Economic Recovery Efforts in Israel and Lebanon

More than a year later, and less than a month after the ostensible ceasefire, reports estimate that the military exchanges between Israel and Hezbollah have significantly impacted both economies, resulting in strained public finances, budget deficits, and rising inflation. This financial strain has been further exacerbated by supply chain disruptions, increased military spending, and higher costs for goods and services. The Israel-Hezbollah war, combined with Israel’s aggression on Gaza, is estimated to have cost nearly $100 billion in total so far. In this piece, we examine the direct and indirect costs of the war on Lebanon and Israel, highlighting the destruction of critical infrastructure, the strain on public finances, and the significant toll on civilian populations, as well as ongoing relief efforts.

Direct and Indirect Costs: Lebanon

Lebanon has borne the brunt of the war, which is estimated to have cost the country $20 billion, according to Lebanese Minister of Economy and Trade Amin Salam. Nearly $9 billion is attributed to physical losses and economic damages, with estimates suggesting that Hezbollah has lost over a quarter of its "fungible cash." The housing sector has been the most affected, suffering $2.8 billion in damages, including 100,000 homes either partially or completely destroyed. Other major sectors, including tourism and agriculture, have also been heavily impacted. The agricultural sector alone has incurred $1.1 billion in losses due to relentless bombing, fires, and contamination from Israel’s illegal use of white phosphorus. Furthermore, Israel targeted a major channel carrying water from Lebanon’s main water source through the Litani River Irrigation Project, contributing to an estimated $200 million in damages to water infrastructure and solar energy systems. This strike on the agricultural sector directly impacts Lebanon's food security and affects the neighbouring countries to which it exports. In terms of casualties, 3,768 Lebanese have been killed and 15,699 wounded. Over 1.4 million Lebanese, mostly from Southern Lebanon, have been displaced, with the majority internally and the rest fleeing to Syria.

Relief Efforts: Lebanon

As of now, relief efforts in Lebanon primarily consist of foreign aid packages. France has taken a leading role, committing $108 million and organising an international conference in Paris that raised $1 billion, including $800 million for humanitarian aid and $200 million for security forces, according to French Foreign Minister Jean-Noël Barrot. Other European countries have also pledged support, with Germany committing $64.7 million and Italy $10.8 million. Given that the European Union designates Hezbollah’s military wing as a terrorist organisation, these European financial contributions appear to be aimed at strengthening the Lebanese Armed Forces as a countermeasure to Hezbollah. The Gulf Cooperation Council (GCC) is expected to take a leading role in reconstruction as well.

Locally, Hezbollah Secretary-General Naim Qassem promised Iran-financed support and shelter to those who have lost their homes, offering a lump sum of $8,000, “and $6,000 for a year of rent for those living in Beirut or its suburbs and $4,000 for those living outside the capital until they can move back home.” Despite the reopening of most roads and border crossings into Syria, many displaced Lebanese have yet to return due to a lack of trust in the so-called ceasefire, which Israel has violated since day one.

Relief Efforts: Israel

The events following 7th October have plunged Israel into its longest and most expensive conflict to date. With an estimated cost of $67.6 billion, the financial, infrastructural, and social impacts of the war have been immense. Beyond the immediate costs, Israel now faces the formidable task of economic recovery amidst widespread damage to infrastructure, the displacement of tens of thousands of citizens, and a significant decline in investor confidence. Nevertheless, Israel’s historical resilience, innovation-driven economy, and strong international alliances offer a foundation for rebuilding. Israel faces many challenges and opportunities to revitalise its economy in the aftermath of the conflict.

Fiscal and Monetary Policy Challenges

One of the most pressing issues for Israel’s recovery is the strain on public finances. The government will need to allocate substantial resources to reconstruction, housing, and stabilising key sectors of the economy. However, recent credit rating downgrades by Fitch, Moody’s, and S&P have increased borrowing costs, making it more expensive for the government to finance its deficits. Moody’s, which downgraded Israel twice this year, cited “material negative consequences for the country’s creditworthiness in both the near and long term.” This will require the government to adopt prudent fiscal measures while seeking alternative sources of financing, such as international loans or bonds. Simultaneously, monetary policy interventions by the Bank of Israel will be necessary to curb inflation and ensure liquidity in the market.

Investor confidence, a vital component of Israel’s economy, has been severely undermined by the conflict and subsequent credit downgrades. Attracting foreign investment will require the government to implement transparent policies and provide incentives for businesses to return or expand operations in Israel. The country’s reputation as a hub for technology and innovation will remain a critical asset in restoring economic stability. Targeted support for technology companies, coupled with global investment campaigns, could reignite growth in this key sector.

Similarly, Israel’s tourism industry has suffered greatly due to cancelled travel plans, with tourist hostels converting to cheap housing. Reviving this crucial sector will require a focused global campaign to re-establish Israel’s image as a safe and attractive destination in addition to restoration of cultural and religious heritage sites. This is evidenced by the Israeli Ministry of Tourism’s recent allocation of $64 million to tourism projects aimed at tapping into the “faith-based market,” as noted by Tourism Minister Haim Katz. This investment is part of a broader total of $114 million allocated to new tourism initiatives.

Domestic Front

Reconstruction efforts are crucial to Israel’s recovery, as the extensive damage to infrastructure, particularly in Northern Israel and the Gaza-border communities, will require billions in investment. Approximately 62,000 Israelis from Northern Israel and the occupied Golan Heights have been forced into shelters due to Hezbollah-inflicted damage to infrastructure, including an estimated 9,000 buildings and 7,000 vehicles, with damages valued between $30–39 million. The government will need to fast-track public works projects to repair roads, utilities, and housing. Additionally, addressing the housing needs of displaced citizens will be a priority. Public-private partnerships may be instrumental in accelerating these reconstruction efforts and reducing the financial burden on the state.

Moreover, the war has taken a heavy toll on Israel’s labour force. The Israeli Army’s latest reports have released the names of 816 casualties and claim that 5,485 individuals have been wounded since 7 October, nearly half of whom sustained injuries following Israel's ground invasion of the Gaza Strip. The psychological toll has also been significant: the Israeli Defence Ministry’s Rehabilitation Division reports that approximately 1,000 soldiers are withdrawn from combat each month, with over a quarter of them leaving due to mental health concerns. The division is currently treating a record 70,000 disabled soldiers with projections suggesting this figure will reach 100,000 by 2030. Consequently, comprehensive mental health support and reintegration programmes will be essential for restoring the workforce and ensuring long-term economic productivity.

Conclusion

The road to recovery will be long. Strengthened economic ties with regional partners through the Abraham Accords and other agreements could pave the way for new growth opportunities, a prospect that is likely to gain momentum with the anticipated second presidency of Donald Trump. Moreover, as the largest cumulative recipient of American aid, Israel is expected to receive significant financial support from the US to offset some of the costs incurred from its war on Lebanon and Gaza. The US has contributed $17.9 billion in military aid to Israel in the period between 7 October and April 2024 alone.

Israel’s economic recovery after 7 October will require a balanced approach combining immediate relief with long-term reforms to address challenges like geopolitical instability, rising debt, and inflation. Key priorities will include rebuilding infrastructure, supporting displaced citizens, and restoring investor confidence. Success depends on the government’s ability to navigate financial constraints and ensure stability in a shifting global landscape.

For Lebanon, similar challenges arise. Long term recovery is going to be slow as the country struggles to secure necessary funds for reconstruction and restarting the economy. Inflation persists and will continue to be a significant problem as supply line challenges and monetary policy constraints undermine market recovery. Regional partnerships will become more necessary and the geopolitical competition between Iran and the Abraham market in Lebanon will grow clearer. Globally, the US and France will continue to dominate the political and power landscape and will press for Hezbollah's disarmament. It is unlikely however that such efforts will succeed, suggesting the continuation of sanctions on Lebanon hurdling recovery efforts.