Have you ever wondered how businesses make it in war economies? The Turban Times’ Sara Tarzi writes about the challenges businesses face in Libya.
BLOG | BY SARA TARZI
In this blog post, I will walk you through how it is to maintain a business in an unstable environment. More specifically, in a conflict environment. Let’s take a look at the case of Libya.
Not only do business owners have to deal with internal business challenges like management and profit, they also have to deal with whatever the external environment throws at them, such as hyperinflation, liquidity crisis, power outages, etc.
In stable economies, the failure rate of start-up businesses is 75%. There’s no available data for the failure rate in war economies, but if the failure rate of start-ups in stable environments is 75%, the failure rate in a war economy must be much higher.
Let me break it down for you. I’ve listed the challenges as following:
5 key external challenges that Libyan businesses confront
1. Hyperinflation – The value of the Libyan dinar is falling
2. The liquidity crisis
3. Power outages
4. Additional costs that didn’t exist before
5. Decrease of import
Feel like you are back on the school bench? Let’s dive in.
Hyperinflation: The value of the Libyan dinar is falling
Currently, the Central Bank holds the value of the dinar LYD 1.4 to the US dollar. However, the gap between the official rate and the black market rate has widened, which now fluctuates between 6 and 7 LYD.
This is a problem for everyone, including business owners, when buying raw materials/goods for their businesses.
Moayed Faza, owner of Alemtiyaz Aldawlya Co. states, “Libya hasn’t had this inflation problem in over 40 years now. Now that this problem is a reality, we’ve learned that before placing an order to import raw materials, we have to think six thousand times before making a decision to purchase.”
As a business owner, if you were to buy goods for $1,000, instead of paying 1,400 LYD like it was before 2011, you now have to pay around 6,000-7,000 LYD. This creates new issues for business owners.
Moayed Faza explains: “Another problem with this currency problem is, the money I pay my employees for their jobs are not worth much anymore. So the turnover of employees increases.”
The liquidity crisis
The liquidity crisis has left both businesses and customers lacking cash, which results in prices skyrocketing and sales dropping.
Mohammed Fagih, owner of Dolphin Telecom, states: “This started to affect my business in 2015, when the Central Bank of Libya stopped opening letters of credit, due to lack of cash and some corruption; only food and medicine businesses were prioritized.”
The Central Bank of Libya allocated 750 million dollars for the letters of credit for businesses to use in importing food and medicine in the first two months of 2017. When I write food, this only includes grocery stores and supermarkets and not restaurants and ice-cream shops.
To overcome this challenge, Fagih explains: “I try to secure direct deals between the suppliers and end users commercially. We use foreign companies to get external orders and get paid through international banks.”
Dolphin Telecom therefore provides their services to the end users, but when it comes to purchase of products, they do so directly with the suppliers without the company being intermediary.
Both Moayed Faza and Mohammed Fagih explain that to overcome this problem, they have to secure more than one source of income to survive as a business.
Since 2011, the damage caused by attacks and vandalism on, in example, power plants and cables reached 1.5 billion dollars, according to the General Electricity Company of Libya (GECOL). Quite a number, right?
The national electricity grid is collapsing under the high demand for power and the refusal of some cities to abide by the quotas established by GECOL, for sharing the available power. This leads to frequent power outages in Libya.
The solution? Owning a private generator.
This is not always a stable solution, however, as the generator needs fuel and periodic maintenance. To top it all off, there are times when diesel fuel is lacking in the country.
So, when the businesses experience a power outage, but don’t have fuel to run the generators, they’re compelled to shut down the business, until they get fuel. This limits productivity and increases costs, which I will explain further in the next section.
Evil loop of the external environment
As a business owner, if you offer your customers to pay with credit card, you will gain more customers (because people lack cash). But in doing so, you will be unable to withdraw the money from the bank yourself. Quite a paradox.
“We have thought of offering credit card payment methods to our customers. But that will be unfair to us as a business, as we can’t withdraw the cash ourselves,” Moayed Faza explains.
This basically means that you can’t make it easier for your customer without suffering as a business. On the other hand, if you don’t offer credit card payment methods, the average Libyan customer is not able to buy from you, as most of their money are stuck in the bank.
“People think we’re taking advantage of the current situation by increasing prices, but all we’re doing is surviving.” – Moayed Faza
The perception of the product becomes luxurious in the eyes of the customers, since it used to be a ‘normal product’ before the inflation.
“The frequent changes that affect your business make you unreliable in the eyes of customers. People think we’re taking advantage of the current situation by increasing prices, but all we’re doing is surviving, really,” Moayed Faza explains.
This leaves you with lower sales and therefore: lack of cash – which again forces you to set even higher prices to increase income.
And so, the evil loop continues and continues…