Revenue Implications of a Customs Dollar Rate at 45,000 LBP

In Azar and Bolbol, “An Empirical Note on the Desirability of a Reasonable Customs Dollar Rate”, Blominvest Bank Blog, Spotlights, August 26, 2022, the authors arrive at the following:

  • The historical average customs rate on Lebanese imports is: 2.5%
  • The price elasticity of imports is: -0.68

Accordingly, if the customs dollar rate is set at 45,000 LBP, as has been approved recently, then the % increase in the rate from 15,000 LBP will be: 200%

As a result, the resulting increase in prices due to the higher rate will be a reasonable rise at:

200% x 0.025 = 5%

As such, the reduction in imports due to the higher import prices will be:

5% x -0.68 = 3.4%

Given that in 2021 goods imports were $13 billion but increased in 2022 to $19 billion, mostly due to the oil price shock because of the Russia-Ukraine war, it is not un-reasonable to assume that in 2023 imports would be the average of the two at $16 billion. Hence, since we expect the price rise to reduce imports by 3.4%, then the resulting imports will be $15.4 billion

Therefore the new customs revenue at 45,000 LBP will be:

15.4 x 0.025 x 45,000 = 17,325 billion LBP or 17.3 trillion LBP

It is widely accepted that the new customs rate will be mostly used for paying public employees twice more than the total wages that they had received at end 2022, which was around 10 trillion LPB.  Hence, the new public wage bill will be about 30 trillion LBP. As such, the customs revenue could pay for almost 2/3 of that – quite reasonable. So, overall, the new customs dollar is not a bad policy measure.

Two additional observations are relevant. First, the above analysis applies to the average customs rate; naturally, some goods incur higher rates while others incur lower rates; and some might deserve a lower customs dollar rate or no rate at all if they are very crucial to the economy. Second, it is important to note that there will be an added effect on government revenues through VAT, as the higher import prices in LBP will increase VAT receipts from the imports purchased by the final consumer.

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