Lebanon’s economy is dominated by banking, services, tourism and real estate, but there are scores of firms working in the productive sectors that are fighting to hold their own in circumstances that can at best be described as challenging. High operating costs, decrepit infrastructure and a dysfunctional body politic are assured burdens for Lebanon’s captains of industry.
While the enterprising and tenacious producers and traders within Lebanon are well attuned to this ramshackle playing field, 2012 has thrown some hefty additional spanners in the works. “We have reached an economic situation where we are stranded in the middle of a tunnel and there is no end in sight,” warns Mohammad Choucair, president of the Lebanese Chamber of Commerce, Industry and Agriculture. “We are seeing bankruptcies and lots of companies closing down.”
At the dawn of the new-year the International Monetary Fund (IMF) was predicting 1.5 percent growth for Lebanon’s economy during 2012. The reality is that it will be lucky to have flat-lined at 0 percent, with all indicators suggesting that the country slipped into negative growth in the final quarter. This deterioration was compounded by the political establishment’s sadly predictable degeneration into gridlock, which has only served to strip the economy of leadership and amplify the sense of insecurity in the country.
While discussing with Executive the dire straits into which the economy has fallen, the Minister of Industry, Vrej Sbounjian, stated, “We don’t have to make money every year; there are many nice things to be done in the country.” This frank admission perhaps best illustrates how rudderless the government is when it comes to offering meaningful succor to the nation’s business community.
And surely they need it. The World Bank and International Finance Corporation “Doing Business 2013” report ranked Lebanon 115th among 185 countries and 11th among 19 Arab countries in terms of ease of doing business. In almost every category, including starting a business, getting electricity, protecting investors and paying taxes, Lebanon slipped down the rankings from last year’s position. In such a climate, Charles Arbid, president of the Lebanese Franchisers Association, says, “Us Lebanese are used to being crisis managers but today we have to reconsider our way as a nation.”
Golden days past
Lebanon’s industrialists enjoyed a boom from 2005 to 2010, but those days are now a distant memory. Industrial exports nearly doubled in value from $2.17 billion in 2006 to $4.06 billion in 2010 but, “in 2011 it was not a slowdown in growth but a complete stop, and it was the second half of the year that did all the damage,” according to Neemat Frem, president of the Association of Lebanese Industrialists.
The standstill in late 2011 has gone into full-scale retreat in 2012 with figures released by the Ministry of Industry showing that industrial exports totaled $1.9 billion in the first eight months of 2012, constituting a decrease of 12.2 percent from the same period the previous year.
The reasons for this downturn are numerous, including a slump in tourism, which hit demand for agricultural and industrial products, a fall in exports through Syria due to the ongoing violence there and a drop in foreign investment on account of the precarious security and political situation in Lebanon. Furthermore, the already prohibitively high operating costs for Lebanon’s producers were pronounced in 2012 by an escalation in the energy crisis within the country and the implementation of new minimum wage legislation.
“I can’t stress enough the fact that our economy is inversely correlated to the price of a barrel of oil, as we have no other form of energy other than liquid oil: no gas, coal [or] nuclear,” gripes Frem. “Électricité du Liban (EDL) does not provide any buffer zone like other countries for surges in energy costs, and industrialists are running on their own generators.”
EDL was engulfed in a highly politicized internal labor dispute for much of the summer and the decaying energy infrastructure only deteriorated further, resulting in a ratcheting up of power rationing, with some parts of the country stranded without electricity for up to 22 hours a day.
With industrialists increasingly relying on generators, the global rise in fuel prices was acutely felt on the balance sheet. “Operating costs are so high in Lebanon. Businesses can’t even forecast a budget for the year because the international price of diesel fluctuates so much. It jumped by around a third [in 2012],” explains Nassib Ghobril, head of economic research at Byblos Bank.
The labor costs incurred in Lebanon are also high in comparison to regional competitors, and when the government bungled its way through the implementation of new minimum wage legislation the private sector cried foul. “The increase in salaries has affected us,” says Daniel Abboud, general manager of Carosserie Abillama, which has a staff of 300 to manufacture trailers and other automotive add-ons that are exported to some 27 countries. “Our products are customized and cannot be mechanized so we rely on labor. Our prices are up 6 percent, so it’s significant.”
As of February 1, “the minimum monthly wage will be fixed at LL675,000 ($450) and the minimum daily wage will be set at LL30,000 ($20), as per articles 1 and 2 of law No. 36/37 issued 15/05/1967,” stipulated the decree published in the government’s Official Gazette. Effectively, employees received a monthly increase ranging from LL175,000 ($116.67) for those earning the minimum wage, up to LL299,000 ($199.33) for those on salaries above LL1.5 million ($1,000).
With Lebanon’s living costs spiraling, reforming the minimum wage was necessary. However, the manner in which it was implemented whiffed of more than a hint of populism, with criticisms from numerous fronts that the proposed legislation would further fuel inflation. Unaccompanied by progressive reforms to taxation and service provision, it is likely the wage shift will do little to really improve the living standards of those on the bottom rungs of the economy, while it will certainly increase the operating costs of employers.
Left out to dry
Lebanon’s private sector is used to operating amid political crisis and under weak governments. However, the elected leaders of the country could easily throw them a few bones to help them get on with keeping the nation in business. There are several key pieces of legislation that would go a long way to energize Lebanon’s business environment, but they are gathering dust in drawers or are lost in the labyrinth of commissions at Parliament.
“We are trying to see that most of the economic decisions are taken in a sane logic and create a more business-friendly environment, and to enhance SME’s [small and medium-sized enterprises] in Lebanon,” says Nicolas Nahas, minister of economy and trade. However, in reality the Lebanese business environment is stacked in favor of a minority of players dominating the markets.
A 2003 report commissioned by the Ministry of Economy of Trade revealed that half the products sold in the Lebanese market come from sectors where there is an oligopoly, under which more than 40 percent of the market is owned by four companies or less. In plain English this is called a cartel. According to the study, three companies own 65 percent of the cement market, 69 percent of the soft drinks market, 77 percent of soap sales, 79 percent of elevator repairs and 85 percent of insulated wires and cables.
Just as Lebanon’s political elite is dominated by a small clique of men, so too is its business arena; the boundaries between the two domains are oftentimes blurred. The prevalence of cartels is damaging to the consumer who suffers from less choice and higher prices while it also hinders competition. It certainly is no friend to the SMEs.
A major step to challenge these oligopolies would be the adoption of anti-trust and competition laws. Such legislation does exist but it has been comfortably squirreled away and virtually never enters the political discourse. Minister Nahas claims the law is in stasis because there is a “constitutional debate” over the legitimacy of any legislation that was introduced during the term of Prime Minister Fouad Siniora (2005-2009).
While technically plausible, this logic is not particularly convincing. Even it were true, the fact that some politicians would hold back important legislation because it was inked from their opponent’s pen is repugnant. The more plausible and distasteful reality is that politicians who have vested interests in the survival of the cartels would rather these laws never see the light of day.
Other vital laws have also been drafted but are held up in the opaque quagmire of Lebanese politics. Perhaps most notable among these are new investment, e-commerce, trade and intellectual property rights bills. With the politicians engaged in a ruinous faceoff over who gets to hold court, they are likely to stay in the dark for some time yet. Indeed, Nahas concedes that none of this legislation will pass as long as the political impasse prevails.
And so it is that 2012 ends on a sour note for Lebanon’s private sector. For those that have persevered through the year’s economic and political crises the closing chapter brings little reason to believe things will get better in 2013. Businesses are going to have to hunker down and hope that at the very least security is maintained so they can stand fast until brighter days return.