Passing the 2019 budget:
a good first step, World Bank

Tax of three percent to be

imposed on imports subject to VAT

Lebanon’s passing of the 2019 budget that aims to achieve a significant reduction in the country’s fiscal position is a good first step, said Saroj Kumar Jha, Regional Director at the World Bank.

“For a successful outcome, we urge proper implementation of budget measures, as well as continued momentum into the budget of 2020,” he said.

Parliament approved the austerity budget amid protests, mainly by army veterans.

The parliamentary Finance and Budget Committee had projected a total expenditure of nearly $16.9 billion and regular revenues of $12.8 billion.

The lawmakers have authorized the imposition of three percent customs duties on imports subject to valued added tax (VAT) with the exception of gasoline and agricultural and industrial raw materials. The tax must be determined by a governmental decree. This tax replaces the two percent on all imported goods that was proposed in the draft budget.

Another decision involved deducting 1.5 percent from military pensions in order to use the proceeds for medical care expenses.

The lawmakers have also approved the imposition of an income tax on army veterans according to the scheme proposed by the parliamentary Finance and Budget Committee. The tax is to be levied on the basic salary of high-ranking officers starting from colonels.

Parliament has also decided to exempt firefighting vehicles and ambulances from customs duties and registration fees.

Prime Minister Saad Hariri said: “Cutting the deficit in the 2019 budget to 7.6 percent of gross domestic product (GDP) is a ‘red line’ that we cannot cross.” He said the most important factor in this budget is that it has set the basic principles for reforms that the government will continue to implement in the 2020 and 2022 budgets.

The deficit-to-GDP ratio realized in 2018 was 11.2 percent. At the CEDRE donor conference the government committed to lowering the fiscal deficit by one percent on an annual basis over a period of five years.

Parliament held the plenary session to ratify the budget behind closed doors. The session came after 31 meetings and deliberation by the Finance and Budget Committee. The Cabinet referred the draft budget to Parliament in the last week of May, more than seven months after the constitutional deadline.

Riad Salameh, Governor of the Central Bank (BDL), said that BDL does not intend to subscribe to the proposed Treasury bill issue at a one percent interest rate; the issue aims to reduce the cost of debt servicing in the 2019 budget. He said that the Central Bank would look for other options to help the Ministry of Finance (MoF) cut the deficit.

Earlier this year, the MoF said that it plans to issue nearly $7.3 billion in Treasury bills denominated in lira at an interest rate of one percent. The aim was to reduce 2019’s debt servicing costs by $663 million. The MoF had said that the issue will be carried out in coordination with BDL and the commercial banks after the ratification of the budget.

Earlier this month, the International Monetary Fund (IMF) said that the 2019 deficit would likely be well above the government’s target of 7.6 percent of GDP. According to the Institute of International Finance (IIF) projections, the fiscal deficit could narrow to 8.4 percent of GDP in 2019. "In the absence of meaningful adjustment and external support, Lebanon would remain in a vicious cycle of rising debt, high interest rates, depressed private investment and subdued growth," the IIF said in its Lebanon Country Report ‘Time to Establish Credibility’.