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Why currency depreciation has proved no boon for Lebanese manufacturers

Why currency depreciation has proved no boon for Lebanese manufacturers

A worker arranges finished jugs at a factory that recycled broken glass after the 2020 Beirut port explosion. (Credit:Joseph Eid/AFP)

BEIRUT — The new government’s ministerial statement, like that of Hassan Diab’s government before it, calls for a transition from a “rentier” economy to a “productive economy” to achieve social justice. Since the beginning of the economic crisis there have been calls from outside the halls of power to build a productive economy, and attempts from members of the established parties to claim the issue as their own.

In theory, the Lebanese currency’s collapse should have facilitated a shift toward an export economy and more goods being produced domestically for the local market.

“Normally you would expect that a real depreciation of the exchange rate would help you export more,” says Nasser Saidi, a former economic minister and industry minister. “That is part of the adjustment process when you have a depreciation of the exchange rate: it makes imports more expensive, but it also helps you with exports.”

But the most recent statistics from the Industry Ministry, covering January and February of this year, show that the opposite has occurred.

In the first two months of 2021, industrial exports totaled $282.8 million, 26.5 percent lower than in the first two months of 2019, prior to the crisis, when Lebanon had $384.8 million in exports.

High energy costs, the need to import most raw materials, a lack of credit and strained relations with customers in Gulf countries have all taken their toll on Lebanese industry.

An import-based economy

Lebanon’s post-Civil War economy was heavily skewed toward banking and real estate, high interest rates crowded out investment in productive businesses and the balance of payments became extremely skewed. In 2018 Lebanon imported $19.9 billion worth of goods, while exporting just $2.9 billion, leaving it with a trade deficit of $17 billion.

The result was a stark trade deficit and a hunger for ever-more US dollars to finance imports, helping set the stage for economic crisis.

Lebanese consumers have found themselves extremely vulnerable to the currency’s depreciation because so many goods are either imported or produced locally using imported materials, which are priced based on the dollar rather than the lira, while most salaries in Lebanon continue to be denominated in lira.

The depreciation has made foreign goods more expensive for lira earners, pushing consumers to domestic alternatives. This is one reason economists typically say a depreciation in a currency encourages local production and reduces the trade deficit, and why some factions have called for leveraging the weakened currency to enhance production for local and foreign consumption.

But outside production of the barest necessities, the shift from imported to domestic goods has been hamstrung in Lebanon, says Paul Abi Nasr, the CEO of Polytextile and a board member of the Association of Lebanese Industrialists.

“With the total collapse of [locals’] purchasing power, even if your products are cheaper than what gets imported, it’s still inaccessible to a large swathe of the population,” he says.

At the same time, roughly 60 percent of Lebanese manufacturers sell at least some of their products overseas, according to Ziad Bekdache, ALI’s vice president, and thereby acquire fresh dollars while typically paying their workers in lira, a cost saving strategy that could, in theory, encourage more production and more jobs even if local demand is weak.

However, the advantage gained by manufacturers in cheaper wages has been more than offset by rising energy costs.

Industrialists who manufacture for export say that their labor cost savings in workers’ collapsed wages don’t cancel out cost increases in electricity, which they now mostly have to produce on their own via generators, burning imported diesel that they pay for at the parallel exchange rate.

Before the fuel crisis worsened earlier this year, cheap subsidized energy was one of their main advantages, even though it came at the expense of Electricité du Liban, which charged users below the cost of energy production.

Bekdache says manufacturers are paying roughly five times as much for power as they were previously. The smallest factories now consume 10 tons of diesel a month, he estimated, whereas larger ones may consume 600 tons. Industrial consumers of diesel have been able to purchase diesel in dollars at a market price since late August.

Exporters may have had a window of opportunity after the currency began losing value in late 2019 but before the energy crisis dramatically worsened in 2021, says Abi Nasr, but COVID-19 brought international trade to a near halt, causing the opportunity to pass by unseized.

In addition to energy costs, Bekdache says 25–60 percent of the sector’s costs consist of imported raw materials, which must be paid for in dollars. In the past, Abi Nasr has estimated this share of costs at 30 percent.

For Saidi, “the major problem” in applying the conventional economics of currency depreciation to Lebanon “is that most of the inputs of industry and manufacturing are imported.” Only a small proportion of Lebanese industrialists’ overall costs are dependent on the lira’s value, as opposed to the dollar’s value. And with the currency devaluation, only those costs are reduced, and even then perhaps only in the short run.

“People think wages are now lower,” Saidi says. “True, but they will not stay lower. We are a highly dollarized economy so people gradually would have to start to increase their wages, because at the current wages workers cannot reach your factory. They have to pay so much in transport, they can’t even reach your factory.”

Bekdache says the effective minimum wage in manufacturing is now LL2 million, as opposed to the legal minimum wage of LL675,000. This is still low: as of late September a full-time worker earning LL2 million would have to spend roughly 16 hours on the job to buy 20 liters of gasoline.

Before the crisis 135,000 people worked in the formal industrial sector, according to Rabih Badran of the Industry Ministry’s industrial information department. Badran says the ministry does not have statistics on current employment in the sector, but Bekdache claims there are now 195,000 Lebanese workers, thanks largely to the replacement of imports.

Some Lebanese businesses also say they are having increasing difficulty accessing what Saidi calls Lebanon’s “traditional” export market: the Arab Gulf states. Saudi Arabia, the largest Gulf economy, banned Lebanese agricultural products in April, devastating Lebanon’s farmers. The kingdom also does not allow Lebanese to ship to other Gulf states by trucking over its roads, rendering shipping to other Gulf countries cost prohibitive.

When it comes to nonagricultural exports to Saudi Arabia, “it’s been a touch-and-go situation,” Abi Nasr says. “Officially there are no restrictions, but on the ground there are.” Discussions to bring about a rapprochement between Lebanese business owners and the Saudi government are underway.

Lastly, the currency depreciation has been a double-edged sword for business’ finances. Unlike depositors, who have seen their savings depreciate, businesses typically have debts to the banks, and benefit from a decline in their value.

“Most manufacturers cleared out everything they have that is payable to the banks,” Bekdache says. “This is an advantage for them.”

Meanwhile, with the banking sector frozen and reportedly unwilling to originate new loans, industrialists complain that they are unable to access credit, which they would need to expand their operations.

“Even the companies that would like to increase their production find it difficult to do so,” Abi Nasr says.

Cedar Oxygen: A possible credit solution?

A private for-profit investment firm called Cedar Oxygen, backed by a $175 million investment from Banque du Liban, is supposed to provide one partial answer to the credit crunch. Cedar Oxygen, incorporated in Luxembourg, has started providing short-term hard currency loans to Lebanese industrialists to cover the costs of raw materials, supply chain investments, capital expenditures and conversions to renewable energy. Cedar Oxygen says it has so far approved 35 deals, signing $25 million in credit facilities.

Industrialists told L’Orient Today the project is welcome given the dearth of financing options available, but highlighted the large scale of Lebanon’s needs.

Cedar Oxygen says it will soon announce an expansion, and other alternative financing sources, including cooperatives and social impact funds, are being explored by the NGO sector. The new government has made promises to put more money in Lebanon’s residents’ pockets, resolve the energy crisis, improve relations with Gulf states and unblock the financial system. Whether these ambitions will be realized in tangible actions that begin to alleviate the crisis remains to be seen.

Asked what the situation would be a year from now if nothing meaningfully changes, Bekdache predicted that most small manufacturers would close and the large ones would move their operations outside the country.

“I assure you,” he said. “If the situation stays how it is, many sectors will shrink, not just industry.” 


BEIRUT — The new government’s ministerial statement, like that of Hassan Diab’s government before it, calls for a transition from a “rentier” economy to a “productive economy” to achieve social justice. Since the beginning of the economic crisis there have been calls from outside the halls of power to build a productive economy, and attempts from members of the established parties...