Continued Israeli attacks, regional conflict and a drop in remittances have strained Lebanon’s dollar reserves, fuelling fears of another financial crisis in a country already battered by years of economic collapse.
Amid Israel’s war on the country which resumed on 2 March, Lebanon faced further economic stress amid the devastating effects of bombardment, and as cash inflows plummeted.
Losses have accumulated in the country since late 2019, when Lebanon’s currency and banking sector collapsed and locked most people out of their savings. In 2020, the Beirut Port explosion happened, followed by a failure of the energy sector, and conflict between Hezbollah and Israel beginning in 2023.
Lebanon has long depended heavily on its large diaspora, particularly Lebanese working in the Gulf. But the oil and gas rich economies of these countries were affected by the regional conflict triggered by the US-Israeli war on Iran , affecting remittances sent back to Lebanon.
As Israeli attacks continue on southern Lebanon – despite a US-brokered ceasefire and Washington-sponsored diplomacy between Beirut and Tel Aviv – it remains difficult to account for total damages.
In an alarming statement on Thursday, Finance Minister Yassine Jaber warned that Lebanon was facing an estimated $20 billion in direct and indirect losses because of the war. Atop a financial deficit successive governments have failed to address, this colossal figure has stoked fears that Lebanon could be plunged into further financial turmoil. War triggered panic Economic journalist Mounir Younes told The New Arab that concerns over Lebanon’s financial stability intensified at the start of the war after dollar inflows into the country sharply declined, triggering fears over the central bank’s ability to sustain key spending commitments.
"What changed with the war was that dollar inflows into the country decreased," he said, referring to March and April when the conflict between Hezbollah and Israel reached its peak.
Younes explained that remittances from expatriates, tourism revenues and other foreign currency sources all dropped during that period, reducing the amount of dollars circulating on the Lebanese market.
"As a result of the war, there was a decline in the quantity of dollars available, which triggered panic in the market."
Younes noted that Banque du Liban (BDL) – Lebanon’s central bank – had been accumulating additional foreign currency reserves to continue funding monthly payments to depositors as per banking circulars, estimated at around $230 million per month, as well as public sector salaries amounting to roughly $250 million monthly.
He explained that the Lebanese state provides salaries in Lebanese pounds to BDL which then converts them into dollars for public employees — a policy in place since 2023 to preserve workers' purchasing power amid the country’s economic collapse.
"There were fears over whether the central bank would still be able to secure enough additional dollars to meet the needs of depositors and public sector salaries," he said.
Those concerns intensified after official figures showed that Lebanon’s foreign currency reserves fell by $516 million over a three-month period spanning February, March and April, dropping to around $11.4 billion from $12 billion.
Younes said the decline fuelled broader concerns over the monetary and financial mechanisms used by BDL and the Ministry of Finance to maintain exchange rate stability, particularly policies aimed at reducing the amount of Lebanese pounds in circulation in order to limit currency speculation.
"There were fears that if the government expanded spending in Lebanese pounds to respond to war-related emergencies and additional expenditures, it would undermine this monetary policy based on absorbing excess lira from the market," he said. If the war escalates, what is the limit? Younes warned that a renewed escalation in the war could once again trigger a shortage of dollars in the Lebanese market, forcing the central bank to draw further from its already strained foreign currency reserves.
"If the war intensifies again and the dollar shortage returns, the central bank will be forced to spend from its reserves, and that would be a negative development," he said.
He noted that the key question now concerns how much further depletion Lebanon’s central bank can withstand, given that the remaining $11.4 billion in reserves are widely considered to include depositors' funds.
"The question will become: if there is additional depletion in foreign currency reserves, what will be the position of BDL? What about depositors? How much more can it endure – another billion dollars? Two billion?" he asked.
Younes pointed out that recent reserve losses during the war amounted to roughly $200 million per month, warning that if the situation continued for a full year, Lebanon could lose between $1 billion and $2 billion more in reserves.
"Does the central bank have the capacity to absorb that? Yes or no – that becomes the issue."
On long-term solutions, Younes said any sustainable recovery would require an agreement with the International Monetary Fund and the implementation of a broad set of reform conditions, a process he cautioned would take time. A breather However, Younes noted that the situation had since stabilised somewhat.
"In the first half of May, the central bank’s reserves rose again by around $32 million," he said, adding that clearer conclusions would emerge once the full monthly data is released at the end of the month.
He said panic had eased compared to several weeks earlier, partly because Israel’s offensive had become largely confined to southern Lebanon rather than Beirut and its southern suburbs.
Israel has continued to bombard and occupy parts of southern Lebanon – with occasional strikes outside this region – despite a 17 April ceasefire . The truce has been extended as Lebanon and Israel engage in direct negotiations.
"Economic activity has partially resumed in the country, remittances from expatriates appear to be increasing again, and there are hopes that the summer season will bring tourists," Younes told TNA .
According to him, spending by expatriates and tourists during the summer season has historically ranged between $3 billion and $5 billion, providing temporary economic relief and easing pressure on Lebanon’s foreign currency reserves. Could a deal with Israel bring relief? Younes questioned whether a lasting ceasefire or peace arrangement can accelerate international support for Lebanon.
Some in Lebanon argue that striking a peace deal with Israel – or going further by normalising ties – could help the crisis-ridden nation unlock the desperately needed funds to help its economy bounce back.
Others refuse this idea and view it as blackmail from Israel and its US ally.
Opening direct channels of communication with Israel has long been massively taboo. But as the two countries engage in direct talks – the first in decades – the matter of forging ties with Tel Aviv, even economic, is no longer out of the question.
Lebanese President Joseph Aoun has defended the negotiations as a means to end the decades-long conflict and the suffering of the Lebanese, particularly those in the south. Prime Minister Nawaf Salam has ruled out normalisation and said the talks were merely to reach a peace arrangement to end hostilities.
"If peace is achieved, things could move faster, and Lebanon could receive some form of compensation package through aid or loans," he told TNA .
He added that some political and economic circles in Lebanon are betting that negotiations between Lebanon and Israel could eventually include an economic dimension alongside political and security tracks , potentially opening the door to international assistance backed by the United States.
"Some in Lebanon are counting on the country receiving aid in the context of progress in negotiations – whether that is called peace, normalisation, or ending the state of hostility, depending on what kind of agreement is ultimately reached," he said.
While Younes raised the possibility that an agreement with Israel could unlock incentives for Lebanon, he stressed that structural reforms remain crucial .
Lebanon’s ruling elite have resisted major reforms since the 2019 collapse, with critics arguing that meaningful restructuring would force politically connected bankers and officials to absorb significant losses. Is Lebanon buying US Treasury bonds? Younes dismissed rumours that BDL was planning to use its US Treasury holdings to obtain fresh dollar liquidity from the Federal Reserve amid the recent market panic.
He said BDL holds roughly $5.5 billion in US Treasury bonds, and speculation had emerged that it could pledge those securities to the Federal Reserve in exchange for cash.
"These rumours emerged in the context of the panic we discussed earlier, but this is not realistic," he told TNA .
According to Younes, the Federal Reserve would not provide Lebanon with "fresh dollars" worth billions in exchange for the bonds for several reasons, most notably because Lebanon has been in sovereign default since March 2020 when it halted payments on its Eurobond debt.
"As a result, Lebanon is internationally classified as a country in default," he said.
He also noted that Lebanon remains on the Financial Action Task Force’s "grey list" over concerns related to anti-money laundering and counterterrorism financing measures.
"There is a special situation in Lebanon that requires a series of reforms, especially in the banking sector, which the country has still not implemented," he said.
He added that Lebanon’s current financial and political conditions make it highly unlikely that the Federal Reserve would accept Lebanese collateral arrangements and provide cash financing.
Younes explained that countries in sovereign default are generally required to enter a reform programme with the IMF before regaining access to international financial markets.
"Usually, when a country defaults like Lebanon did, it must enter an IMF programme and begin implementing reforms. It then negotiates with Eurobond holders to restructure the debt, including write-downs and new repayment schedules," he said.
Lebanon has yet to complete that process, he added, making any return to international bond markets extremely difficult.
"The priority is first an agreement with the IMF, reforms, and resolving the previous external debt crisis, so that Lebanon can eventually return to international financial markets and borrow again," he said.