Formerly acclaimed the “Switzerland of the Middle East,” Lebanon’s economic collapse offers a stark warning about the dangers of fiscal recklessness, political dysfunction, and structural fragility. Ranked by the World Bank as one of the worst global crises since the mid-19th century, Lebanon’s collapse demonstrates the catastrophic impact of disregarding economic principles and failing to enforce sound governance. With its currency in freefall, banks paralyzed, and poverty engulfing over 80% of the population, Lebanon’s crisis serves as a case study of the interplay between flawed policies and systemic vulnerabilities.
Debt: The Double-Edged Sword of Growth
Debt, when used strategically, can serve as a catalyst for growth and reconstruction. After Lebanon’s 1975–1990 civil war—a brutal conflict rooted in sectarian divisions that devastated its infrastructure and economy—the government had ample justification for borrowing: rebuilding a war-torn nation and laying the foundation for a brighter future. However, this vision was derailed by a failure to channel borrowing into productive investments, turning debt from a driver of growth into a burden.
Despite borrowing heavily after 1990, successive governments failed to direct these funds toward initiatives that could sustain economic expansion. Instead, Lebanon relied on remittances, tourism, and foreign aid to maintain its currency peg and meet growing fiscal obligations. By 2019, the debt-to-GDP ratio had reached unsustainable levels, skyrocketing to 495% by 2021. Economically, this represents a classic case of debt unsustainability—where borrowing outpaces the economy’s ability to generate returns, leaving the government overburdened by debt servicing costs that consumed nearly a third of its budget.
The Fragile Foundation of Currency Pegs
A cornerstone of Lebanon’s monetary policy was its decision to peg the Lebanese pound to the U.S. dollar at a fixed rate of 1,507.5:1. This policy, implemented in 1997, was intended to stabilize the currency following its sharp devaluation during the civil war and to boost investor confidence. For over two decades, the peg provided a sense of stability, bolstered by inflows from remittances, tourism, and a booming real estate sector. This system worked for years but masked growing vulnerabilities. Beginning in 2016, dollar inflows began to slow as the region’s geopolitical instability—exacerbated by the Syrian Civil War—strained Lebanon’s fragile economy. Compounding matters, Gulf states withdrew their support in response to the rising influence of Hezbollah, a development that alienated Lebanon’s key foreign donors.
To maintain the peg in the face of dwindling reserves, Lebanon’s central bank, Banque du Liban, resorted to extraordinary financial engineering measures. Offering exorbitant interest rates on dollar deposits, it created a Ponzi-like mechanism where new inflows were used to pay off existing obligations. Economically, this strategy highlights the danger of relying on short-term liquidity solutions to address deep-seated structural problems. By 2019, dwindling reserves and a loss of public trust in the central bank led to the peg’s collapse. The Lebanese pound lost over 98% of its value between 2023 and 2024, leading to hyperinflation that reached 221.3% annually in 2023. With purchasing power eroded, millions were thrust into poverty, and Lebanon became a textbook example of how poorly managed fixed exchange rates can devastate an economy.
The Banking Sector’s Role in Lebanon’s Downfall
Lebanon’s banking system, once a pillar of its economy, became its Achilles’ heel. Banks were heavily intertwined with government finances, using depositor funds to purchase state-issued bonds. This created a dangerous dependency: as the government’s fiscal situation deteriorated, so too did the solvency of its financial institutions. When foreign inflows dried up, banks responded by imposing informal capital controls, freezing depositors’ accounts, and effectively trapping depositors' savings as the currency’s value plummeted.
Ordinary citizens eventually found themselves unable to access their life savings, leading to widespread anger and desperation. Some resorted to armed bank robberies in a bid to reclaim their own money. This stark reality illustrates the dangers of moral hazard, where implicit government guarantees motivated banks to engage in risky practices without enough safeguards. The collapse of the banking sector not only shattered public trust but also triggered a broader economic crisis as liquidity dried up and businesses struggled to survive.
Political Paralysis and External Shocks
At the root of Lebanon’s collapse lies not just economic mismanagement but a deeply fractured political system. Sectarian rivalries paralyzed decision-making, while elites prioritized their own interests over the nation’s well-being. This paralysis highlights the risks of institutional failure. Lebanon’s repeated inability to reform its fiscal policies, despite consistent warnings from international donors, underscores how weak governance erodes economic resilience.
Lebanon’s economic crisis, already severe by 2019 amidst mass protests, was worsened by a series of external shocks. The COVID-19 pandemic, which began in early 2020, forced businesses to shut down and strained already limited public resources. In August 2020, the Beirut port explosion killed over 200 people, caused billions of dollars in damage, and decimated Lebanon’s primary trade hub. The crisis deepened further with global disruptions caused by the Russian invasion of Ukraine in 2022, which drove up the cost of essential imports such as wheat and fuel. These events underscored Lebanon’s extreme dependence on external factors for its economic stability, as well as the fragility of its domestic institutions.
The Human Toll of Economic Collapse
The collapse of Lebanon’s economy has inflicted devastating consequences on its people. Public services have virtually ceased to function, with electricity available for only one to two hours a day for most households. Shortages of clean water have led to outbreaks of disease, including cholera. Inflation has made basic goods unaffordable, forcing families to send children to orphanages simply because they can no longer feed them. This crisis has also triggered a mass exodus of skilled professionals, further eroding the country’s economic potential. As poverty deepens, a cycle of desperation and stagnation takes hold, reinforcing the reality that poverty is both a cause and a consequence of economic collapse.
In January 2025, Lebanon elected Joseph Aoun, the former commander of the Lebanese Armed Forces, as its president, ending a two-year leadership vacuum. Shortly thereafter, Nawaf Salam, a respected judge at the International Court of Justice, was named prime minister. These developments signal a significant shift in Lebanon’s political landscape and provide a rare opportunity for reform and rebuilding. The appointment of these leaders is particularly notable given the diminished influence of Hezbollah, which failed to secure its preferred candidates. This loss of power marks a turning point, suggesting a weakening of Iran’s grip on Lebanon through its proxy, Hezbollah. For the first time in years, momentum seems to favor reform and legitimacy over entrenched sectarian interests.
Aoun’s military background promises stability, while Salam’s legal expertise signals a commitment to reform. Their appointments have renewed international interest, with Gulf states and Western allies showing willingness to provide aid critical for rebuilding infrastructure, stabilizing the currency, and revitalizing key sectors like tourism and agriculture. However, the path forward is fraught with challenges. Lebanon’s public services remain in shambles, inflation has devastated household budgets, and entrenched corruption continues to undermine trust. The government must deliver immediate relief—ensuring access to electricity, water, and healthcare—while pursuing long-term reforms, including disarming militias, restructuring the banking system, and creating job opportunities.
Nevertheless, the resilience of the Lebanese people offers reason for optimism. Known for their entrepreneurial spirit and adaptability, many Lebanese citizens have continued to persevere, even in the face of unimaginable hardship. With the support of the international community and a renewed focus on governance and reform, Lebanon has a chance to emerge from the shadow of collapse.
.png)
