The industrial sector is laboring to overcome a series of hurdles that are limiting its ability to expand domestically and develop an export capability, with weak infrastructure and low levels of investment constraining growth. Currently, industry accounts for around 16% of Lebanon’s GDP, an input level dwarfed by the services sector, which represents almost 80% of the national economy.
In late April, Vreij Sabounjian, the minister of industry, acknowledged that the sector was struggling to gain investment and support, having suffered from the neglect of successive governments. Vowing to rectify past failings, the minister said the government would take measures to facilitate investments in the sector and cut red tape to the development of more dedicated industrial zones.
“We are fully aware that expanding the industry sector will only take place through the establishment of modern industrial zones. There is some delay on this level, given the need to appropriately equip each zone,” Sabounjian said.
Ensuring these zones have access to electricity will be crucial. According to Ministry of Industry estimates, energy costs account for at least 20% of the manufacturing sector’s production expenses, far higher than in many countries.
Lebanon’s fuel import bill currently runs well over $6bn annually, representing some 15% of GDP. The majority of this is spent on firing the turbines of the state’s electricity monopoly, Electricité du Liban, or privately owned and operated generators. This option is favored by many industrial concerns, which seek to bridge the gap between demand and electricity supply.
However, the cost of electricity is by no means the greatest challenge facing many companies when it comes to the issue of power. Extensive interruptions to supply is a major issue in most regions across the country. Daily production, meanwhile, is running at only around 1500 MW yet demand on the grid is growing, rising to more than 2400 MW a day.
While power cuts and high costs are a part of daily life for Lebanon’s industrial sector (and every other area of economic life), there will come a time when this is not the case, particularly if the most-conservative estimates of natural gas deposits off the country’s coast are proved accurate. Some projections put Lebanon’s untapped reserves at around 1.9bn barrels of oil and 3.45bn cu meters of natural gas, enough to fire the country’s power stations and fuel industrial production for many years.
However, it will be years before the reserves can be brought on-line, meaning Lebanon’s manufacturers are looking to shorter-term solutions. One such solution is the government’s plan to offer interest-free loans for investments in renewable energy. The proposal, announced in March, would allow companies to take out loans for terms of up to 14 years. These loans will help reduce reliance on the national grid through alternative energy production, such as solar or wind turbines.
While the industrial sector can look forward to a more powerful future, it still has many other obstacles to overcome. One of the hurdles identified in a recent World Bank report is that little of the capital inflows had gone towards productive sectors, instead mainly being channeled into banking and real estate.
According to Hedi Larbi, the country director for the Middle East and North Africa region, highly productive industries and innovative activities were receiving small benefit from financial inflows, which total between $7bn and $8bn per year.
“These inflows are not generating long-term, broad-based endogenous growth,” Larbi said. “They certainly are not curbing the brain drain, nor creating jobs for skilled youth, which is migrating due to the lack of opportunities at home. They are not supporting productive activities depleted by infrastructural bottlenecks and structural dysfunctions, which reduce return on capital.”
The World Bank also stressed that the lack of reliability in Lebanon’s infrastructure services was reducing the competitiveness of the country’s industrial base. Citing a 2010 study on the business climate in Lebanon, the World Bank’s report said 76% of firms surveyed identified issues with electricity supply as a constraint to activity, with 42% saying transport bottlenecks were hindering production.
Oxford Business Group
May 30
