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Deficit slashing Lebanese draft budget awaiting approval, paves way for $11bn in loans

Lebanon's draft budget hopes to avoid insolvency, but is it enough?

A proposal for a 50% cut in the salaries and remunerations of the president, the prime minister, ministers and current MPs was not included in the draft budget On the revenue side, the draft budget raises from 7% to 10% the tax on the interest earned on deposits, and applies to the interest income earned from T-Bills, and bonds issued Draft budget calls for pension salaries of civil servants as well as the salaries and benefits of current and former Presidents, Prime ministers, Speakers, and MPs to be subject to income tax

The Daily Star reported that the Cabinet is set to meet Monday to endorse a draft austerity budget that cuts public spending and slashes the deficit to 7.55 of the GDP from 11.5% last year, quoting former Future MP Ammar Houri, a political adviser to Prime Minister Saad Hariri. Houri said that the draft budget would not be opposed.

If passed, there is a likelihood that more than $11 billion in soft loans and grants from international contributors have pledged, known as CEDRE, will make their way to Treasury coffers, in support of a delicate Lebanese economy.

Reservations Already

The street might react negatively to the approved budget, as many feel it falls short of the reforms hoped for in a state riddled with corruption and waste.

Fears the budget would end up lowering state salaries, pensions or benefits resulted in prolonged strikes and protests by public sector workers and military veterans.

Minister of State for Administrative Development May Chidiac said she voiced “reservations” about projected expenditures and revenues.

“[We] put forward ideas to increase state revenues, such as the shutdown of illegal crossings and controlling legal crossings [to ensure customs duties are levied]. But these ideas were not adopted,” Chidiac told The Daily Star.

She said that a proposal for a 50% cut in the salaries and remunerations of the president, the prime minister, ministers and current MPs was not included in the draft budget.

Lebanon’s bloated public sector is its biggest expense, followed by the cost of servicing a public debt equal to some 150% of GDP, one of the world’s heaviest debt burdens.

General steps taken by the draft budget

A report by Thomson Reuters, published in Zawya said the Lebanese draft state budget for 2019 is the start of a "long road", quoting Prime Minister Saad al-Hariri said after his unity cabinet wrapped up marathon budget talks on 19 separate occasions.

"The 2019 budget is not the end. This budget is the beginning of a long road that we decided to take in order to lead the Lebanese economy to safety," Hariri said in a speech at a Ramadan iftar meal on Saturday.

Hariri said the budget was a message to the Lebanese, financial markets and friendly foreign states that Lebanon was determined to "address the weakness, imbalance and squander in the public sector".

“The government plans to cut some $660 million from the debt servicing bill by issuing treasury bonds at a 1% interest rate to the Lebanese banking sector.

A more detailed look at draft budget

Nassib Ghobril: Chief Economist, Head of the Economic Research & Analysis Department, Byblos Bank Group, published in today’s Lebanon this Week May 20-25, 2019, a list of the most important revenue and expenditure schemes for the draft budget.

Revenue

“On the revenue side, the draft budget raises from 7% to 10% the tax on the interest earned on deposits. It also applies to the interest income earned from T-Bills and bonds issued by the Lebanese government, among others. At start 2018, the tax rate went from 5% to 7%,” the Byblos Bank report says.

“Draft budget raises to 25% the income tax rate on persons and enterprises, excluding corporations and limited partnerships, that generate an income of LBP225 million ($150,000) or more. Prior to that, the tax rate was 20% on annual income above LBP120 million($80,000) for individuals and 21% on annual income above LBP 104 million ($69,333) for enterprises,” the report continued.

“The budget imposes a 2% fee on imported products, excluding hybrid cars, raw materials and machinery used for local production.”

“The draft cancels exemptions to customs duties and excise taxes, including privileges extended to current MPs and ministers to purchase cars that are exempt from tariffs. It revokes exemptions on the payment of car registration fees and related fees that some people benefit from.”

Read more: Drilling for offshore oil soon in Lebanon: A savior from economic collapse?

“The draft budget imposes fees on cars with special license plates from LBP 60,000 ($40) to LBP2.3 million ($1,533) per plate. Various other fees include up to LBP1 million ($666) on tinted windows, LBP250,000 ($166.6) for licenses to carry weapons, LBP1000 ($0.66) on hubbly bubbly orders at cafes and restaurants and fee on hotel rooms or furnished apartments from LBP3,000 ($2) to LBP 10,000 ($6.66)per room per night.”

The report said the draft budget calls for pension salaries of civil servants as well as the salaries and benefits of current and former presidents, Prime ministers, Speakers of parliament and MPs to be subject to income tax.

On the expenditure side, the draft budget freezes recruitment of public sector employees for 3 years. It also limits public sector salaries to 12 months per year, “as some agencies pay 16 months per year and this would cover Ogero telecom, National Social Security Fund (NSSF), and Port of Beirut among others.”