The Lebanese Economic Model Dilemma: Stuck In Park Mode

20 March 2025

As news regarding the return of credits and loans provided by banks emerged, a renewed sense of hope spread, signalling that Lebanon’s financial sector and economy might be regaining health and stability. However, the perception collapsed on the sill of the headline. The loans are being offered for the purchase of new imported cars. While such financing may provide individual benefits, such as allowing people to acquire reliable and environmentally friendlier vehicles, supporting the car import industry, creating few jobs in the sector, and restoring Lebanon’s position in the international market as an importer of newly manufactured cars rather than unsafe and scrapyard cars, such an approach to offering loans poses a fundamental issue: What lesson have we learned from past experiences?

Should Lebanon continue following the same pre-2019 economic patterns, or should we redefine our approach to economic recovery to more of a substantial change? Are we on cloud nine or merely in another phase of the economic freefall?

If you ask a ten-year-old child or an elderly person about the primary cause of Lebanon’s financial crisis over the past five years, their response would likely align with that of a prominent financial expert: there aren’t enough dollars in the market. But what does this imply from a technical perspective?

In simple terms, the gross influx of hard currency was lower than the gross outflow. At its core, Lebanon suffered from a chronic imbalance between dollar inflows and outflows over the past 26 years, in which the country recorded a staggering trade deficit of $310 billion, highlighting the absence of a strong industrial sector and the lack of high-value modern services that could generate foreign currency, and a deficit in the trade balance post 2011, instead, Lebanon heavily relied on imports to meet domestic demand and uphold the lavish lifestyle such as tourism abroad.

(It has been estimated that 1  million Lebanese individuals travelled to Turkey in 2018, according to the former Minister of Tourism Avedis Guidanian), 

While its economy was sustained by tourism and remittances from the diaspora, in reality, the entire financial system was dependent on foreign and expatriate bank deposits rather than productive economic activity.

Prior to the crisis, Lebanon’s GDP was largely service-based, with the sector contributing approximately 75% to the economy, while industry accounted for only 15%, and agriculture a mere 5%. This economic model was unsustainable, and its collapse in 2019 underscored the urgent need for diversification.

Accordingly, efforts were undertaken to shift towards a more balanced and diversified economy, ensuring that the services sector no longer serves as its sole pillar. The Lebanese government entered into an agreement with McKinsey & Company to develop an economic vision to define a suitable economic model for Lebanon and to identify economic sectors with high potential, as per the former Minister of Finance and Chairman and General Manager of Cedrus Invest Bank Raed Khoury. The "Lebanon Economic Vision" proposed diversifying the Lebanese economy by shifting from a rentier model (relying on banking, real estate, and remittances) toward more productive sectors such as technology, tourism, agriculture, and industry. 

A major area of focus was the development of a digital economy and encouraging innovation. The plan aimed to position Lebanon as a regional tech hub, encouraging investments in start-ups, digital infrastructure, and innovation incentives. The plan also proposed modernizing Lebanon’s agriculture sector by integrating technology, improving exports, and supporting rural development. In addition, it recommended expanding Lebanon’s tourism beyond Beirut, focusing on eco-tourism, cultural tourism, and medical tourism. It also highlighted the potential of Lebanon’s offshore gas reserves, urging the government to develop clear regulations and infrastructure to capitalize on the sector.

Despite the ambitious recommendations, the McKinsey Plan was ultimately never implemented. The Lebanese government failed to take the necessary actions, and the country’s economic situation worsened in parallel with a political stalemate leading to a severe financial crisis in 2019; thus, the plan’s potential impact was never realized.

Rebounding to the initial issue, why should banks abstain from providing such loans?

The third quarter of 2019 provides a revealing snapshot of Lebanese banks’ credit distribution across various economic sectors:

• Trade and services: 34.44%

• Individuals: 30.40%

• Construction: 16.13%

• Industry: 10.67%

• Financial intermediaries: 4.11%

• Community/personal services: 2.99%

• Agriculture: 1.26%

This allocation underscores the overreliance on consumption-driven lending rather than investments in productive sectors. Moving forward, banks must reconsider their credit distribution strategy for various valid reasons:

1. Preventing Economic Imbalances

Historically, a disproportionate share of bank credit in Lebanon was allocated to trade, services, and consumer loans rather than productive sectors such as industry and agriculture. The pre-crisis economy was overly dependent on banking, real estate, and remittances, aggravating trade deficits and reinforcing reliance on imports over local production, but the 2019 financial collapse exposed the fragility of this rentier model. If banks resume pre-crisis credit allocation by prioritizing consumption and imports over investment in productive sectors, they will risk perpetuating the structural weaknesses that consequently led to the financial collapse. Therefore, and in acknowledging the vitality of sustainable growth, banks must realign lending policies to support productive industries that generate long-term economic value and are resilient to malevolent political or economic conditions.

2. Containing Dollar Outflows

Lebanon’s financial collapse was largely driven by an imbalance between dollar inflows and outflows. Extending credit for imported goods, such as automobiles, intensifies demand for foreign currency without generating corresponding revenues to cover the deficit resulting from the transaction. With limited access to fresh dollars, banks must prioritize financing sectors that yield foreign currency earnings rather than depleting current reserves. Strengthening export-oriented and self-sufficient industries would reduce dependence on imports and address trade deficits rather than fueling consumption-driven imports; accordingly, banks should channel credit into productive sectors that enhance job creation and financial stability.

3. Promoting Financial Stability and Economic Resilience

The Lebanese banking sector must transition from an unsustainable model of excessive consumer lending to one that nurtures innovation, entrepreneurship, and job creation. Banks can build a more resilient and diversified economy by financing industries that contribute to GDP growth and exports, reducing Lebanon’s vulnerability to external shocks. Continued credit expansion toward unproductive consumption without structural reforms risks inflating new debt bubbles that could further destabilize the financial sector. Sustainable economic recovery requires responsible credit allocation, prioritizing productive investments over short-term demand stimulation.

4. Mitigating Systemic Risks

The pre-crisis credit distribution revealed an excessive reliance on lending to sectors with minimal contribution to GDP growth. Overleveraging individuals and service-based businesses without structural economic reforms risks repeating past financial instability. A significant factor in Lebanon’s banking crisis was reckless lending where credit was allocated based on speculative returns rather than sound economic fundamentals. Many loans were extended to politically exposed persons (PEPs), real estate ventures, and consumption-driven sectors without adequate risk assessment. To prevent another financial collapse, banks must enforce stringent lending criteria to ensure that credit is directed toward sectors with demonstrable economic benefits.

5. Restoring Public Confidence and Institutional Credibility

The Lebanese banking sector has suffered a severe loss of depositor trust due to mismanagement of deposits, financial engineering schemes, and illegal capital controls. Banks risk further reputational damage and depositor flight due to the absence of a clear and responsible credit strategy. They should assume a pivotal role in economic restructuring through sound investments since restoring confidence in the banking system requires a commitment to prudent lending practices and alignment with broader economic recovery efforts.

6. Facilitating the Recovery of Deposits

A critical component of restoring confidence in Lebanon’s banking sector is the gradual and structured return of deposits, if achievable, and through reallocating credit towards high-yield and exporting industries, banks can generate sustainable revenue streams that contribute to deposit recovery, thus strengthening the financial system’s ability to restore liquidity and meet depositor obligations.

7. Financing Technological and AI-Driven Industries

To position Lebanon as a competitive player in the global economy, banks must actively support modern industries, particularly artificial intelligence (AI), fintech, and digital innovation. These sectors have the most potential to attract foreign investment, create high-skilled jobs for the Lebanese youth and entrepreneurs, and diversify revenue sources. Investing in AI-driven solutions and services can modernize the economy and society, as well as the banking sector.

Issuing loans for imported cars may offer short-term convenience, but it does nothing to address the structural weaknesses that crippled Lebanon’s economy. 

The country cannot afford to repeat the failed rentier model of the past, where unchecked consumer lending and speculative investments drained resources without creating real value. Instead, banks must pivot toward industries that generate foreign currency and offer job opportunities for different types of labour.

The financial sector has an opportunity and a moral obligation to be part of the solution by laying the foundation for a new economic era, one that isn’t dependent on diaspora remittances and unsustainable credit cycles. More importantly, banks can restore trust, proving to depositors that their money is backing a system built on sound economic principles and productive investments.

Is Lebanon rebuilding its economy on solid ground, or are we just setting the grounds for a pre-2019 economy, the same mistake, à refaire?