, remittances, and exports – that Lebanon desperately needs to finance its large import bill. Considering the multiplier effect, the real and potential losses are much greater than estimated in this article, as both the duration and the geographical scope of the war will impact the inflow of hard currency into the country.  

While Lebanon was expecting 1.29 million tourists between October 2023 and February 2024, it is likely that this target will fall short by 300,000 tourists, assuming the 23% drop in arrivals in the month of October 2023 holds. Given that tourists, on average, spend $1,500 per visit based on 2022 numbers, the economic loss in tourism inflow is estimated at about $450 million.

The investment sector is also suffering. For instance, foreign real estate investment in southern regions is set to significantly drop. In fact, October 2023 recorded a countrywide 60% year-on-year decrease in real estate transactions and a 40% decrease compared to the 12-year average (2011-2022), indicating broader hesitancy among investors.² Projecting this trend, a 40% loss in foreign direct investment (FDI) over six months translates to an estimated $105 million loss. The total loss in inflows for Lebanon, considering just these two sectors, could total about $550 million. 

In the event of a prolonged conflict, both tourism and real estate investment will continue to suffer, depriving the country of further inflows. For instance, the number of tourists visiting Lebanon stands to drop by 900,000 between October 2023 and September 2024, resulting in an estimated loss of $1.35 billion in tourist receipts. Similarly, a prolonged conflict would exacerbate hesitancy in the real estate sector, and FDI losses could reach approximately $210 million over one year.

Additionally, damage to the agricultural sector will affect exports. Given that the South is an important contributor to the production of olives, tobacco, almonds, wheat, barley, citrus fruits, bananas, milk, and olive oil, among others, their total exports, valued at $94 million per year, will suffer.³ Hence, the expected losses in foreign currency inflows are expected to total at least $1.6 billion.

In the event of an all-out war, Lebanon’s four key inflow channels will be severely disrupted. Tourism would virtually cease, with inbound passenger numbers dropping by 90%, similar to the trend observed during the 2006 war.⁴ This could lead to about $4 billion in lost tourist receipts. Moreover, due to the emigration of Lebanese high-skilled workers and companies, particularly international ones, the inflow of compensation to employees would suffer substantially. Lebanon’s compensation to employees dwindled progressively after the 2006 war, reducing by 55% in December 2006 compared to December 2005.⁵

Assuming an already feeble economic landscape, Lebanon’s losses due to the exit of international companies and the relocation of local companies would be deeper than in 2006. As such, we assume a 50% contraction in compensation to employees between March and October 2024, which will likely last for a longer period. This would lead to losses of about $53 million, and an overall contraction in economic activity.

In such a scenario, the war would have affected most of Lebanon, compromising vital transport and shipping infrastructure, as well as water and energy supply. This would likely lead to a large contraction in the manufacturing sector and its exports. This contraction could swell to over 50% over the 12-month period between October 2023 and September 2024, or about $2 billion.

As Lebanon depends on cash banknote imports to disburse incoming remittances, a loss of ports and imports means that Lebanon will lose out on this vital inflow during the war. This would significantly jeopardize the livelihood of remittance-dependent families during the war, as they would not have access to other forms of income. In total, Lebanon would likely lose out on about $1.5 billion in remittance inflows during this period.

The potential loss in affected inflows would reach around $7.7 billion, a staggering number of losses given Lebanon’s shrinking GDP of $16 billion.⁶ Add to the losses of inflow the multiplier effect, the costs are even larger.

While Lebanon has faced several conflicts with Israel, a new war would have catastrophic effects on the entire country for multiple reasons. Firstly, Lebanon's economy is in ruins following the financial crisis that began in 2019, exacerbated by the ruling elite's refusal to implement necessary reforms to stabilize the economy they had destabilized. The country's GDP has plummeted to 40% of its 2018 level, with societal vulnerability at an all-time high. Secondly, the economic collapse has made Lebanon increasingly dependent on capital inflows, which soared to nearly 90% of GDP in 2023, up from just 50% in 2018. Thirdly, as a cash-based economy, Lebanon's reliance on importing dollar banknotes to sustain its economy is critical. Therefore, if ports and airports were to become inoperative, Lebanon would be cut off from accessing cash. Lastly, donors who previously helped cover expenses are now hesitant to assist Lebanon, given the failure of its leaders to implement reforms. What is imperative is for international actors to push for an immediate stop to the Israeli war on Gaza, which would not only offer a pathway to reducing tensions but also mitigate the increasing humanitarian crises and the significant human and economic losses across the region.