English
The Political Economy of Debt Accumulation in Lebanon
by Khalil Gebara
Introduction
Lebanon is grappling with an economic and financial collapse widely recognized as one of the most severe globally since the mid-nineteenth century. Since 2018, the country's real GDP has contracted by approximately 40%, marking one of the steepest peacetime economic declines on record (World Bank, 2025). The Lebanese lira has depreciated by over 98% on parallel markets, severely eroding purchasing power and pushing more than half the population into poverty (World Bank, 2021; IMF, 2022). Amidst hyperinflation and mass unemployment, the government defaulted on its Eurobond debt in March 2020—its first-ever default—while the banking sector became functionally insolvent (Hausmann et al., 2020; IMF, 2022). Public sector debt, including central bank liabilities, has surged to more than seven times the country's GDP (World Bank, 2023). Lebanon is simultaneously confronting a sovereign debt crisis, a banking crisis, a currency crisis, and a profound socio-economic collapse (UN ESCWA, 2022).
Despite the dire situation, a comprehensive resolution remains elusive four years into the crisis, with mounting costs in terms of income losses, service degradation, and human suffering (World Bank, 2023).
This paper critically analyzes the evolution of Lebanon's sovereign debt crisis from the early 1990s through mid-2025. It highlights how a confluence of monetary and fiscal mismanagement, structural weaknesses, and institutional dysfunction contributed to the catastrophe. The analysis traces the historical trajectory of debt accumulation since the post-war reconstruction began in 1992, a period when Lebanon's economy became increasingly reliant on foreign inflows and a rigid currency peg, and identifies the central role of persistent twin deficits in exacerbating vulnerability (Harvard CID, 2022; ERF, 2021). Key policy choices, such as maintaining the currency peg since 1997 and the central bank's financial engineering practices, are examined for their role in deepening systemic risks (IMF, 2022; Hausmann et al., 2020). Governance failures—including entrenched sectarian patronage, elite capture, and chronic resistance to reform—have compounded these economic distortions (World Bank, 2022; ACW, 2023).
This paper delves deeper into the composition and ownership of Lebanon's public debt, assessing pathways to future debt sustainability and fiscal, sectoral, and monetary reforms in the country. It aims to provide well-supported policy recommendations for recovery and debt sustainability, taking into account Lebanon's constrained institutional capacity and complex political economy (World Bank, 2025). The analysis that follows provides the evidence base for these conclusions by first examining how Lebanon arrived at this crisis during the period from independence, with a focus on the period after the civil war (1992–2018), then reviewing the collapse since 2019, and finally outlining the necessary steps forward.
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