Regional instability harms Lebanese exports

Industrial and agricultural sectors hope for improvements in 2017

Greg Demarque

The year 2016 was a difficult one for Lebanon’s manufacturing and agriculture sectors. Exports have been one of the clearest indicators of the challenges the sectors have faced and, in general, of Lebanon’s depressed economy – largely due to the war in neighboring Syria, a conflict that has cut Lebanon off from its larger trading markets.

However, a new government negotiating access to, or expansion of, existing trade deals could help local producers recoup lost market share in the coming year. The hope moving forward in 2017 is to reorient exports to new markets with new investments, spurring local capacity production and absorption of Lebanese products in country. On the latter, foreign assistance will partly look to boost production capacity and new job creation by supporting the establishment of several industrial zones.

Industry Minister Hussein Hajj Hassan said in early November that there was a contraction of the manufacturing sector’s contribution to GDP (gross domestic product), projected to decline from the World Bank estimate of 9.1 percent in 2015. The decline can be attributed to a slowdown in local manufacturing output and a fall in industrial exports – a downward trend perpetuated by the Syrian conflict. The depressed market, combined with the closure of land routes across Syria to Gulf markets such as Saudi Arabia and Iraq, has hurt Lebanese exports overall.

While the Syrian crisis has had its share of negative impact on the Lebanese economy, it has allowed for increased demand  for Lebanese products to compensate for the decrease of Syrian exports

Refined food products and raw produce exports have suffered in the same period. For refined food products 2014 was the peak year, with exports totalling close to $357 million to the top 10 importing countries, led by Saudi Arabia at $76.9 million. However, in 2015 the value of Lebanese exports to top importing countries fell some $20 million, and the trend points to continued decline in 2016.

As for exports of raw produce, its high came in 2013 when Lebanon shipped $177 million in fruits and vegetables to the top 10 countries (importing 82 percent of all Lebanese produce exports) – with Syria leading the way at almost $39 million. Two years later, those countries imported only $144 million worth of fruits and vegetables (77 percent of total produce exports), with Syria falling to number two on the list at $20.7 million, behind Saudi Arabia. While we don’t yet have data for all of 2016, the trend looks to have continued. By September 2016, Syria had imported only $12.9 million in Lebanese fruits and vegetables.

In an interview last year, Hajj Hassan attributed the decline of all Lebanese exports, and particularly those from the agriculture sector, to the slowdown of regional economies exacerbated by wars in Syria, Iraq and Yemen, and the closure of land routes to the Gulf.

To alleviate the burden on Lebanese farmers last year, the government agreed to subsidize produce exports by sea routes. The allocation of some $20 million to subsidize these exports from August 2015 to August 2016, the minister said at the time, may have helped limit losses to raw produce exports, which fell year-on-year by about $11 million compared to the same period the year before. Clearer data on the effect of covering the increased costs of exporting by sea is not available.

Maurice Saade, Lebanon’s country representative to the Food and Agriculture Organization of the United Nations, told Executive last December that the subsidies would at least soften losses to profit and allow produce exporters to maintain client relations (like supermarkets and food processors) in the Gulf countries. “If you don’t deliver, the client will move on to somebody else … [these subsidies] at least ensured that the Gulf and Iraqi markets were not lost,” Saade told Executive. As a whole, the agriculture sector’s contribution to Lebanon’s GDP fell nearly 2 percent in 2015 from the previous year and is likely to have declined further in 2016, but the calculation is not yet available.

The bright spot for both sectors, says Dany Gedeon, the director general of the ministry of industry, is improved internal consumption of local production. “Our internal market improved, increasing by about 25 percent. It decreased externally and increased internally, so we can say it’s a stable environment,” Gedeon told Executive in November. Gedeon didn’t explain how the ministry calculated the figure, nor did he offer an answer as to what might explain any such increase in domestic consumption of local production.

Higher domestic demand

The increase likely comes from the output of Lebanon’s agro-factories. Local food industrialists probably filled some of the void of food products from neighboring countries whose manufacturing and agricultural production were disrupted by conflict. In Lebanon there has also been an increase in consumption for Lebanese food products that can be attributed both to the sizeable Syrian population seeking refuge in Lebanon, and to the decline of that country’s output because of its civil war. “While the Syrian crisis has had its share of negative impact on the Lebanese economy, it has allowed for increased demand for Lebanese products to compensate for the decrease of Syrian exports,” according to a facts and figures sheet published in 2016 by the Investment and Development Authority of Lebanon (IDAL), the country’s national investment promotion agency.

Lebanese consumption patterns, particularly for food products, may also be changing as consumers’ purchasing power decreases because of the economic knock-on effects of the neighboring civil war. Local consumers have a penchant for more expensive imports of Western brands and products – a look at the year-on-year imports of food products shows a slight uptick this year over 2015, but one that is about $20 million less than in 2014. In the end, there is no clear explanation for the ministry’s claim of a 25 percent improvement of local consumption of industrial output.

It all hinges on  the outlook of a new Lebanese government and a hoped-for peaceful resolution to Syria’s civil war

“For sure,” Gideon affirms when asked whether there will be positive growth for the industrialists and the sector as a whole in 2017. Lebanese agro-food industrialists could be the source of positive growth for both the manufacturing and agriculture sectors. According to a 2016 IDAL presentation, agro-food is Lebanon’s largest industrial subsector, contributing some 20 percent of the sector’s value to GDP in 2013, as the latest data available shows. In 2013 the entire manufacturing sector contributed 8.6 percent to national GDP, or nearly $3.5 billion of an estimated $44.3 billion, according to figures from the World Bank. According to Blom Bank, overall agro-food output in 2014 was valued at $1.13 billion.

Last year, IDAL chairman Nabil Itani announced the agro-food subsector had witnessed some $70 million in investments, according to a report in The Daily Star. However, it is not exactly clear where all of the money was invested, but some $30 million did go into a new factory in the Bekaa Valley for Master Chips – a local manufacturer of potato chips. Through the first three quarters of 2016, IDAL reviewed project proposals worth nearly $260 million, 60 percent of which the body says qualifies for IDAL incentives (100 percent exemption from corporate income and project dividends tax for up to 10 years), creating almost 2,200 jobs when the investments are realized. While the investment body did not clarify exactly where the number of projects or investment dollars were directed, it did say that $12.4 million went toward an expansion of Algorithm Pharmaceutical’s facility in the Chouf, and that the industrial and agro-food sub-sectors were the largest beneficiaries of the investment activity.

The overall investment potential in the industrial sector, IDAL explains in its November 2016 newsletter, “may be partially due to the Syrian crisis. Many industrial companies in Syria have shut down their operations, resulting in Arab countries switching to high quality Lebanese products.”

Moving forward

Expanding the domestic market is the top objective of the ministry’s 2025 vision. While the document doesn’t spell out how it plans to enlarge the local market, it does list the creation of industrial zones and the support of small and medium-sized enterprises (SMEs) as priorities in order to do so. Both priorities have and will continue to receive foreign assistance.

In early November, Executive attended the announcement of the launch of three planned industrial zones, the feasibility studies of which should be completed early next year. Supported by the Italian government, the plan is to develop a competitive manufacturing sector to act as a stabilizer in underdeveloped parts of Lebanon, and to help the country to develop capacity and competitiveness in its infrastructure and industrial sectors to meet the demands of international markets, according to Cristiano Pasini, the United Nations Industrial Development Organization (UNIDO) representative in Lebanon, who spoke to Executive on the sidelines of the event.

The project calls for three industrial zones – two in the Bekaa Valley at Baalbek and Tourbol-Qusaya, and one at Deir el Moukhalles-Jleilye in the Chouf – affecting some 32,000 jobs (up to half of which will be new jobs) at a total investment of $85 million. “The aim of the zones is to relaunch manufacturing competitiveness, create new jobs and improve labor productivity, enhance country resilience to internal and external shocks, and promote regional and local development,” says Ygor Scarcia, international project coordinator for UNIDO.

In terms of support for Lebanon’s niche creative industries, like jewelry in Bourj Hammoud and furniture in Tripoli, it is still too soon to know the impact of Italian foreign assistance. Last year, Pasini told Executive that the creative industries, taken as a whole, contributed 5 percent to the country’s GDP in 2010 and accounted for four percent of the national workforce that year, which is the latest comparison available. The creative cluster initiatives that the Italian government is supporting – visibly through a new shop in Beirut’s Gemmayze district cleverly named Creative Lebanon – is meant to elevate the quality standards of the products produced to compete in international markets, the Italian ambassador to Lebanon, Massimo Marotti, told Executive (see interview with the Italian Ambassador, page 126).

In the end, 2016 was yet another year of struggle for the industrial and agriculture sectors, though it seems likely that next year will be better. Marotti suggests it all hinges on the outlook of a new Lebanese government and a hoped-for peaceful resolution to Syria’s civil war.

“Hopefully with peace in Syria there will be conditions for the economy of Lebanon to grow. But basically the most important factor would be the indication from the government of where the country’s resources will go – renewing infrastructures, incentives for the private sector and for SMEs.”

Jeremy Arbid

Jeremy is Executive's in house energy and public policy analyst.

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