Lebanon’s draft budget heaps even more pain on the poor

Lebanon plans to raise the bulk of its revenue this year with policies that will disproportionately harm the poor, according to a copy of the 2022 draft budget shared with Al Jazeera.

A man counts Lebanese pounds at a currency exchange shop in Beirut
The draft budget shared with Al Jazeera calls sees revenues from VAT - a regressive tax - tripling this year [File: Mohamed Azakir/File]

Beirut, Lebanon – Cash-strapped Lebanon is considering hiking customs duties and fees and other regressive policies to generate the lion’s share of state revenues this year, according to a copy of the country’s 2022 draft budget shared with Al Jazeera – moves experts warn will compound the financial hardships already plaguing millions of Lebanese.

The draft budget calls for raising the exchange rates that determine customs duties, as well as hiking other import and trade fees – moves analysts say would increase the cost of imports and feed inflation that is already at eye-watering levels.

While the proposals lack a clear timeline for introducing these changes, they do include empowering Finance Minister Youssef Khalil to modify exchange rates for different fees at his sole discretion.

“There should be a clear framework about how and when these exchange rates will be adjusted,” Mohamad Faour, professor of finance at the American University of Beirut, told Al Jazeera. “It’s a half-baked attempt at something that resembles a budget,” he said, adding that it does however acknowledge “that the multiple exchange rate regime will persist for the foreseeable future”.

Lebanese officials have said in recent days that hiking fees on internet and phone services could also be in the cards.

It’s a half-baked attempt at something that resembles a budget.

by Mohamad Faour, American University of Beirut

The proposed changes are expected to triple the amount of revenue the government collects from value-added taxes (VATs). Critics have long blasted VATs as regressive because they disproportionately harm the poor by consuming a larger share of their incomes.

Faour said that while it is “fair” for the government to increase tax revenues, he believes the focus on regressive instead of progressive taxes will “compound economic inequities”.

“Collecting [the] bulk of revenue through tax is fair, but we’re seeing aspects like maritime properties not being taxed whatsoever,” he said, adding that this policy alone could possibly generate millions for the state.

The World Bank recommended last year that Lebanon implement a wealth tax.

The draft budget also continues to shell out large advances to Lebanon’s decrepit, polluting and unreliable power sector, which provides only a few hours of government-funded electricity each day. 

Compounding hardships

The Lebanese pound has lost over 90 percent of its value over the past two years and currently trades at roughly 23,200 to $1. 

Lebanon’s central bank, the Banque du Liban, continues to shell out millions of dollars of its dwindling foreign reserves to shore up the pound. And over three-quarters of the country’s population lives in poverty.

Parliamentarian Ali Darwish, who is also an adviser to billionaire Prime Minister Najib Mikati, told Al Jazeera that the budget will function with three exchange rates to the United States dollar. The first, the effectively defunct official rate of 1,500 pounds to $1, will apply to state contracts. The second, a rate of 8,000 pounds to $1, will apply to customs duties, phone and internet bills and other fees. The third, the prevailing parallel market rate, will apply to state expenditures that require payment in foreign exchange.

We don’t have stability, neither economic nor political.

by Ali Darwish, member of Parliament

“In some ministries like telecommunications or energy, you have machinery you can only import in fresh dollars,” Darwish said. “State contracts will stay at 1,500, and public sector won’t get a raise yet but a financial bonus.”

Before Lebanon spiralled into crisis over two years ago, Lebanon’s monthly minimum wage was the equivalent of $450. It is currently worth around $20.

“It might be hard to increase [fees] until a public sector wage hike, so maybe in the future,” Darwish said.

Telecommunications Minister Johnny Corm said in a radio interview that the telecommunications sector needs to modify its exchange rate to 9,000 pounds to the dollar, days after internet cuts plagued the country over the past week due to fuel shortages.

And according to Darwish, the Lebanese government will keep its sickly public service ministries running in neutral gear, while it scrambles to secure a World Bank loan for a ration-card programme that aims to provide temporary cash assistance for millions of impoverished Lebanese.

No reforms, no path out of crisis

Lebanon’s nearly bankrupt government is hoping to pass the draft budget as quickly as possible, but it has still not completed a wholesale economic recovery plan needed to unlock billions of dollars in foreign aid, including a bailout from the International Monetary Fund (IMF).

Meanwhile, the country has struggled to implement a handful of financial and accountability reforms the IMF is requesting. These include forensic audits of the central bank and state institutions and a capital controls law. Millions of Lebanese are locked out of their US dollar savings accounts in Lebanese banks and fear that they will never get their money back.

While Prime Minister Mikati hopes to reach an agreement with the IMF soon, MP Darwish says that there is no clear deadline yet.

“We don’t have stability, neither economic nor political,” Darwish said. “It’s not clear until now.”

The budget, experts say, should be done in tandem with vital reforms in place, and an IMF-approved economic recovery plan to restructure the economy and stabilise the currency.

Source: Al Jazeera