Analysis: Can the McKinsey Report serve as a roadmap for change to the Lebanese economy

The 1,274-page study, watermarked “internal,” and titled “ Lebanon Economic Vision,” focuses on sector-based initiatives to revamp the economy, including Agriculture, Industry, Tourism, Financial Services, Knowledge Economy and Diaspora.
by Christina Farhat

8 January 2019 | 15:38

Source: by Annahar

  • by Christina Farhat
  • Source: Annahar
  • Last update: 8 January 2019 | 15:38

PM Saadi Hariri at the podium of the Paris IV conference. (NNA)

BEIRUT: Acknowledging the necessary need for reform, on October 20th, 2017, the Cabinet approved launching a study prior to the April, 6, 2018 economic aid conference in Paris designed to assist Lebanon with grants and soft loans – in short, the government conceded that they never had an economic plan, and needed one for attending the conference.

The project, ultimately awarded to US-based consulting firm, McKinsey & Co, caused a stir of controversy at the time. Most of this debate, however, was regarding the outsourcing of the plan to an international private company, at cost of $1.3 million, despite this being a small amount in comparison to many government expenditures.

A draft document was needed in time for the Paris IV conference, which came to be known as CEDRE courtesy of French President Emmanuel Macron. The full report was submitted six months ago.

This report that made news headlines in early 2018 has finally been made public despite Economy and Trade Minister, Raed Khoury, publicly stating the report would only be made public contingent on the formation of a new cabinet.

However, with ongoing political deadlock, and no immediate signs of resolve, the study was made accessible to the public mid-last week.

The 1,274-page study, watermarked “internal,” and titled “Lebanon Economic Vision,” focuses on sector-based initiatives to revamp the economy, including Agriculture, Industry, Tourism, Financial Services, and Knowledge Economy, and Diaspora.

The recommendations put forward include realistic strategies, in addition to strategies that are extremely optimistic at best, noted a number of critics of the document.

Nassib Ghobril, chief economist, Byblos Bank, gave Annahar a detailed list of comments about the McKinsey report.

“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 told Annahar, adding, “Second, it is not clear why they decided that ‘hotels and restaurants is a productive sector and excluded many others, such as retail & commerce, ICT, real estate & construction, and finance, among others.”

He noted that thirdly the “report includes 160 recommendations that range from the practical and implementable to the highly abstract and unrealistic. For example, the initiatives related to the tourism sector seem to be the most practical and feasible ones, while others, such as ‘revamping the educational sector are questionable at best.”

The report did include a clear method to measure accountability as expected by the conference.

"Fourth, the most important recommendation of the 1257 slides is to hold the government accountable for the implementation of these measures and initiatives through a mechanism that includes key performance indicators. This is particularly relevant, given the lack of any notion of accountability among public officials and institutions."

That the report is jargon-filled is obvious to even the most casual reader, which is duly noted by the Byblos economist.

“Fifth, 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”, “optimization”, as well as catchphrases like “hygiene factors of economic competitiveness”, “flagship projects”, “strategic plays”, “seamless end-to-end journey” and “institutionalization mechanism”, among many others. But this should not distract from the content.”

Questions have also been raised regarding the methodology of the report, which is very reliant on official data, some of which is dated, as well as on international organizations, such as the World Bank and IMF, citations which in large part disregards private local data, such as bank reports.

Ghobril noted archly, "Sixth, and last but not least, the methodology section shows that the consulting firm has those who drafted the report have little regard to the economic and sectoral research, and indices, produced by private institutions in the country."

According to McKinsey, due to a plethora of ongoing economic events, Lebanese economic volatility has been influenced by factors such as the reliance on Diaspora inflows, which is channeled into real estate, and banking and consumption sectors.

These factors, in addition to the spillover effects of the ongoing Syrian Civil war, national political deadlock, and large-scale regional instability, along with the resignation of PM Saad Hariri last November while traveling in Saudi Arabia, are just a few of the events that raised previous global concerns of an economic collapse.

McKinsey considers that the standard deviation of real GDP growth of the Lebanese economy from 1992 onwards depicts fluctuation resembling that of a rollercoaster. With a 3.3 percent volatility rate over the 27 year period, the Lebanese economy is comparable in GDP growth to countries such as Greece and Korea.

It is no secret that the Lebanese economy is not growing, mired in unsustainable deficits, and in desperate need of immediate reform.

The question stands whether the report itself is able to bring much-needed change to the Lebanese economy should it be implemented in congruence with desperately needed CEDRE funding, and new government formation.

“I believe that the aim of the report in itself is to jump-start reforms in a focused and orderly way, as implementing all of the 160 initiatives may be too ambitious” noted Ghobril. He added, “If 25 percent of these initiatives are put in motion, this will send positive signals to the market, and if 50 percent end up being fully implemented, it will be sufficient to notice a tangible change.”

Marwan Barakat, chief economist at Bank Audi, said that change is possible should the correct measures be taken.

“I think that the McKinsey report shows that a soft-landing scenario of the Lebanese economy is still plausible, if the right decisions are taken from Lebanese authorities to embark over counter-cyclical measures that would support growth, and stimulate adjustment in public finances which remain the main vulnerability of the Lebanese economy.”

Barakat added the outlined report vision would spark job creation, and reduce public debt in addition to other outcomes.

“The vision targets (under McKinsey's scenario) a surge in real GDP growth from a current 1 percent to an average of 6 percent by 2025, the creation of 370,000 domestic jobs over the period, the contraction of the unemployment rate from 25 percent to 8 percent, the reduction in public debt to GDP ratio from 145 percent to 100 percent through privatization and deficit reduction, the decrease in public deficit to GDP from 8 percent to 3 percent through spending restraint, subsidy cuts, fighting corruption, increase in resource mobilization and improvement in collection and the realization of surpluses in the balance of payments equivalent to 10 percent of GDP.”

Politics of Plan Implementation

With the $11 billion dollars in grants and soft loans granted to prevent economic collapse to Lebanon from the conference put on hold by a lack of preliminary series of reforms leading to a better implementation of CEDRE goals, the 2025 vision, it seems, may very well be out of reach.

Rumors have been sparked that the World Bank, by far the largest tranche of loans to Lebanon via CEDRE, in becoming impatient over political deadlock, may reallocate funding if the Lebanese government is unable to elect a cabinet.

It has been approximately seven months since PM Saad Hariri was tasked with forming a cabinet in late May 2018. There appears no near-term solution on the horizon as Lebanon lurches into 2019.

Ultimately, the report, such as it is, stands as an accurate reflection of a Lebanese economy and government that are both seriously dysfunctional; with the fourth worst electricity sector in the world, an embarrassingly slow Internet infrastructure, a backward public education system, a long-time obsession with real estate development over other sectors such as ICT, and a government that has never really had a technocratic central economic plan or vision.

Show Comments

An-Nahar is not responsible for the comments that users post below. We kindly ask you to keep this space a clean and respectful forum for discussion.