Reviving Lebanon’s economy

The below article is part of the series "Seizing Lebanon's Moment," a joint initiative with the Italian Institute for International Political Studies (ISPI). The contributors to this series — who comprise top scholars, policymakers, and professionals from Lebanon, Europe, and the United States — set out to identify Lebanon's critical problems and propose specific reforms aimed at practitioners and officials dedicated to helping the country recover from its deep, multi-year crisis. The series has been compiled in a report, whose findings aim to carry forward the constructive policy dialogue initiated during this year's Mediterranean Dialogues Conference.
 

Lebanon’s economy has a rare opportunity for revival amidst compounded crises. Since 2019, the country has faced economic instability, limited state capacity, compromised sovereignty, and persistent regional tensions. The recent proposal by United States Special Envoy Tom Barrack reaffirmed the need to centralize all arms under state control, while renewing focus on border demarcations with Syria and Israel. The firm stance showed by several international donors — no aid without disarmament — underscores that true recovery hinges on addressing these security challenges directly.

Restoring both domestic and international confidence in the Lebanese government will ultimately depend on taking tangible steps towards economic revival. An independent judiciary, transparent governance, and enforceable regulations are non-negotiable measures for signaling Lebanon’s commitment to credible economic governance. Securing an International Monetary Fund (IMF) program, contingent on the enactment of such reforms and disarmament, is pivotal to unlocking bridge financing. This article presents key policy options to achieve this result, including rebuilding trust through improved governance and judicial reforms, investing in digital infrastructure, driving sustainable growth via regional integration and innovation, and balancing economic revival with sovereign debt restructuring.

Lebanon’s battered economy and the road to recovery

Lebanon’s economy stands at a crossroads, ravaged by concurrent crises and the recent Hizballah-Israel conflict. Real GDP has declined more than 38% since 2019, contracting 6.6% in 2024 alone due to the war. Government debt has continued to grow, surpassing 357% of GDP in 2022, and the banking sector’s collapse has led to the Lebanese pound losing over 97% of its value. Hyperinflation has reached unprecedented levels, propelling a dollarized cash economy and intensifying depreciation. Over 80% of the population now lives in multidimensional poverty,¹ and the middle class has practically been eliminated, raising concerns about profound social fragmentation.

The recent round of war with Israel has caused an estimated $11 billion in damage to infrastructure, deeply disrupting key sectors such as agriculture, tourism, and manufacturing. This devastation, combined with the state’s limited capacity to implement any reforms since 2020 — such as the stalled 2023 competition law, whose implementation decrees are still pending, and the Competition Authority, whose members have yet not been appointed — has eroded trust in governance and hindered economic recovery. As a result, growth forecasts remain unrealized, while Lebanon’s dim economic prospects and mounting distrust have fueled brain drain since 2019. The mass emigration of youth and trained professionals now poses a long-term threat to recovery. Investor confidence has notably declined in response to such political dysfunction and weak institutional frameworks.

Low credibility not only constrains capital inflows but also limits long-term investment planning and undermines faith in the prospects for broader economic reforms. These challenges have underscored the need for international assistance. Yet many international donors firmly insist that no aid will be provided without Hizballah’s disarmament, a critical step for regional peace and economic stability. This was reaffirmed in Special Envoy Barrack’s recent proposal, which provided an implementation roadmap for securing the Lebanese state’s monopoly over arms and ensuring sovereign borders.

With the era of unconditional bailouts long gone, Lebanon faces a stark economic reality: recovery will hinge not on external rescue, but on sustained investment and meaningful integration into regional markets. The government has taken small steps — and is signaling openness to reform — but investor confidence remains low, and capital inflows are minimal. To attract long-term investment, Lebanon must offer more than promises. Legal clarity, regulatory reform, and credible macroeconomic governance are prerequisites. At the same time, domestic producers — across agriculture, industry, and services — will need targeted support to compete regionally and absorb new capital. What would it take to bridge these two fronts and anchor Lebanon’s recovery in a new, regionally connected economic model while sustaining innovation and addressing other challenges such as brain drain? The emphasis on the rule of law cannot be overstated: without it, no amount of regional integration or investment will take root, as trust remains the bedrock of any sustainable revival.

Rebuilding trust through regulatory clarity and improved governance

To translate legislation into change, Lebanon’s future reforms should include strong enforcement mechanisms, the lack of which precluded change and fueled corruption in the past. Improvements to financial and judicial policies can affect multiple sectors and subpopulations, allowing for efficient and comprehensive solutions. Primarily, restoring the credibility of Banque du Liban (BdL), Lebanon’s central bank, is crucial to regaining domestic and international trust. Adopting transparent monetary policies, such as regularly communicating future policy intentions, and auditing financial accounts, will gradually improve the bank’s reputation. Fiscal discipline to manage deficits must be balanced with adequate social spending, allocated based on data-driven evidence, to prevent escalating social instability during the reform process. In a context where the Central Administration of Statistics still lacks the resources to provide and collect necessary data, academic institutions and non-governmental organizations (NGOs) can play a valuable supporting role.

Establishing an independent regulatory body to investigate monopolies, enforce penalties, and enhance transparency is essential for addressing stalled reforms, such as the 2023 competition law, and advancing new policies. Complementary measures, including simplifying business licensing and strengthening property rights, would further improve investor confidence and enhance the business environment. According to the UN ESCWA Arab Business Legislative Frameworks (ABLF) 2023 report, Lebanon scores 3.93 (moderate) on competition law, while Saudi Arabia and Egypt lead the region with scores above 6 (very strong). As such, both countries might present models that Lebanon could draw from to enhance its independent regulatory body, enforcement mechanisms, and overall business environment.

A key step to attract investments is the reform of Lebanon’s judiciary. The new law on judicial independence, passed by parliament on July 31, 2025, offers a promising start, although remaining gaps hinder institutional development. The authority granted to government-appointed prosecutors to halt investigations, coupled with persistent political interference in judicial appointments, reduces the overall effectiveness of the system. In fact, aligning the judicial selection process with international standards will engender greater trust, as an independent judiciary is critical for establishing investor confidence and combating corruption. The rule of law, fortified by this reform, is indispensable for regaining the trust lost by years of impunity and inefficiency.

In parallel, curbing the pervasive cash economy demands concerted efforts to formalize the informal sector. This includes incentivizing digital transactions through tax rebates for electronic payments, expanding e-signature implementation, and integrating informal workers into formal tax and social security systems. Such measures not only broaden the tax base but also reduce vulnerability to corruption and enhance economic transparency. To further strengthen these measures and address the even greater impact of tax avoidance by high-net-worth individuals and corporations, Lebanon should close legislative loopholes and pursue international cooperation to combat evasion. Accountability is particularly important here: public sector restructuring must involve a comprehensive audit of employees, the elimination of redundancies, and the upskilling of the workforce for a digital future. Full e-government (e-gov) adoption — streamlining services like licensing, procurement, and taxation online — will cut bureaucratic red tape, foster accountability, and free up resources for productive investments.

While there is a risk that entrenched elites and sectarian parties could further consolidate power, the upcoming 2026 elections could still hold promise for a more reformist parliament — particularly if Hizballah's disarmament is actually implemented, international conditions for aid are met, and other reform initiatives gain traction. This would enable ambitions to accelerate reforms, develop implementation mechanisms, and review remaining unfavorable policies. In the interim, the current legislature must proactively advance reforms to build momentum and regain trust. Prioritizing enforcement of existing legislation, committing to transparent governance, and demonstrating institutional accountability are crucial to fostering long-term economic stability.

Infrastructure in the digital age: The backbone of recovery

In the digital age, robust infrastructure is not a luxury but rather an essential enabler of economic revival. Lebanon’s outdated and war-damaged networks must be modernized to support a competitive, innovation-driven economy. Fast and cheap telecommunications are paramount: introducing services like Starlink could provide high-speed internet to remote areas, bridging the digital divide and enabling remote work, e-commerce, and fintech growth. Coupled with a reform of the electricity sector, these measures can help lower operational costs for businesses and households as well as attract tech startups and diaspora returnees. Lebanon’s electricity sector has long been plagued by chronic issues, including frequent power outages, reliance on costly fuel imports, and mismanagement at Électricité du Liban (EDL), resulting in daily blackouts averaging 12-20 hours. These challenges, exacerbated by fuel shortages and unmaintained infrastructure, have driven businesses to depend on expensive private generators, inflating costs and deterring investment. Prioritizing reforms like modernizing EDL, expanding the use of renewable energy, and securing regional energy imports can stabilize supply and reduce costs. Establishing regional interconnections to import affordable electricity from Gulf states like Saudi Arabia,² where production is cost-effective, could provide a reliable supply and rapidly address shortages, helping to support greater economic stability.

Upgrading digital infrastructure and deploying nationwide fiber-optic and 5G networks would also foster an ecosystem for artificial intelligence (AI), blockchain, and digital services. Without these, Lebanon risks further isolation from global markets. Public-private partnerships should prioritize these upgrades, with international donors tying aid to verifiable progress. Reliable power and digital connectivity will not only curb brain drain by creating viable job opportunities but also formalize the economy by digitizing transactions and reducing reliance on cash.

Driving sustainable growth

Lebanon has a strategic opportunity to enhance its trade environment. The aforementioned Barrack proposal reaffirms Lebanon’s sovereignty and border control. The included border demarcation plans can be leveraged to facilitate expanded land trade with neighboring countries, positioning Lebanon as a regional hub. The demarcation of Lebanon’s borders would allow for the establishment of additional official border crossings and help boost legal cross-border trade. This will simultaneously improve the state’s control and oversight over land corridors and fight smuggling networks. In parallel, strengthening trade relations with the Gulf states through updated agreements and modernized logistics can inject much-needed foreign capital into the economy.

To realize this potential, investing in improving Lebanon’s trade infrastructure is crucial. Upgrading ports, improving road corridors, and exploring the construction of rail links will significantly increase Lebanon’s trade capacity. Enhanced infrastructure can attract international financing that would support regional integration and unlock export potential that would be key to economic revival. Domestic producers in agriculture, industry, and services must receive targeted support — such as subsidies for modernization and access to regional markets — to compete effectively and absorb incoming capital.

Sustaining innovation and slowing the flight of skilled and professional workers are vital steps for long-term recovery. Offering tax breaks, incentives, and startup grants can attract diaspora professionals to return to a more stable and encouraging environment. Targeting investment in technology and green sectors — such as solar energy, fintech, and digital services — can generate high-value jobs for young talent. Establishing public-private partnerships for research, development, and vocational training will gradually rebuild human capital and slow emigration. In the digital age, these efforts must align with infrastructure upgrades: cheap electricity and fast telecoms will empower innovators, while formalizing the informal economy ensures that entrepreneurial gains are taxed and reinvested sustainably.

Balancing economic recovery with sovereign debt crisis

Lebanon must urgently accelerate negotiations with creditors to restructure its foreign debt. As mentioned earlier, public debt had surpassed 357% of GDP as of 2022. Eurobonds, which account for 95% of Lebanon’s foreign debt, stood at $39.2 billion that same year, following default and interest accumulations. However, creditors are unlikely to agree to restructure the debt without an effective IMF program. Therefore, engagement with the IMF is critical. Lebanon has the opportunity to secure a program conditional on the aforementioned reforms. Strengthened judicial enforcement, enhanced central bank transparency, and the successful disarmament of Hizballah are essential to mobilizing funds. This would provide much-needed bridge financing while signaling Lebanon’s commitment to credible governance and fiscal responsibility. The IMF program could also enforce public-sector restructuring, mandating e-gov integration and employee accountability to streamline operations and reduce fiscal burdens.

A promising strategy to complement fiscal discipline involves issuing green bonds. These could be used to fund sustainable projects focused on energy infrastructure, appealing to environmental, social, and governance (ESG) investors by aligning Lebanon’s fiscal strategy with global sustainability trends. Furthermore, implementing progressive taxation, such as higher taxes on luxury items, high-net-worth individuals, and corporations, would raise government revenues. Simultaneously, fully digitalizing public procurement can reduce corruption and financial leakages. To avoid austerity traps, a portion of new revenues should be allocated for social safety nets to protect the most vulnerable populations during economic adjustments. Comprehensively including and supporting the populace can help ensure that economic revival does not open the window for social unrest.

Lebanon’s economy is at a crucial moment between further collapse and the beginning of recovery. There is an urgent need to seize this moment by building trust in the state. Effective disarmament of Hizballah is fundamental to ensuring peace, securing access to aid, and restoring investor confidence. Simultaneously, capitalizing on regional investments emphasized by the opportunities outlined in the Barrack proposal and renewed Gulf engagement can catalyze an economic revival. The rule of law, robust digital infrastructure, IMF-backed reforms, and public-sector accountability are the key pillars of this process. Seizing this moment demands bold yet credible reforms anchored by transparency, accountability, and trust. Coordinated action will ultimately ensure Lebanon’s future as a peaceful, stable, and prosperous nation.

 

Dr. Leila Dagher is the Founding Director of the Center for Policy Action and Associate Professor of Economics and Policy at the Lebanese American University (LAU), and has been an adjunct lecturer at the George Washington University since 2016. Before joining LAU, Dr. Dagher had taught for 15 years at the American University of Beirut with several visiting stints, including at Harvard’s Kennedy School of Government and the Department of Energy’s National Renewable Energy Laboratory.

Isabelle-Yara Nassar holds a Bachelor of Science in international affairs from the Georgia Institute of Technology (2023) and is currently pursuing a master’s in international development at Sciences Po Paris. She is a Fellow of LAU’s Center for Policy Action.

Photo by Bilal Photos via Getty Images