The World Bank recently released its Lebanon Economic Monitor (LEM) Fall-2023 report titled “In the Grip of a New Crisis” in which it tackled several issues, of which the impact of the Gaza war and its spillovers on the Lebanese economy. The report first commented that the Lebanese economy was originally forecasted to grow (for the first time in five years) by 0.2% in 2023, buoyed by a robust tourism season, stable remittance flows, increasing dollarization of salaries and a better private sector activity, all of which supported consumption. The report commented, however, that the escalation of the confrontations in the South of Lebanon will dent the aforementioned consumption drivers, sending the country’s economy into a recession. The report added that the impact on the tourism sector is already starting to unfold, with the ratio of completed to planned flights (tracked to scheduled flights ratio) freefalling from 98.8% on October 7, to 63.3% on November 4. Always in the same vein the report pointed out that Lebanon was the most hit amongst neighboring countries, with a tracked to scheduled flights ratio of 81.3% over the October 7 – November 6 period compared to 90% and 92.1% for Egypt and Jordan on a respective basis. International trade was also heavily impacted, as a result of the steep rise in insurance premiums, with import and export volumes contracting by 50% and 64.6% on a respective basis. Eurobond prices, which rose to above 8% of face value in September as a result of the flamboyant tourism season and commencement of gas exploration, have dropped to around 6.3% of face value in November. The World Bank then went on to estimate the impact of the aforementioned events on the Lebanese economy, assuming in the process that the events would persist until end of year, in the event of a containment of tensions (such as the current case) and in the event of significant propagation of hostilities. The World Bank then conducted a scenario analysis for the containment scenario, relying mainly on the extent of the drop in tourist arrivals, as tourism receipts have been over the last period a main driver of economic growth. In details, the World Bank assumed three scenarios, with scenario 1 anticipating a 50% drop in travel receipts and spending by Lebanese expatriates in the final quarter of the year, vs a 70% decline assumed by Scenario 2, and an 80% contraction assumed by the third scenario. The results point out that all three scenarios would lead to an economic contraction, particularly a 0.6% one in Scenario 1 to $17.85 billion, and projected contractions of 0.7% in Scenario 2 to $17.72 billion and 0.9% in Scenario 3 to $17.65 billion, leading to respective deviations of 0.8%, 0.9%, and 1.1% from the pre-conflict anticipated growth of 0.2%. Always on the containment case front, the World Bank anticipated the social impact of the crisis to be high, with hundreds of tourism jobs being in peril coupled with the rise in the number of Internally Displaced People, yet the human and infrastructure toll to be somewhat contained to the Southern area.

However, and in the event the conflict escalates, the report estimated the human impact to be high, drawing in this perspective comparisons with the 2006 war which resulted in more than 1,000 deaths, 4,000 injuries and a displacement of 25% of the population. The World Bank commented, however, that unlike the 2006 war, the situation in Syria would practically rule out the prospects of a refuge there, which would result in a higher internal displacement. The report added that the propagation of the conflict would further pile misery on Lebanon’s already weak infrastructure in the event it is targeted, with the prospects of a Gulf financing such as the year 2006 being unlikely. In addition, remittance inflows would be severely impacted and tourism activity would come to an abrupt halt, with the damage in human and physical capital severely undermining Lebanon’s long-term growth potential. The World Bank commented that while the 2006 conflict led to a 10.5% contraction in GDP, any escalation of the current events will likely have a more severe impact on the economy, and would last longer. Finally, the World Bank revealed that the expansion of the conflict would dry up investment and capital inflows, and would exert high pressure on the exchange rate, with the Central Bank’s meager reserves limiting its ability to intervene.