IndustryApr 13, 2023
Manufacturing in Crisis: How Can the Sector Survive?
- Bacel Maddah, Lina S. Maddah
This article is supported by the Friedrich Naumann Foundation Beirut Office. The opinions expressed here do not necessarily reflect those of the donor.
The current crisis resulted from a depreciation of the local currency, with the exchange rate continuing to steadily increase from around 1,500 LBP/USD in October 2019 to around 100,000 LBP/USD in March 2023. The corresponding inflation rates have been estimated by the World Bank at 150% percent in 2021 and 218% in the first half of 2022.1 Another alarming indicator is the negative growth in GDP, with estimates of a total drop in 2020, reaching 20% with respect to 2016. The crisis was compounded by local and international events, such as the COVID pandemic, the Beirut port disaster in August 2020, and more recently, the war in Ukraine.
In the years preceding the current crisis, total revenue from the Lebanese manufacturing sector was around $8.8 billion in 2015, which represented around 17% of the GDP at the time, a decline from $10.5 billion in 2012, which indicates a “pre-crisis” effect.2 The main manufacturing sub-sectors include food industries (at around 19% of the total number of firms), followed by plastic and chemicals (14%), then paper and packaging and minerals (11%). The total number employed in manufacturing in 2015 was estimated to be around 77,700, which represents around 4% of the total workforce. The output of the manufacturing sector in 2015 was split between local consumption (83%), and exports (17%). The major exports in 2017 were jewelry, machinery, metals, food, and chemicals.3
Numerous difficult challenges are faced by manufacturers in Lebanon at present, ranging from high energy prices to immense financial imbalances. We categorize them as follows:
- Financial Challenges
The declining purchasing power of the local customer has created vast restrains on purchasing power. Lebanon ranked second, after Sudan, in the highest inflation rates globally in 2022.4 In addition, pricing difficulties are being experienced due to this hyperinflation, coupled with inventory imbalances, supply chain disruptions, and high shipping costs. In addition, the lack of bank credit lines is a major impediment, as getting “fresh dollars” is a main challenge for manufacturers, and the banks are giving no facilities. The same goes for the unclear and chaotic subsidies from the government that have created additional bottlenecks for manufacturers. Finally, there is a difficulty in drafting contracts stemming from the fact that contracts are legally enforced in the rapidly deteriorating LBP.
- Employment and Wages
Lebanese manufacturers are suffering acutely from labor shortages. The reasons are four-fold: (1) an unbalanced labor market, (2) a high emigration rate among the skilled labor force, (3) a shortage in the labor supply of people with the necessary skills, and (4) a lack of young professionals with an interest in technical and mechanical work. According to UNESCWA, a 27% loss in full-time employment was observed in the manufacturing sector between 2019 and 2020.5 Following the financial crisis, some manufacturers have tried to adjust to the new reality of wages, but this cannot be generalized.
- Decaying Infrastructure
Manufacturers are facing energy challenges with the failure of the main grid and the need to rely on private diesel generators and renewable energy, which have become very expensive. In 2021 and 2022, almost all governorates were experiencing interruptions that sometimes exceed 22 hours per day.6 While the integration of renewable energy sources is helping, factories still suffer from shortages in energy supply. Some large manufacturers reported operating under 40% capacity during the crisis due to energy issues.
- Dysfunctional Government
Corrupt and dysfunctional are two characteristics of successive Lebanese governments, which have been the main drivers of the country’s decay. This challenges manufacturers in several ways: (1) delays in the processing of incoming raw material shipments and outbound exports (ministries are operating at less than 30% capacity), (2) challenges in maintenance and capacity expansion, (3) lack of local production protection laws, (4) outdated environmental policies, and (5) illegal smuggling.
- Political Aspect
Regional political dynamics have severely impacted industrial growth in Lebanon. Affected by the Israeli-Lebanese conflict, the Syrian crisis since 2011, and the more recent crisis with the GCC countries, along with a lack of political support, the Lebanese manufacturing sector is not capable of adapting fast enough to cope with these regional export challenges.
- Vulnerable Economic Model
Lebanese industry was neglected for 50 years, with little to no room for significant growth. The vulnerable economic model, led by political elites, marginalized productive sectors, focusing on tourism, banking, and other services. For example, 80% of Lebanon’s food needs are covered through imports.7
Opportunities Offered by the Crisis
The limited opportunities emerging from the crisis are threefold. The first is related to lower labor costs. One of the main production costs for Lebanese manufacturers is labor. Employee salaries are mostly being paid in LBP, with additional benefits, such as transportation fees, schooling, and medical support. Salaries are low relative to previous years. The second opportunity is evident in the increased local demand. Opportunities might also exist in sourcing some raw materials locally. Currency depreciation makes foreign products more expensive. Many households are paid in LBP, which is altering consumer preferences towards local alternatives. The third opportunity rests in higher export potential. With the lower cost, there might be more demand for Lebanese exports. Evidence can be derived by the Product Space Analysis conducted by USAID, which highlights opportunities in specific subsectors, such as vaccines, blood, antisera, toxins, and cultures production, washing and bottling machines, and textiles.
In the following, policy recommendations are offered that are deemed useful to manufacturers in the current crisis.
- Target Sectors
There is a need for manufacturing in Lebanon to focus on key sectors where profitability and export potential are plausible. This can be done by looking at the product space and attempting to incrementally increase the complexity of the products manufactured in Lebanon. For example, some studies suggest focusing on boosting electronics manufacturing,8 while others propose advancing production of medical lab supplies.9 Lebanese manufacturers should embrace the results of these studies and partner with research institutions to update and refine the findings in light of the ongoing crisis.
- New Government Regulations
Improved governmental regulations and policies are critical to manufacturing survival. For example: (1) Instituting a new tax and customs policy that gives manufacturers a competitive edge over imported products for a well-defined time period, until these manufacturers can compete on their own in the open global market; (2) Revisiting trade agreements to ensure the benefit of local manufacturers, while not being too restrictive on imports to keep local high-quality products competitive; (3) Adopting a more genuine approach to control illegal smuggling through both border control and subsidy policy; (4) Creating incentives for operating in industrial zones by way of improved infrastructure and low property and municipal taxes.
- Energy, Infrastructure, and Finance Solutions
Energy is a key challenge, and with many plants located in the Greater Beirut area, the potential of benefiting from renewable energy becomes challenging (for example, due to limited space available for solar panels). Adopting micro-grid solutions to connect to other organizations, and even residential units, can be beneficial. The government can contribute to easing-up the electricity crisis by “opening up the grid” where it takes on the role of managing the grid, while it allows private businesses to generate and sell electricity to the grid.
Regarding the high cost of fuel, a possible remedy could be in ride sharing (busses and carpooling) and technology-enabled ones (apps for ride sharing among employees of one or more companies). To reduce the need for extensive capital financing, manufacturers can share major resources—a solution which has been adopted in other countries. Sharing can also provide procurement financing solutions. For example, several manufacturers can form a cluster for procurement of raw material, which would facilitate obtaining credit lines and quantity discounts.
- Embracing Emerging Trends
The crisis in Lebanon should not prevent manufacturing companies from adopting modern trends that can add efficiency and reduce costs, especially in pain areas such as energy and transportation. Automation, sensory technologies (relying on electronic sensors to collect data), and data science can all help in this vain. Moreover, the efficiency of operations inside manufacturing plants continues to improve globally, and Lebanese manufacturers can avail themselves of this. For example, productivity, defined as the ratio of output goods over input resources, has been improving by 2.5% per year in the US. More than 52% of this improvement comes from advances in operations management. Collaborating with researchers in local universities with expertise in these emerging trends could prove to be beneficial for Lebanese manufacturers.
1World Bank. Lebanon Economic Monitor, Fall 2022: Time for an Equitable Banking Resolution.
2Association of Lebanese Industrialists (ALI) Industrial Indicators, March 2017, https://ali.org.lb/indicators/ali-indicators-march-2017/
3Atallah, S. Ezzeddine, N. and Mourad J. (2019). Lebanon must develop an export strategy to create jobs. LCPS Policy Brief,
8Bustos, S. and Yildirim, M. A. (2017). Lebanon’s manufacturing sector inaction and untapped potential. LCPS Policy Paper,
9USAID, 2022, Lebanon’s Product Space Exploring Paths for Export Diversification in Lebanon, September 2022.Bacel Maddah is a professor and the inaugural chairperson in the Industrial Engineering and Management Department at American University of Beirut (AUB). His research interests are in retailing, supply chain management, and stochastic processes. His research is published in leading journals specialized in operations research and management science. He also consults and provides professional training.Lina S. Maddah is a Senior Economic Researcher at the Lebanese Center for Policy Studies. Her areas of work include Urban and Regional Economics, Firm Dynamics, Spatial Economic Analysis, Cultural and Creative Industries, and Local Entrepreneurship Ecosystems. Lina holds a Ph.D. in Economics from Universitat Rovira i Virgili, Spain, and is an Adjunct Professor at the Department of Economics at the Lebanese American University.