Banking to Cannabis: McKinsey Has a Plan for Lebanon's Economy

(Bloomberg) -- Global consulting firm McKinsey & Co. has set out its vision for Lebanon's economy, with recommendations ranging from building a wealth-management and investment-banking hub to becoming a provider of medicinal cannabis. Turning it into reality will be a tall order.

Caretaker Economy and Trade Minister Raed Khoury said implementing the thrust of the 1,000-page report will be crucial if Lebanon, the world's third-most indebted nation, wants the international community to start releasing $11 billion in grants and soft loans pledged in April.

“They are all interrelated,” Khoury said Friday in an interview at his Beirut office as he read from a summary of the report.

The abridged document was presented to President Michel Aoun this week, and the full version must be ratified by the new cabinet, which Prime Minister-designate Saad Hariri is still attempting to form following May's elections.

Voting again exposed Lebanon's notoriously complex sectarian rifts, with the Iran-backed Hezbollah group securing a bigger chunk of the seats in parliament. After weeks of horse-trading, Hariri is nowhere near forming a ministerial team amid infighting within Christian and Sunni communities, and demands by political leaders for greater representation.

World's Third Most-Indebted Country Gets More Desperate for Cash

The divisions could reduce the McKinsey report to a “theoretical exercise,” said Sami Nader, head of the Levant Institute for Strategic Studies in Beirut.

“The effort is laudable,” he said. But “anything that touches the economy will need political consensus in Lebanon because we don't have a functioning democracy.”

Lebanon hired McKinsey this year to help it formulate an economic plan. With at least three times as many Lebanese living abroad than at home, Lebanon has been sustained by remittances, mainly from the Gulf and Africa, which banks use to buy government debt.

Public debt stands at the equivalent of 150 percent of economic output and the International Monetary Fund sees it reaching 180 percent in five years. That puts Lebanon in the same league as Japan and Greece.

Foreign reserves -- currently a record $43 billion -- enabled the local currency to survive political storms that periodically left Lebanon without a president or prime minister, as well as the influx of 1.5 million Syrian refugees and the negative impact of low oil prices on the Gulf job market.

‘Quick Wins'

Tackling some of Lebanon's biggest problems, including corruption, will be key to rebuilding the economy, Khoury said. Lebanon has slipped down Transparency International's graft ranking to 143rd of 180 countries.

The report proposed some “quick wins” to ease the economic slowdown and show the international community that the country is serious about change, he said. They include setting up a construction zone for prefabricated housing that can be used in the rebuilding of war-torn Syria and Iraq, boosting tourism and opening new markets for a couple of Lebanese crops: avocados -- and cannabis.

Cannabis is cultivated clandestinely in the eastern Bekaa Valley, which is dominated by Hezbollah, despite regular government eradication campaigns. Khoury said Lebanon could legalize cultivation and export the drug for medicinal treatments. “The quality we have is one of the best in the world,” he said, adding cannabis could become a one-billion-dollar industry.

The government wants to boost real GDP growth to 6 percent within three years of reforms being implemented, halve unemployment that's currently at around 20 percent in five to seven years, and raise the contribution of the productive sector from 14 percent of GDP to 25 percent by 2023, said Khoury.

Lebanon's history of chaotic administration, its unstable region and vested interests that could derail anti-corruption initiatives pose challenges, he said. But without change, “we will have major economic turmoil.”

To contact the reporter on this story: Donna Abu-Nasr in Beirut at dabunasr@bloomberg.net

To contact the editors responsible for this story: Alaa Shahine at asalha@bloomberg.net, Mark Williams, Andrew Langley

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