The McKinsey Lebanon Report - Lebanese economy has been going through a vicious cycle
8 January 2019
The Economy Ministry on Friday 4 June 2019 published the final report issued by the McKinsey consultancy firm last year, after the U.S.-based company was hired in October 2017 to help revamp Lebanon's economy.
The 1200-page “Lebanon Economic Vision” report consists of a detailed study of Lebanon’s economy with a long-term plan to revive and overhaul its productive sectors.
The plan mentions that Lebanon should develop a national vision that focuses on the improvement of five sectors by 2025 which are tourism, knowledge economy, financial services, industry and agriculture. This would help grow the GDP and generate job opportunities.
According to the report, the Lebanese economy has been going through a vicious cycle due to the country's highly-volatile economy and the absence of incremental wealth generation.
"The volatile growth is driven by concentrated diaspora and regional inflows and sporadic donors’ funds. These inflows are channeled into less productive sectors and into financing the governments’ increasing size and indebtedness leaving little room for the capital expenditure that is 4% of budget in last 10 years," it pointed out.
"Economic volatility was compounded by a lack of lack of fiscal discipline making Lebanon the country with the third largest Debt-to-GDP in the world."
The report warned that Lebanon is witnessing a sub-par infrastructure compounded with low legislative productivity and high perceived corruption, leading to limited investments into productive areas, creating an unconducive business environment, limiting job creation and productivity further perpetuating the cycle of driving a low contribution of productive sectors.
"Over the last 40 years, Lebanon has not created significant incremental wealth and has also lagged other countries in the last 7 years," it added.
"Private sector investment has therefore dropped, leading to additional economic stagnation. An unconducive business environment has kept Lebanon’s productive sectors underdeveloped."
The report found that productive sectors contribute to only ~16% of the country’s GDP, while employing ~26% of the labor force.
McKinsey stressed that Lebanon’s economic challenges necessitate a change in its economic model, adding that countries with Lebanon’s characteristics have successfully applied a clear recipe to develop their economy.
"To overcome the challenges, Lebanon should develop a National Vision guided by consistent principles," it recommended. "The National Economic Vision 2025 would build on Lebanon’s unique economic and social characteristics."
Three overarching government enablers should also be tackled to further fuel the economic growth through disseminating radical reforms and high productivity mindset in public sector, establishing new fiscal rules and re-visit existing ones and overhauling parliament productivity, the consultancy firm said.
On the expenditure side, two thirds of total government budget has gone to salaries and debt service, with 6% in capital expenditures.
As for the revenue side, Lebanon’s tax performance has been significantly below its potential with a tax effort less than 50% while the country spends 50% more on public servant salaries and generates 10% less government revenue compared to peer countries.