New taxes spark fears of effect on prices in Lebanon
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?”