Lebanon: How to finance the private sector? A challenge for the Lebanese economy

While some mid-sized companies (ETIs) managed to partially finance themselves through banks, and some microenterprises through the microfinance sector, SMEs suffered from a large financing deficit. The startup sector was an exception, having benefited from a dedicated policy from the Banque du Liban. The financing constraints of companies were greatly exacerbated by the crisis. First, the banking sector, which collapsed in 2019, has stopped all lending activity.

The sudden depreciation of the pound (-98% against the dollar since 2019) has, however, allowed the private sector to significantly reduce its debt by repaying its loans at the official exchange rate. Then, donors specializing in private sector financing (EBRD, EIB, IFC, Proparco, etc.), which had lent and/or invested in Lebanese banks, have decided to suspend their financing activities until an IMF program has been adopted. Finally, the electricity crisis has significantly degraded the self-financing capacities of companies, due to the exorbitant cost of generators ($0.5/kWh, compared to a global average of $0.16/kWh), which has a crowding-out effect on productive investment. The needs are mainly at the level of ETIs and industrial SMEs.

The Lebanese productive fabric is embryonic (its exports represented 7% of the GDP before the crisis) but diversified (agri-food, pharmaceuticals, chemicals, electrical equipment, paper/wood). The fall of the pound has generally improved cost competitiveness (although energy costs have weighed in the opposite direction), but most SMEs have not managed to increase their production or redirect it to exports. The shortage of financing is forcing companies to favor self-financing and prevents them from making significant investments, financing working capital requirements and entering international trade, in a context of maximum country risk.

Activity is maintained at very low levels, while the small size of the majority of establishments is an obstacle to their modernization and their costs will remain high without achieving economies of scale. In this context, and in the absence of restructuring of the banking sector, donors have begun to think about creating the conditions for their re-engagement. Direct financing could be provided to the most viable ETIs, whose revenues are largely generated from exports and which generate “offshore” dollars (like the $15 million loan that the IFC has just granted to the MAN group). In addition, a debt fund dedicated to financing solarization operations, initiated by USAID (which provides $4 million in grants serving as a first loss guarantee), aims to raise an initial amount of $16 million. However, financing Lebanese SMEs (“mesofinance”) remains a blind spot in donor action. The EU certainly plans to disburse several tens of millions of euros in grants to support SMEs, but its programs consist primarily of technical assistance, while SMEs report debt financing needs. Donors still need to secure a mechanism – such as the European Fund for Sustainable Development (EFSD+) – that will allow them to operate despite the high level of country risk.

Source: French Embassy in Lebanon