As Lebanon lives a fragile cease fire agreement initial assessments of the 66 days war damages have begun to emerge. Economists estimate the total cost of the 2024 war to be around Usd13 billion, significantly higher than the 2006 destruction figure. The widespread destruction across various regions, including the South, Bekaa, and Beirut, has exacerbated the situation. To secure necessary funds, Lebanon must engage with the international community and present a clear reconstruction plan. This could involve an international conference and the establishment of a dedicated committee to oversee the process. The success of these efforts will depend on Lebanon’s political stability and its ability to implement international decisions. 

However, the real worry comes from another economic indicator that of inflation. This discrepancy highlights a critical issue: reconstruction costs are not only rising but doing so at a rate that exceeds general inflation. Looking ahead, it remains uncertain whether inflation will continue to outpace reconstruction costs. This trend is mirrored across many regions where inflation outpaces wage growth. As reconstruction costs rise, government agencies will certainly face budgetary constraints that limit their ability to fund essential infrastructure projects or disaster recovery efforts. This could lead to delays in rebuilding efforts and increased public dissatisfaction.

From the pandemic to the war in Ukraine and the escalation of violence in the Middle East, a series of unforeseen events have contributed to soaring costs manufacturing and procuring materials (due to the rise in oil and gas prices), as well as supply chain issues; further exacerbated by disruption to international trade routes.

Although it is the rises in the Consumer Price Index (CPI) that tend to hit the headlines, indexes show that skyrocketing inflation has had an even more adverse impact on the construction industry.

Estimates of damages

A first annual comparison since the war began in October 2023 reflects the impact of the intensification of the conflict since late September 2024.

Since some Lebanese areas were heavily damaged by the war, the government Central Administration des Statistiques (CAS) faced significant challenges in collecting the prices of goods and services. Therefore, it sought some alternative methods, such as replacement and reliance on electronically available data. CAS still succeeded in issuing the CPI in a scientifically sound manner.

Inflation is defined as the rate at which the general level of prices for goods and services rises, eroding purchasing power. In recent years, inflation has surged due to various factors, including supply chain disruptions, increased demand for goods, and geopolitical tensions. 

The World Bank estimates economic losses at Usd8.5 billion, with Usd2.8 billion attributed to housing sector damage. This figure accounts for approximately 99,000 housing units.

The Hezbollah-affiliated Jihad al-Bina foundation has provided a similar estimate of Usd2.9 billion for reconstruction and debris removal. However, Lebanon’s caretaker Economy Minister, Amin Salam, has suggested a significantly higher figure of Usd20-Usd30 billion.

Information International believes Salam’s estimate to be inflated. As of mid-November, the firm estimated housing sector losses at Usd4.3 billion, affecting 220,000 units. It suggests that reconstructing a single house could cost around Usd750,000.

The reconstruction of Lebanon after Israel’s war could cost billions, however the real worry is that the shock and disbelief that comes with the destruction of physical assets is often compounded by the dire realization that current reconstruction costs and policies don’t provide adequate cover for the sum required for reinstatement. The estimated costs of rebuilding are already believed to be at least two billion dollars

The cost of rebuilding Lebanon when the Israel-Hezbollah war ends could exceed losses incurred after the 2006 conflict, according to some current estimates.

Reconstruction costs have varied but will likely keep climbing as Israel continues its aerial offensive in the country.

It is currently difficult to assess the level of destruction, some international and local bodies have made preliminary estimates of the damage. In a World Bank report published last week, Lebanon’s economic losses were estimated at Usd8.5 billion, including Usd2.8 billion in the housing sector. This only accounts for the approximately 99,000 housing units partially or completely destroyed.

The Hezbollah-affiliated Jihad al-Bina development foundation estimates a similar cost, at Usd2.9 billion. The US-sanctioned institution says these expenses include removing rubble as well as reconstruction. 

As of mid-November, Information International estimated the losses in the housing sector to be about Usd4.3 billion, as 220,000 housing units were either partially or completely damaged. Estimates are based on that reconstructing one house would cost around Usd750,000. The 2006 war between Hezbollah and Israel resulted in a bill of about Usd3 billion, according to government estimates.

As of late October, rebuilding the southern suburbs of Beirut alone will cost around Usd630 million, with Usd2.3 billion needed for other regions, according to the pro-Hezbollah Al-Akhbar newspaper.

The extent of destruction in the area is already on par with the aftermath of the 2006 war, which lasted for 33 days, according to Al-Akhbar. Then, about 246 buildings were completely destroyed. So far in the current war, 220 have been destroyed.

The Lebanese capital’s southern suburbs, known as ‘Dahiyeh’, have been battered by the Israeli bombardment. But while some buildings have been levelled and certain neighborhoods have been hit significantly more than others, it is visibly evident that many buildings have only suffered some damage to their facades.

Daily inspections in the Dahiyeh areas how structural damage to the buildings surrounding those which have been targeted. A lot of these buildings will also have to be demolished after their foundations are weakened because of the strikes, raising the total cost when the war ends. Estimates say that if the July 2006 war model is adopted, 30 percent of the damaged buildings will be subject to demolition. Lebanese officials have estimated reconstruction in Dahiyeh to take three to five years.

In the meantime it is to be noted that Lebanon’s annual inflation rate dropped to 15.68% in October 2024, down from 32.92% in September 2024, marking its lowest level since February 2020, according to the Central Administration of Statistics (CAS). On a monthly basis, the Consumer Price Index (CPI) rose by 2.02% in October 2024.

The drop in inflation is partly due to increased dollarization in the economy and the stabilization of the exchange rate at around 89,500 LBP per USD. However, ongoing political and military tensions in the Middle East and disruptions in Red Sea shipping could raise inflation by increasing shipping costs. The escalating Lebanon-Israel war risks additional import disruptions of basic needs, driving prices higher.

While Hezbollah has pledged to fund the reconstruction effort, with Iran reportedly allocating Usd5 billion, the broader strategy involves a multi-faceted approach. Committees will be formed to assess damages and coordinate the reconstruction process, which may involve international partners and regional donors.

However, uncertainty persists among affected residents, who are hesitant to start rebuilding without assurances of compensation. Some have opted to proceed with repairs, incurring additional costs to expedite the process.

While the CPI has significantly dropped from its triple-digit levels since 2020, current figures are still high, indicating that prices are still increasing in dollars.

The 86% price increase is not an indicator of easy availability of the product. Some traders in Mount Lebanon and the south are hiding the product or limiting its delivery to workshops. Despite sufficient quantities for current market needs, one glass importer notes that shipments are expected between December 12 and 18, as orders were placed since September before any ceasefire negotiations. Workshop owners describe the market shortage as “deceptive,” stating that the product is abundant in the market. However, many traders prioritize large clients, leaving smaller workshops without raw materials, forcing them to buy at inflated prices from intermediaries.

The value of glass panels imported by Lebanon represents 100% of local consumption needs, with China accounting for 56% of the imported quantities, followed by Egypt at 22% and India at 21%. In 2023, the quantities imported from China reached 981 tons or 74,000 panels.

Inflationary Pressures Across Categories:

Food and Non-Alcoholic Beverages prices rose by 22.77% annually due ongoing supply chain disruptions and as the war severely damaged the agriculture sector, limiting agricultural products supply.

Housing Water, Electricity, Gas, and Other Fuels saw a 16.86% increase. Mass displacement led to a 37% rise in new rents and a 33.77% rise in owner-occupied housing costs. However, Water, Electricity, Gas, and Other Fuels was the only component to see an annual drop of 4.56% in October.

As for education costs, those rose by 0.93% yearly in October after a sharp increase of around 587% in previous months.

Inflation has become a pressing concern in Lebanon economy, particularly in the context of reconstruction costs following the need for significant infrastructure projects. As inflation rates rise, the cost of materials and labor also escalates, leading to a complex interplay between inflation and reconstruction expenses. 

Key Drivers of Increased Reconstruction Costs

Several factors contribute to the rising costs associated with reconstruction:

The prices of essential construction materials have skyrocketed. For instance, lumber prices saw an increase of 28.7% year-over-year in April 2024

Such spikes are often driven by increased fuel prices and supply chain disruptions that have plagued the industry since the COVID-19 pandemic began.

The construction industry is also expected to face significant labor cost increases. Retail labor costs rose by 30% on an annual level according to public sector estimates. The shortage of skilled labor exacerbates this issue, as demand continues to outstrip supply.

Rising fuel prices directly impact transportation costs for materials and equipment, which in turn affects overall construction expense . Also the volatility in fuel prices creates uncertainty in estimating future project costs.

The Impact of Inflation on Stakeholders

For stakeholders involved in construction projects—be they contractors, developers, or homeowners—the implications of rising reconstruction costs are profound. Many contractors operate on thin margins, making them particularly vulnerable to cost overruns caused by inflation. If they cannot accurately predict future costs due to fluctuating material prices, they risk underbidding projects and incurring significant losses. Thus by increased reconstruction costs can lead to higher home prices and rents, making housing less affordable. 

The extreme rises in prices will have an inevitable impact on reinstatement costs. Even if the estimated cost of materials is correct at the point the asset was originally insured, the declared sum may not be enough to cover the cost of procuring them in the event of a rebuild; further down the line. 

According to the General Directorate of Land Registry and Cadastre (LRC), the cumulative number of real estate (RE) transactions reached 26,430, valued at Usd2,653M by September 2024. This valuation is calculated at the new official rate of USD/LBP 89,500, effective from February 1st, 2024.

On a monthly basis, the number of RE transactions stood at 2,447 in September 2024, compared to 4,290 transactions in August 2024 and 4,409 transactions in October 2023.

BlomInvestbank research disclosed that cumulative real estate transactions Hit Usd2,653M by September 2024

The value of real estate transactions in September 2024 reached Usd187.04M. Beirut held the largest share of the total value at 40.60%, amounting to Usd76M. North followed with 23.25% of the total value, equivalent to Usd43.5M, it quoted in a report.

On several fronts, housing is becoming more expensive. Home sales prices have risen, interest rates and insurance have increased, prices for construction materials have risen and costs of construction overall are about 30% higher than five years ago. The amount of construction of single- and multi-family housing continues to climb, but less of that construction is at the affordable end of the price spectrum. Low-income buyers find the home buying market less accessible than it was even five years ago.

Future Outlook

While some indicators suggest that material costs may stabilize or even decrease slightly, ongoing geopolitical tensions and economic uncertainties could maintain upward pressure on prices. Additionally, as demand for construction remains robust—driven by both recovery efforts and new developments—costs may continue to rise.

In conclusion, the relationship between inflation and reconstruction costs is intricate and evolving. As stakeholders navigate this challenging landscape, the real challenge is whether reconstruction strategies can adopt flexible budgeting options that account for potential price fluctuations. By doing so, the cost of reconstruction can better manage risks associated with inflation while striving to meet the growing demand for housing and infrastructure improvements.