Lebanon: banks weigh on competitiveness

Theloss of competitivenessas demand from the Gulf countries weakens. The report of 18 August 2026 highlights a problem deeper than the only decline in exports: companies continue to produce with expensive energy, degraded infrastructure and, above all, a banking system that no longer normally fulfils its role of financing the economy. Six years after the beginning of the financial crisis, banks remain at the heart of the problem. The lack of credit, the weight of accumulated losses and the delay in restructuring deprive producers of the necessary leverage to invest, modernize their equipment and finance their exports. The decline in demand in the Gulf thus comes at a time when the Lebanese productive apparatus remains particularly fragile.

Lebanese products lose ground

The deterioration of competitiveness is one of the main economic signals of 18 August. Lebanese production faces more difficulties in maintaining its external markets, while demand for the Gulf markets is declining. This development directly affects companies that had built a significant portion of their activity on exports to Arab countries.

The problem is not just a one-time drop in orders. A Lebanese company must now absorb high production costs while facing competitors who often benefit from more regular access to electricity, financing and logistical infrastructure. When demand slows, these handicaps become more difficult to offset by export volumes or trade margins.

The consequences then spread into the domestic economy. An exporting company buys raw materials, employs employees, works with carriers and provides suppliers. The decline in foreign sales thus reduces the activity of several links in the production chain.

This situation also weakens the ambition shown since the 2019 crisis to rebalance the Lebanese economic model. After decades of strong dependence on services, external capital and diaspora transfers, the development of local production is regularly presented as a condition for a more sustainable recovery. The current loss of competitiveness is in the opposite direction.

Gulf remains a key market for Lebanon

The decline in the demand of the Gulf countries is particularly significant because of the historic position of these markets in Lebanese trade. Saudi Arabia, the United Arab Emirates, Qatar, Kuwait and other economies in the region have high purchasing power and are natural markets for several categories of Lebanese products.

Agri-food industries are directly concerned, as are certain agricultural products, beverages, manufactured products and various value-added products. The geographical proximity, human ties between Lebanon and the Gulf and the presence of a large Lebanese diaspora have long facilitated such exchanges.

However, this dependency is a vulnerability when demand slows down or when political relations deteriorate. Companies must quickly find other markets, which requires commercial investment, certification, adequate logistics and often additional financing.

It is precisely on this last point that the Lebanese system remains deficient. A company facing a decline in market opportunities should normally be able to borrow to modernize its production, improve productivity or finance its development in a new market. The current functioning of the banking sector makes this adjustment much more difficult.

Banks no longer normally finance production

Theloss of competitivenesscannot therefore be separated from the banking crisis. Before 2019, the financial system had a disproportionate place in the Lebanese economy. Banks attracted deposits at high rates and financed the State and the Bank of Lebanon massively. When this model collapsed, losses were passed on to the entire economy.

Restrictions on applicants were the most visible manifestation of the crisis. But for companies, another consequence was decisive: the contraction of credit. The banking system has ceased to play its full role as an intermediary between savings and productive investment.

This disruption profoundly alters the operating conditions of a company. Bank credit is normally used to finance stocks, buy machinery, cover a gap between an order and its payment or prepare an export. Without these instruments, producers must use their own liquidity or seek alternative financing.

Large companies can sometimes raise capital abroad or rely on their shareholders. Small and medium-sized enterprises have much fewer opportunities. This difference increases inequalities between producers and can lead the most fragile companies to reduce their activity or to abandon investment.

Six years of crisis have profoundly reduced credit

The banking collapse started in 2019 left a lasting imprint on the real economy. Banks have reduced their balance sheets, old loans have been repaid or restructured and new loans have remained well below pre-crisis levels.

At the same time, the daily functioning of the economy has shifted to cash payments and direct use of the dollar. This de facto dollarization has enabled some trade to resume, but it does not replace a financial system capable of turning deposits into investments.

An economy can work with cash transactions. It can be much more difficult to develop sustainably without credit. Industrial investment requires several years of horizons. A company generally does not finance a new production line, warehouse or technological modernization solely with its current revenues.

This weakness in funding becomes a handicap of competitiveness. Foreign competitors can borrow to increase productivity while Lebanese producers often have to self-finance their investments. Even when a Lebanese product retains a good reputation, its manufacturer may lose ground without being able to reduce its costs or increase its capacity.

Banking restructuring remains a condition for recovery

The restructuring of banks is therefore not confined to depositors and shareholders. It also determines Lebanon’s ability to rebuild a productive economy. Until the losses of the financial sector are recognized and distributed through a credible mechanism, the return to normal banking will remain difficult.

Since the beginning of the crisis, the central question has been the distribution of losses between the State, the Bank of Lebanon, banks, their shareholders and depositors. This issue delayed several reforms and complicated negotiations with the international financial institutions.

The stakes are considerable. Misconceived restructuring could leave banks unable to finance the economy. On the other hand, credible restructuring should identify viable institutions, recapitalize those that can be recapitalised, and treat others’ losses in a transparent manner.

For producers, the result counts more than the legal architecture. They need banks capable of granting loans on terms consistent with their investments and business cycles. Without this function, the recovery remains dependent on the liquidity held by each company.

Electricity increases each product manufactured in Lebanon

However, the banking system is only part of the problem. The cost of energy remains one of the main structural handicaps of Lebanese production. Companies still do not have a public supply of electricity that is sufficiently stable to operate under conditions comparable to those of many foreign competitors.

They must therefore supplement public electricity with private generators or with their own installations. Some have invested in solar energy to reduce their dependence on fuel, but these equipments themselves require significant initial capital. Again, the lack of bank financing limits the ability of small businesses to make these investments.

The energy cost directly affects the final price. A plant that pays more to power its machinery, cool its facilities or store food must incorporate this expense into its prices or reduce its margin.

For an export-oriented company, the difficulty is immediate. The foreign consumer compares the Lebanese product with goods produced in countries where industrial electricity is more stable and where producers have cheaper financing.

Infrastructure adds second handicap

Companies also bear the consequences of the deterioration of public infrastructure. Roads, electricity networks, telecommunications and logistics equipment directly determine the cost of transporting goods.

These difficulties are particularly important for agricultural and food exporters. Transport times, the maintenance of the cold chain and the speed of customs procedures can determine whether a cargo arrives on its market under acceptable commercial conditions.

Each additional cost reduces the producer’s margin. Companies can try to pass it on to their prices, but they risk losing customers. They can also absorb, at the price of lower profitability and hence a further reduced investment capacity.

Competitiveness thus becomes the result of an accumulation. None of these handicaps is necessarily enough to make a product unsold. But the combination of expensive energy, poor infrastructure, scarce credit and less dynamic external demand ultimately weighs heavily on businesses.

Dollarization did not solve the problem

The relative stabilization of the use of the dollar in transactions has enabled a part of the private sector to regain visibility over its prices. After the collapse of the Lebanese pound, many companies adopted tariffs directly denominated in dollars to limit the impact of currency fluctuations.

This adaptation reduced some of the uncertainty but did not restore competitiveness. A company can know exactly its costs in dollars while being too expensive to compete with.

Dollarization is also a financing problem. Companies need income or foreign currency liquidity to pay for certain imported raw materials and equipment. Exporters have an advantage when cashing directly from foreign currencies, but the decline in external demand reduces precisely this source of liquidity.

The slowing down of orders in the Gulf therefore has an additional effect: it not only reduces turnover, but also reduces the inflow of foreign currency into the companies concerned.

Productive employment directly threatened

The deterioration of competitiveness can ultimately be passed on to the labour market. Whenever a company loses orders, it usually starts by reducing expenses, deferring investments or limiting recruitment. If the slowdown continues, existing jobs may be affected.

This risk is particularly important in a country that has already experienced a high emigration of skilled workers since 2019. Companies need engineers, technicians, sales people and specialized personnel to maintain production that meets international market standards.

The loss of these skills creates a difficult circle to reverse. A less competitive company reduces investment and recruitment. The most skilled workers then seek opportunities abroad. The company then has less skills to modernise its production and conquer new markets.

The question of exports thus far exceeds the trade balance. It directly affects Lebanon ‘ s ability to maintain productive employment and maintain the skills necessary for a sustainable recovery.

Producing more requires a change in model

Since the financial collapse, there has been broad consensus on the need to rebalance the Lebanese economic model. The crisis has shown the limits of an economy that is too dependent on capital inflows, real estate, financial services and transfers from abroad.

Strengthening industry, agriculture and exports would theoretically generate more external income through production. But the observation of 18 August shows that this objective cannot be based solely on entrepreneurs.

A producer can improve its organization and look for new customers. It cannot rebuild the electricity grid, restructure banks or reform public infrastructure alone. Competitiveness therefore also depends on collective and institutional decisions.

It is at this level that the role of the State becomes central again. It must create an environment that allows viable businesses to invest and produce at a reasonable cost, rather than individually offsetting public service failures.

Banks become a test of reform capacity

The banking record is a decisive indicator in this context. Six years after the start of the crisis, the inability to find a normal credit system continues to affect investment. The problem can no longer be seen as a mere legacy of the financial shock of 2019.

A credible restructuring must gradually restore confidence, but also restore the fundamental economic function of banks. Their role is not only to receive deposits or make payments. They must select and finance productive projects.

Without this transformation, Lebanese companies will continue to operate with a structural disadvantage. The best-capitalized producers will be able to survive with their own resources. Others will remain deprived of the necessary financing to grow, export or modernize their equipment.

The decline in Gulf demand makes this weakness more visible. When markets were dynamic, some companies could offset their high costs by sales. With less demand, every internal handicap weighs more.

The Gulf retreat sounds like a warning

The evolution reported on 18 August is therefore a warning to the Lebanese economy. The country cannot assume that its traditional markets will sustainably absorb its production regardless of its price and manufacturing conditions.

Producers must be able to maintain the quality and identity that distinguish certain Lebanese goods, while reducing their costs and diversifying their markets. This transformation requires investment, financing, but also improved energy and logistics.

The decline in Gulf demand thus reveals the weaknesses accumulated since the crisis. It comes at a time when the banking sector has not yet regained its financing role, where electricity remains expensive and where infrastructure continues to impose additional burdens on businesses.

As of 18 August 2026, therefore, the immediate question is no longer whether Lebanese exports can regain their former volumes. It is a question of determining whether banking, energy and institutional reforms will move forward quickly enough to allow producers to win back lost markets. Without a return to credit and without reducing structural costs, the decline in Gulf demand is likely to become a lasting indicator of a deeper loss of competitiveness.