New taxes spark fears of effect on prices in Lebanon

Restaurants, cafes and other shops have increased prices but some small business owners were waiting.
January 14, 2018
A Lebanese woman holds a placard during a protest in downtown Beirut

Beirut - A series of taxes im­plemented Janu­ary 1 caused fear of worsening economic problems among small businesses and consumers in Lebanon. Among the taxes passed by parliament last summer to fund a public sector wage hike is value added tax (VAT) increase from 10% to 11%.

Restaurants, cafes and other shops have increased prices but some small business owners were waiting. “I haven’t changed the costs of my items just yet,” a small grocery store owner off Beirut’s busy Hamra Street said, asking to remain anony­mous. “I have to see how much my costs will increase once I restock my inventory.”

However, others realised that prices have been inflated inconsist­ently. “Go to any small grocery store or business and you’ll see that the prices have gone up much higher than anticipated,” said Hasan S., a taxi driver. “I’m all for the public sector wage hike but these taxes will harm the poor and the rich won’t notice much of a difference.”

American University of Beirut As­sociate Professor of Economics Jad Chaaban echoed those concerns, saying the tax reforms came at the wrong time. “Countries impose taxes when they are done in a way that does not harm the vast majority of the population,” Chaaban said.

The cabinet agreed on the pub­lic sector wage hike in 2012 but the measure languished in parliament for five years due to legislative paral­ysis. Public sector workers, includ­ing teachers, routinely protested and went on strike, demanding their minimum wage increase to $450 a month, matching the country’s min­imum wage for private and other non-government institutions.

“The only wage increase that took place was for those in the public sec­tor,” Chaaban said, adding that they make up one-third of Lebanon’s workforce. “If you increase taxes on individuals without increasing income to at least offset it, then you will have negative net purchasing power.”

Economy Minister Raed Khoury recently warned merchants about raising prices beyond a certain point.

Other notable components of the reforms include the tax on corpo­rate profit increasing from 15% to 17%, as well as $1.65 tax on stamps for phone, internet and prepaid card bills.

Jeremy Arbid, a journalist in Leba­non reporting on economics and government policy, said the lack of data and economic modelling has been alarming. “What’s confusing is that I haven’t seen any sort of mod­elling on either the tax increase or the wage hike,” he said. “Either the data do not exist or the government refuses to publicise the data and we don’t have a congressional budget office to measure the economic ef­fects of public finances.”

Arbid added that the projections on the tax reforms he saw from the prime minister’s office and Ministry of Finance “did not match.”

“They [businesses] are rounding up costs because they don’t know what impact these taxes will have,” Chaaban said. “Even if the govern­ment claims that the 1% VAT in­crease is small, everybody has been rounding up prices — in some cases up to 10% — because they don’t know what effect this will produce.”

He said people will be further frustrated when taking Lebanon’s poor job market and lack of income into consideration.

The conditions are far from ideal for the Lebanese market and be­cause the tax reforms were passed last summer, consumer confidence plummeted, the December 2017 Byblos Bank/AUB Consumer Confi­dence Index indicated.

When the tax measures were in­troduced in parliament last spring to fund the wage hike, which costs ap­proximately $1.2 billion, civil society and some opposition political par­ties took to the streets. They called for alternative measures to fund the public sector wage increase, spe­cifically cracking down on money laundering and other forms of cor­ruption, squandering and misusing public funds. One notable example used was evasion of duties on im­ported goods.

“There is a lot of manipulation in the mobile phone market where there are smuggling and avoidance of customs and tax duties,” Arbid said. “When [former Communica­tions Minister Nicolas] Sehnaoui was minister, it was $40 million-$60 million per year in missed revenue on mobile phone imports only [due to tax duties avoidance].”

The issue of transparency and access to information is a persis­tent problem. “The Ministry of Finance would not provide these figures [on mobile phone im­ports] to us,” Arbid said. “I agree with the self-described opposition political parties and others that you can shore up revenue by plugging holes in revenue streams but who can say precisely where those holes are?”

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