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On February 28, open hostilities erupted between Iran, the United States, and Israel. Only days later, on March 2, Hezbollah launched missiles and drones targeting the Israeli military south of Haifa, effectively opening a new front from Lebanon. The decision shocked much of the Lebanese establishment. In the weeks and days preceding the escalation, Hezbollah had repeatedly reassured officials that it had no intention of dragging Lebanon into war.
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These assurances came at a moment many hoped would be a historic turning point. The Lebanese Armed Forces had just completed the first phase of a peaceful process to disarm Hezbollah’s military presence at the boarders of Israel (south of the Litani River). Plans were already underway for a second phase that would gradually extend this process to the rest of the country, raising hopes that Lebanon might finally move toward restoring full sovereignty over its territory. Those hopes were abruptly shattered.
The escalation could hardly have come at a worse time. Lebanon is still struggling to recover from the devastating banking crisis that wiped out much of the population’s savings and shattered confidence in the financial system. With the formal financial system largely paralyzed, many Lebanese have turned to cash, raising concerns about its use to facilitate Hezbollah financing and money laundering. At the same time, the government faces growing pressure to raise public sector wages despite extremely limited public finances and the continued sovereign default on Eurobond payments.
Against this backdrop, the economic challenges become even more critical. Lebanon’s economic weaknesses will significantly affect its ability to cope with the war, from humanitarian pressures and refugee flows to strains on host communities, economic paralysis, and eventually reconstruction and recovery.
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As Hezbollah Disarms, The Case for Currency Board
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In January, Lebanon announced that France would host a conference on March 5 to support the Lebanese Armed Forces’ efforts to disarm Hezbollah. The initiative follows the disarmament of areas south of the Litani River and plans to extend the process to the north. Israel has criticized the army’s progress as insufficient, while Hezbollah has rejected calls to surrender its weapons. Meanwhile, investor confidence has remained fragile. The UAE-based Al Habtoor Group announced it would exit Lebanon, citing financial restrictions and mounting security uncertainty.
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According to LIMS, Lebanon should consider establishing a currency board as a hedge against chronic political and security volatility. Under such a system, the Lebanese pound would be fully backed by foreign currency reserves, effectively eliminating exchange-rate risk. LIMS argues that this framework would shield the currency from panic-driven depreciation and capital flight during periods of war. In a country where security shocks are recurrent, a currency board would act as a form of exchange rate protection.
The credibility of a fully backed currency regime could also help attract fresh capital inflows by encouraging investors and depositors to hold Lebanese pound assets without fear of devaluation. This could help rebuild deposits, revive lending and support economic activity at a time when businesses face severe financial constraints. By anchoring trust in the currency and reducing exchange-rate risk, financing costs would decline, potentially encouraging investment.
While the army is working on reducing security risks, a currency board helps shield Lebanon against those risks. Together, they could provide a foundation for renewed stability and long-term economic recovery.
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Banking Reform Debate Interrupted by War
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Lebanon’s paralyzed banking sector has been the main obstacle to economic recovery since late 2019. This paralyze accelerated the shift toward a cash-based economy which complicated the Financial Action Task Force (FATF) compliance and contributed to the country’s placement on grey list for money laundering and terrorism financing. The U.S. Treasury has warned that informal networks, including Al‑Qard Al‑Hassan, are exploited to finance Hezbollah.
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In January, the central bank governor announced reforms to strengthen anti–money laundering standards and cooperate with European judicial authorities. The announcement follows the government’s submission in December of the long-awaited Financial Gap Law aimed at addressing financial sector losses and unlocking the banking paralysis. Before the war erupted, these reforms were at the center of national debate. Depositors criticized bail-in provisions in the gap law, while bankers opposed potential requirements to repatriate funds transferred abroad during the crisis. Questions about accountability were also raised.
LIMS explained that the proposed law represents a significant improvement for depositors. It would raise deposit insurance coverage from roughly $800 to $100,000. The deposit portion exceeding that threshold would be converted into central bank–issued asset-backed securities (ABS). LIMS notes that while withdrawals currently face an 85 per cent haircut, the ABS discount should be smaller, as it avoids the risk of bank liquidation. The ultimate recovery value will depend on fiscal discipline and broader public finance reforms. For the banking sector, the law would transfer part of the liabilities from commercial banks to the central bank, helping to clean up bank balance sheets and potentially allowing them to resume financial intermediation. Restoring the credit cycle would enable businesses and households to access loans after six years of financial paralysis.
LIMS argued that resistance to the proposal reflects, in part, the interests of bankers who profited from financial engineering operations or transferred funds abroad after 2019 and now face potential clawbacks. Similar concerns apply to depositors who received exceptionally high interest rates or profited from trading banking cheques during the crisis. At the same time, some political actors are advocating the liquidation of the central bank’s gold reserves to repay deposits. LIMS warns that such a move could expose the reserves to political spending pressures and risk repeating the fiscal mismanagement that contributed to the crisis.
On the regulatory front, LIMS welcomed the central bank’s announcements as stronger anti–money laundering standards and cooperation with foreign courts are necessary to rebuild credibility and pursue terrorism financing cases. However, monitoring remains difficult in an economy dominated by cash transactions. Restoring a functioning banking sector is therefore essential to bring economic activity back into regulated financial channels.
The Financial Gap Law has been delayed for years, and the prolonged paralysis has deepened economic contraction while entrenching poverty and distrust in public institutions. Passing the law would be politically contentious but economically necessary, particularly at a time when Lebanon faces mounting uncertainty and growing financing needs amid regional conflict.
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War Raises the Stakes in Lebanon’s Budget Debate
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Lebanon entered 2026 facing renewed pressure over public sector wages and living costs. As in previous budget cycles, public employees intensified demands for salary increases during parliamentary deliberations. Boosting public‑salaries risks further straining an already fragile fiscal base, an impact that will be magnified by the war.
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Even before the conflict escalated, the debate over public wages had intensified during deliberations over the 2026 budget. In January, the government resisted pressure from public employees and presented a balanced budget. Yet with parliamentary elections initially scheduled for May, political incentives to expand spending on salaries remained strong despite the country’s underperforming public administration. The war is likely to make those choices even more difficult as economic activity slows, and fiscal resources come under additional pressure.
While the 2026 budget achieved procedural balance, LIMS warned that the headline “zero deficit” masks deeper fiscal vulnerabilities. Major obligations, including Eurobond debt service, remain outside the effective adjustment path. As a result, the apparent balance does not fully reflect Lebanon’s structural fiscal position or its capacity to absorb new wartime pressures.
LIMS cautioned that across-the-board wage increases risk worsening fiscal fragility without addressing underlying inefficiencies. Roughly half of public sector positions are considered redundant or unproductive, often the result of political or sectarian hiring rather than administrative need. Meanwhile, wages and operating expenditures already account for more than half of government spending. Increasing salaries without restructuring the state would intensify fiscal pressure and could ultimately erode the purchasing power such measures aim to restore.
Arguments that expanding the public payroll would boost government revenues were also challenged. According to LIMS, sustainable revenue growth depends on productivity, competition and economic growth rather than increasing headcount in the public sector. As long as productivity remains low and financing scarce, sustained wage growth will remain difficult to achieve.
In this context, the war reinforces the urgency of structural reform. Restructuring the public sector and opening key sectors to competition and private investment would help lower costs, strengthen economic resilience and preserve scarce public resources during a period of heightened uncertainty.
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Safe Havens in Uncertain Times: Gold, Silver, and Bitcoin in Lebanon’s Dollarized Economy
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Global markets entered 2026 amid rising geopolitical tensions, growing political pressure on the Federal Reserve, and a correction in precious-metal prices after a year of exceptional gains.
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LIMS noted that gold prices surged sharply in 2025, rising by about 64%. The correction observed in January 2026 was largely driven by easing geopolitical tensions between the United States and Venezuela after a quick resolution, portfolio rebalancing, profit-taking after the strong rally and reduced consumer demand on jewelry. Silver outperformed gold during 2025, supported by similar safe-haven demand but also by strong industrial use, particularly in solar panels, electric vehicles, and electronics.
Concerns about the declining value of the US dollar also have implications for Lebanon. Because the Lebanese economy is highly dollarized, any depreciation of the dollar can translate into higher inflation locally. As a result, some Lebanese are increasingly seeking alternative stores of value, including gold, silver, and Bitcoin, to protect their savings against potential declines in the dollar’s value. Bitcoin also provides human rights activists and individuals facing financial restrictions with an independent channel for transactions and value storage. For those operating under capital controls or surveillance, Bitcoin’s ability to transfer funds securely and privately can offer a practical safeguard.
In Lebanon’s current environment, where banking restrictions persist and confidence in financial institutions remains fragile, individuals seeking to protect their savings face limited options. Gold has traditionally served that role, and increasingly Bitcoin is viewed as an additional alternative.
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Reopening Syria’s Economy: The Path to Recovery After Assad
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One year after the fall of the Assad regime, Syria remains burdened by the economic legacy of conflict, isolation, and decades of state-dominated industrial and trade policies. Through its SERAJ initiative, LIMS argued that recovery will depend on reopening the economy to trade, competition, and capital.
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On trade policy, LIMS emphasized that meaningful liberalization is essential. Eliminating tariffs and non-tariff barriers would reduce input costs, increase competitiveness, and expand consumer choice. While recent policy discussions in Damascus suggest movement in this direction, LIMS cautioned against viewing tariffs primarily as a revenue tool as reliance on trade taxes risks undermining competitiveness and long-term growth.
Tax reform is another priority. Syria’s complex and uneven tax structure discourages investment and encourages evasion. LIMS recommended replacing it with a simplified flat tax applied equally to individuals and companies, with rates set competitively relative to neighboring economies. Encouragingly, recent developments indicate a shift toward flatter tax structures. Such simplification would improve compliance, facilitate financial planning, and signal that Syria is committed to a predictable, investor-friendly environment.
State-owned enterprises represent a third challenge. Many public industrial firms remain inefficient, overstaffed, and resistant to modernization, absorbing fiscal resources while generating limited value. LIMS argued that privatization and competition offer the only sustainable path forward, but sequencing matters: competition should precede privatization to prevent cronyism and asset capture, risks that loom large in transitional settings. Non-viable enterprises should be liquidated, viable firms privatized, and natural monopolies carefully regulated.
Syria’s economic recovery will ultimately depend not only on reconstruction but also on the credibility of its reforms. By opening trade, simplifying taxes, and privatising state-owned enterprises, the country can shift from a closed, state-dominated model to a dynamic market economy. Such reforms would lower costs, attract investment, and lay the foundations for sustainable growth and long-term stability.
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References
LIMS Media Interviews
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As Hezbollah Disarms, The Case for Currency Board
- From Crisis to Solution: What Reforms Are Needed in 2026 to Rescue Lebanon’s Economy? January 8, 2026: VDL, Video interview (AR)
- How Does the Financial Gap Law Regulate the Recovery of Depositors’ Funds? January 9, 2026: Beirut 24, Video interview (AR)
- Weapon Confiscation: The Gateway to Rescue – Three Conditions for Lebanon to Regain International Support. January 28, 2026: Erem News, Article (AR)
- Confidence Barometer Withdraws from Lebanon. January 30, 2026: Alhurra, Article (AR).
Banking Reform Debate Interrupted by War
- Why Do Some Oppose the Financial Gap Law Even Though It Is the Key to Exiting the Crisis? January 7, 2026: VDL, Audio interview (AR)
- Why Does the Financial Gap Law Represent a Better Option for Depositors? January 8, 2026: Aljoumhouria, Op-ed (AR)
- How Does the Financial Regularity Law Return Depositors’ Funds? And Why Do Bankers Oppose It? January 8, 2026: Al-Manar, Video interview (AR)
- Saïd Launches Internationally Required Reforms from the Central Bank of Lebanon: Will He Be Able to See Them Through? January 9, 2026: Lebanon Debate, Article (AR)
- Six Years of Waiting: The Financial Regularity Law Restores Banks’ Operations and Kickstarts the Economy. January 12, 2026: Radio Ehden, Audio interview (AR)
- The Financial Gap Law: The Best Available Option to Restore Deposits and Revive the Economy. January 20, 2026: Beirut 24, Video interview (AR)
War Raises the Stakes in Lebanon’s Budget Debate
- Prices Are Eroding Family Income. January 8, 2026: Nidaa Al Watan, Article (AR)
Household Purchasing Power: How Prices Erode Family Incomes and Affect Daily Life. January 8, 2026: Arab Sport, Article (AR)
- Public Sector Salaries Between Rights and Capacity: What Reform Does Lebanon Need? January 22, 2026: Lebanon 24, Article (AR)
- 2026 Budget: What Financial Options Does Lebanon Have? January 28, 2026: Independent Arabia, Audio interview (AR)
- Record Surplus in the Balance of Payments and the Challenge of Maintaining It. January 28, 2026: Aljadeed, Video interview (AR)
- The Future of the Public Sector: Is It Time to Say Goodbye to Traditional Jobs in Lebanon? January 29, 2026: This Is Lebanon, Video interview (AR)
- 2026 Budget: Balance Without Surplus and the Positivity of Respecting the Constitutional Deadline. January 29, 2026: Lebanon Debate, Article (AR)
- Amid Political Division, Lebanon Approves the 2026 Budget: What Are Its Flaws and Positives? January 30, 2026: CNBC, Video interview (AR)
Safe Havens in Uncertain Times: Gold, Silver, and Bitcoin in Lebanon’s Dollarized Economy
- The Future of Gold and Silver in 2026: Will the Historic Surges Continue? January 12, 2026: Nile TV, Video interview (3AR)
- Global Dollar Depreciation: Economic Risks and Monetary Alternatives. January 22, 2026: Al Markazia, Article (AR)
Reopening Syria’s Economy: The Path to Recovery After Assad
- Free Trade: A Gateway to Lift the Syrian Economy from Isolation to Integration. January 8, 2026: LIMS, Policy brief (AR)
- Roadmap to Exit the Planned System in Syria: Launching Competition and Privatizing the Public Industrial Sector. January 8, 2026: LIMS, Policy brief (AR)
- Developing a Competitive Fiscal Policy That Aligns with a Free Market Economy. January 8, 2026: LIMS, Policy brief (AR)
- Summary on Syria Adopting a Competitive Fiscal Policy Aligned with a Free Market Economy. January 8, 2026: LIMS, Policy brief (AR)
- Summary on Lifting the Syrian Economy from Isolation to Integration through Free Trade. January 8, 2026: LIMS, Policy brief (AR)
- Summary on Launching Competition and Privatizing the Public Industrial Sector to Exit the Planned System in Syria. January 8, 2026: LIMS, Policy brief (AR)
- Economic Control Tools in Syria and the Axes of Transition to a Market Economy. January 13, 2026: LIMS, Policy brief (AR)
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