Lebanon has been grappling with a severe economic crisis over the past four years, dealing a significant blow to its financial stability. The country’s gross domestic product (GDP) has endured a staggering decline of more than 60 percent, plummeting from approximately $54 billion to less than $20 billion. This economic downturn has been compounded by the government’s inability to meet its financial obligations.

During a recent legislative session on July 19, the Lebanese parliament approved the increases in civil servants’ salaries and transportation allowances. However, this approval was granted without a budget in place for the year 2023. As a result, a clear picture of the government’s revenues and expenditures remains elusive.

LIMS conducted an analysis and estimated the impact of these measures on the fiscal deficit. According to the exclusive paper, the increase in the “customs dollar” (the new exchange rate used to calculate tariffs on imported goods) is expected to generate around 30 trillion LBPs. Nevertheless, this estimation falls short of covering the cost of salary increases, which amounts to 50 trillion LBP. Consequently, LIMS foresees an increase in the deficit by approximately 20 trillion LBP in the general budget for 2023. This deficit signifies funds that the government has pledged to pay but lacks the capacity to do so. To address this gap, the government plans to seek financing from the central bank, a move that may exacerbate inflation and currency devaluation.

One positive aspect is the unification of official exchange rates in the 2023 budget. Incorporating an exchange rate closer to market reality through Sayrafa would offer improved clarity. Nonetheless, the unification should have been based on the real price reflected in the black-market exchange rate rather than the artificial Sayrafa rate.

With the official exchange rate hike to Sayrafa level, taxes on dollar transactions, including customs, dollarized services, wages, value-added tax, and real estate, are expected to rise naturally. However, in an economy grappling with recession and substantial tax and customs evasion, higher taxes may inadvertently encourage further tax evasion, hampering the anticipated revenue growth. This evasion particularly impacts legitimate companies, hindering their competitiveness against evasive entities and potentially leading to business closures, thus worsening the economic stagnation.

In light of these challenges, LIMS recommended the implementation of substantial tax and customs cuts in a series of media interviews. Lebanon currently applies multiple tariff rates that can reach up to 40% on some items. However, the average collection rate from customs is merely 2.5% of imports, owing to various exemptions exploited by customs evaders. LIMS proposes reducing tariffs to 2.5% flat on all imported goods. This approach would harness the benefits of exchange rate unification while mitigating the drawbacks of exchange rate hikes. Moreover, LIMS suggests extending this model to encompass all types of taxes in order to foster economic recovery and stability.

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