Assessment · AST-LBN-ECON-2026-05
The stabilization that has held the Lebanese economy together since 2024 is intact at the May 2026 inflection, but all three of its supports are under simultaneous strain. The pound has traded within half a percent of its fixed rate of 89,500 to the dollar throughout the war. The central bank’s foreign-currency reserves, counting both cash and foreign bond holdings, stood near 12.0 billion dollars before the war and 11.43 billion at the end of April 2026, a drawdown of...
The call, up front
The stabilization that has held the Lebanese economy together since 2024 is intact at the May 2026 inflection, but all three of its supports are under simultaneous strain. The pound has traded within half a percent of its fixed rate of 89,500 throughout the war. Reserves stood near $12.0B before the war and $11.43B at end-April. Payments cleared by check have shifted to a 64 percent share in post-2019 money. None of the three supports has broken. Each is being compressed.
With the Financial Gap Law stalled, the central bank has become the de facto authority resolving the banking collapse, carrying 88 percent of the March deposit payout with no statutory mandate and no government guarantee, and adding roughly $240M a month to a liability some future budget will have to absorb.
The roughly $25B of cumulative war damage across 2024 and 2026 is large but is not what binds the 2026 economy. The binding constraints are the legislative paralysis on the deposit and bank-resolution laws and the absence of outside financing, which the IMF will not unlock without those laws.
Governor Souaid has aligned BdL's conduct with what the IMF wants, but full delivery of the reform agenda within twelve months is very unlikely (5 to 20 percent), because the core changes require laws only Parliament can pass, and Parliament has not moved.
Gulf remittances are the support most exposed to a shock Lebanon cannot control. Roughly $2.8B of the $5.8B annual inflow is Gulf-sourced, and Q1 2026 already shows a 5 percent decline. A sustained 15-to-20-percent contraction would force a choice between funding the deposit payouts and defending the currency.
Executive summary
The Lebanese economy carries three crises at once, each on its own clock. The 2019 financial collapse remains unresolved: the state in default since March 2020, the dollar economy shrunk from around 55 billion to near 20 billion, and banking losses the IMF put at roughly 72 billion dollars. Above it sits the post-2023 stabilization: the pound fixed at 89,500, frozen deposits trickling out through two central-bank schemes, and roughly 5.8 billion dollars a year in remittances keeping dollars flowing in. The war that resumed on 2 March 2026 tested that stabilization and did not break it.
What the war changed is the growth path: the pre-war projection of 4.0 percent growth has given way to forecasts running from a 7 percent contraction (IMF) to 12 to 16 percent (IIF). The argument of this file is that the binding constraint is not the physical destruction. It is the political failure to pass the Financial Gap Law, the draft that would divide the banking system's losses and return frozen deposits. It cleared Cabinet 13 to 9 in December 2025 and sits in committee with no vote scheduled.
In the vacuum, the central bank holds the system together: it defends the currency, funds the payouts the commercial banks can no longer afford, and is itself the subject of a 17 May IMF report calling for an overhaul of its founding law. All three supports are under strain. None has yet given way.
The most exposed is the Gulf remittance inflow, because Lebanon has no policy lever over it. The least visible danger is the liability quietly building on the central bank's books.
Reference
Section I
Three crises run through the Lebanese economy at once, each on a different timeline. The structural collapse of 2019 has never been resolved. The stabilization built from 2023 onward has held the currency steady without touching the underlying insolvency. The war has stressed the stabilization without breaking it. Each runs on its own logic, and each leaves a different mark on the data.
The 2019 collapse remains the defining event: the dollar economy down 63 percent by 2023, the 1997 peg broken, a sovereign default on 31 billion dollars of Eurobonds, and banking losses near 72 billion, the largest part on the central bank's own books, with 7.7 billion attributed by the Alvarez & Marsal forensic audit to BdL's financial-engineering operations.
The single fact that shapes everything downstream is the October 2019 deposit freeze. Banks stopped honoring foreign-currency withdrawals and split every depositor's money into two pools: money deposited after the freeze ("fresh") moves normally; money trapped by it is payable only slowly, at a steep loss, through the central-bank circulars.
The pound has held at 89,500 since August 2023, and inflation fell from above 200 percent toward a projected 15.2 percent in 2025. The political conditions are newer and matter as much: the Aoun presidency and Salam government, installed in early 2025 through the opening the 2024 war created, passed the banking-secrecy amendment in April and the Bank Resolution Law in July, the first substantive reform legislation in six governments. The war that resumed on 2 March made the recovery projections obsolete within weeks.
The peg held: street quotes stayed within 0.2 to 0.5 percent of the official rate, with no emergency intervention. Reserves fell by about 642 million dollars over the war window. The defaulted Eurobonds dropped from near 30 cents to 22.75 and recovered to 26 to 27 as US-Iran talks signaled de-escalation. The real economy absorbed the shock unevenly: the port kept operating, tourism collapsed, pump prices nearly doubled, and construction fell back. What the war did not do is break any of the three supports. What it did do is shorten the runway on each.
Lebanon runs three economies side by side: an informal cash economy on physical dollars (a stock near 9.9 billion, half of GDP, against 696 million dollars' worth of pounds in circulation), a formal banking sector that processes payouts and settlement but does not lend, and an aid economy that converts directly into cash and bypasses the banks. BdL is the load-bearing institution across all three. So many system-critical functions in one institution, set against the governance weaknesses the May IMF report documents, is the structural vulnerability beneath the stabilization.
Section II
The working buffer is the foreign-currency stock: 11.43 billion dollars at end-April. Gold is larger, about 42.7 billion, but barred from sale without a parliamentary vote. At the war-window drawdown pace the reserves last for years, so exhaustion is not the binding twelve-month risk. The real question is whether a loss of confidence sends Lebanese converting pounds faster than reserves can meet them. The reserve stock buys time. It does not fix the insolvency the stabilization has deferred.
The gap between the official and street rates is the single cleanest gauge of confidence in the peg. During the collapse the street ran at multiples of the official, peaking near 142,000 in March 2023; through this war it stayed under 0.3 percent. A gap above 5 percent held for 30 days would signal eroding credibility; above 15 percent for two weeks, the operational start of a renewed break. Neither has happened.
Payments cleared by check ran at 64 percent in fresh money by March 2026, and the price that matters to most Lebanese is now the dollar price: food in dollar terms moved from about 80 percent of its pre-2019 level to about 95 percent by April. The household pays close to 2018 dollar prices on an income far below its 2018 level.
No public-debt report has been published since 2022, and war pressures cut treasury revenue 40 percent in March. The Salam government runs no deficit it cannot fund: no stimulus, wages paid, nothing added. By refusing a war deficit, the state pushes the cost of absorbing the war onto the private sector and the central bank's reserves. The fiscal void is not a vacuum. It is a deliberate non-response that keeps the IMF track alive and shifts the adjustment cost onto banks, BdL, and households.
Section III
The sector runs as two parallel systems: a fresh layer that transacts normally and a frozen legacy layer reachable only through the circulars, at a steep loss. Eight large banks remain open but do none of the lending a banking sector exists to do. The crisis is, at its core, political: the people who own the banks and the people who sit in Parliament are, to a substantial degree, the same people, which is why a collapse now six years old has still not been allocated to anyone.
Through end-March 2026 the two schemes had paid out 6.1 billion dollars to 579,000 depositors. The funding split is the consequential fact: BdL has carried 68.5 percent cumulatively and 88 percent of the March installment, because the commercial banks' capacity is measurably running out. That imbalance has no legal basis; the central bank is not a deposit-insurance fund. With the Financial Gap Law stalled the accumulation has no end point, roughly 210 million a month, and every month shrinks the room any eventual loss-allocation will have to work with.
The law would divide an estimated 70 billion dollar gap among the state, BdL, the banks, and depositors: long-dated bonds for the state's share, a 40 percent contribution from the banks, full repayment over four years for deposits up to 100,000 dollars (85 percent of accounts). The Cabinet approved it 13 to 9 in December 2025; the nine opposed it from incompatible positions. The Lebanese Forces want harder accountability for the banks' owners, Hezbollah opposes the recovery cap that hits its larger depositors, and the two anchor blocs cannot unite behind a single amendment. The banks' lobby opposes the 40 percent contribution outright; the IMF will not endorse the draft unless losses fall on shareholders before depositors; and the election postponement to 2028 removed the pressure a vote would have applied. Passage by end-2026 is unlikely, 20 to 45 percent, absent outside financing made conditional on it.
The banking-secrecy amendment opened bank records to regulators and auditors with a ten-year reach, and the forensic audit has resumed under that cover; its findings are the evidentiary floor for any loss-allocation, and they anchor the prosecutions of former governor Salameh at home and abroad. No bank has been closed, merged, or restructured: the most probable outcome over twelve months is continued limbo, because the banks have every incentive to delay, the central bank lacks the political mandate to force the issue, and the IMF has no leverage without a program. The sharper risk is a US Treasury designation against AQAH or a named bank's correspondent relationships, which would force the structural break the Lebanese process has avoided.
Section IV
The real economy has settled at a permanently smaller scale than in 2018, and the war is pushing it down from there. Construction and real estate have not regained their footing, tourism has shed most of its weight, and the public sector has grown as a share only because private activity collapsed faster. The 2024 recovery, the first positive growth in six years, is over; first-quarter 2026 data show contraction across the war-exposed sectors.
Cement deliveries run near 2.5 million tonnes a year, 40 percent of the boom peak and back to mid-1990s levels. Q1 2026 property transactions fell 29.3 percent, with value falling slower than count, the signature of a market narrowing to cash buyers. The deeper change is structural: the banks no longer lend, mortgage origination is effectively zero, and construction is no longer a channel through which ordinary households build wealth.
Port of Beirut throughput shows the expected dips at the two war restarts but no structural break. Tourism is the opposite story: the Eid al-Adha season was effectively cancelled, and the 2026 season is, in practice, lost, dependent on airlines and Gulf advisories that Lebanon does not control. The trade balance runs a chronic deficit near 1 billion dollars a month, covered by remittances.
Lebanon imports essentially all its fuel. By mid-May, 95-octane reached about 1.43 dollars a litre and diesel 1.25, close to double end-2025, a direct channel from the war to the cost of living that runs independently of the exchange rate. State power reaches most areas 2 to 6 hours a day; the rest comes from generator networks at multiples of the tariff. The most credible short-term fix is importing power through Syria, advanced by the 9 May Damascus delegation, which also opened talks on gas transit, a business council, and a rail link. Offshore gas is a possibility for the 2030s, not revenue for this file's window: Block 9 was relinquished in March, and first gas from Block 8 would not arrive before 2031.
Section V
Remittances, roughly 5.8 billion dollars in 2024, are the largest single inflow of foreign currency, and the Gulf supplies an estimated 48 percent. Q1 2026 shows a 5 percent year-on-year decline; the Q2 reading, due in August, is the critical update. The corridor carries no Lebanese policy lever, and a sustained 15-to-20-percent contraction would cut inflows by roughly the annual cost of the deposit circulars.
The Salam government has delivered or begun most of the 2022 staff-level agreement's prior actions, yet the program remains unapproved. The Fund's operative position: losses on shareholders and junior creditors before depositors, and a Bank Resolution Law amended to international standards. Its 17 May report on BdL's governance calls for a comprehensive overhaul of the 1963 founding law. Without those amendments there is no program; without a program, no review closes.
The reform pipeline moves at the speed of its least urgent actor, which is also the one that holds the decisive vote.
War-response funding since 2 March totals 2.4 billion dollars committed, 0.5 billion disbursed, led by European governments and Japan, with no Gulf state among the top donors. Against cumulative two-war damage near 25 billion, that is emergency relief, not reconstruction. The 2006 model of Gulf pledges is not available: Riyadh, Abu Dhabi, and Doha will not finance the reconstruction of a country where Hezbollah retains an armed presence. The reconstruction money and the sovereignty question are, from the Gulf's side, the same file. Short of a comprehensive regional settlement, reconstruction will be funded mostly from within.
Total public debt carries a face value near 95 to 105 billion dollars against a market value below 10 billion; that gap is the space any restructuring will be negotiated inside. The Eurobond's three phases, distress, recovery on the reform laws, war shock and partial rebound to 26 to 27 cents, price a restructuring 18 to 24 months out that assumes the Financial Gap Law passes, the resolution law is amended, and a program is negotiated. None is locked in. The ratings sit at the bottom of the scale and will not move until a restructuring concludes.
Section VI
This assessment rests on three load-bearing assumptions: the Aoun-Salam-Souaid constellation stays intact through 2026, the reserves sustain the peg with the real risk a loss of confidence rather than exhaustion, and the Gulf remittance corridor continues without a structural break. Each can fail, and the indicators below specify what would signal it.
The peg holds through the coming twelve months in the central case (55 to 80 percent), provided no second major war and no major bank failure. The binding risk is a confidence event, not reserve exhaustion; the street-rate spread is the live signal, and it can move on factors Lebanon does not control.
BdL commits around $2.5B over the coming year to payouts the commercial banks are legally liable for, affordable against the reserves, but each month shrinks the room any eventual loss-allocation under the Financial Gap Law will have to work with. The payout share has moved in one direction for over a year.
Passage of the Financial Gap Law in 2026 is unlikely (20 to 45 percent). The opposition is incompatible rather than unified, the banks' lobby is dug in, and the election postponement lowered the cost of delay. The calculus shifts only on an external trigger, a Gulf pledge, US pressure, or an IMF deadline, none of which has materialized.
The Gulf remittance corridor is the support most exposed to a regional shock. A sustained 15-to-20-percent contraction cuts inflows by $400-500M a year, roughly the annual cost of the circulars. Q1 already shows a 5 percent decline; the Q2 reading is the next observable update.
Completing the central bank's reform agenda within twelve months is very unlikely (5 to 20 percent) without parliamentary action. Souaid can act through his regulatory tools; the overhaul of the Code of Money and Credit is beyond his reach. The regulatory floor is operational, the legislative ceiling is not.
Alternative hypothesis. A faster collapse is less consistent with the war-window evidence: the spread held under 0.5 percent, no queues formed, the fresh-money share kept rising, and the Eurobond recovered. The collapse reading gains weight if a second war accelerates the drawdown, a major bank enters resolution, or a failed Financial Gap Law triggers a mobilization the state cannot contain.
Section VII
Monthly BdL reserve drawdown above $400M for two consecutive months: the war pace accelerating beyond the central case.
Street-official exchange gap above 5 percent for 30 days: eroding confidence. Above 15 for two weeks: a renewed break.
BdL's share of the monthly payout above 90 percent: the banks' capacity exhausted, forcing the Financial Gap Law issue.
Financial Gap Law movement: referral to plenary, a finalized amendment package, or a scheduled vote.
An IMF staff-level agreement on a lending program: shifts Assessment 5 toward reform completion.
Eurobond benchmark above 30 cents for two weeks: restructuring optimism. Below 20: renewed distress.
Remittance proxy down 15 to 20 percent year-on-year across two quarters: the remittance-shock scenario.
Regulatory milestones: a named bank designated for resolution, or disclosure of the forensic-audit findings.
Port of Beirut containers below 40,000 TEU for two months: real-economy compression beyond the war dip.
BdL coverage of bank liabilities below 75 percent: absorption exceeding the balance sheet's structural capacity.
Interactive web edition of Core Group Source File SF-LBN-ECON-2026-05, issued 21 May 2026, adapted for the web. The PDF edition is the report of record and carries the full text, methodology, and source apparatus.