Preliminary Estimate of the Economic Impact of the Possible War with Israel on Lebanon

Source: BDL and CAS

It is widely believed that a possible war between Israel and Hezbollah will add insult to injury to the Lebanese economic situation, as the war will magnify the negative impact of the current financial crisis on GDP and the capital stock. An interesting question to consider is: by how much? We intend to provide a preliminary answer in this brief economic digest.

In Azar, Bolbol, and Mouradian (2020), it has been shown that the growth rate in BDL’s coincident Indicator (CI)[1] is a good, statistically significant linear determinant of the growth rate in GDP[2]. In addition, starting in 2019, the Central Administration of Statistics (CAS) began calculating quarterly GDP growth rates for Lebanon covering the period 2017 to 2020. Since the Lebanese crisis is known to have crystalized in 2020, the table above shows that the quarterly changes in CI averaged -10.2% in that year with the corresponding quarterly changes in GDP averaging -25.5%.

Now to get an estimate of the possible war, we can fortunately (or unfortunately!) rely on the actual similar experience that occurred in the summer of 2006. Between July and September 2006, the CI fell by an average of 27.3% because of the war during that quarter. So if we assume that a possible war will be as intense and destructive as the previous one then based on our earlier calculations and the relationship established between CI and GDP growth, the corresponding fall in GDP will be 68.3%. Moreover, as the World Bank estimates that Lebanon’s GDP will be $18 billion in 2023, then quarterly GDP will be $4.5 billion. As such, if the war between Israel and Hezbollah does occur in October 2023, then its quarterly impact or its impact till end December 2023 will be a fall by $3 billion (0.683×4.5), or two-thirds of quarterly GDP. But that is not all: given that Lebanon’s capital-output ratio is about 5 then the corresponding fall in the capital stock will be $15 billion[3].

The above are preliminary and tentative numbers but they are not trivial, and the ensuing misery will be equally substantial. More important, it should make you pause about the legitimacy of starting the war, as the cost benefit analysis will put the country seriously in the red – let alone the fact that neither the majority of the Lebanese nor the Lebanese government wants it!.

[1]  The Coincident Indicator is a composite index of all major real and financial indicators of the Lebanese economy; see www.bdl.gov.lb

[2] See: Azar, S. Bolbol, A. and Mouradian, A. 2020. “An IS-LM-BP Model for Lebanon”, International Research Journal of Finance and Economics, January (177).

[3]  Note that even if (luckily) the war does not actually take place, the current prevailing risk of war is casting a very negative shadow on income and output in Q4 2023.