Estimate of the Impact of the War in South-Lebanon on Lebanese GDP

Source: BDL and World Bank

The year-long skirmishes between Israel and Hezbollah in South Lebanon because of the Gaza war culminated in an all-out war in the second half of September 2024. The war comes on top of an economic crisis that has crippled the Lebanese economy since late 2019, and will depress an already shrunken GDP even more. A relevant question is by how much more? We intend to provide an estimate in this 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]. As BDL has discontinued the calculation of CI in 2022, the table above shows the annual changes in CI and GDP for the crisis years whose data are available (2019-2021), where CI and GDP growth averaged -24.79% and -11.76% respectively.

Now to get an estimate of the impact of current war, we can rely on an actual similar episode that occurred before. In the summer of 2006 a brutal war erupted between Israel and Hezbollah, and the annual CI up to the end of hostilities in August 2006 fell by 32.9%. So if we assume that the current 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 annual GDP will be 15.6%[3]. Moreover, anecdotal estimates would have put Lebanon’s GDP at $20 billion in 2024; hence its impact on 2024 GDP will be a fall by $3.1 billion (0.156×20). But that is not all; given that Lebanon’s incremental capital-output ratio is about 4[4], then the corresponding fall in the capital stock will be $12.4 billion

The above estimates are, of course, preliminary, tentative numbers. They strictly depend on the (not unreasonable) assumption that the current war will largely replicate the 2006 one.  If the current war proves to be less destructive and shorter, then our estimate of a negative hit on GDP of 15.6% will be overvalued. However, an important point is that, though the current war started in September 2024, a limited-scale confrontation has been going on since October 2023, and as such its depressing impact on GDP has been accumulating ever since. So, in this sense, the 15.6% estimate could actually be an undervaluation. Either way, that doesn’t in any way diminish the fact that both the war and its antecedents were unnecessary and purposeless.

[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] This estimate largely agrees with estimates – non-technical ones, though — put forward by host of experts in the article, “Lebanon’s economy may shrink by up to 25% in 2024 as war intensifies”, The National, September 24, 2024.

[4]   See: Bolbol, A. and Mouradian, M. 2018. “Potential Output and Unemployment in Lebanon”, Association of Banks in Lebanon (ABL) Monthly Bulletin, No. 4/2018.