War with Israel would deepen Lebanon's myriad crises

BEIRUT (Reuters) - The conflict between Hezbollah and Israel is unfolding against a backdrop of deep financial and political crises in Lebanon, adding to the risks for the fragile country should hostilities spiral into full-blown war.

The Iran-backed Hezbollah and Israel have been trading fire since the onset of the Gaza war in October. Both sides say they are prepared for possible escalation as mediators struggle to secure a Gaza ceasefire.

Though the conflict has been relatively contained so far, it is weighing heavily on a country where five years of domestic crises have hollowed out the state.

Here's an overview of Lebanon's troubles:

ECONOMIC MELTDOWN

Lebanon continues to be afflicted by a catastrophic financial collapse which hit the country in 2019.

Caused by decades of profligate spending and corruption by the ruling elite, the meltdown sank the currency, impoverished swathes of people, paralysed banks, and fuelled the biggest wave of emigration since the 1975-90 civil war.

The World Bank has described it as one of the sharpest depressions of modern times. Lebanon's economy shrank from $55 billion in 2018 to $31.7 billion in 2020. The government has yet to enact reforms needed for recovery.

The lingering impact of the crisis was captured in a World Bank report in May which found poverty had more than tripled in Lebanon over the past decade, reaching 44% of the population.

It found that one-in-three Lebanese was poverty stricken in 2022 in five surveyed governorates, including Beirut. While new Beirut restaurants serve the rich, the World Bank report said three out of five households had cut back on food spending.

The International Monetary Fund said in May a lack of action on necessary economic reforms continued to exert a heavy toll on the economy and people. It said there was no credible and financially viable strategy for the banking system.

Tourism and remittances helped the economy find a temporary bottom by 2022 and early 2023, according to the World Bank. Prior to the onset of the Gaza war, the economy was projected to expand slightly in 2023 by 0.2%. But after hostilities began, the forecast changed to a contraction of between 0.6% and 0.9%.

POLITICAL TENSIONS

Lebanon has not had a head of state or a fully empowered cabinet since Michel Aoun's term as president ended on Oct. 31, 202, leaving an unprecedented vacuum.

The government of Prime Minister Najib Mikati has been serving in a caretaker capacity since then. Filling the presidency and installing a fully empowered government requires a deal among Lebanon's deeply divided factions.

On one level, the standoff reflects rivalries among Maronite Christians, for whom the presidency is reserved in Lebanon's sectarian power-sharing system.

On another, it reflects a power struggle between the Iran-backed Shi'ite movement Hezbollah - which propelled its ally Aoun to the presidency in 2016 - and opponents who have long opposed the group's possession of arms and say it has unilaterally embroiled Lebanon in conflict again.

With politicians showing no compromise in the tussle over state power, a compromise on the presidency may demand the type of foreign mediation that has saved Lebanon from previous such standoffs.

SYRIAN REFUGEE CRISIS

Thirteen years since Syria's conflict broke out, Lebanon remains home to the largest refugee population per capita in the world: about 1.5 million Syrians - half of whom are refugees formally registered with the United Nations refugee agency UNHCR - in a country of approximately 4 million Lebanese.

Funding for the Syria crisis is dropping, reflecting fatigue among donors grappling with other conflicts around the world. Despite their differences, parties from across Lebanon's political spectrum agree the Syrians should be sent home.

(Writing by Tom Perry, Editing by Timothy Heritage)