MENAPOL Blog

Why Europe should care about Lebanese Start-Ups

Due to the debt and political crisis that has been further compounded by the COVID-19 pandemic, large parts of Lebanon’s burgeoning knowledge economy are facing extinction. Preventing the country’s most promising growth sector’s demise is in Europe’s strategic interest and offers opportunities for effective aid in a complex and highly politicised context.

A drastic decline in foreign direct investments, an unresolved sovereign debt crisis and now the COVID-19 pandemic have put Lebanon’s economy on a dangerous downward trajectory. After years of anaemic growth, the Lebanese economy had already contracted by 6.5 per cent in 2019, with the IMF forecasting a further sharp contraction by 12 per cent for 2020, making it one of the hardest hit in the region. Although hard data is generally hard to come by, the sight of shuttered shops, idle construction sites and falling real estate prices across the country already spoke their very own language long before the pandemic’s outbreak. Today, the massive currency devaluation of around 80 percent further illustrates the free fall of the economy. The companies – and individuals behind them – who are most affected by these developments are the country’s small and medium-sized businesses, notably its proliferating start-ups at the heart of its growing knowledge economy.

In the years prior to the crisis, Lebanon’s knowledge economy expanded at remarkable rates, turning it into a rare economic success story for the country and, indeed, the region as a whole. Though still far from being mature, the Lebanese tech start-up ecosystem went well beyond its nascent growth phase. The wider benefits of this emerging knowledge economy have begun to crystallise with the tech sector creating large numbers of high-skilled jobs, putting it in stark contrast to the economy’s other key low-skill sectors: tourism, construction and agriculture. Given the small size of the Lebanese market and its multilingual society, many tech start-ups also have an inherently international outlook.

Unfortunately, the worsening crisis and the lack of funding has made itself felt in Beirut’s major tech hubs with scores of start-ups and entire co-working spaces closing down for good. Funding has been steadily drying up since last year, as banks are experiencing a double whammy of large exposures to Lebanese government debt in need of restructuring and accelerating declines in customer deposits. Restricted access to foreign currencies – notably the US dollar – along with rampant inflation have worsened companies’ liquidity position. Even government guarantees have largely failed to create incentives to lend, as the declining number of approvals for the government-backed “Kafalat” small loans guarantee scheme suggests. The ongoing uncertainty has also meant that VC investments have slowed to a trickle. Of course, there have been private initiatives to lessen the pain, a notable example being the NGO Yallafund, a crowdfunding platform for start-ups to raise funds. Yet these initiatives mostly target relatively established start-ups constituting only a fraction of an ecosystem that draws much of its lifeblood from a multidimensional dynamic where ventures are constantly created, fail, transform or are bought up. Moreover, their approach rarely seems to have the systemic nature of the knowledge economy in mind.

In what is going to be a protracted economic downturn, more external support will hence be crucial and should include both, the expansion of existing programmes as well as new initiatives. Multi- and bilateral development banks like the European Investment Bank, the German KfW and the French AFD – many of which already have substantial SME financing programmes in place – can play a big role in this. At this stage of the crisis, like elsewhere in the world, the wholesaling of funds at low interest rates will not be sufficient. It will need to be accompanied by comprehensive guarantees to transfer large parts of the credit risks to development lenders. Development banks should furthermore recognise the opportunities this banking crisis offers to provide incentives to make the very homogenous banking sector more sustainable and attuned to the needs of the knowledge economy. Lastly, there is a pressing need for equity investments – most importantly seed capital, which has always been in short supply. Programmes like the European Bank for Reconstruction and Development’s Star Ventures programme would find fertile ground in the Lebanese knowledge economy. On a smaller scale, other European institutions in the country such as the Friedrich Naumann Foundation can play a bigger role in promoting start-ups when given sufficient flexibility.

European assistance for the knowledge economy is badly needed and its advantages are apparent. Firstly, help in terms of loans or seed-funding directly goes to a highly productive sector rather than channelling money through the national government. The EU has rightfully become impatient with Lebanese governments promising a lot but delivering little. This is unlikely to change. Therefore, new and innovative tools that go directly to businesses are much needed to alleviate this frustration. Secondly, financing the knowledge economy will help to create high-skilled jobs with the potential of reducing the country’s staggering current account deficit. At the same time, it creates opportunities for the workforce and thus helps to prevent brain drain of the brightest minds in the country. During this painful period of political, economic and financial turmoil, support for Lebanon and its vibrant start-up community should be ramped up. By helping start-ups companies to help themselves, Europeans can make a big impact in creating a more sustainable and resilient Lebanese economy. This is an opportunity not to be missed.

Kristof Kleemann is head of the FNF Beirut Office since March 2020. Previously, he worked at the German Chancellery in Berlin in the directorate for European affairs and as Chief of Staff of Alexander Graf Lambsdorff, a liberal Member of Parliament and Vice-President of the European Parliament.  

Benoît Barthelmess is an economist who co-founded in 2019 the think tank Le Club Européen, a centrist forum for progressive and innovative ideas for the future of Europe and partner of the Friedrich Naumann Foundation.