Any tax hikes should be coupled with structural reforms and development projects in partnership with the private sector to boost economic activity and offset inflation, Central Bank Governor Riad Salameh said Monday.
Salameh was speaking at the fifth annual banking conference, dubbed “Lebanese Banks under Stress Tests,” to discuss the challenges facing Lebanon’s banking sector both on the domestic and regional level.
“Taxes, if approved, should be coupled with projects in partnership with the private sector. In the absence of such projects, taxes will constitute a burden on the economy and fuel inflation,” Salameh said.
The 2012 draft budget, recently proposed by the Finance Ministry, stipulates a 2-percent hike on both VAT and interest-revenue taxes and a new 15-percent tax on profits made through real estate transactions.
The private sector has voiced concerns over the government’s intent to raise taxes, warning against Lebanon’s failure to grow its economy by at least 4 percent in 2012.
The IMF estimates that economic growth will pick up to 3 percent this year from 1.5 percent in 2011.
Many experts believe that such an expansion remains well below Lebanon’s potential mainly due to political and security instability.
“Political crises, security incidents and the budget deficit are challenges that still face Lebanon ... Most economic activity takes place between May and October of every year and we hope for a normal political atmosphere to achieve the expected growth,” Salameh said.
According to the IMF, Lebanon’s debt stood at 134 percent of economic output at the end of October, and about 40 percent of it is denominated in foreign currency.
Bank lending to the government stands at about $28 billion while credit to private businesses and consumers has exceeded $40 billion, extending a reversal that started in 2009 in how the country’s banks deploy funds.
Despite risks posed by domestic and regional instability, Salameh said Lebanon’s economic growth could pick up as soon as stability is restored due to high levels of liquidity available to Lebanese banks in line with the Central Bank’s policy. Lebanon enjoys liquid foreign-currency assets of more than $32 billion and a stock of gold worth about $16 billion.
The increased risk of domestic instability and increasing unrest in Syria, recently led Standard & Poor’s to revise its outlook for Lebanon’s credit rating from stable to negative.
S&P’s warned that the fiscal deficit was likely to widen this year to 8 percent of GDP, with the unrest in Syria hitting key sectors of the Lebaneseeconomy, notably trade, tourism and foreign capital inflows.
Despite the deteriorating economic and security situation in Syria and political uncertainty in Egypt, Lebanese banks have fared well.
In precautionary measures, Lebanese bank affiliates in Syria have cut their exposure to Syrian businesses by 45 percent in the past 15 months, according to CFO and Strategy Director of Audi Saradar Group, Freddie Baz.
Baz said the cutback was a healthy sign as Lebanese banks sustained their operations while limiting their risk exposure. Since October 2010, assets of affiliates of Lebanese banks operating in Syria shrank from $5.5 billion to $3.3 billion, deposits decreased from $4.6 billion to $2.5 billion and credit exposure was down from $2.25 billion to $1.2 billion. Baz added that liquidity to deposits increased from 56 percent in October 2010 to 64 percent in March 2012.
By The Daily Star