Lebanon: Proposal to raise taxes met with opposition

Published February 16th, 2017 - 06:52 GMT
The IMF has urged the Lebanese government to look for new alternatives to reduce the mounting public debt.  (File photo)
The IMF has urged the Lebanese government to look for new alternatives to reduce the mounting public debt. (File photo)

Taxes proposed by Lebanon's Finance Ministry are coming under mounting criticism from economists, bankers and businesses who are warning that these measures would add more burden on citizens and the struggling economy.

One of the vocal opponents of the taxes, which are aimed at financing a public salary increase, was the Association of Banks in Lebanon, which issued a statement urging the government to look for other ways to increase state revenues.

The Cabinet and Parliament’s Finance and Budget Committee held several meetings over the past few weeks to review the 2017 draft budget and the proposed taxes.

There is a consensus among the main political parties to endorse the budget before the parliamentary elections, but the issue of taxes is still point of contention.

Many politicians realize that increasing taxes amid an economic slowdown could trigger social unrest and wide demonstrations by the labor unions and civil society groups.

Finance Minister Ali Hasan Khalil has proposed a series of taxes in his draft budget, such as increasing the value added tax from 10 to 11 percent, increasing taxes on the interest of deposits from 5 to 7 percent, increasing taxes on companies’ profits from 15 to 17 percent, placing a 15 percent tax on profits from real estate transactions and implementing a 4 percent fee on the import of kerosene.

Khalil argues that these taxes are necessary if the government wants to finance overdue salary increases for the civil servants and public school teachers.

The minister estimated the cost of financing the proposed salary scale at LL1.2 trillion ($800 million).

Total expenditures, according to the draft budget bill, are LL24.701 trillion, an increase of 7.7 percent.

Projected government revenues are around LL13.406 trillion, or 20.49 percent of the GDP.

Leading economist Marwan Iskander told The Daily Star that there are better ways in reduce spending and increase revenues without the need to add more taxes on the citizens.

“The alternative [to taxes] is clear as the sun. One the solutions are to run some of the power plants on gas instead of fuel. The Chinese have proposed to finance the construction of power plants over the next 30 years with 2 percent interest and two year grace period. If we build one more plant and turn two other existing plants to run with LNG [liquefied natural gas], Lebanon can save $1.2 billion annually,” Iskander said.

Deir Ammar and Beddawi power plants, each with a 450 MW capacity, were originally built to run on gas. But the plants were forced to run on fuel oil because the government could not secure a sustainable gas supply.

Iskander also proposed the rejuvenation of Tripoli Port and the opening of Qleiaat airport in the north.

He said these two things alone could secure $500 million of additional revenues to the state.

Iskander also reiterated calls for the full computerization of all government departments, as in the case in Dubai.

The Association of Banks in Lebanon, which held a meeting in its headquarters Wednesday, urged the government to drop the idea of raising taxes on the profits of companies and banks, adding that it would meet with officials soon to address this issue.

It cautioned that additional taxes amid an economic slowdown would have negative effect on growth and the inflow of deposits and funds to Lebanon.

Some economists and bankers fear that increasing taxes on interest on deposits would dissuade the investors and Lebanese expats from sending remittances to Lebanon.

They added that increasing taxes on interest of deposits from 5 to 7 percent represents a 40 percent increase.

Iskander said that customer deposits registered a growth of just 2 percent before the Central Bank launched its financial engineering program last year.

In its latest report on Lebanon, the International Monetary Fund recommended similar tax increases to those found in the draft budget.

The IMF has also urged the Lebanese government to look for new alternatives to reduce the mounting public debt. “The authorities need to articulate a plausible policy mix that halts the growth of public debt and places the economy on a more sustainable path. Front-loaded fiscal adjustment needs to be based on fair and broad-based revenue measures – starting from fuel taxation – and rebalanced spending, in particular a reduction of costly electricity transfers. Passage of a credible budget is a priority,” the fund said.

It noted that the country’s credit ratings reflect Lebanon’s challenges. “Moody’s downgraded Lebanon from B1 to B2 in December 2014; and Fitch downgraded Lebanon to B-minus in July 2016. S&P, on the other hand, has kept its B-minus rating since November 2013, though it upgraded the outlook from negative to stable in 2016. Rating agencies’ assessments continue to focus on the bank-sovereign nexus, slowing deposit growth and reserves, domestic political uncertainties and rising fiscal difficulties,” the IMF said.

By Osama Habib

 


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