Release of McKinsey Lebanon report highlights depth of economic woes

18 January 2019 Consultancy-me.com

The exasperated Lebanese Economic Minister Raed Khoury has publicly published McKinsey’s hefty recent economic country report ahead of previous plans, and the picture isn’t pretty.

In July last year, the global management firm McKinsey & Company delivered a 1,000-plus page macroeconomic report to the government of Lebanon, with a focus on short-term economic gains to steady a faltering local econom, which has been consistently hampered by drawn-out political instability and a chronically high debt to GDP ratio. Interest payments are predicted to account for up to half of all government spending this year.

Among the McKinsey document’s reported recommendations, which included ‘quick wins’ in the areas of wealth management, construction and tourism, the American strategy giant suggested Lebanon should consider legalising its illicit marijuana crops – later described by Economy and Trade minister Raed Khoury as among the best in the world – as a potential export commodity. The progressive recommendation made global headlines.

Since then, much of the international media has moved onto the next short grab, while Lebanon remains mired in debt and stuck in a political stalemate marked by factional fighting; more than eight months since last year’s general election, and still the various parties have yet to form a functioning government. This ongoing delay, according to the Economic Minister himself, recently pushed Khoury to release the prodigious McKinsey report into the public domain.

While garnering far less media attention beyond the Middle East region this time around, the precisely 1,274 page McKinsey report paints a damning and somewhat desperate picture of gross economic mismanagement as well as the true depth of the country’s current woes across just about every sector. With Consultancy-me.com refraining from republishing the graphs from the ‘internal’-watermarked document, they indeed tell a truly and deeply troubling story – in just the first few pages alone.Release of McKinsey Lebanon report highlights depth of economic woesSome figures, led by sub-headings such as ‘Over the last ~40 years, Lebanon has not created significant incremental wealth, and has also lagged other countries in the last 7 years’, ‘Volatility has been influenced by the economy’s reliance on diaspora inflows’ (rather than a focus on developing productive sectors), and, ‘Persistent corruption and legislative inefficiencies have further perpetuated the government’s inability to spur economic growth’:

Lebanon’s real GDP growth has slipped from 9.2 percent in the period covering 2006 to 2010 to just 1.3 percent over the following seven years – while its debt to GDP ratio has rocketed to ~150 percent (surpassed by only Greece and Japan) and the country’s IMF ‘ease of doing business’ ranking has dropped 30 places to 133rd during that time. GDP per capita, meanwhile, has grown by less than 10 percent since 2010, and is only 30 percent greater than in 1980.

Korea, for example, similarly placed to Lebanon in economic terms in 1980, has over that time grown its GDP per capita figure by 700 percent, while Turkey's statistic in just the years from 2010 to 2017 was up by 42 percent. Other international comparisons include Lebanon having the world’s fourth-worst quality of electrical supply (actually an improvement on 2014) ahead of only Haiti, Nigeria and Yemen. Meanwhile, Lebanon has fallen behind Myanmar on the global corruption index.

In fairness, Lebanon has suffered periods of devastating military conflict over that time, but the McKinsey report – said to have commanded a $1.3 million fee (at almost exactly $1,000 per page) – pulls no punches in dissecting the local economy sector by sector, with negative 2010 to 2016 compound annual growth registered just about every sector across the board – compounded in turn by its drastically lagging infrastructure and a significant drop off in foreign direct investment.

Recommendations & Commentary

Without giving up an entire weekend to a thorough analysis, the report recommendations (numbering some 160 core initiatives in total), in brief centre on improving the gross mismanagement and developing the five sectors identified as carrying the greatest potential to jump-start the economy, namely;  Agriculture, Industry, Tourism, Financial Services and the Knowledge Economy. Together, these priority sectors are projected to add over 200,000 jobs and $11 billion in incremental GDP to 2025.

“It’s important the government adopt this vision, which creates confidence and at the same time a roadmap for all ministries to work accordingly,” Khoury has said, defending against criticisms by adding, “The government doesn’t have an economic policy. The mere fact that we now have a policy is an achievement.” When a government is finally formed, the Economic Minister says; “The Cabinet has to decide how to finalise this. If they remain scattered, it won’t work.”

Yet, criticism of the report from some quarters has been fierce, notably from Byblos Bank chief economist Nassib Ghobril in a discussion with local media agency An-Nahar. “First, the report lives up to the reputation of global consulting firms in terms of submitting reports full of glossy graphics, charts, and visuals,” Ghobril begins, before taking a swipe at McKinsey (and effectively the world of strategy consulting) for among other things the use of insubstantial buzz-words.

“The report also lives up to expectations in terms of using the consulting world’s jargon, as it is full of expressions such as ‘aspirations’, ‘future-proofed’, ‘actionable’, ‘enablers’, ‘radiate’, ‘leap’, ‘anchors’, ‘optimisation’, as well as catchphrases like ‘hygiene factors of economic competitiveness’, ‘flagship projects’, ‘strategic plays’, ‘seamless end-to-end journey’ and ‘institutionalisation mechanism,’” Ghobril rails, before quietly adding; “But this should not distract from the content.”