Lebanon’s economic landscape is facing a critical juncture, with two possible paths ahead—one based on limited reforms and another that would require deeper structural changes. According to the latest report by the Institute of International Finance (IIF), titled "New Era: The Urgency for Deep Reforms" (February 16, 2025), Lebanon is caught between these two scenarios, each carrying its own set of challenges and potential outcomes.

Since 2019, Lebanon has grappled with severe crises, ranging from financial collapse to political instability, and ongoing conflict that continues to inflict lasting damage. The country's economy has contracted by a cumulative 38% from 2018 to 2024, with a staggering drop in the Investment to GDP ratio—from 21% in 2018 to below -9% in 2024. Despite this grim backdrop, some positive steps have been taken recently, such as the stabilization of the exchange rate, a ceasefire with Israel, and the election of new leaders believed to be pro-reform. These changes have sparked some cautious optimism, but deep-rooted issues of governance, political divisions, corruption, and mismanagement still hamper progress.

In the limited reform scenario outlined by the IIF, the newly elected government faces numerous challenges, notably its complex relationship with Hezbollah. This relationship complicates Lebanon's ability to fully honor the ceasefire with Israel and comply with UN Security Council Resolution 1701. Furthermore, political divisions within the current parliament could stymie essential economic reforms until the parliamentary elections in May 2026. If no major political shifts occur during these elections, the new government is unlikely to implement substantial reforms, leaving Lebanon without an IMF-backed economic program. Consequently, international aid would primarily be humanitarian, insufficient to meet the country’s reconstruction needs.

In this scenario, the economy is projected to grow at a sluggish 3% annually between 2025 and 2029. The exchange rate is expected to continue weakening, and inflation could rise once more. The current account deficit is anticipated to remain high, ranging between 9% and 10% of GDP, while foreign exchange reserves are expected to decline, dropping from $10.1 billion at the end of 2024 to just under $7 billion by 2029.

On the other hand, the IIF's deep reform scenario offers a more optimistic outlook, but it requires Lebanon to secure significant international assistance and undertake challenging structural reforms. Under this scenario, Lebanon is projected to receive $12.5 billion in financial aid, including $3 billion from the IMF, $3 billion from the World Bank for specific projects, $4.5 billion from the Gulf Cooperation Council (GCC), and $2 billion from major European countries. Additionally, Lebanon could attract $10 billion in foreign direct investment (FDI) from the GCC between 2025 and 2029, a crucial source of non-debt creating capital.

If Lebanon can achieve these reforms, it is projected to see real GDP growth of 6.2% on average between 2025 and 2029. By 2031, the country’s GDP could return to its 2017 peak, with the 2018 GDP level of $54 billion expected to be reached by 2028. Inflation would likely continue its downward trajectory, decreasing from an average of 45.2% in 2024 to 3.4% by 2029. The current account deficit is projected to shrink, while government debt as a percentage of GDP would decline from 136% in 2024 to 53% by 2029.

This optimistic scenario relies on Lebanon securing an IMF agreement and making progress on key reforms, including political and security stability, restructuring the banking sector, adopting a flexible exchange rate, improving tax systems, restoring confidence in the Lebanese pound, judicial reforms, and strengthening social safety nets. However, these reforms face significant hurdles. Corruption remains deeply entrenched, and political and security challenges, particularly the ongoing violations of the ceasefire by Israel, add further complexity.

Despite the promising potential of the deep reform scenario, the report acknowledges that achieving these reforms is far from certain. Lebanon's deep-rooted corruption and entrenched political divisions pose significant obstacles to the implementation of even the most basic reforms. The country’s judicial system, for example, remains compromised by the influence of corrupt political appointments, while Hezbollah's ongoing role in Lebanon's politics continues to complicate any efforts to align with international mandates.

Moreover, Israel’s repeated violations of the ceasefire agreement—over 830 breaches since November 27, 2024—have not only resulted in civilian casualties but have also delayed Israel’s withdrawal from several positions in southern Lebanon, further complicating Lebanon's sovereignty and its prospects for peace and stability.

Despite these challenges, the IIF report suggests that Lebanon may have reached rock bottom, offering a unique opportunity for recovery if bold reforms are pursued. Both the limited and deep reform scenarios offer hope, with the deep reform path providing a more optimistic outlook, but even the limited reforms would represent a significant improvement over the current dire situation.

Ultimately, Lebanon's future remains uncertain, and the IIF concludes that there is a 50% probability of either scenario unfolding. What is clear, however, is that Lebanon's recovery will require significant international support, political will, and commitment to implementing tough reforms.