BEIRUT, Lebanon, Aug. 21 (UPI) -- The World Bank said Friday that the recent Israel-Hezbollah conflict has severely disrupted Lebanon's fragile recovery, predicting a 6.4% contraction in the crisis-ridden economy this year and a rise in inflation to 17.5%.
The international financial institution said in a report that Lebanon entered 2026 "on firmer footing," after an estimated 4.2% expansion in real gross domestic product in 2025.
It was the country's fastest growth since the onset of the 2019 financial crisis, driven by stronger consumption, investment and tourism, as well as improved high-frequency indicators, according to the report.
It noted that the rebound was sharply interrupted by the military escalation between Hezbollah and Israel on March 2, causing further damage to housing and infrastructure, displacing some 1.2 million people, disrupting supply chains, and severely affecting tourism and domestic demand.
Dahlia Khalifa, World Bank Middle East director, said Lebanon's recovery has been "sharply set back by the renewed conflict," adding to an already severe social and economic crisis.
The report projects that Lebanon's economy will contract by 6.4% in 2026, while inflation is expected to rise to 17.5%, driven by supply disruptions, higher shipping costs and rising oil prices, further eroding purchasing power.
According to the latest casualty count released by the Lebanese Health Ministry, some 4,348 people have been killed and 12,703 others injured since March 2. Israel's intensive military campaign has caused massive destruction to property and infrastructure, with some 70 border villages in southern Lebanon reduced to rubble and rendered uninhabitable.
Lebanese Finance Minister Yassine Jaber has estimated that the combined direct and indirect losses resulting from the conflict in Lebanon since 2023, including the 2024 and 2026 escalations, could reach $20 billion.
Lebanon was still struggling to recover from a protracted financial crisis -- described by the World Bank as a "deliberate depression" and the worst globally since 1850 that limited access to bank deposits, caused prices to soar, unemployment to soar and public services to deteriorate.
Moreover, the population faced eroded purchasing power after the Lebanese pound lost more than 95% of its value against the U.S. dollar,
The World Bank report said the government recorded an overall surplus of 3.9% of GDP in 2025. However, rising humanitarian and reconstruction needs after the recent war, pressure to increase public sector wages and slower revenue growth are expected to place additional strain on public finances in the second half of this year.
The report noted that continued progress on reforms remains essential to restoring confidence, reviving growth and supporting a durable economic recovery.
"Advancing reforms -- particularly on banking sector restructuring and fiscal management --will be critical to restoring confidence, protecting stability and mobilizing the financing needed for reconstruction and recovery," the World Bank's Khalifa said.
The report noted that the banking sector remains deeply weakened despite some progress in advancing its restructuring agenda and warned that the exchange rate could come under pressure "if foreign inflows decline or conflict-related shocks persist."