In Lebanon, foreign investment soars despite ongoing challenges

Since the onset of the economic crisis in 2019, Lebanon has endured a cascade of severe challenges that have dramatically altered the landscape of everyday life for its citizens. The crisis, triggered by a combination of financial mismanagement, political corruption, and a volatile regional environment, has led to unprecedented levels of inflation, a dramatic devaluation of the Lebanese pound, and a sharp decline in the purchasing power of the population. Daily life has become a struggle for many, with basic necessities like food, fuel, and medicine becoming increasingly scarce and unaffordable.

Headwinds

The situation has been further exacerbated by the prospects of war with Israel, which have fueled instability and insecurity, but did not discourage both domestic and foreign investment. Additionally, the devastating explosion at the Beirut port in August 2020 dealt a crippling blow to the economy, destroying a significant portion of the city’s infrastructure, displacing thousands of residents, and causing billions of dollars in damages. The explosion also shattered public confidence in the government, which was already at a low point due to the ongoing financial crisis.

…and windfalls

And yet, in the face of these challenges the Lebanese economy has demonstrated remarkable resilience. The World Investment Report 2024 published by the United Nations Conference on Trade and Development (UNCTAD) provides compelling evidence of this resilience through the substantial increase in foreign direct investment (FDI) inflows into Lebanon.

Foreign Direct Investment (FDI) refers to the investment made by a company or individual from one country into business interests located in another country. Unlike portfolio investments (like stocks or bonds), FDI typically involves acquiring a lasting interest in a foreign business, such as buying a significant share or establishing operations like factories or offices. This type of investment aims to have direct control or influence over the foreign business’s operations, often leading to job creation, technology transfer, and economic growth in the host country. In simple terms, FDI is when a foreign entity invests money to help grow or expand businesses in another country.

According to the report, the net inflow of FDI into Lebanon increased by 25% in 2023, reaching US$582 million compared to US$461 million in 2022. This surge is a testament to Lebanon’s enduring attractiveness as a fertile ground for entrepreneurship and investment, particularly in the context of small industries and digital services.

Championing small industries

Lebanon’s capacity to boost the country’s investment allure despite its ongoing economic struggles can be explained by several factors.

The country’s entrepreneurial spirit is a major one. Known for its dynamic and innovative culture, Lebanese entrepreneurs are managing to spark significant economic activity and draw international investors – a testament to their confidence in Lebanon’s growth potential even in difficult times.

Another crucial factor is the active role of the Lebanese diaspora. Many successful Lebanese expatriates are reinvesting in their homeland, particularly in industries that operate on a smaller scale, typically with limited capital, fewer employees, and local or niche market focus. These industries include artisanal food and goods production, handicrafts, tech startups and digital services, eco-tourism and hospitality, and renewable energy. These areas are seeing notable investment due to their lower capital requirements and high growth prospects. The connection between expatriates and domestic economic activities creates a continuous flow of capital, expertise, and market links.

Small industries and digital services have also emerged as leading sectors in Lebanon’s economic recovery, attracting substantial FDI due to their adaptability and innovation. Small industries benefit from Lebanon’s skilled workforce and strategic location, while digital services thrive thanks to the country’s high Internet penetration estimated to 93% in 2024

The World Investment Report 2024 indicates that the volume of inbound FDI in Lebanon rose by 24% in 2023, amounting to approximately USD 655 million, up from USD 527 million in 2022. This figure represents about 0.86% of the total inbound FDI in the West Asia and North Africa ( WANA) region and 0.05% of global inbound FDI.

This growth stands out particularly in the context of a global decline in FDI, which fell by 2% in 2023, totaling approximately $1.33 compared to about $1.36 trillion in 2022. The decline in global FDI underscores the significance of Lebanon’s performance, highlighting its ability to attract investment even as global investment flows contract.

Lebanon’s appeal

The surprising increase of FDI to Lebanon is driven by several key factors. Government efforts to attract investors are a primary one, with various reforms aimed at improving the business environment. These include improvements to regulatory frameworks and incentives designed to make Lebanon a more attractive destination for foreign investors.

Lebanon’s location is, of course, another crucial factor. Positioned at the crossroads of Europe, Asia and Africa, the country offers businesses the opportunity to establish a presence in the fertile crescent region of Syria.

Additionally, Lebanon’s highly educated and multilingual workforce adds to the country’s investment appeal. The country’s universities and educational institutions continue to produce graduates with the skills needed to thrive in today’s economy.

Finally, Lebanon’s rich cultural heritage and historical connections with various regions worldwide can also explain its attractiveness as an investment destination. These longstanding ties facilitate strong international partnerships and collaborations.

As Lebanon charts its course to recovery, the sustained support and confidence of international investors will be crucial. The rising FDI inflows are not only a testament to the country’s economic resilience but also a foundation for sustainable growth and development in the years to come. However, it is important to remember that the economic situation in Lebanon is also linked to the geopolitical situation in the Middle East.

The Syria Civilian Protection Act

The repercussions of the Caesar Syria Civilian Protection Act, commonly known as the Caesar Act, is a US law enacted in December 2019. The Caesar Act imposes extensive sanctions on the Syrian government, as well as any individuals or entities supporting the regime, such as foreign businesses, financial institutions, and government officials. The Act also targets sectors critical to the Syrian economy, including construction, energy, and finance.

The Caesar Act has had significant catastrophic repercussions for Lebanon’s economy, which is closely tied to Syria’s. The restrictions restrict Lebanese businesses from engaging in trade or financial transactions with Syrian entities, leading to reduced trade, disrupted supply chains, and increased economic uncertainty. Given Lebanon’s geographical proximity and historical economic ties with Syria, these sanctions have further strained the Lebanese economy, which is already grappling with its own financial crisis.

Lebanon’s ability to attract and sustain FDI despite a challenging economic landscape highlights its potential and ongoing efforts to foster an attractive country for investors.