Introduction of tariffs could cause profits of Lebanese lenders to plunge by up to 20 per cent
Exclusive: Lebanon's combined bank profitability may be hit by new taxes, Central Bank governor says
The combined annual profitability of Lebanon's banks could fall as much as 20 per cent because of the introduction of new taxes intended to help finance public sector salary increases, the country's central bank governor said.
Tax increases "might affect profitability, depending on the banks,” Riad Salameh said in an interview with The National in Washington. “It can range between 5 per cent to reach 20 per cent on the small banks, but it will not create a situation of losses at banks.”
Earlier this month, Lebanon’s parliament passed a bill that raises taxes, including hiking the tax rate on company revenues, as well as an increase in interest paid on bank deposits and a rise in tariffs on Lebanese pound denominated state treasury bills. After lawmakers voted, Prime Minister Saad Al Hariri said that if the public sector salary law was enacted without the tax bill “it would be a disaster for the country,” and could have led to the collapse of the Lebanese pound in six months.
The new hikes are expected to help fund a US$917 million pay rise for public sector workers by raising additional annual revenue of $1.2 billion.
"There are about 14 banks that will be severely affected, with their effective income tax rate jumping to 50 per cent," said Nassib Ghobril, chief economist at Lebanon's Byblos Bank. "There are various estimates that put the decline in the sector’s overall profits at about $300 million to $400 million."
Banks, which are major buyers of treasury bills, have raised a hue and cry over the tax increases, which come at a time of slow economic growth impacted by geopolitical tensions and Lebanon’s hosting of Syrian refugees, the highest per capita in the world.
The tax hikes are "a serious package but these fiscal reforms were lagging and necessary given the fact that the government had also to readjust the scale of salaries in the public sector which also were overdue due to the fact there we no adjustments for many years," said Mr Salameh.
Lebanon's longest standing central bank governor expects banks to merge to cope with the new tax hikes, which represent 2.5 per cent of Lebanon's gross domestic product (GDP). Mr Salameh is credited with shielding the country from the 2008 global financial crisis because he banned Lebanese banks from investing in subprime products and maintaining healthy balance sheets.
“Banks will always have the flexibility to adjust their bottom line either through the level of interest rates they pay or receive throughout the private sector or also by some cost cutting,” he said.
Despite the tax hikes, Mr Salameh said the banking sector in Lebanon remained strong and well-capitalised.
Lebanon, which has one of the world’s highest debt-to-GDP ratios, is struggling to lower its fiscal deficit as the economy slows and geopolitical tensions dent investor confidence in the country. The debt-to-GDP ratio, which reached over 148 per cent last year, is rising because of the slow growth and debt servicing costs. Lebanon’s public debt increased 4.4 per cent to $77.3 billion in August, according to the Ministry of Finance.
Moody’s Investors Service downgraded the country’s sovereign credit rating in August, citing the worsening debt burden, which is the third-highest among its rated sovereigns.
Business activity in Lebanon plunged to an 11-month low in September and is projected to worsen over the next 12 months, according to the Purchasing Managers Index, a gauge of the health of the private sector sponsored by Lebanon's Blominvest Bank and compiled by IHS Markit.
The worsening conditions were attributed to lower demand for goods and services as the political uncertainty gripping the country, weak economic conditions and cash-flow problems take their toll.
“The indicators in the country are not indicators that shows Lebanon is in a crisis financially,” said Mr Salameh, ruling out the need to secure an IMF assistance program to help control Lebanon’s finances.
French President Emmanuel Macron has promised to help organise a conference early next year to discuss economic support for Lebanon.
“In fact the effort to decrease the budget deficit is needed but can be conducted locally with the guidance of IMF without having a program but there has to be a political agreement on decreasing the fiscal deficit,” said Mr Salameh.
Still Mr Salameh is optimistic about growth, which he is forecasting at 2.5 per cent this year, driven by the services sector.
Growth has been aided by a $1bn annual stimulus package that the central bank introduced in 2013 to help prop up the economy. The bank will continue to provide the $1bn package next year, he added.