Lebanese government missed opportunity to improve public finances - IIF

05 July 2010

BEIRUT: The Institute of International Finance (IIF) indicated that Lebanese authorities missed an opportunity to implement significant fiscal measures during the current favorable economic conditions, as the 2010 budget does not aim for a significant primary surplus through the implementation of long-delayed reforms, as reported by Lebanon This Week, the Byblos Bank Group’s economic publication.

It noted that the budget’s revenue-enhancing measures are not ambitious and fall short of the Paris III reform agenda. It stressed the need for larger primary surpluses that would generate a more rapid decline in the debt-to-GDP ratio, particularly in the context of the current global financial environment following the crisis in Greece. It said the current favorable environment of rapid growth, low global interest rates, and abundant liquidity in the Lebanese banking system is unlikely to persist over the medium term.

At such, it urged authorities to avoid complacency and build a consensus on reforms that, combined with political stability, could lead to a real GDP growth rate of about 5 percent annually beyond 2010 and reduce the government debt to more sustainable levels.

The IIF noted that the overall fiscal deficit, excluding grants, narrowed from 9.9 percent of GDP in 2008 to 8.6 percent of GDP in 2009 and the primary surplus improved from 1.3 percent of GDP to 2.6 percent of GDP during the same period due to sharp increases in revenues. It attributed this performance to strong real GDP growth and to the reintroduction of gasoline excise taxes, which led to a 25 percent rise in tax receipts.

It noted that tax revenues rose by 13 percent in 2009 when excluding the rise in gasoline excises. It also noted the limited scope to reduce primary government spending, with the exception of the transfers to Electricité du Liban (EdL) that account for 13 percent of total expenditures and are equivalent to 4 percent of GDP. It said the rehabilitation of EdL is a must for fiscal consolidation and further reduction in debt, adding that lowering the budgetary support to EdL would pave the way for achieving fiscal sustainability, stimulating economic activity, and reducing the need to raise the tax burden in the future.

The IIF called for implementing additional revenue-enhancing measures initiatives through several tax measures. It said there is considerable scope to increase the current 10 percent VAT rate, which is well below the OECD average of 18 percent and one of the lowest among comparable emerging markets and developing economies. It noted that the introduction of the VAT in 2002 was a major success, generating 5.7 percent of GDP in revenue in 2009.

It estimated that raising the VAT rate from 10 percent to 12 percent would generate additional revenues of $390m, equivalent to 1.1 percent of GDP, which would bring total VAT contribution to the budget to 6.8 percent of GDP in 2010. It said additional revenues could also be raised by removing VAT exemptions on precious and semiprecious stones as well as on yachts and other excursion or sports sailboats.

The IIF also recommended an increase in real-estate transaction fees. It said the 2010 budget increased the property transfer fee from 5 percent to 7 percent for properties valued at over $500,000, adding that this measure is not adequate as property taxes in Lebanon remain low relative to other comparable countries.

It estimated that a further increase in the real-estate registration fee from 7 percent to 10 percent for properties exceeding $300,000 could generate additional revenues of $350 million, equivalent to about 1 percent of GDP, and would limit property speculation. It added that imposing a 10 percent capital gains tax could generate additional revenues from real estate, as there is no capital gains tax on real estate in Lebanon currently.

The IIF expected the initiatives to improve the primary surplus to 3.7 percent of GDP at end-2010 compared to a surplus of 1.7 percent of GDP without the measures.

It also forecast a decline in the debt-to-GDP ratio to 138 percent of GDP at end-2010 and 132 percent of GDP at end-2011 when implementing these reforms, compared to 143 percent of GDP at end-2010 and 141 percent of GDP at end-2011 without the revenue-enhancing measures.

It considered that the adverse impact of the two revenue-enhancing measures on growth and inflation would be limited and temporary.

It expected real GDP growth to slow down to 7.5 percent instead of 8.2 percent, and for the average inflation rate to increase to 5.4 percent under the reform scenario from 4.4 percent under the baseline scenario.

The IIF warned that, in the absence of major fiscal reforms and the rehabilitation of EdL, the primary surplus would remain lower than 2 percent of GDP annually, real GDP growth will decelerate to around 3 percent over the medium term, and the debt-to-GDP ratio will remain very high and would decline to just 137 percent by 2015.

It noted that under the reform scenario, the primary surplus would gradually increase to 6 percent of GDP, real GDP growth could be maintained at around 5 percent over the medium-term, and the debt-to-GDP ratio would decline rapidly to relatively more sustainable levels of 108 percent of GDP by 2015. – The Daily Star

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