No Surprises, Useful Guidance from Global Ratings Organizations

When we were in Lebanon this summer, discussions about the economy included likely scenarios of Lebanon being downgraded by the world’s financial rating organizations. This was and is of concern because their ratings have an impact on how investors perceive the risk worthiness of countries and institutions, as well as companies and organizations that are the subject of their evaluations. Being downgraded affects the entities capacity to manage borrowing to maintain its credit and fiscal worthiness. Lebanon’s political leaders mentioned the upcoming ratings in remarks these past two months.

The end of summer brought with it the much anticipated ratings that provide a measure of the various indicators of Lebanon’s fiscal and monetary health. Standard & Poor’s Global Ratings, according to the Byblos Bank Economic Research and Analysis Department, was not the devastating drop that many had expected, but it was not good news nevertheless. The report noted that “Challenges to public finances persist and include vested political interests, weak economic growth, and public opposition to austerity measures,” which will be a significant factor in the drafting of the 2020 budget due this fall.

While S&P gave Lebanon’s long- and short-term foreign- and local-currency sovereign credit ratings a B-/B, it maintained a ‘negative’ long-term rating. It gave the Bank of Lebanon (BdL) significant credit for garnering sufficient foreign reserves to cover the government’s debt servicing in the near term. It also noted that the ratings take into account the country’s wide fiscal and external deficits, elevated public debt level, political divisions, and regional security risks.

In an example of the outsized nature of public sector expenditures, the Ministry of Finance noted that the compensation of public-sector personnel equaled 65.4% of the total fiscal receipts in the 1Q2019 and absorbed 47.5% of overall fiscal spending in the 1Q2019 compared to 35% in the same period in 2018.

Lebanon’s liquidity begins with the BdL’s ability to attract deposits from non-residents, meaning the amount of money that will be deposited into the banking system by overseas Lebanese and others attracted by the high interest rates being offered. These dollars are then deposited with the BdL by the banks that earn very high rates (8-15%) from the BdL to hold the dollars. This enables Lebanon to finance its debt within the banking system rather than expand public debt held externally (by overseas banks and institutions). Considering that there was a deposit outflow of about $2.5 billion in the 1H2019, this is a risky strategy but one that BdL has managed well.

The report said that “It anticipated non-resident depositors and foreign investors to remain cautious of Lebanon unless the government is able to resolve the political divergences and implement structural reforms to narrow the fiscal deficit and improve economic activity.” Among positive signs, it pointed to the approval of the 2019 budget, a plan for reforming the electricity sector, and plans to draft the 2020 budget on schedule. The caveat, of course, is that “Lebanon’s fragile political landscape will continue to hamper policy-making in the country.”

The likelihood of improving its ratings depends on “If the Lebanese government takes credible steps to implement its fiscal consolidation and electricity sector reform plans, which would strengthen foreign investor confidence.”

Fitch Ratings looked at the same data and downgraded Lebanon’s long- and short-term foreign and currency default ratings, indicating a declining level of confidence in the country’s capacity to support its bonds, both those guaranteed by the BdL and those that are unsecured. “It added that the downgrade reflects pressures on banking sector deposits and BdL’s foreign currency reserves, given the government’s reliance on the BdL to finance its domestic debt and repay Eurobond maturities.” As with S&P, it credited BdL with managing the country’s debt by holding a large part of the country’s public debt and building deposits from non-resident Lebanese.

“It noted that the increase in private sector deposits [key to providing the foreign reserves], has slowed down due to domestic political instability, government ineffectiveness, low economic growth, as well as to geopolitical risks,” and “It added that improving public debt dynamics, through fiscal tightening or stronger economic growth,” as well as environmental, social, and governance indicators such as the control of corruption, institutional and regulator quality, and the rule of law, constitute key drivers of Lebanon’s sovereignly ratings,” which reflect the credibility of its ability to borrow.

Whether or not Lebanon will improve its ratings in the coming months will require more than simply acquiring more foreign deposits. It will require passing a credible budget, adherence to promises it has made regarding reforms to entities such as the electricity sector, implementation of a rigid and transparent process for cutting expenditures and raising revenues, and embarking on the CEDRE programs and the National Industrial Policy to put Lebanon on track to fiscal restraint, economic growth, and an inclusive and sustainable economic strategy serving the people of Lebanon.

Will the 2019 Budget Make a Difference in the Daily Lives of Lebanese?

Since the budget has not been in effect for a fiscal quarter yet, there is little data available to show that it will bring about the changes needed to meet Lebanon’s commitments under the CEDRE program and, more importantly, bring about visible changes to the quality of life and economic standard of living for the Lebanese people.

There have been concerns that upcoming credit ratings from global agencies will downgrade Lebanon’s bond rating, but according to the most recent report, it will remain at one step about junk status. Al-Joumhouria newspaper said the reports are based on “high-level contacts between Lebanon, the US, a host of other countries, the agency itself [Standard & Poor’s], and similar international agencies.”

With the 2020 draft budget a priority discussion in the cabinet, now that it has reconvened, there are concerns that actions which meet reform requirements and address the immediate needs of citizens, let alone the million plus refugees, will be hard to come by as the “low-hanging fruit” such as minimally invasive tax increases have already been picked over.

A recent article from the Xinhua news service presented a summary of the challenges ahead. It surveyed Lebanese economists and found that they “attribute the high cost of living in Lebanon to poor infrastructure and the lack of proper public services.”

“There are no proper basic public services in Lebanon. The state of infrastructure is a major burden on the economy and it constitutes a major cost for households and businesses,” Nassib Ghobril, head of the economic research and analysis department at Byblos Bank, told Xinhua. He noted that the Lebanese, and especially those without access to alternatives, “have to pay double bills for some of the government’s services including electricity and water, in addition to high fees for telecom services.” Given the outsized role that electricity plays in the government deficit, consuming subsidies while barely addressing the needs of its customers, it has become the #1 priority for reform. Unfortunately, while some steps have been mandated, as currently proposed, upgrading the sector will not proceed in transparent and regulated steps that do not privilege power brokers rather than rapidly advancing efficient, equitable services as soon as possible.

Ghobril noted that the lack of a reliable power sector and limited access to water is like a form of taxation that only benefits those who provide alternatives to government services. In a similar fashion, government control over the telecoms sector also results in customers paying more for less, which holds back Lebanon’s development and attractiveness to business investors.

“When a sector is managed and regulated by the same entity, which is the state in this case, the result will translate into poor services and a big burden on the economy instead of being a factor of competitiveness for the economy,” he said.

Layal Mansour, an LAU economist points out that the lack of a public transportation system forces people to buy cars, an added burden on consumers. Unlike some countries in Europe, Lebanon also does not have free health and education services, which can be quite costly as parents seek out private education and health alternatives. Mansour also pointed out the trap that investors in food service industries face when they have to have operating profit margins in excess of what they can make just parking their monies in the banks, thus driving up the costs of restaurants.

The most recent report from the Byblos Bank Economic Research and Analysis Department noted that real estate demand was down 17% in the second quarter as potential buyers are waiting for clarity on government subsidies for mortgages as well as other changes to spur investments. The decrease was felt across all income brackets. In overall infrastructure ratings, Lebanon ranks behind the GCC, Algeria, Morocco, Tunisia, and Jordan in terms of general infrastructure, information and telecommunications technologies, and ecological sustainability.

The report also looked at the most recent report by the Bank of Lebanon Governor Riad Salamé, who predicts a 0% growth rate without additional fiscal and structural reforms. He said that the size of the public sector has increased beyond the economy’s capacity to sustain its growth. In the first half of 2019, the trade deficit is up by 5.8% on rising imports. The US is still the #1 source of imports with a 9.1% share followed by China 8.6% and Russia at 7%.

While Lebanon may gain a respite until the end of the year for stabilizing government costs and raising revenues, it is still far from the remedial and progressive reforms needed to have a firm basis for growth and raising the quality of life.

If we share our roads better, could we then learn to share the country better?

An-Nahar News: Another month long visit to Lebanon by an expatriate was just concluded, and that urge is here again just like last year to write, draw or sculpt an impression.

Lebanon remains mired in its existential and its societal problems, both broad based issues seemingly unsolvable since 1975. All parties seem to play the existential issues (Qadaya massiriyyi) wrong because there’s only one way of dealing with them and that is authentic internal unity.

Still one can be pleasantly surprised and grateful that we are at a great advantage compared to our Arab neighbors and beyond. We have more political vibrancy and the terrible discord is in and by itself a sign of a livelier society than most of our neighbors.

And we have more peaceful coexistence on a community level than most other countries. But what is it about the societal issues (Qadaya hayetiyyi) that they keep looking so bleak, and do they really have to stay as such, basically without improvement over three decades since the war ended?

Electricity and internet are neither pleasant enough nor business friendly for investors. The garbage and pollution troubles keep demoralizing everyone. Simpler things like the roads having no car lanes seem inexplicable leaving driver citizens simulating dangerously an Indy racetrack. The sidewalks have the same stains and potholes as 44 years ago.

The stairs to public buildings have not been washed or touched in 44 long years. The gap between civic space dilapidation and personal home glitz is the widest in the world especially when you watch interviews with politicians from their homes.

Some paradoxes can be even more tantalizing: the bathrooms in high end restaurants are ultra modern with decor and glisten; but the bathrooms in most if not all ministries and public and governmental buildings smell viciously where you also cannot find toilet paper or a bar of soap. Most hotels and bed-and-breakfasts push down their sink and shower stoppers so the rooms don’t smell.

That assault on the olfactory grooves of visitors is only matched by the noise pollution and then the retinal pollution of smog and garbage mounds. Even the fourth and fifth integumentary and gustatory senses are challenged: witness the mixed feelings of pleasure and fear delving into a fattoush plate. Year after year the usual immune defense response to the above goes through the left ventricle and on to the soul, blocking all assaults on the senses in a deep rooted seizure of nostalgia and a faintly undying hope in the future.

When you experience all above and you’re at war you hope for postwar construction and renaissance. And when you’re relatively younger you can return to your sanctuary city in the West or the Gulf and hope for a better day next year and keep planning some sort of return. But when you are not at war for 30 years and nothing is improved year after year, and especially when you are at almost 70 years of age and contemplating retirement, you may just stop believing in your dreams!

Well of course I am not pessimistic to the point of not considering returning to visit or even invest. The glorious sun rays and the breeze that run by the tall leafy green trees of the towns of the Bekaa and the Chouf, the South and the Qadisha Valley villages … those rays and that breeze are usually on their way to caress your face; they even sneak to the balconic views from the high rises of the Beirut waterfront; letting you feel the weight of history and the good times, then comes the overjoy of immersing oneself in the vibrant night life; with the day usually capped by the tight loving hugs of cousins and old time friends.

That is all just too precious to walk away from; and equivalent to the rarest of rare stones that people can spend a whole decade or even a lifetime actively pursuing. We have all that accessible to us on only an 18 hour plane ride from New York, a 5 hour ride from Europe and less from the Gulf.

So the questions of what to do, can we contribute, can we retire? are questions that keep popping up during, and long after, every visit to the motherland. Last year on these pages I floated the idea of a two tier government: one government that deals with the big existential issues tied covalently to relations with neighboring regional powers, defunct ideologies, and permanent religious warfares; and a second government that deals with societal issues. Some responders thought it was a good idea but the majority retorted that the political establishment will not allow the second tier government to exist for obvious turf, control and financial reasons.

But we have spent 30 years without war yet without reconstruction; we bring excellent ministers but place them under the spell of self serving not national serving political leaders and repeatedly little or nothing is achieved. I often wondered how many hours a week on average does a minister spend in his office at the ministry working on the issues pertaining to the average citizen, not otherwise tending to the broader politics of keeping their seat and analyzing regional and international politics which in Lebanese/Arabic slang is equivalent to “eating air”.

The narrative that development, investment and reconstruction in general cannot precede but must follow fundamental political progress does not apply any more in Lebanon. We have reached the point where absent accountability there will be no more development. And absent development we are running the risk that there is no more a viable nation where any meaningful politics can be played.

Accountability of a government is the basic role of parliament but that has proven to be also almost impossible especially after governments have become cheese shop mini parliaments. Perhaps our civic society and our expatriates can cooperate on forming a National Accountability Board that could be made public and could generate great interest and become a pressure group. There’s been also talk of revolutions but I am now convinced that sectarianism has been able to destroy revolutionary spirits.

We just must start making some progress on societal issues. Any success there could re-ignite pride and inspire more similar projects and thus more hope. People’s hope and morale may make or break this country, small as it is in its size yet being acknowledged as a very large country in its message and its potential as a beacon of tolerance and prosperity in this miserable Middle East.

An easier goal to achieve and that may be huge on an inspirational level is changing the pervasive poor communication skills among Lebanese politicians but also among average citizens. Nowhere is this more apparent and repulsive than in our driving habits.

For expatriates it has become a cliche question: do you drive in Lebanon??? For the resident population nothing shows our inability to respect each others’ spaces, rights, and safety more than observing how we share the road. It is a microcosm of how we don’t know how to “accept the other”, even of the same sect.

Put differently we ought to move from “accepting or quboul the other” to “embracing the other or al iqbal ala el akhar”. I am literally paraphrasing great advice from a cousin, a one time successful but now frustrated industrialist. So in driving we desperately need well drawn traffic lanes with nice white and yellow lines that stop drivers from swerving incessantly increasing the risks of accidents and the stress of driving; and help remove that feeling on the roads that we are all in a race to get there first; again demonstrating the huge divide between absent civic sense and that yet most developed generosity and warmth on a personal level. We double and triple park to pick up a man’oucheh or a medication (even when a hundred meters down there is a manageable parking spot). We take off into the fast traffic on a highway without even looking back on the incoming cars to negotiate and navigate a safe and respectful entry. We pour disrespectfully from right and from left onto a one lane line of cars conflagrating in front of an army checkpoint basically consecrating the me first race mentality. Compare this behavior with the same people standing at the door of a Lebanese house party and being exceedingly nice to each other inviting the next person to walk in first so respectfully and warmly.

Driving misconduct is a sign of the social and political dysfunction in the country, and improving driving conditions will send a powerful message to all, that correcting the way we share the road could inspire improvement in the way we share the country. I call on the ministry of public works to instill white and yellow demarcated lanes on all roads immediately. It must also name and number all buildings and houses so we can use GPS technology better. Having no addresses to any building is just unconscionable in this century. The government must also man the roads with enforcing police officers, trained to be gentle, explaining infractions, starting with warnings first… and creating jobs for young Lebanese men and women in the process.

The journey of a thousand miles starts with small steps that have now become existential in value. Some forward motion is bound to re-ignite pride and re-inspire hope and perhaps generate motion forward on other issues.

Dr. Jack Tohme is an endocrinologist in the New York area and is affiliated with Columbia University and the Valley Hospital in New Jersey. He left Lebanon in the 1980s after having studied medicine and practiced in Beirut at the American University of Beirut Faculty of Medicine. He has now been in practice in the U.S. for more than 33 years. Dr. Tohme is also a board member of the American Task Force For Lebanon.

Advancing Lebanon’s Energy Sector, Learning from the UAE

The Lebanese are exhausted from the lack of follow-through on government commitments to rebuild the country’s power sector. The mistrust continues to deepen as short term solutions, such as the off-shore generator platforms, have not appreciably improved the situation as blackouts still exist.

Nada Boustany, Lebanon’s Minister of Energy and Water, has launched a campaign to remove illegal links on the defective electricity grid across the Lebanese territory. Doing this should reduce theft and losses on the network and do more to distribute power equally. This campaign is delivering reliable results, but unfortunately, it is not enough. Furthermore, the cost of consumer power hadn’t changed since 1996 when, at that time, a barrel of oil was around $23. Now it costs around $70 per barrel.

Additionally, the central power plants cannot reach the peak demand of 3,400 Megawatts (MW). The average capacity for these plants is just over 2,000 MW. Due to the shortage of supply, it involves daily blackouts for three hours in Beirut, and elsewhere it can be much of the day. While Lebanon does use privately financed gas-fuel sources, there is the dilemma that there is no regulator that can resolve disputes between government and power producers.

Many people wonder why fixing this difficulty is such a hassle. The Lebanese civil war damaged the economy, which now is on the brink of a financial collapse. Any new plans that the government suggests will not succeed unless it attracts foreign investments. It is obvious that Lebanon can improve by advancing its energy sector and create electricity reforms. There are lessons to be learned from countries that utilize their energy sectors to boost their economies. The United Arab Emirates (UAE) is a perfect example. The UAE is ambitious when it comes to increasing renewable energy. It is moving away from oil and building a hub for clean energy technology.

The UAE funds renewable energy projects around the world and invests millions of dollars on research. They are sharing their research with other countries. Its strategy makes UAE a model for the renewable energy sector. In more than 25 countries, Masdar Abu Dhabi invested more than $2.7 billion in clean energy development. By doing this, it earns them a spot of being a regional leader and an international player in renewable energy and sustainable urban development.

The relation between UAE and Lebanon is calm. Lebanese Economy and Trade Minister Mansour Bteish encouraged the UAE to invest in different sectors in Lebanon. Bteish stated, “UAE’s investment in productive sectors will contribute to creating job opportunities in the country while increasing exports from Lebanon.” Thanks to many shared interests and the many contributions that Lebanese expatriates have made in the UAE, it is safe to say that they are “brotherly countries.” Might the Lebanese government approach the UAE to invest in Lebanon’s energy sector, mainly on solar photovoltaic (PV) and bioenergy?

A report written by the United Nations Development Program outlined the potential boom in Lebanon’s energy sector. It concentrates on PV, wind energy, and bioenergy.

PV is an established sector in Lebanon that includes several competitive private companies. The sector still has high potential growth. The government needs to upscale its power capacity and be ready to contribute towards the decentralization of the power supply. This investment can create 14,000-18,000 jobs.

Wind energy is a strange idea to Lebanon due to the unfamiliarity with the installations and operations of wind farms. Recently the government signed a power purchase agreement with two developers for the first installation of a wind farm that will produce 200+ MW in the northern mountain district of Akkar. Now, there is a bidding process to ensure that the added capacity is between 200 and 400MW. Through an optimistic lens, this can produce almost 3,000 jobs that in the service and construction sectors.

The Lebanese government has not focused in detail on the concept of bioenergy, which allows potential synergies with other sectors such as water treatment, agriculture, and waste management. There is currently a waste crisis where one of the landfills in Beirut is reaching its capacity of waste and is challenging nearby residents’ well-being. This has raised the government’s attention on biomass. By utilizing that landfill, the waste can be converted to energy and boost its sector. This report states that the quantity is low for creating jobs (around a few dozen), but in reality, it can be a strategic advantage due to multi-potential synergies with other sectors.

Can Lebanon move ahead aggressively with renewable energy options? Absolutely. It only requires an energy design similar to what is already happening in the UAE.

Lebanon Shows Weak Rankings in Terms of Readiness for Change, Human Capital Development, and Support

The recent weekly summary on the Lebanese economy published by the Byblos Bank Economic Research and Analysis Department carried a story on Lebanon’s ranking in the 2019 KPMG Change Readiness Index (CRI). The CRI measures how effectively a country’s government, private and public enterprises, as well as people and civil society anticipate, prepare for, manage, and respond to change and cultivate opportunities. It is based on 150 variables grouped into three equally-weighted baskets: Enterprise Capability, Government Capability, and People and Civil Society Capability.

It will be of little surprise that Lebanon scored best on the enterprise capability with a global rank of 71, and worst on the government capability with a score of 93. Lebanon has rather weak rankings relative to others, coming it at 77th among 140 countries and 7th in the Arab world, although this is an improvement of its 2017 ranking of 92nd worldwide and 14th among Arab countries.

According to the UNDP project director for fiscal reform in Lebanon, the country placed 86th out of 157 countries on the Human Capital Index (HCI) with a score of .54, meaning that its productivity in terms of human capital is just 54% of what it could be. His analysis, published in Executive Magazine, said that “Lebanon has failed to design and implement developmental policies for its own population.” Due to low-quality public education and limited years in school, the HCI estimates the effective school years for Lebanese students is just 6.8 years, compared to the regional average of 7.6 and the world average of 7.9. If comparing the country to developed countries, Lebanon shows an even greater learning gap of 3.7 years.

In this light, he calls for an “emergency plan” to understand the problem with the added burden of the Syrian refugee population that is overtaxing the educational system, the low quality of public versus private education, curricula needs, how to improve teacher quality, and the linkages between education, health, and an overall economic plan, “because society is not a sum of the parts—it is a whole to which success is as good as that of its weakest member.”

Another indicator related to the education performance of Lebanon, is the vitality of the emerging private sector – is it dynamic, stagnating, or incrementally growing? One measurement is the growth of small and medium-sized enterprises (SMEs), which are critical to creating jobs and expanding economic diversity, both in terms of output and the regions of the country.

Of concern here is the report of the Kafalat Corporation, a state-sponsored organization that provides financial guarantees for loans for the set-up and expansion of SMEs in industry, agriculture, tourism, high technology, crafts, and energy. In the first half of 2019, loans decreased some 85.1% from $28.8 million in 1H2018 to $4.3 million in 1H2019. There were 223 guarantees issued in 1H2018 while only 34 were made in 1H2019, down some 84%. Among the regions receiving the guarantees, Mount Lebanon stood at 50%, the Bekaa at 25%, Beirut with 11.1%, North and South with 5.6% each, and Nabatieh at 2.8%. These represented 36.1% to the industrial sector with tourism and agricultural projects at 27.8% each, specialized technologies at 5.6%, and handicrafts at 2.8%.

Russia continues its broad offensive to become a key force in the Levant. Its latest steps being a closer security relationship with Iran and the outcomes of the recent Astana process meeting. An article in Al-Monitor noted that “Russia and Iran are deepening their military ties in a joint challenge to perceived US hegemony in the Middle East.” A memorandum of understanding (MoU) between the Defense leadership on both sides envisions an expanded military relationship, which illustrates that despite other disagreements such as their respective roles in the reconstruction of Syria, that there is a great deal of common military and maritime interests, the latest featuring a joint naval exercise in the Straits of Hormuz.

As reported by a Turkish journalist, the latest session of the Astana process, held in Nur-Sultan, resolved some agenda items while others are still pending. The first item on the agenda was the composition of the constitutional committee, with Russia able to pressure Turkey to accept proposed changes to the membership. “In the final communique, Turkey, Russia, and Iran expressed satisfaction that work on establishing the committee and its procedural rules was nearing conclusion and pledged support to make sure it convenes in the shortest possible time.”

Turkey is representing opposition groups supported by Turkey, and the remaining issues are related to the functions and working principles for the committee. Disagreements include a time frame for drafting the new constitution, the specific time and frequency for committee meetings, and what the majority percentage should be for decision-making.

As the author concludes, “A constitution-drafting process excluding the self-rule administration [the Kurdish enclaves], which holds nearly a third of Syria’s territory, could hardly claim inclusiveness and produce a durable solution. What is more, it remains doubtful whether a committee that has taken so long to create could work with determination, consistency, and efficiency.”

Given Russia’s long-term interest in dominating the region, it is no surprise that leading Russian companies, already maneuvering for Syrian reconstruction projects, are being joined by midsized firms looking to cash in. The former head of Russia’s Trade and Economic Division at its embassy in Damascus wrote in Al-Monitor that there are good reasons for these companies to seek out Lebanese partners.

These include access in Lebanon to international service providers in consulting, auditing, financial insurance and banking services, “which minimizes risks related to anti-Syrian sanctions imposed by the United States and EU;” extensive holding of Syrian deposits in Lebanese banks anticipating reconstruction opportunities; access to international partners that prefer operating in Lebanon’s business environment; and the well-positioned and trained human resources available in Lebanon. In addition, cross-border business is a staple of commerce between the countries, and there are many successful joint ventures and family partnerships between the two.

If Russia continues its expansive influence campaign at the expense of Iran and Turkey, its companies will be well-positioned to command key roles in Syrian reconstruction while American firms will be standing outside waiting for the US government lights to turn on.

Does Lebanon Have an Economic Growth Strategy?

Lebanon has finally caught up with Israel in rankings; in this case it is negative, being tied for second place in the world for water stress, which occurs when the demand for water exceeds the available amount during a certain period or when poor quality restricts its use. The World Resources Institute report ranks Lebanon second after Qatar and tied with Israel at 4.82, which means that Lebanon withdraws an average of more than 80% of its water supply every year. Baalbeck-Hermel province ranks the worst for water stress, with a score of 4.93 out of 5, where five denotes the highest stress levels.

Of the worst 17 countries, 12 are in the MENA region. The report points out that the situation can be reversed if Lebanon rebuilds and revamps its infrastructure to “better store its water supply while increasing agricultural efficiency and recycling its wastewater.” It would seem that this is a more critical issue than who makes the best falafel or who invented hummus. Several water improvement projects are on the CEDRE list, some that have been in the planning stages for years.

Lebanon’s leaders believe that the country can create more jobs by investing in the country’s long-neglected productive sectors. As recently as last week, PM Hariri launched the “National Campaign to Support Lebanese Industry” organized by the Ministry of Industry in collaboration with the Association of Lebanese Industrialists entitled “with the national we support the nation.”

According to accounts of the launch, “The campaign included a fifty second promotional film highlighting the importance of national industry and the interaction of the Lebanese youth with it. The campaign will also organize educational dialogue programs and advertising campaigns on production and industry, in addition to specialized exhibitions in several Lebanese areas and support the participation of industrialists in foreign exhibitions.” It is a puzzle why this hasn’t been done nationally before as Lebanon is mired in an economic slump at an annual growth rate stuck at about 1% with little anticipated change unless significant reforms move forward.

In a case of well-intentioned overstatement, the PM noted “We have more than five thousand factories and we can increase this number and produce, manufacture, and secure our local needs and even export. But what is important is to invest according to our production potentials. Today, the industry’s share of the gross domestic product is close to $4.6 billion. Rest assured that we can double this number after five years and triple it after 15 years. We can also create more than 50,000 new jobs through this sector in the next five years.” While this is helpful, unfortunately, Lebanon needs to create more than that number of jobs annually to meet existing labor supply, and some jobs in factories and agricultural work are not attractive to Lebanese youth.

Lebanon will focus, according to Hariri, on where it has a competitive advantage to satisfy domestic consumption and then produce for export. These include food, pharmaceuticals, furniture, jewelry, fashion, handicrafts, light industries, and others outlined in the McKinsey report. Limiting this strategy are high production costs in Lebanon caused by opaque government regulations that inhibit transparent transactions, and shortages and inefficiencies in power and telecommunications, among other issues.

The plan has four steps: set up industrial zones under favorable conditions for Lebanese industrialists; encourage joint venture with foreign companies; work to open overseas markets for Lebanese exports; and upgrade the vocational and technical education sector to develop the skills needed in the industrial sectors. While this holds some promise and Lebanon has to start somewhere, the challenge is if it will be enough to kick start the manufacturing sector.

Hariri stressed that the overall economy would benefit from a growing productive sector, which would in parallel promote investment in agriculture, technology, and tourism, not to mention the interdependence with the financial and banking sectors. In his conclusion he said that the Lebanese cannot lose hope. “This is Lebanon’s democracy, though sometimes it becomes the enemy of itself, and sometimes we are enemies of ourselves in approaching things in the country. What is important is to look at the interests of the citizens and the youth who are fed up of politics and don’t want to hear our problems. They want job opportunities, medical care, electricity and infrastructure.”

This emphasis on growing the productive sector was the subject of a study by the Lebanese Center for Policy Studies (LCPS) that noted that “the manufacturing sector’s share of the GDP has shrunk from around 10% in 2005 to 6.2% in 2017, despite employing 25% of the labor force. More recently, the sector’s exports dropped from a high of $5 billion in 2012 to $3.9 billion in 2017.” The good news is that Lebanon’s exports are quite diverse, covering some “1,147 products, the majority of which were distributed across the following sectors (based on international classifications): 18% in precious metals, which includes gold and jewelry; 15% machinery, including computers, electric generators, and insulated wires; 14% in metals; 13% foodstuffs, such as processed fruits, raw sugar, chocolate, and other food items; 8.7% chemicals, including packaged medicines, phosphoric fertilizers, and perfumes; 8% paper and wood products; and 5% plastics and rubbers.

With such a broad arrange of products for exports, the study claimed “the country has the advanced productive capacity and know-how to manufacture a wide variety of complex products.” In 2018, Lebanon exported to 171 countries. LCPS concluded that “Providing support and public inputs such as infrastructure and proper regulation to existing manufacturing sectors with the aim of improving their productivity can lead to significant growth and advancement within the sector’s exports.”

Whether or not the country can focus on the steps needed to make this a successful and sustainable efforts is just another challenge on the road to a healthy economy. For an insightful and detailed review of what Lebanon can do to enhance its productive sectors, check out this link to a recent LCPS report.