In the third week of the Al Aqsa Deluge operation, the announcement of an Emergency Plan by the Lebanese Council of Ministers is still wishful thinking. A number of reports have cautioned that risks of escalation involving the opening of a second front with the full military engagement of the Lebanese militant group Hezbollah remain material, even if Iran would become directly involved. High on the risk in the event of escalation would be the potential for an energy supply shock, which could underpin inflation and weigh on economic activity.
Whether markets will be beginning to feel a scarce supply of basic needs is to be seen, as many sources in the markets confirmed to NOW the availability of stock for the coming month. However, merchants’ profiteering is a cause of concern in the imminent future, sources say.
A report by BLOMINVEST said, “if we assume that a possible war will be as intense and destructive as 2006 … the corresponding fall in GDP will be 68.3 percent. Moreover, as the World Bank estimates that Lebanon’s GDP will be $18 billion in 2023, then quarterly GDP will be $4.5 billion.” As such, if a war between Israel and Hezbollah does occur in November 2023, then its quarterly impact, or its impact until the end of December 2023, will be a fall by $3 billion, or two-thirds of the quarterly GDP, the report adds.
Insurance premiums are already experiencing the impact of war, as supply routes face potential threats. If the current insurance situation persists, the repercussions of a significant reduction in imports will likely manifest in two ways: first, through a decrease in the availability of essential food items, and second, through rising prices driven by increased transportation costs. However, it has been reported that Lebanese traders and industrialists have managed to secure sufficient food supplies to maintain market stability for the next three to four months, according to an industry source.
In addition, aviation war insurers have issued notices to cancel coverage for some airlines based in Israel and Lebanon due to the ongoing conflict in the region. Some of these cancellations have already taken effect, as confirmed by three industry sources with direct knowledge of the matter.
One of the insurers’ primary concerns revolves around aircraft stranded in conflict zones. Middle East Airlines recently announced its decision to keep 5 out of its 24 airplanes in Turkey, following a series of rocket, missile, and artillery exchanges between Israel and Hezbollah.
Lebanon’s safety nets are gradually eroding, and even before the Al Aqsa Deluge and ensuing war, the health sector was weighed under by a lack of funding. “People in Lebanon are enduring unimaginable suffering as they struggle to access life-saving medication. Meanwhile, the Lebanese authorities persist in neglecting their responsibility to uphold the right to health,” emphasized Aya Majzoub, Amnesty International’s Deputy Director for the Middle East and North Africa. An employee at a local pharmaceutical company informed Amnesty International that the supply of unsubsidized medication has been inconsistent due to mounting debts owed to international manufacturing companies.
According to Caretaker Minister of Public Health Firas Abiad, the government reduced its overall spending on the health sector by 40% between 2018 and 2022, without allocating more than 3% of the health budget to the PHCC. This means that funding for Primary Health Care Centers (PHCCs) has dwindled during this period. The impact on Lebanon’s health sector in the event of high casualties remains uncertain.
“People in Lebanon are facing unimaginable levels of suffering while trying to get their hands on life-saving medication. The Lebanese authorities, meanwhile, continue to shirk their responsibility to safeguard the right to health,” said Aya Majzoub, Amnesty International’s Deputy Director for the Middle East and North Africa. A staff member at a local pharmaceutical company told Amnesty International that the supply of unsubsidized medication has been inconsistent due to mounting debts owed to the manufacturing companies abroad.
Basic Food Supplies
One of the most vulnerable changes in prices hovers around the price and availability of wheat. The syndicate has been working with the Ministry of Economy to provide bakeries with their monthly supported share of flour for no less than ten days, a source told NOW. Bakeries will purchase flour in dollars and sell it at the supported price to bridge the deficit and shortage to ensure the availability of bread supply. Securing flour stocks inside bakeries and mills for no less than 75 days is also a main concern for the syndicate. The source claimed that appealing to UNIFIL in case public facilities are targeted to secure the wheat from the sea to the mills and from the mills to the bakeries may remain an option.
According to the Central Administration of Statistics (CAS), the Consumer Price Index (CPI), representing the evolution of the prices of goods and services consumed by households, revealed that Lebanon’s inflation rate registered another high level of 208.5%. It is worth noting that despite this persistent elevation in inflation, there appears to be a decreasing trend since April 2023, when it peaked at 268.78%.
Many basic food ingredients have already seen an upheaval in prices. As a result, the average monthly needs of a Lebanese family consisting of four people now range between 20 to 24 million Lebanese pounds. These numbers can be described as outrageous when compared to the income levels of over 60 or 70 percent of the Lebanese population.
A quick survey by NOW illustrates that there has been a noticeable increase in the price of vegetables such as lettuce – from 24,000 Lebanese pounds to 61,000 Lebanese pounds, and the price of cabbage – from 12,000 Lebanese pounds to 70,000 Lebanese pounds, which is an increase of 400 percent. Even the price of radishes, parsley, or mint, which were sold for around 7,000 Lebanese pounds last year, has reached over 30,000 Lebanese pounds – an increase of 300 percent.
The prices of dairy products, cheese, and eggs have also surged. In the same period last year, a 150-gram portion of cheese or a 500-gram container of labneh was sold for approximately 140,000 Lebanese pounds. Prices have since risen to around 340,000 Lebanese pounds, which is an increase of about 200,000 Lebanese pounds over the course of a year, at an average rate of 16,000 Lebanese pounds per month. Meat prices have increased by 150 percent. For instance, the price per kilogram of beef has risen from 350,000 Lebanese pounds to over 900,000 Lebanese pounds, even reaching one million Lebanese pounds. As for lamb meat, it surpasses the two-million Lebanese pounds mark per kilogram. This is only affordable for a small segment of the Lebanese population. The situation is similar for poultry, with price hikes approaching 190 percent.
Most traders would blame it on supply and demand. Different prices of agricultural products, such as the increase in the price of diesel fuel over the past three months, has been paramount in this token. The price of a tank of diesel has risen from 12 dollars during the months of June and July to around 20 dollars today. This increase affects the costs and, as a result, leads to price hikes.
Spillovers and Energy Prices
Contained spillovers are a bitter reality, though recent developments present a real threat to stability in the wider Middle East and add to already heightened geopolitical concerns globally. One of the highest risks should Hezbollah launch a full-scale second front in the North of Israel or should Iran get directly involved is escalation or contagion. This crisis has reawakened latent sympathy for the Palestine cause in many countries and communities, which could become manifest in demonstrations and protests from Palestinian supporting groups across the globe.
While full-scale involvement of Hezbollah, would likely significantly increase risk premiums and volatility in financial markets, any potential oil supply disruption caused by sanctioning Iran and cutting off the exports of Iranian oil—currently about 2 million barrels per day (mbd )–might be offset by Saudi Arabia given it has sufficient spare production capacity (about 3 mbd), the report adds.
Maan Barazy is an economist and founder and president of the National Council of Entrepreneurship and Innovation. He tweets @maanbarazy.
The views in this story reflect those of the author alone and do not necessarily reflect the beliefs of NOW.