Lebanon’s fragile economic recovery has been sharply derailed by the renewed war with Israel, with the World Bank projecting a 6.4% contraction in the economy this year and warning that the damage could weaken the country’s growth prospects for years to come.

In its latest Lebanon Economic Monitor, titled “A Conflict-Torn Economy,” the World Bank said the escalation that began in March 2026 abruptly halted the momentum of stabilization and recovery that had emerged over the previous year.

Lebanon’s economy had expanded by an estimated 4.2% in 2025, its strongest growth since the country’s financial crisis erupted in 2019. The recovery was supported by stronger private consumption, investment and tourism, as well as improvements in a range of high-frequency economic indicators.

But the renewed conflict inflicted further damage on homes and infrastructure, displaced hundreds of thousands of people, disrupted supply chains and severely weakened tourism and domestic demand.

“Lebanon’s fragile recovery has been sharply set back by the renewed conflict, adding to an already severe social and economic crisis,” World Bank Middle East Director Dahlia Khalifa said.

She said advancing reforms, particularly the restructuring of the banking sector and improvements in public financial management, would be essential to restoring confidence, maintaining stability and mobilizing the financing required for reconstruction and recovery.

The World Bank estimates that the conflict will reduce Lebanon’s economic growth by 10.4 percentage points compared with what it would have been had the fighting not resumed.

The latest contraction follows an estimated 5.2% decline in GDP in 2024, when the country was already emerging from years of economic turmoil and the effects of the previous war.

The bank based its estimate of the conflict’s direct economic impact largely on two key drivers of the 2025 recovery: tourism revenues and private consumption. Both have been hit hard by renewed hostilities.

Before the latest escalation, economic activity had begun showing signs of a more sustained recovery. Construction permits and cement deliveries in the second half of 2025 rose by 12.8% and 14%, respectively, from the first half of the year. Passenger arrivals by air, a key indicator of tourism activity, increased by 24.5% over the same period.

The conflict reversed that momentum.

Around 360,000 people remain displaced, including at least 22,000 living in collective shelters, according to United Nations figures. More than 700,000 people continue to be affected by damage to water infrastructure in parts of southern Lebanon. At the height of the fighting, the United Nations said as many as 1.2 million people had been internally displaced.

The World Bank warned that the consequences could extend well beyond the immediate destruction. Prolonged displacement, damage to physical capital, interruptions to education and healthcare and the potential loss of skilled workers and talent could erode Lebanon’s productive capacity and weigh on medium-term growth.

The economic contraction is expected to be accompanied by another sharp increase in inflation.

The World Bank forecasts inflation of 17.5% in 2026, driven by supply disruptions, higher shipping costs and rising oil prices. The increase would further erode household purchasing power in a country where many families have already seen their incomes and savings severely weakened by years of crisis.

Lebanon’s dependence on imported energy adds to the risks. Energy products accounted for around 23% of the country’s total imports in 2025, leaving the economy particularly exposed to higher global oil prices and disruptions to regional trade and shipping routes.

The Lebanese pound, however, has so far remained broadly stable. The World Bank attributed the stability to the use of foreign-exchange reserves and tighter liquidity in Lebanese pounds.

But the bank warned that the exchange rate could come under renewed pressure if foreign financial inflows weaken or conflict-related shocks persist.

Lebanon’s public finances had shown notable improvement before the latest escalation.

The government recorded an overall fiscal surplus equivalent to 3.9% of GDP in 2025, helped by improved tax compliance and stronger collection of customs duties and value-added tax.

That performance continued into the first half of 2026, according to the World Bank, extending the gains recorded the previous year.

But the fiscal outlook is becoming more difficult.

Rising humanitarian and reconstruction costs, demands for higher public-sector wages and slower revenue growth are expected to put increasing pressure on government finances during the second half of the year.

The World Bank also warned that Lebanon’s public debt remains unsustainable, while negotiations over restructuring the debt have yet to begin.

The country’s external position faces challenges as well. Lebanon continued to import more than it exported in 2025, widening its current account deficit. Disruptions to regional trade and higher energy costs have added to those pressures.

The World Bank said Lebanon’s banking sector remains deeply weakened despite progress on some elements of a restructuring agenda.

The banking crisis has been at the heart of Lebanon’s broader economic collapse since 2019, and international donors have repeatedly made financial and structural reforms a condition for significant external assistance.

Lebanon’s parliament last week approved amendments to a bank resolution law aimed at restructuring troubled banks and addressing longstanding weaknesses in the financial sector.

The International Monetary Fund welcomed the legislation, describing it as an important step toward bringing Lebanese law in line with international best practices. Lebanon has been negotiating with the IMF, which has said it plans to resume meetings in Beirut next month.

The World Bank said the urgency of implementing reforms has only increased as Lebanon confronts enormous humanitarian and reconstruction needs.

Banking-sector restructuring and stronger fiscal management, it said, are not simply long-term policy objectives. They are necessary to restore confidence in the economy and unlock the external financing needed to rebuild.

The latest World Bank projections mark a dramatic reversal from the start of 2026, when Lebanon appeared to be emerging from years of economic collapse.

After growing 4.2% in 2025, the fastest expansion since the onset of the 2019 financial crisis, the economy is now expected to shrink by 6.4% this year.