LEBANON — Lebanon’s economy is showing early signs of improvement in 2025 following a severe contraction of real GDP by 6.4% in 2024, according to Banque du Liban’s June 2025 Macroeconomic Review. Political stabilization, including the election of a president, the formation of a government, and the appointment of a new central bank governor, has helped improve sentiment and reduce uncertainty.
Real GDP is projected to return to modest growth in 2025. Headline inflation has eased, falling to 15% year-on-year in June 2025 from 41.8% a year earlier. However, core inflation, which excludes food and energy price volatility and is typically used by central banks as a more stable measure of long-term inflation, remains elevated.
Despite these signs of stabilization, the composition of growth raises questions about its sustainability.
Growth Driven by Consumption
The BdL review indicates that domestic consumption has been the primary driver of activity in 2025. Imports have risen sharply, reaching 62% of GDP compared to 31% in 2019, reflecting increased reliance on imported goods to meet domestic demand.
Tourism, which declined by 16% in 2024 due to economic and security challenges, is expected to recover gradually. Total airport arrivals increased by 3.4% in the first half of 2025. While this signals cautious improvement, exports and investment remain weak.
This suggests that the current recovery is being supported largely by spending and remittance flows rather than by productive expansion.
The Missing Engine of Growth: Investment
Private and public investment remain critically constrained.
Gross fixed capital formation, which measures spending on long-term productive assets such as infrastructure, machinery, equipment, and buildings, fell from around 22% of GDP in 2018 to just 1.9% in 2023, according to World Bank data cited in the BdL review. It is expected to remain at similar levels through 2025.
Public investment continues to be limited by fiscal constraints, with government spending largely directed toward wages rather than capital assets. Private investment remains minimal, reflecting banking sector paralysis and continued uncertainty.
Commercial bank balance sheets have contracted by nearly 60% since 2019. New lending remains extremely limited, highlighting the breakdown of banks’ role in providing credit to the economy. Without restructuring the banking sector and restoring the flow of credit, a recovery in investment will remain out of reach.
What Research Says About Growth and Investment
Economic research highlights the importance of protecting productive investment during recovery periods.
A 2015 study by Ambar Rabnawaz on the impact of public investment on economic growth in Pakistan found a positive relationship between public investment and GDP, with evidence of two-way causality between the two public investmenr and economic …. The findings suggest that higher public investment supports output growth, while stronger economic growth can in turn stimulate further public investment.
Similarly, IMF research on social spending and growth finds that education and health expenditure contribute to human capital accumulation and economic growth in developing countries. The study also notes that spending effectiveness depends on governance, transparency, and fiscal discipline.
Another cross-country study, Growth-friendly Fiscal Rules? Safeguarding Public Investment from Budget Cuts through Fiscal Rule Design by Martín Ardanaz, Eduardo Cavallo, Alejandro Izquierdo, and Jorge Puig, finds that during fiscal consolidation episodes, countries without flexible fiscal frameworks tend to cut public investment disproportionately, often by around 10 percent. In contrast, countries with well-designed and flexible fiscal rules are better able to protect capital expenditure during adjustment periods.
Evidence indicates that cutting investment may improve short-term budget balances, but it can come at the cost of weaker long-term growth.
Stabilization Without Rebuilding?
The BdL review mentions that without reforms to restructure the banking and financial sectors, manage deposit repayments, revive the credit cycle, advance governance and transparency, and restore confidence, investment recovery will remain weak.
Lebanon’s recovery in 2025 reflects improved stability and easing inflation. However, the low levels in public and private investment suggests that while economic activity may be stabilizing, the foundations for sustained economic growth remain underdeveloped.
As Lebanon navigates its post-crisis phase, restoring productive investment may determine whether the current stabilization evolves into durable recovery.
