A widening of the Israel-Gaza war could result in an economic contraction of 10 per cent to 15 per cent for Lebanon this year, halve its tourism revenue and sever its vital air links.
A full-scale armed conflict spilling into the region would further damage Beirut's ailing economy, that has become increasingly dependent on foreign visitors for hard currency. It would also shrink the country's gross domestic product and potentially damage critical infrastructure from the its sole international airport to its seaports.
“The summer season started well and was promising, driven by a large influx of expatriates, given the severe drop in foreign visitors,” said Nassib Ghobril, head of group economic research at Beirut-headquartered Byblos Bank.
“But developments since the start of August put a halt to this momentum and ruined the positive vibes of the summer season.
“This will affect directly tourism receipts for this year, and I expect the figure to be at best 50 per cent to 55 per cent of what it was in 2023. In turn, this will have an impact on economic growth.”
If the conflict escalates with major Israeli strikes on vast areas of Lebanon and its infrastructure, then Beirut will face an economic contraction of 10 per cent to 15 per cent in 2024, Mr Ghobril said.
In a scenario where the conflict is contained, the Lebanese economy is forecast to contract by 0.5 per cent this year, he added.
Lebanon's direct tourism receipts totalled $5.4 billion in 2023, which is equal to about 25 per cent of GDP.
Tourism is a key pillar of the Lebanese economy, having become a critical lifeline over the past two years amid a deepening financial crisis and political stalemate over necessary reforms.
Lebanon, whose economy is already beset by financial woes amid years of political deadlock, faced another shock in the fourth quarter of 2023 from the spillover effects of the Israel-Gaza war.
The escalation in military confrontation in southern Lebanon caused major infrastructural damage, and mainly affected its tourism and agriculture sectors, further weighing on Lebanon’s crisis-ridden economy amid a prolonged political paralysis.
Now concerns are rising sharply over a possible wider conflict in the region after the killing of Hamas political leader Ismail Haniyeh in Tehran last week, hours after Israel struck a south Beirut suburb, killing Hezbollah commander Fouad Shukr.
This led to vows of retaliation against Israel from Iran's supreme leader. While Israel said it had killed Mr Shukr, it has not admitted to assassinating Mr Haniyeh.
International airlines are avoiding Iranian and Lebanese air space and cancelling flights to Israel and Lebanon, amid fears of an escalation in tension in the Middle East.
On Monday, Italy's ITA Airways said it had extended a suspension of its flights to and from Tel Aviv until August 8, citing geopolitical developments in the region.
Air France also said it had extended the suspension of its flights to and from Lebanon until August 8.
Israeli strikes in southern Lebanon and the Israel-Gaza war had already dampened demand for travel to Beirut at the beginning of the year.
The number of inbound visitors to Lebanon fell by an annualised 13.52 per cent in the first quarter of this year to 237,633, mainly due to a decline in the number of European and North American visitors, Blominvest Bank, Lebanon's largest lender, said last month, citing Ministry of Tourism data.
Many governments have urged their citizens to avoid travel to Lebanon due to the high risk of armed conflict.
Lebanon’s national carrier Middle East Airlines stationed about half of its fleet of 22 aircraft abroad after the Israel-Gaza war began in October 2023, in case a broader conflict developed between Israel and Hezbollah.
Inbound passenger numbers to Beirut International Airport decreased by 23 per cent annually in October 2023 after the start of Israel’s war in Gaza and subsequent Hezbollah retaliations.
Possible scenarios
A drop in tourist arrivals and revenue will have an impact on Lebanon's economic growth in 2024, but the degree of damage will depend on the scope of the conflict.
Analysts say the region will probably be able to avoid a full-scale war.
“However, there is a caveat to the impact on tourism, as a relatively limited percentage of expatriates have made plans to leave the country earlier than their original schedule, while the rest are not panicking and are staying in mountain resorts and in regions far from the conflict zone,” Mr Ghobril said.
Airport and seaport damage
A full-blown war in Lebanon would also severely damage the country's critical transport and logistics infrastructure.
In the 2006 war, Israel's air force bombed Beirut airport’s runways, forcing a complete shutdown until the 33-day war ended.
“If the current conflict between Israel and Hezbollah escalates further in response to Israel’s assassination of senior Hezbollah commander Fouad Shukur, particularly if Hezbollah retaliate with a casualty attack on an Israeli city, particularly Haifa or Tel Aviv, this would increase the likelihood of the current escalatory confrontation deteriorating into a sustained Israeli operation that also repeatedly targets Hezbollah in Beirut,” said Jack Kennedy, head of Mena country risk, global intelligence and analytics at S&P Global Market Intelligence.
The most likely Lebanese targets would include Hezbollah military assets in or near critical infrastructure such as Beirut airport and Beirut seaport, as well as Sidon, Tyre and all the smaller ports in southern Lebanon, Mr Kennedy said.
“Hezbollah’s main stronghold in Beirut’s southern neighbourhoods is also located in proximity to Beirut airport, adding to risks of collateral damage during Israeli air strikes,” he added.
“There are high risks of an accidental shoot-down in southern Lebanon and northern Israel by both Israeli and Hezbollah-operated air defence systems regardless of whether conflict escalates into a wider regional conflict, including frequent suspension of air traffic, particularly into Beirut.”
In a possible major escalation with Hezbollah, it is likely that Israel would also seek to disrupt any traffic into Beirut to prevent the transfer of advanced weaponry, said Mr Kennedy.
Iran's Mahan Air was designated a global terrorist airline in 2011 by the US for “providing financial, material and technological support to the Islamic Revolutionary Guard Corps' Quds Force”.
Implications for regional tourism
Neighbouring countries surrounding Lebanon could also record fewer tourists if the conflict escalates, analysts said.
“We would expect the regional impact to be similar in terms of its negative outlook, although the overall risk and damage to fixed assets is likely to be less than in Lebanon,” said Mr Kennedy.
“If there is a major escalation between Israel and Hezbollah, but also including Iran, it is highly likely that there will be co-ordination with Iran’s proxy and allied militia groups across the Mena region.”
Such a scenario implies the involvement of Yemen's Houthi rebels who are expected to use drones and missiles to strike targets in southern and central Israel, with “a risk of collateral damage” to tourism sites in Egypt and Jordan, he said.
This potential scenario will “have a negative impact on overall tourism confidence, especially if airlines are concerned about airspace closures or [aircraft] groundings”, Mr Kennedy said.
Scramble for flights
Demand for flights out of Lebanon has surged as foreigners and visitors seek to leave amid fears of an all-out war between Hezbollah and Israel.
Emirates, Etihad Airways, flydubai and Turkish Airlines are among the airlines still flying out of Beirut.
“Demand from Beirut to other countries has increased, with [flight] searches up by 10 per cent, though clearer trends are expected within the week,” said Mamoun Hmidan, chief business officer at Wego.
“Airfares have risen by 10 per cent to15 per cent, with further increases likely depending on the evolving situation.”
Currently, the average price for flights from Beirut to the UAE is $733, $350 to Europe and $658 to the US, according to the online travel platform.
The potential for more airlines to pull out of Lebanon in the coming week depends on how the political situation develops, Mr Hmidan said.
“An all-out war would significantly impact Lebanon's aviation and tourism industry, severely affecting flights in and out of the country, although travel may resume once conditions stabilise,” he said.
On Tuesday, Etihad Airways said it was “monitoring the situation minute-by-minute”.
“Safety is always our highest priority and we would never operate a flight unless it was safe to do so,” an airline representative said.
Flydubai revised its flight schedule to Beirut Airport and will operate two daily flights until August 7.
“We continue to monitor the situation closely,” an airline representative said, advising passengers to check their flight statuses on the website for the latest information.
Growth projections
The World Bank forecasts that Lebanon's economy will grow by 0.5 per cent in 2024, from 0.2 per cent in 2023, assuming the end of hostilities in the second half of the year and as the country adjusts to a “volatile” security situation.
“Growth in private consumption supported by tourism, remittances and a stabilisation in private sector activity will underpin a continued yet volatile bottoming out of the economy and drive modest growth in 2024,” the Washington-based lender said.
“Because tourism tends to be volatile and subject to external and internal shocks [the spillover of the current conflict being a case in point], the sector cannot substitute for more sustainable and diverse drivers of growth.”
