Since 2019, Lebanon has experienced cumulative economic and institutional breakdown, leaving the state hollowed out, public trust shattered, and large segments of society pushed toward despair and emigration. This breakdown has been accompanied by an erosion of state sovereignty, as Hezbollah’s military dominance and influence within state institutions have shaped national decision-making, constrained government authority, and enabled the consolidation of parallel security, financial, and social structures operating beyond state control. The country now stands at one of its most consequential crossroads since the end of the civil war in 1990. Multiple dynamics are converging to create a narrow but genuine opportunity for Lebanon to reclaim its sovereignty and begin the long journey toward stabilization.
Much depends on the will of Lebanese actors to lead a stabilization trajectory. A central concern is the disarmament and demobilization of Hezbollah, now significantly weakened by Israeli attacks. Economic reforms are also critical to revive an economy that is dominated by cash, informal markets, and illicit networks. Lebanon cannot recover economically without restoring state authority, and it cannot consolidate sovereignty without rebuilding the economic and institutional foundations of governance.
While Lebanese officials continue to reassure international partners of their commitment to reassert state authority and to implement long-delayed economic reforms—including by indicating that the government may soon announce completion of Hezbollah’s disarmament south of the Litani—their assurances have yet to translate into verifiable outcomes. International donors are demanding tangible implementation and transparency to distinguish between political signaling and actual execution. Additional pressure comes from the looming December 31, 2025, deadline for Phase One of Hezbollah’s disarmament in South Lebanon. Israeli officials have repeatedly said that Hezbollah’s relative restraint since the November 2024 ceasefire will not offset its concerns about rearmament or about Lebanon’s failure to meet these security benchmarks. Without credible progress by year’s end, and in the absence of an outlook for full disarmament beyond the first out of the five stages, Israel will expand airstrikes on any continued Hezbollah presence in the south or in response to any sign of rearmament or transfer of weapons northward—a scenario that would destabilize Lebanon. The weeks ahead are critical for the country.
The Shifting Landscape of Disarmament
For decades, discussions of Hezbollah’s weapons remained largely theoretical, constrained by regional instability, Lebanese internal political divisions, and the lack of enforceable mechanisms for demobilization. This context changed after the 2024 Israel-Hezbollah war and the November 2024 ceasefire, which re-centered implementation of United Nations Security Council Resolution 1701 (2006)—particularly its requirement that any armed presence south of the Litani River be limited to the Lebanese Armed Forces (LAF)—and generated external pressure for measurable steps toward this goal. In the war’s aftermath, Israel continued air and drone attacks to thwart Hezbollah’s rearmament and occupied at least five hilltops along the border, signaling its willingness to act unilaterally to prevent a return to the pre-war security situation.
In parallel, Washington shifted from calling for broad implementation of Resolution 1701 to calling for a phased, time-bound proposal aimed at achieving a Lebanese state monopoly on arms. The Lebanese government responded by formally tasking the LAF with developing a plan to achieve that monopoly by the end of the year, and welcomed the LAF’s phased roadmap for state control of all weapons. These moves signaled a more explicit state position than in the past, even as implementation remains contested.
Lebanese authorities have pointed to signs of progress such as expanded LAF deployments and curbs on smuggling.
Lebanese authorities have pointed to signs of progress such as expanded LAF deployments, the detonation of arms caches, and curbs on smuggling. But progress has been uneven and slower than expected, reflecting both domestic constraints and the reciprocal nature of the post-ceasefire framework. Implementation has been delayed repeatedly, with familiar justifications offered: the need to preserve internal stability and to avoid sectarian confrontation, the LAF’s limited resources and capacity to move faster, and the argument that progress must be sequenced with Israeli withdrawal and reconstruction assistance. While some of these constraints are real, the result has been a widening gap between commitments and outcomes at a moment when timelines are tightening and the costs of delay are rising for all parties.
This gap has been revealed by questions asked by regional and international partners. Where exactly does Lebanon stand on Phase One? Which commitments have been fulfilled, and which remain outstanding? Critically, how will the state consolidate its authority in the South while preventing the displacement of armed activity to other parts of the country and how will it advance progress on the remaining phases once initial security arrangements are in place? These questions reflect a growing regional consensus that ambiguity now carries unacceptable risks and must be avoided. At the same time, interlocutors emphasize that the framework is inherently reciprocal: Lebanese steps toward disarmament and expanded state authority are expected to advance in parallel with credible Israeli withdrawal and restraint.
Intensifying pressure on Beirut therefore unfolds within a two-sided dynamic. Arab governments have warned that a renewed war in Lebanon could destabilize neighboring states and exacerbate already fragile domestic balances of power across the Levant. They are urging the Lebanese government to accelerate implementation where it can, underlining a warning that Lebanon will not receive funds unless Hezbollah disarms, while condemning Israeli strikes and stressing that failure by Israel to withdraw undermines political space for progress on the Lebanese side. In this context, therefore, Arab states are urging the Lebanese government to accelerate the process if it wants to prevent Israel from imposing its own potentially devastating timeline. The December 18, 2025, talks in Paris between the LAF commander and French, Saudi, and US officials took place in the context of reviewing the army’s progress in consolidating arms under state authority and identifying the resources and support needed to complete this task nationwide.
Financial Demobilization
Hezbollah is sustained not just by weaponry but, as is the case for many individuals and organizations in Lebanon, also by a financial ecosystem operating outside the formal economy. For this reason, disarmament must also be understood as a process of financial demobilization. After the collapse of its banking sector in 2019, Lebanon’s shift into an overwhelmingly cash-based economy created fertile ground for unregulated flows, smuggling, money laundering, and Hezbollah’s financing. Thus, reducing the size and opacity of the cash economy must become a national security priority.
Lebanon has strengthened its anti-money laundering and counter–terrorism financing regulations, increased reporting requirements for cash transactions and enhanced cooperation between the Banque du Liban (the country’s central bank) and the state’s Special Investigation Commission. Tighter oversight of currency exchange and transfer companies has yielded limited but meaningful gains in traceability. The state has also attempted to sever formal financial channels linked to unlicensed or sanctioned entities, including to Hezbollah’s “black bank,” al-Qard al-Hasan.
These efforts are occurring under heightened international scrutiny following Lebanon’s October 2024 placement on the international Financial Action Task Force (FATF) grey list, which prompted authorities to improve coordination and supervision of cash flows and unlicensed financial activity. The new central bank governor stated that combating money laundering and terrorist financing is a priority for Banque du Liban in its efforts to restore confidence in the financial system. This includes enhanced scrutiny of individuals who exert outsized influence over cash flows and financial networks, in line with FATF risk-based supervision standards.
These measures regulate aspects of the formal sector without having a meaningful effect on unregulated networks such as porous border crossings, smuggling routes, informal exchange houses and cash-based networks, under-supervised ports, and trade-based money-laundering schemes that have expanded since the collapse of the formal economy. This is where the bulk of illicit financial activity occurs, including that conducted by Hezbollah. Key leakage points include land-border corridors with Syria, which facilitate smuggling of commodities like fuel and other subsidized goods, with US sanctions justifications linking fuel smuggling from Lebanon to Syria to Hezbollah-linked financing networks. At the same time, ports and customs nodes remain vulnerable to under-invoicing, misdeclaration, customs evasion, and bribery.
Economic Reform as Foundation for Sovereignty
Lebanon’s pre-collapse economy was deemed one of the world’s greatest Ponzi schemes. Its collapse was not caused simply by a currency crisis, but by a crisis of governance and accountability. The ruling establishment ran persistent fiscal and current-account deficits, financed largely by borrowing and attracting dollar inflows, while the central bank and banks relied on ever-higher interest rates and complex operations to keep the dollar peg stable. This system effectively recycled new dollar inflows to cover old obligations to the state, the central bank, and depositors. By 2019, inflows had slowed down due to political instability and regional shocks, leading the model to crack. Banks could no longer meet depositor withdrawals, informal capital controls spread, and the currency peg broke down. In March 2020, the state then defaulted on external debt, including coupons on its Eurobonds, marking the first sovereign default in the country’s history and signaling the depth of its fiscal crisis. The banking system became insolvent, and ordinary people’s deposits were effectively trapped and devalued as the pound collapsed and inflation surged. Since 2019, Lebanon has operated in a stalemate phase, during which banks have imposed de facto capital controls and limited withdrawals, while International Monetary Fund (IMF)-mandated reforms have remained partial and contested.
The passage of the 2025 Banking Resolution Law, which sets a framework for bank insolvencies but defers the critical issue of loss allocation to the pending Gap Law, was widely viewed as a necessary step toward a restructuring framework. But it defers the core political question of loss allocation to the financial gap (or Gap Law), the draft legislation for which specifies how the estimated $50–70 billion financial shortfall in the central bank and commercial banks will be distributed between the state, the central bank, commercial banks, and depositors. At present, this legislation is the subject of intense debate. How losses are distributed, how surviving banks are restructured, how depositors’ rights are protected, and how regulatory bodies enforce compliance will determine whether Lebanon can restore economic activity and regain domestic and international confidence.
Without reviving the financial system, no domestic or foreign investor is likely to commit capital.
International partners increasingly argue that the time for drafting plans has passed and that Lebanon must move decisively toward adopting the IMF program requested in May 2020 that provides an operational roadmap for fiscal choices, banking-sector restructuring, and structural reforms. Without reviving the financial system, no domestic or foreign investor is likely to commit capital, and without a functioning formal economy, Lebanon risks sinking deeper into informality.
In the past, state-led reconstruction in South Lebanon has largely been channeled through the Council of the South, an institution long associated with Parliament Speaker Nabih Berri and accused of corruption. Although recently the Council, which has historically lacked oversight and transparency, was controversially allocated approximately $67 million from the state budget, its problematic track record has reinforced donor concerns about politicization and accountability. Reconstruction planning must be anchored in state institutions but also safeguarded by robust, internationally accepted oversight mechanisms designed to mitigate mismanagement and corruption.
Reconstruction and service delivery in South Lebanon carry profound political significance, in light of the fact that popular support for Hezbollah rests in part on its ability to provide social services, financial assistance, and a sense of protection and dignity to historically marginalized Shia communities. With Hezbollah’s social and military role under pressure, some Shia communities may feel abandoned. The Lebanese state therefore needs to demonstrate that public institutions can deliver security, livelihoods, and social support that includes Shia communities. Winning public trust, particularly from this community, will be as critical as dismantling parallel military structures in determining whether sovereignty can be restored in Lebanon.
A Narrow Window
Lebanon’s future will be determined by its leadership’s ability to take decisive action to prevent another war. Today, Hezbollah’s disarmament is within reach for the first time ever. Reconstruction will be as much about restoring a functioning state-society compact as about rebuilding infrastructure.
Foreign partners have signaled their willingness to support a Lebanese-led stabilization process and to invest in state institutions—if the government can push forward with reforms and gain a monopoly over arms. This opportunity is tightly bound to events on the ground, beginning with completion of Phase One of the disarmament roadmap, which has become the test of whether Lebanon can translate commitments into action. Failure will risk ceding the initiative to Israel, which has made clear that it will not tolerate an open-ended security vacuum along its northern border and is prepared to act unilaterally if benchmarks are not met—even if this risks destabilizing Lebanon.
The Lebanese government should decisively consolidate state authority by empowering the LAF, by constraining illicit financial networks, and by advancing economic reforms to revive the formal economy. Doing so will create the conditions for stabilization and recovery while averting war. Alternatively, it can allow delay and fragmentation to persist, inviting outcomes imposed by actors whose priorities may not align with Lebanon’s interest in sovereignty, institutional recovery, and social cohesion. For the first time in years, the costs of inaction are evident. The consequences may be irreversible. Whether Lebanon can seize this moment will determine the viability of the Lebanese state itself for years to come.
The views expressed in this publication are the author’s own and do not necessarily reflect the position of Arab Center Washington DC, its staff, or its Board of Directors.
Featured image credit: Shutterstock/Ali Chehade Farhat