Lebanon at a Crossroads: Prospects of US and Gulf Investment Following a Weakened Hezbollah
May 15, 2025 - Written by Oscar Bermudez
Introduction
Lebanon is at a crossroads in its history. In the wake of a weakened Hezbollah, following Assad’s ouster in Syria and its war with Israel, which have left Hezbollah’s social welfare, financial, and military operations significantly weak, the new Lebanese administration is pushing for the group’s disarmament. As Lebanon navigates the aftermath of Hezbollah’s war with Israel and the country’s crippling economic crisis, the need for reconstruction and reform is urgent. The new Lebanese administration is willing to make the necessary financial and governance reforms to secure international confidence. However, it must also pass these reforms into law while addressing Hezbollah’s future role in the country, as both the US and most Gulf Cooperation Council (GCC) states classify Hezbollah as a terrorist organization. Despite changes in aid policy, the US continues to support the new Lebanese government and its national military, the Lebanese Armed Forces (LAF). However, it is widely believed that without Hezbollah’s complete disarmament, Lebanon will not receive US or Gulf assistance for reconstruction. As Lebanon seeks international support, especially from the US and Gulf states, it has a historic opportunity to implement reforms and rebuild its economy.
Historical Background
The US has long viewed Lebanon as a strategically important partner in the Middle East, particularly in its efforts to counter Iranian influence and promote stability in the region. Since 2019, the US has given more than $3.5 billion to Lebanon in humanitarian aid and, since 2006, more than $3 billion to the Lebanese Armed Forces (LAF). In March, despite President Donald Trump's ongoing freeze on foreign aid, the US State Department approved an exception for the delivery of $95 million in military support to the LAF, reinforcing the US's continued support for the LAF. In Lebanon, where over 90 percent of the population views their government as corrupt, the LAF stands out as the most trusted public institution, with 90% of Lebanese having confidence in it. The US views its aid in Lebanon as not only vital in supporting and strengthening the LAF but also as necessary for guaranteeing essential services to the Lebanese people, protecting the country's pluralistic nature, and challenging Hezbollah's narrative and influence.
Historically, Gulf states have provided Lebanon with external help in the form of loans, direct aid, and investments in various sectors, including real estate and construction. Saudi Arabia brokered the 1989 Taif Agreement, which ended the Lebanese Civil War, and its close relationship with former Prime Minister Rafik Hariri saw massive Gulf investments in Lebanon, which rebuilt the country following its civil war. However, Hariri’s assassination in 2005, blamed on Hezbollah, and the toppling of his son, Saad Hariri’s, government by Hezbollah in 2011, marked a downturn in Gulf-Lebanese relationships. Today, most GCC states have designated Hezbollah as a terrorist group in response to its support for the Houthis in Yemen and its harsh critiques of Gulf interventions in Yemen. As a result, Gulf states advised citizens to leave Lebanon, recalled diplomats, banned Lebanese imports, and arrested Lebanese Shi'ites in the UAE for supposed Hezbollah affiliations. Because of Hezbollah's growing power in Lebanon, as well as mismanaged fiscal and monetary policies and institutional incompetence, many Gulf Arabs began to shift away from Lebanon.
Signing of the 1989 Taif Agreement. Source: https://www.middleeasteye.net/big-story/25-years-taif
Economic Crisis and Hezbollah-Israel War
Months after President Joseph Auon and former Prime Minister Nawaf Salam signed a decree forming the country’s first full-fledged government since 2022, Lebanon remains plagued by economic crisis and conflict. The World Bank reported that Lebanon's economy has shrunk by around 34% since 2019 and claims that Lebanon's financial crisis could be among the three worst in the world during the last 150 years, saying that Lebanon “has been assailed by the most devastating, multipronged crisis in its modern history.” Years of economic crises and the recent Hezbollah-Israel war have left Lebanon desperately seeking money for both investment and reconstruction.
Lebanon's severe economic crisis began in 2019, with the collapse being blamed on questionable banking practices, decades of corruption and political instability, and severe economic mismanagement. In 2019, banks stopped paying out deposits, and in March 2020, the Lebanese government defaulted on its debts; since then, the Lebanese currency has lost more than 98% of its value. The recent war with Israel only intensified the economic challenges, leaving Lebanon to deal with the challenges of seeking international aid for the country’s reconstruction. Last November, the US brokered a ceasefire between Israel and Hezbollah following a 14-month war that left more than 4,000 people dead, with the World Bank estimating that reconstruction will cost $11 billion. Israel, however, continues to violate the terms of the ceasefire, with frequent bombings of Beirut and 71 civilians being killed since the ceasefire was agreed upon, according to the United Nations.
The US Approach Under the Trump Administration
In early April, Deputy US Special Envoy to the Middle East, Morgan Ortagus, arrived in Lebanon to meet with President Aoun, Prime Minister Nawaf Salam, and Speaker of Parliament Nabih Berri. In her meetings, Ortagus stressed the US’s continued commitment to the LAF while reasserting its position that the LAF should maintain control over all Lebanese territory, specifically calling for the disarmament of Hezbollah. From a financial perspective, Ortagus praised the Lebanese government's reform plan, which includes initiatives such as lifting banking secrecy, creating a banking sector reform law, establishing a new system for appointments to state institutions, and pushing forward with administrative and institutional reform. In an interview with Sky News Arabia following her visit to Lebanon, Ortagus spoke of the “historic” opportunity to turn Lebanon around while also acknowledging the difficult situation the state is in, saying, “We cannot sugarcoat the dire economic condition the country is in; Lebanon is bankrupt,” and also stressing the importance of reaching a deal with the International Monetary Fund (IMF).
A unique aspect of the Trump administration is the role the Lebanese diaspora community is playing in US cooperation with the new Lebanese government. Lebanese American Tom Barrack Jr., one of Trump’s closest and most trusted friends, along with Lebanese-born Michael Issa and Bill Bazzi, were all named US ambassadors to Middle Eastern countries, while Trump’s son-in-law’s Lebanese father, Massad Boulus, was appointed as senior advisor for Arab and Middle Eastern affairs; all have been vital in drawing the Trump administration’s attention to Lebanon. In mid-April, the American Task Force on Lebanon met with the new Lebanese administration to discuss cooperation between the US and the LAF, economic reforms, including the steps needed to secure an IMF package, and Gulf state aid and cooperation in reconstruction. A spokesman for Lebanese American congressman Darrell Issa said, “For the first time in many years, Lebanon is a land of possibility: A new president is in office, and Hezbollah is diminished. The Lebanese Armed Forces is an essential bulwark if this situation on the ground is maintained and improved.”
Deputy US Special Envoy to the Middle East, Morgan Ortagus (Left), and Lebanon’s President Aoun (Right). Source: https://www.newarab.com/news/lebanon-ortagus-thanks-israel-defeating-hezbollah
Dimensional Analysis
Political Dimension: During US diplomatic talks with Lebanon’s new government, UN Security Resolution 1701 is frequently referenced. This resolution, negotiated to end the 2006 Hezbollah-Israel war, requires that only LAF and United Nations Interim Forces in Lebanon (UNIFIL) remain south of the Litani River. The US supports the resolution, seeing it as crucial for regional stability, Lebanese sovereignty, and supporting the LAF. Recently, with Hezbollah’s cooperation, the LAF has taken control of around 190 of the 265 Hezbollah military positions in south Lebanon. Israeli forces have withdrawn from the south but still maintain control over five fortified positions that they deem strategic.
While Hezbollah’s weakened position is seen as a positive development among Lebanon’s Sunni and Christian populations, which account for around two-thirds of the country’s population, Hezbollah still holds broad support among Lebanon’s Shia communities, accounting for a third of the population. Years of managing social services, including schools, infrastructure, health care facilities, and youth programs, have garnered support for Hezbollah. Many Lebanese remain loyal to Hezbollah and consider the organisation essential for security. President Aoun has suggested incorporating Hezbollah fighters into the LAF, yet doing so remains challenging due to the close relationship between Hezbollah and Iran; there is also the fear that such a move would complicate relations with the US and the Gulf states.
Economic Dimension: On April 13, the Lebanese government approved a draft law to reform and restructure its banking sector. The banking reform law, which includes 39 clauses, focuses on protecting small depositors, increasing transparency by amending banking secrecy laws, and limiting the use of public funds in the bank restructuring process. This draft law aligns with the reform conditions set by the IMF, while a new bill is currently being drafted to address Lebanon’s fiscal deficit. International support, including from the IMF and UN, highlights the importance of these reforms amid Lebanon’s economic collapse, currency devaluation, and widespread poverty. Lebanese officials are currently meeting with IMF officials in Washington to discuss support for addressing economic and humanitarian challenges, focusing on reviewing financing strategies, emphasising the importance of coordinated international efforts, and strengthening partnerships between donors and financial institutions.
Key Players and Stakeholders
The US: Over the past two decades, US security assistance totalling over $3 billion has been provided to the LAF, to guarantee Lebanon’s sovereignty and to establish a counterbalance to Hezbollah, thereby reinforcing regional stability and US influence in the Levant. With Hezbollah's weakening and a new Lebanese government friendly to the US, the US is cautiously optimistic about Lebanon's future. However, the US has warned that Lebanon’s economic reforms—specifically the enactment of banking transparency and restructuring laws—and the diminution of Hezbollah’s influence are prerequisites for securing international investment, particularly from Gulf states.
Lebanon: In January, Joseph Aoun was elected president of Lebanon, after a two-year presidential vacuum, securing 99 out of 128 votes from Parliament. Aoun was widely considered the preferred pick by the US and Saudi Arabia, with the US actively working to secure the votes needed for his election. Aoun has inherited a country facing deep economic and political challenges, with weakened state institutions and widespread corruption. Aoun faces the challenges of Hezbollah’s undermining of state sovereignty and continued Israeli aggression. However, changing regional conditions offer a chance to restore sovereignty, rebuild institutions, and strengthen relations with allies to support economic recovery.
Israel: With little diplomatic or military pressure, Israel has continuously breached the ceasefire agreement, justifying these attacks on Hezbollah as vital for national defence. Israel has been leveraging Lebanon’s instability to consolidate regional hegemony, perceiving a weakened Lebanon as a strategic buffer state that enhances Israel’s strength and regional influence. The US is actively working to push for normalisation between Lebanon and Israel; however, this could only be achieved with the complete disarmament of Hezbollah, yet currently, there appears to be no appetite for talks with Israel from the new Lebanese government.
Hezbollah: Hezbollah has suffered significantly from its war with Israel and the loss of its ally Assad in Syria; much of its military arsenal has been destroyed, and its leaders have been killed. There is a growing consensus among Lebanese that the Lebanese state must now be the sole arbiter of arms. President Aoun has repeatedly stated that Hezbollah is cooperating with the LAF, and there are reports that Hezbollah is open to talks about disarmament if Israel were to withdraw from Lebanon. Hezbollah’s conditional openness to disarmament suggests a potential opening for diplomatic negotiations, contingent on Israeli withdrawal. Hezbollah still draws significant support from Lebanon’s Shia community; therefore, any disarmament must be done in agreement with Hezbollah. Hezbollah, which for decades has portrayed itself as the sole defender of Lebanon against Israel, will have to re-imagine a new vision for the party if it expects to remain a significant political entity.
Gulf States: A Saudi delegation headed by the kingdom’s envoy, Prince Yazid bin Farhan, along with US support, was instrumental in electing Joseph Aoun president. Now, after years of disengagement from Lebanon, the Gulf states are taking a renewed interest in the country. But, before committing to economic engagement, the Gulf states are waiting for serious administrative and legal reforms, a weakening of Hezbollah, and the upcoming 2026 Lebanese elections. However, Türkiye’s role in the Levant adds a complex layer to regional dynamics. Currently, Saudi Arabia is cooperating with Türkiye in post-Assad Syria, with their interests largely aligned. However, concerns persist that Türkiye’s pursuit of “neo-Ottoman” ambitions could pose challenges in the future. As a strategic counterbalance, Lebanon could serve to limit Turkish influence in Syria.
Israeli Defence Force operating near the Litani River. Source: https://www.longwarjournal.org/archives/2024/11/israel-moves-closer-to-a-ceasefire-in-lebanon.php
Opportunities and Risks
Opportunities:
US/Gulf investments: The US and Gulf states have a historic relationship with Lebanon and wish to see a sovereign and prosperous state. Lebanon cannot emerge from its six-year crisis without the help of the US and Gulf states; by making the proper financial and political reforms, Lebanon will show itself as a stable environment and be able to attract the foreign investment needed to rebuild the country.
Reconstruction of South Lebanon: Following the 2006 war with Israel, Hezbollah led the reconstruction effort; now, without their Syrian ally and in a weakened state, the Lebanese state has an opportunity to lead this effort. A state-led effort to rebuild the south would lead to greater international confidence, funding, and aid.
Disarmament of Hezbollah: A disarmament of Hezbollah would leave the LAF as the sole guarantor of security in Lebanon. It could also lead to a normalisation of relations with Israel. With the disarmament of Hezbollah, there could be a return to relations between Lebanon and the Gulf states, such as those experienced during the 1990s and 2000s, and a much wider engagement with the international community.
Risks:
Continued Israeli Aggression: A failure of Hezbollah to withdraw from south of the Litani River, according to the UN Security Council Resolution 1701, risks further Israeli aggression and their justification for attacks on southern Lebanon.
Conflict with Hezbollah: If Hezbollah is to be disarmed, it must be done with their full cooperation. Any use of force against Hezbollah could result in conflict and political chaos.
Failure to meet the IMF reforms: Failure to implement the IMF-recommended reforms signals Lebanon’s growing political instability and economic decline. Since 2019, the GDP has contracted by around 38%, and the Lebanese currency has lost over 98% of its value, fuelling hyperinflation and poverty. Between 2018 and 2021, 195,000 Lebanese emigrated due to the crisis. Continued failure risks Lebanon becoming a pariah state, stalling regional diplomacy, and reducing aid and investment prospects. It could also worsen regional instability and accelerate capital and human resource exodus, deepening the country’s decline. These trends are echoed in reports by the IMF, UNDP, and World Bank, warning of a dangerous cycle of economic and social collapse without urgent reforms.
Policy Recommendations
The new Lebanese administration must prioritize implementing the reforms outlined by the IMF to demonstrate its commitment to economic stabilization and governance improvements. Successfully adopting these reforms will help rebuild trust with the international community, which is crucial for unlocking financial support and investment. These reforms should include measures such as fiscal discipline, anti-corruption initiatives, banking sector reforms, and transparency in public finances. By meeting these conditions, Lebanon can create a more stable economic environment that encourages foreign aid and investment, paving the way for sustainable growth and development.
Any efforts toward reconstruction and stability in Lebanon are contingent upon a cessation of hostilities and the complete withdrawal of Israeli forces from Lebanese territory, including airspace. This action is essential to re-establishing security and sovereignty and fostering an atmosphere that is conducive to reconstruction efforts. Achieving this will require diplomatic pressure and negotiations led by the US and Western allies, leveraging their influence to push Israel toward withdrawal. This move not only strengthens Lebanon’s sovereignty but also reduces regional tensions, creating a more stable environment conducive to economic recovery, increased foreign investment, and long-term peace.
Conclusion
Lebanon now stands at a unique crossroads; it is at a moment when Gulf states are signalling a desire to reinvest in the country if Hezbollah is disarmed and major banking and economic reforms are implemented, and while, despite there being a restructuring of U.S. foreign policy, there remains a strong interest in Lebanon by the Trump administration, in part due to the strong Lebanese-American diaspora, with many prominent Lebanese-Americans being close to Trump. This week, Lebanese officials, including the new central bank governor, Karim Souaid, are meeting with IMF representatives in Washington in hopes of securing much-needed aid. If Lebanon is to rebuild after years of economic collapse and its recent war with Israel, it will need the help of the international community, specifically the US and the Gulf states. A window of opportunity is open to Lebanon if the country can make the right political and economic changes; the next few months will be crucial for implementing reforms that could determine its future stability, sovereignty, and regional alignment.