• Financial Challenges

The declining purchasing power of the local customer has created vast restrains on purchasing power. Lebanon ranked second, after Sudan, in the highest inflation rates globally in 2022.⁴ In addition, pricing difficulties are being experienced due to this hyperinflation, coupled with inventory imbalances, supply chain disruptions, and high shipping costs. In addition, the lack of bank credit lines is a major impediment, as getting “fresh dollars” is a main challenge for manufacturers, and the banks are giving no facilities. The same goes for the unclear and chaotic subsidies from the government that have created additional bottlenecks for manufacturers. Finally, there is a difficulty in drafting contracts stemming from the fact that contracts are legally enforced in the rapidly deteriorating LBP.

• Employment and Wages

Lebanese manufacturers are suffering acutely from labor shortages. The reasons are four-fold: (1) an unbalanced labor market, (2) a high emigration rate among the skilled labor force, (3) a shortage in the labor supply of people with the necessary skills, and (4) a lack of young professionals with an interest in technical and mechanical work. According to UNESCWA, a 27% loss in full-time employment was observed in the manufacturing sector between 2019 and 2020.⁵ Following the financial crisis, some manufacturers have tried to adjust to the new reality of wages, but this cannot be generalized. 

• Decaying Infrastructure  

Manufacturers are facing energy challenges with the failure of the main grid and the need to rely on private diesel generators and renewable energy, which have become very expensive. In 2021 and 2022, almost all governorates were experiencing interruptions that sometimes exceed 22 hours per day.⁶ While the integration of renewable energy sources is helping, factories still suffer from shortages in energy supply. Some large manufacturers reported operating under 40% capacity during the crisis due to energy issues. 

• Dysfunctional Government

Corrupt and dysfunctional are two characteristics of successive Lebanese governments, which have been the main drivers of the country’s decay. This challenges manufacturers in several ways: (1) delays in the processing of incoming raw material shipments and outbound exports (ministries are operating at less than 30% capacity), (2) challenges in maintenance and capacity expansion, (3) lack of local production protection laws, (4) outdated environmental policies, and (5) illegal smuggling. 

• Political Aspect

Regional political dynamics have severely impacted industrial growth in Lebanon. Affected by the Israeli-Lebanese conflict, the Syrian crisis since 2011, and the more recent crisis with the GCC countries, along with a lack of political support, the Lebanese manufacturing sector is not capable of adapting fast enough to cope with these regional export challenges. 

• Vulnerable Economic Model

Lebanese industry was neglected for 50 years, with little to no room for significant growth. The vulnerable economic model, led by political elites, marginalized productive sectors, focusing on tourism, banking, and other services. For example, 80% of Lebanon’s food needs are covered through imports.⁷

Opportunities Offered by the Crisis

The limited opportunities emerging from the crisis are threefold. The first is related to lower labor costs. One of the main production costs for Lebanese manufacturers is labor. Employee salaries are mostly being paid in LBP, with additional benefits, such as transportation fees, schooling, and medical support. Salaries are low relative to previous years. The second opportunity is evident in the increased local demand. Opportunities might also exist in sourcing some raw materials locally. Currency depreciation makes foreign products more expensive. Many households are paid in LBP, which is altering consumer preferences towards local alternatives. The third opportunity rests in higher export potential. With the lower cost, there might be more demand for Lebanese exports. Evidence can be derived by the Product Space Analysis conducted by USAID, which highlights opportunities in specific subsectors, such as vaccines, blood, antisera, toxins, and cultures production, washing and bottling machines, and textiles. 

Recommendations 

In the following, policy recommendations are offered that are deemed useful to manufacturers in the current crisis.

• Target Sectors

There is a need for manufacturing in Lebanon to focus on key sectors where profitability and export potential are plausible. This can be done by looking at the product space and attempting to incrementally increase the complexity of the products manufactured in Lebanon. For example, some studies suggest focusing on boosting electronics manufacturing,⁸ while others propose advancing production of medical lab supplies.⁹ Lebanese manufacturers should embrace the results of these studies and partner with research institutions to update and refine the findings in light of the ongoing crisis. 

• New Government Regulations 

Improved governmental regulations and policies are critical to manufacturing survival. For example: (1) Instituting a new tax and customs policy that gives manufacturers a competitive edge over imported products for a well-defined time period, until these manufacturers can compete on their own in the open global market; (2) Revisiting trade agreements to ensure the benefit of local manufacturers, while not being too restrictive on imports to keep local high-quality products competitive; (3) Adopting a more genuine approach to control illegal smuggling through both border control and subsidy policy; (4) Creating incentives for operating in industrial zones by way of improved infrastructure and low property and municipal taxes. 

• Energy, Infrastructure, and Finance Solutions

Energy is a key challenge, and with many plants located in the Greater Beirut area, the potential of benefiting from renewable energy becomes challenging (for example, due to limited space available for solar panels). Adopting micro-grid solutions to connect to other organizations, and even residential units, can be beneficial. The government can contribute to easing-up the electricity crisis by “opening up the grid” where it takes on the role of managing the grid, while it allows private businesses to generate and sell electricity to the grid. 

Regarding the high cost of fuel, a possible remedy could be in ride sharing (busses and carpooling) and technology-enabled ones (apps for ride sharing among employees of one or more companies). To reduce the need for extensive capital financing, manufacturers can share major resources—a solution which has been adopted in other countries. Sharing can also provide procurement financing solutions. For example, several manufacturers can form a cluster for procurement of raw material, which would facilitate obtaining credit lines and quantity discounts.

• Embracing Emerging Trends 

The crisis in Lebanon should not prevent manufacturing companies from adopting modern trends that can add efficiency and reduce costs, especially in pain areas such as energy and transportation. Automation, sensory technologies (relying on electronic sensors to collect data), and data science can all help in this vain. Moreover, the efficiency of operations inside manufacturing plants continues to improve globally, and Lebanese manufacturers can avail themselves of this.  For example, productivity, defined as the ratio of output goods over input resources, has been improving by 2.5% per year in the US. More than 52% of this improvement comes from advances in operations management. Collaborating with researchers in local universities with expertise in these emerging trends could prove to be beneficial for Lebanese manufacturers.

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