The government needs to consider increasing the value added tax by 1 to 2 percentage points, cut electricity subsidies and invest more on infrastructure to achieve higher economic growth, a senior official at the International Monetary Fund said Wednesday.
“What we have recommended first and foremost is to tackle the energy and electricity problem. The electricity problem prevails throughout the region, but is costing Lebanon in terms of growth, in terms of resources of the budget and in terms of the balance of payments,” Adnan Mazarei, the deputy director of the IMF’s Middle East and Central Asia department, told The Daily Star in an interview.
Mazarei said he proposed to Finance Minister Ali Hasan Khalil that the government reduce the subsidies on the state-owned power company Electricite du Liban in order to rein in the huge deficit in the electricity sector.
Successive governments in the last 20 years have been heavily subsidizing the fuel oil, which runs most of the country’s power plants.
The IMF view was also supported by the World Bank, which warned that EDL’s deficit is stifling growth in Lebanon.
The World Bank estimated the cumulative cost of treasury transfers to Electricite du Liban at 55.4 percent of GDP for the period between 1992 and 2013. It noted that 40 percent of Lebanon’s public debt was due to transfers to EDL. It said the public debt level would have stood at 87.8 percent of GDP by the end of 2013 if EDL losses were excluded.
“We also suggest raising the VAT tax as a quick measure to increase revenues and this increase can range between 1 or 2 percentage points,” Mazarei said.
He stressed that Lebanon needs large revenues to reduce the enormous deficit and public debt.
He added that increasing VAT should be done irrespective of whether the government approves the salary scale for civil servants and public school teachers.
“Even without the salary scale there is a need for greater revenue,” the IMF official said.
Mazarei said it was up to the government to add the salary scale to the bill and the IMF had no opinion on this matter. But he noticed that the Lebanese private sector has reservations about the salary scale as it would affect competitiveness.
“If the government wanted to raise the salaries then it should be done in the context of improving the civil service,” Mazarei said, adding that if the salary scale is introduced then the government needs to find funds for it.
He added that the interest rates in Lebanon were relatively high, in part because of the large demand from the government for credit from the banks.
“The fiscal deficit coming down will help lower the government’s demand for credit, and will eventually lower interest rates and help stimulate the economy,” he said.
He argued that although it’s true that public investments would raise the deficit, this would help generate revenues to reduce the deficit over time – as long as it is done properly and projects are done soundly.
“The problem with Lebanon is that the deficit is so large that the government has cut investments to the bare bones in order to finance other things such as energy and electricity,” Mazarei said.
He believes that the energy and electricity sectors need reforms.
Mazarei argued that the electricity subsidies are benefiting the rich and wealthy people in Lebanon and not the poor.
He added that once the government is able to cut the subsidies then part of the money it saves could be used to finance infrastructure.
Mazarei reminded that many countries in the Middle including Egypt, Jordan and Morocco, which heavily subsidized the cost of energy, are contemplating reducing these subsidies. But the official insisted that any cut in electricity subsidies should be accompanied by improvements in social services such as health, education and infrastructure.
Mazarei also said that Lebanon should not count on the fall of oil prices in the international market and the windfall revenues from telecommunications to reduce the budget deficit, as in the case of 2014.
“The authorities have taken some actions to reduce the budget deficit in 2014. But at the same time the decline of the deficit was due to two factors: a drop in the prices of oil in the international markets and there was a temporary transfer of revenues from the telecoms sector. But these may not be repeated in the future,” he said.
Mazarei nevertheless said Lebanon was doing relatively well despite the challenges it encountered such as the presence of a large number of Syrian refugees in the country.
He agreed with calls that the international community should do more to help Lebanon contain the impact of the Syrian refugees in the country.
By Osama Habib
