Lebanon’s industry leaders call for help but pleas fall on deaf ears

The country

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While the Lebanese industrialists’ chorus of demands going into 2007 has certainly grown louder following the July-August war, their wish-list has changed only marginally. As 2006 approached, local manufacturers were lamenting the country’s perennial instability and pleading for the government to compensate the sector for lost income following the assassination of former Prime Minister Rafik Hariri. Industrialists bemoaned high energy prices and the inability of local exports to compete at the regional level with low-priced goods from Egypt and Syria, where both power and labor is far cheaper. They asked for the state to prioritize industrial development—which has traditionally taken a back seat to the hospitality and real-estate sectors—and decrease Lebanon’s reliance on imported raw materials and commodities.

Though the grievances are familiar, the fortunes of Lebanon’s vulnerable industrial sector have deteriorated precipitously. In the first half of 2006, exports of manufactured goods rose 51% to a value of $1.3 billion—only slightly more than the estimated $1.1 billion worth of cumulative losses suffered by the entire sector as a result of the war. According to figures compiled by the Lebanese Ministry of Industry, a total of 142 factories sustained material damage during the 34 days of fighting: in the end, the Lebanese economy was as much a target of Israeli aggression as Hizbullah.

In the fall, the Association of Lebanese Industrialists (ALI) presented a proposal to Lebanese and Arab governments to support the sector’s recovery. Alongside compensation, ALI requested that the governments lift customs duties on primary and raw materials, and exempt manufacturers from VAT payments and tariffs. It also asked that debts be rescheduled for industrialists who suffered serious losses during the third quarter of 2006, and that the banking sector extend loan facilities to finance the reconstruction of damaged factories.

Few industrialists were holding out for the government to reimburse them immediately for direct material damages from the war, but they expected the ALI plan to be circulated at the November Reconstruction summit of Arab League finance ministers in Beirut.

Deal on fuel requested

ALI asked GCC countries to sell fuel to Lebanese manufacturers at the same rates they charged domestically for a period of one year. In Saudi Arabia, for example, the domestic cost of diesel is 10% of the global market value. The association also proposed that Arab League members buy Lebanese products to prop up the ailing industrial sector, as opposed to giving direct financial aid in the form of grants and soft loans. ALI reported that of all Lebanon’s trading partners, GCC countries were the quickest to abandon the Lebanese market at the onset of hostilities. Finally, ALI requested that a portion of pledged reconstruction money be earmarked for a fund to make interest payments on outstanding loans.

According to ALI President Fadi Abboud, however, the government did not present any of the association’s suggestions at the conference.

“The government told me to my face, ‘you can’t be a begger and impose conditions,’” he says. “So basically what they are saying is that ‘we are ready to sacrifice Lebanese industry as long as the rest of the Arab world is happy with us.’”

Material losses notwithstanding, ALI is urging Fuad Siniora’s administration to adopt a principled policy on industrialization, and put incentives in place to encourage both local and foreign investment in Lebanon, where manufacturing has long been overshadowed by the more cost-effective environments of its neighbors.

“The war certainly did not make life for us any easier, but at the same time this country is not very friendly towards industrialists,” says Abboud. “We are finding it very difficult to convince this administration to adopt safeguards to protect various industrial sectors, even though we are only asking for measures that are approved by the WTO and the Greater Arab Free Trade Agreement.”

Aside from levying a 20% duty on imported ceramics in September—which only benefits Lebanon’s two tile manufacturers—the government has not imposed any new safeguard measures since most tariffs were abolished in 2000. The other industrial sectors that still receive government protection, including cement, electric cables and wine, do so not for economic reasons, says Abboud, but because “their owners have friends in the administration.”

Gemayel’s plan allowed to lapse

Siniora formally endorsed the “Lebanese Industry 2010” plan presented by late Minister of Industry Pierre Gemayel at the beginning of his term in 2005. The plan included a short-term “100 day” strategy to boost the manufacturing sector. But the 100 days lapsed 10 months ago, and the government has yet to adopt one of the proposed support measures, save what Abboud calls the “Uniceramic” safeguard, in reference to the company with a near monopoly on the tile trade.

ALI is in favor of the safeguard for ceramic manufacturers—whose local market share has been progressively eclipsed by cheaper Egyptian imports over the past three years—but it is demanding similar protection for other industries in 2007, particularly those that are energy-intensive.

Manufacturers of products such as plastic, glass, and paper—all of which require huge fuel expenditures—were already in an unstable position before the summer war. Now they are in dire straits, says Waji al-Bizri, the vice president of ALI. The Ministry of Industry figures show that local food and furniture manufacturers and construction companies bore the bulk of direct material damage.

“All sectors are in need of help right now,” Bizri explains, “the market has shrunk and customers are not willing to spend money, and the exporters are suffering because many of them lost trading partners during the war.”

Raja Habre, director of the EU-funded Euro-Lebanese Center for Industrial Modernization (ELCIM), agrees that restoring broken chains of production, both at the local and regional levels, will be one of the most significant hurdles for businesses in the new year. In addition to reestablishing regional trade with lost partners, industrialists have to remedy disruptions in local trade from a decline in production levels, damaged transport routes, and failure to collect and repay existing debts.

The destruction of the Maliban Glass Factory in the Bekaa valley, says Habre, is an example of collateral damage that has reverberated across the entire economy, since the company supplied bottles to manufacturers of goods ranging from food to pharmaceuticals.

“I think they are recovering,” Habre says, “but remember since the blockade was lifted there has been a foul mood amongst business leaders, and neither consumers nor manufacturers are feeling confident in the current political situation.”

Indeed, a lack of confidence was identified as one of the most damaging immediate consequences of the conflict, according to a study released in November by Infopro in cooperation with the Lebanese Finance Ministry. Some luxury retailers relocated their offices to the Gulf region or opened up branches elsewhere in the Arab world in anticipation of heightened political tensions. The report also expects a rise in unemployment levels since many factories have been forced to lay off workers due to a dip in consumer spending.

Before the resignation of six cabinet members, ALI had threatened to take legal action against the current administration at Majlis al-Shura if it failed to respond to its demands by Nov. 20, 2006. The association had planned to then hold a general assembly meeting and vote on how to proceed. Abboud said they would debate a series of options, including shutting down factories and “taking to the streets.”

Now that similar threats from Lebanon’s largest opposition party are paralyzing the government, the ultimatum is off the table and local industrialists are pleading once again for an end to political instability, which Bizri claims is the main deterrent to foreign investment, and the biggest obstacle facing the sector in 2007.

“The negative attitude from all political parties is bringing the entire business environment down.” Bizri says of ALI’s current demands on the government, “We are asking political leaders to reach an agreement, otherwise many institutions may be forced to shut.”

All is not negative, however

Habre paints a rosier picture of the mood among local manufacturers. He says many of ELCIM’s clients are continuing the projects they began before the war. So Lebanese exports can claim a larger share of global trade, industrialists are upgrading production methods and accounting procedures to meet internationally-recognized standards.

But the rising costs of moving goods in and out of the country, due to damaged transport routes and high energy prices—compounded by more electricity rationing—will continue to put pressure on Lebanon’s manufacturing sector, reports Infopro. A lack of available labor will also hinder recovery, since most foreign workers fled the country this summer. Though “replacement of foreign labor with local labor is a medium-to-long-term possibility,” according to Infopro, it is not a viable short-term solution.

Industry not a priority

“There are plenty of liberal economies led by governments that understand the importance of industrial development, but this is clearly not a priority of the current government,” Abboud says. “We are the people that can create enough jobs to stop this crazy immigration where we are losing the best we have.”

Abboud’s claims are supported by industry’s performance: despite the lack of government support, the industrial sector has become a linchpin of the Lebanese market: in the first half of the year, manufactured products accounted for 68% of total exports and 21% of GDP. The consequences of a poor second half of 2006 for the manufacturing sector—and, in the current situation, likely underperformance in 2007—will have a significant negative impact on the Lebanese economy.

As Executive went to print, Lebanese industry was struck another blow through the assassination of Minister of Industry Pierre Gemayel. Although Abboud (and indeed, the industrial sector at large) has been consistently critical of the Lebanese government’s policies towards industry, Gemayel was the one minister he identified as a real advocate in conversations with Executive over the past year. Industrialists felt Gemayel took his portfolio seriously, and recognized his tireless efforts in support of their embattled sector. The loss of such a vital ally on the eve of 2007 puts the future of Lebanese industry on ever more uncertain ground.