Lebanon’s Missing Link: Why Restoring Demand Is the Fastest Path To Recovery

Mouhamad Kobeissi

Today, Lebanon’s main obstacle to recovery is not competitiveness or infrastructure, but the collapse of aggregate demand. While the country is trying to restore the credibility of its governance by reforming the banking system, protecting depositors, and reintegrating into the international financial system, these measures alone cannot halt the economy’s short-term decline. Reform initiatives will find it difficult to translate into real economic stabilization unless purchasing power and employment are restored, and available productive capacity is properly used.
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A Collapse of Demand at the Core of the Crisis

Lebanon's aggregate spending, when measured in US Dollars, decreased by approximately 90% between 2018 and 2022 due to the inaccessibility of banking deposits, extreme loss of wages, and public spending cuts (Diwan, 2023). Government spending was reduced by nearly 90%, private investments fell by nearly 85%, and consumption of households by nearly 50%. This contraction made previously profitable companies unproductive and led households to maintain low levels of consumption. Despite the magnitude of the crisis, Lebanon has not experienced a complete collapse in productive capacity. While large-scale emigration, estimated at 220,279 Lebanese in 2025 (Enmaeya, 2026), has depleted human resources, substantial human capital and productive infrastructure remain. This indicates that the current economic collapse reflects underutilization rather than an irreversible destruction of latent economic potential.

The remittances from the diaspora have partially mitigated the collapse of domestic demand, but they are no longer enough. In 2023, remittance inflows reached their highest point post-2019, at USD 6.7 billion (approximately 30% of GDP), then dropped to USD 5.8 billion in 2024. This shows diaspora growing exhaustion and inability to support further (World Bank, 2025; World Bank, 2024).

Concurrently, other apparent financial buffers do little to support short-term demand. International price gains increased the value of gold reserves at Banque du Liban to USD 30.2 billion in 2025, strengthening the central bank’s balance sheet but providing no direct liquidity to households or depositors (BdL, 2025). Meanwhile, war related damage and losses in 2023–2024 (estimated at USD 8.5 billion) further reduced output, trade, tourism, and public services, contributing to an additional decline in real GDP in 2024 (World Bank, 2024).
 
Why Demand-Led Recovery Is the Immediate Priority

Lebanon presently displays underutilized productive capacity, especially in non-tradable areas like health, education, retail, and tourism, where the average utilization is approximated at 50% (Diwan, 2023). This causes the economy to be particularly sensitive to demand-side actions. Demand restoration can produce growth at a rapid rate, unlike export-led or investment-heavy strategies that involve huge capital formation.

A good example is the wages in the public sector. Wages are scheduled to increase by 2026 (Ministry of Finance, 2025) to 7.4 percent of GDP, which was 11.5 percent of GDP prior to the 2022-2023 crisis. Transparent, productivity-based wage increases theoretically increase consumption, reduce inequality, and stimulate labor markets.

Supplementary actions can be taken to ensure that businesses run near capacity, e.g., temporary credit facilities to companies, availability of cheap imports of energy and specially reduced taxation. This so-called catch-up growth might result in 15-20% growth in the GDP within two to three years, mostly by hiring workers but not by accumulating new capital (Diwan, 2023).

Policy Implications: Focus Before Reform Fatigue Sets In

The policy point is direct and simple: Lebanon ought to focus on the short-term demand stimulation as a sequencing policy, not as its alternative to structural reforms. The fiscal policy must be on labor-intensive sectors and social protection which must be funded by progressive tax collection on individuals with high net worth and selective tariffs on luxury imports. Simultaneously, the monetary policy must be well controlled to prevent new inflation. This may be by slow and moderate adjustment of the exchange rates, and they should stimulate local output. Besides this, governance reforms, banks restructuring and institutional transparency are also required. Nevertheless, their financial advantages do not readily come into action, and households and companies must survive in the short run to enjoy these advantages. Short-term stabilization of demand is an urgent requirement of the success of structural reforms because of this sequencing.
 
Conclusion
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Economic rhetoric in Lebanon in 2026 will be overly complex and unfocused, aspiring to achieve too many things at once. This is what the statistics indicate: the economy will never recover with the demand being down. The best solution to stabilize in the short-term, build trust, and increase social resiliency is to reinstitute wages, jobs, and capacity utilization. In the absence of such an emphasis, even carefully thought reforms will be a ship without a sail and recovery will be slowed down instead of being realized.

About the Authors
Mouhamad Kobeissi was an intern in the Sustainability and Inclusive Development Cluster at IFI.