IN BRIEF

• The virtual working model benefits employers and employees.
• It has the potential to foster decentralized economic growth.
• It can be a shield for businesses in times of crisis.

The political crisis in Lebanon has compounded an economic crisis that has been looming in the shadows for decades. News of business closures, salary reductions, and layoffs are added worry to Lebanese already struggling under the burden of the ongoing liquidity and financial crisis. Without urgent reforms, the economy is at risk of experiencing a deep recession.

Adapt to survive

The current—and potential—consequences of these twin crises are catastrophic, especially to Lebanese businesses. In order to survive, companies must reduce their expenditures. Unfortunately, the first instinct in these circumstances is to lay off employees—this will only further damage the economy in the long run.

Instead, companies must adapt to survive. This is where the virtual model can play a huge role. A virtual business conducts all or most of its business via the internet, eliminating the challenges faced with office costs, with geographically unattainable talent, and with scarce cash flow. There is a growing body of evidence to suggest that, if adopted correctly, the virtual model can be both productive and lucrative. Advanced digital and IT transformation strategies have led internationally to success for a diversity of companies such as Dell, Articulate, and Buffer. In Lebanon, however, companies are not yet embracing this change. With the current crisis, they may be forced to.

Adopting a remote working model has mutual benefits for employees and business owners. The latter can save on their costs—electricity, internet, rent, office supplies, and talent retention—as well as gain more flexibility in their business management, while the former can save on fuel, time spent in traffic, food, and professional wardrobe costs, and can have an economic advantage over colleagues who are reporting to the office. In Lebanon’s case, current instabilities will have a reduced impact on businesses adopting a virtual model as employees will be able to continue to work unaffected by road closures from the ongoing protests.

The virtual model also has the potential to influence on the country-wide economic level, as towns outside of Beirut could benefit from flows of income and investment. Virtual working allows employees to stay in their hometowns rather than migrate to the capital, and their spending and investments in these towns, if at a large enough scale, could help foster a decentralized boost that would contribute to Lebanon’s economic growth.

Can it work?

Going virtual is a big change that requires time and effort. If implemented correctly, this model can help businesses survive during difficult times.

Not all businesses can operate remotely, however, and for those that can, there are varying levels of difficulty making the shift to a virtual operation. If a business has a clear organizational structure and tasks lists, the shift can be smoother. On the other hand, businesses with complex organizational structures that are not able to remotely access their files will have a hard time.

The virtual model also requires the use of web tools to manage virtual teams. These tools are already available on the majority of laptops. Companies can also purchase more sophisticated tools as part of their fixed costs.

Successfully virtualizing a company’s infrastructure and operations is also heavily reliant on the team. As businesses strive for a complete reform, one of the biggest impediments is finding employees with the right skillsets.

A final, and key, factor is trust. Managers should earn their team’s trust by providing them with the right tools, training, and space to thrive.

Employees should also demonstrate their commitment through an organized and timely workflow. It is only by combining all these elements that a business can become a virtual success.

As Lebanon races against time to avoid an economic crash, companies should take measures to protect themselves and their employees. The virtual model could be the armor that shields a business from financial catastrophe. It can also play a part in revitalizing the economy outside of Beirut.

IN BRIEF

• The liquidity crisis requires immediate attention and will likely result in an IMF program, with consequences for poorer Lebanese.
• In the short term, an IMF-backed loan program would need to create a specialized fund to promote the local private sector and entrepreneurship.
• In the long term, the government needs to foster relationships between itself, the education sector, and businesses to help promote entrepreneurial growth.

Right now, the challenge every Lebanese entrepreneur is facing is the liquidity crisis. A two-speed approach is required: 1) a set of short-term policy measures to tackle the urgency of the funding gap left by the liquidity crisis, and 2) more medium- to long-term policy measures that are focused on building and strengthening the Lebanese entrepreneurship ecosystem.

Emergency crisis management

As the outlook continues to deteriorate for Lebanon, the newly appointed finance minister Ghazi Wazni said late January that Lebanon needed foreign aid to save it from an “unprecedented” situation that had forced people to “beg for dollars” at the banks and fear for their deposits. The scene looks set for an International Monetary Fund (IMF)-backed program for Lebanon, bringing to mind the example of Egypt. Analysts, observers, and international financial institutions alike have hailed Egypt for tough economic reforms tied to a three-year, $12 billion loan program with the IMF, agreed to in late 2016. The reforms included devaluing the Egyptian pound by about half, relaxing the exchange rate regime to let the currency float freely, cutting energy subsidies, and introducing a value-added tax (VAT). Those changes have reduced the country’s current account deficit, inflation, and unemployment—thus strengthening the national currency. In its fifth and final review of Egypt’s economic reform program completed in July 2019, the Executive Board of the IMF said that “the macroeconomic situation has improved markedly since 2016, supported by the authorities’ strong ownership of their reform program and decisive upfront policy actions. Critical macroeconomic reforms have been successful in correcting large external and domestic imbalances, achieving macroeconomic stabilization and a recovery in growth and employment, and putting public debt on a clearly declining trajectory.” The IMF further noted that the outlook for Egypt’s economy remains favorable.

In Lebanon’s case, given the urgency of the liquidity crisis, any reform that comes along with an IMF-backed loan program would need to address the liquidity requirements of entrepreneurs and SMEs

Yet, Egypt’s robust IMF-backed structural reform program that has helped steady the economy has also been accompanied by an increase in inequality and poverty. Indeed, while macroeconomic indicators have drastically improved, measures such as price increase of basic foods like bread, milk, and lentils, as well as slashing fuel subsidies, which meant an increase in the price to consumers of gasoline, diesel, kerosene, and fuel oil, have left many of Egypt’s nearly 100 million citizens under increased economic strain and struggling to make ends meet. According to Egypt’s Central Agency for Public Mobilization and Statistics, 32.5 percent of Egyptians lived below the poverty line in 2018—up from 27.8 percent in 2015. This darker side of the IMF’s help programs was also visible in a 2019 loan agreement with Ecuador that called for an enormous tightening of the country’s national budget—about 6 percent of GDP over the next three years. It does not bode well for the more than 25 percent of the Lebanese citizens who live in poverty that an IMF-backed program will most likely include raising taxes that fall disproportionately on Lebanon’s poorest citizens while making cuts to the already thin public investment.

In Lebanon’s case, given the urgency of the liquidity crisis, any reform that comes along with an IMF-backed loan program would need to address the liquidity requirements of entrepreneurs and SMEs—95 percent of companies in the country are SMEs, which account for 50 percent of employment. One such short-term emergency crisis management solution is the creation of an entrepreneurship fund or loan to promote the local private sector and entrepreneurship. The IMF has been very vocal about the importance of private sector investment in creating jobs and achieving strong growth, particularly in the MENA region. Once again, Egypt’s example comes to mind. In 2015, Egypt received a $1 billion loan from the World Bank in order to support the country’s small businesses and entrepreneurial sector and pave the way for new job opportunities. That was followed by annual loans worth $3.15 billion from the bank between 2015 and 2017 to help Egypt’s economic reform program and local business development.

This IMF-backed entrepreneurship fund should also go hand in hand with reform policies to make it easier to start and manage a business, policies that tackle the complex and burdensome regulations in Lebanon that have historically held back investment and, hence, job creation and growth. Both the IMF and the World Bank have traditionally been very vocal about the fact that enhancing accessibility to finances, and promoting entrepreneurship and transparency in tax filings and government procurement would allow independent small businesses to thrive and establish new opportunities.

Build and strengthen the ecosystem

Once the short-term crisis is over, and the country is hopefully on the right track to recovery and growth, there are long-term challenges to building a strong entrepreneurship ecosystem that need to be targeted. Within that, government interventions need to be carefully crafted to be limited to improving the environment that surrounds startups. In short, the government’s role is to optimize conditions for entrepreneurs. It is difficult to point to any entrepreneurial ecosystem that has risen through direct government intervention, yet many successful entrepreneurial ecosystems and innovation districts, such as the UK’s Silicon Corridor or Spain’s 22@Barcelona project, have been assisted by governments that are entrepreneurial at the level of policy, legislation, permit authorization, purchasing, infrastructure investments, education, and coaching.

In some regions, such as the GCC, public policy to enhance access to finance has included the creation of regional VC funds, usually taking a hybrid form in which both public and private sector money is combined under private sector management. Yet, this approach has come under criticism for mixed results, with some observers noting the impact on the ability of purely private sector VC funds to raise money in those countries. Furthermore, the focus on risk capital neglects the fact that only a small minority of startups use this financing channel, at least in the early stages. Instead, encouraging the creation of a well-regulated peer-to-peer lending system is more effective as it provides seed and start-up capital and its trust-based nature means that investors typically invest in businesses that are close to home (see article in Executive’s September edition). It is also important to point out that ultimately, it was the liquidity crisis of 2008 that led the way to the creation of the alternative lending sector, peer-to-peer lending, and crowdfunding in the US and Europe.

Ultimately, however, a well-organized interaction between education, business, and government is an important key to success.

As part of the medium- to long-term strategies to build on and strengthen the Lebanese entrepreneurship ecosystem, special attention needs to be paid to policies by stakeholders such as the government, the central bank, and the Banking Control Commission of Lebanon that can foster connections between the different players within entrepreneurial ecosystems. For example, professional networking organizations, such as the Lebanese International Finance Executives (LIFE), entrepreneurship clubs, VC-backed groups, professional associations, and diaspora associations. Lebanon has already seen the emergence of organizations that have sought to build bridges between different entrepreneurial actors through the creation of communities of practice or entrepreneurial networks, such as Berytech, SPEED@BDD, the UK Lebanon Tech Hub, and AltCity—all of which have provided mechanisms for entrepreneurs in the knowledge economy to experiment, improve, and scale up.

Ultimately, however, a well-organized interaction between education, business, and government is an important key to success. This can be done through the effective provision of support to entrepreneurs during the pre-startup, startup, and early post-startup stages. In particular, public sector and university-led business accelerators and incubators have the opportunity to provide startups with advice, networking opportunities, and finance in order to help foster these fledgling ventures.