Moody’s : Lebanon ‘s Tax Hikes and Salary Scale are Promising, but Fiscal Deficit and National Debt Remain High

According  to Moody’s latest research paper on Lebanon, the approved salary scale law which entails raising the minimum monthly salary of public servants to $450 (now equivalent to that of private sector employees) in addition to hiking tax rates marked, “the [country’s] first revenue reform since the 2007 Paris III Conference on Assistance to Lebanon”.

Moody’s further explained, “Parliamentary ratification of the annual budget would be credit positive for Lebanon because it would improve the transparency and predictability of public finances, allow further reforms and facilitate donor funding .”

The budget normalization is expected to improve Lebanon’s fiscal discipline, reduce political inefficiency in the fiscal and economic reforms, and boost the predictability of public finances to facilitate donor funding. In fact, the World Bank recently agreed to new loans and grants for two separate road projects exceeding $400 million.    

Key Items of the Approved Tax Package

  • Increase the Value-added tax (VAT) to 11% from 10%,
  • Increase the Income tax on financial institutions to 17% from 15%,
  • Raise taxes on interest revenue generated from deposits and on bank revenues from fixed-income portfolios.
  • Impose fines on illegally built seaside properties,
  • Increase the tax rate on lottery gains to 20% from 10%,
  • Introduce a 2% fee on real estate transactions,
  • Boost fees on seaborne freight, alcohol and tobacco.

While the Lebanese government expects the new measures to generate additional revenue of $1.2B, or 2.3% of GDP, Moody’s expect the fiscal deficit to contract to 8.9% of GDP in 2017 and 8.7% in 2018, from 9.5% in 2016. Nonetheless, Lebanon’s (B2 Negative) deficit levels will remain high according to the credit rating agency.

Update: Moody’s latest report published in August 2017 downgraded Lebanon’s long-term issuer ratings to B3 from B2 Negative. The stable outlook is in support of the government’s new reforms listed above. Yet, the main driver of the downgrade was the country’s worsening debt dynamics, with debt projected to reach 140% of GDP as per Moody’s. In details, the foreign currency deposit ceiling is lowered to B3 from B2, while Lebanon’s local-currency bond and deposit ceilings remained stable at Ba2.

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