Monthly Editorial  
Economic Letter
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February 2017


Deepening crisis and its exposure to the unknown: in whose interest?

(*) Original text edited in Arabic



The ongoing discussions and movements on the sidelines of the 2017 draft budget which also revolves around the draft elections proposals reveal the increasing contradictions and fragility of the economic and political issues that are being debated.

This dangerous trend is likely to be reflected negatively on the country and people if this course of action persisted. The parties behind these discussions falsely try to speak on behalf of the country and its people, and to defend and protect their interests. There is also an organic correlation between the debate over the budget and the election proposals because the authority which makes this decision on them is one and united. The authority has vested interest in these two issues (budget and elections) and this reality is as clear as the sun.

Despite this correlation, we will leave aside the issue of elections. We are not experts on this issue and as in the case of the rest of the citizens, we are unable to keep track of this debate on elections due to its diversification, or even show interest in it, due to the resemblance of its targets, namely the renewal of the quotas system in our beloved Lebanon.

And what are really troubling are the blind impulses of the people of Lebanon, even for a group of intellectuals and activists seeking change to positions and proposals that could serve the interest of the cheese eaters themselves.

Hell broke loose over the issue of taxes that were incorporated in the draft budget presented by the government. We have written in the last monthly editorial published by our Association a lengthy article about the subject. We are not going back to it.

However, we still have some remarks and observations on the subject of taxes which could be in line with several articles written by economists and people of opinion on this matter. We are also trying to reflect the views of intellectuals, activists and demonstrators for the sake of credibility and to serve their interest away from the arguments and views of those who reaped benefits from the corrupt system.

Our preliminary observation relates to bank profits and taxes on them.

Despite our conviction of the steep gap between the proposals of the beneficiaries of political class and those belonging to intellectual activists, we have noticed that both parties have pointed to the profits of the banks, and the necessity that banks pay the cost of the salary scale estimated at LBP 1200 billion (the equivalent of USD 800 million).

The profits of the banks as it is well known falls under two categories:
The first one is the annual current profits that reach nearly USD 2 billion, out of which banks pay an annual tax estimated to USD 300 million, and this represents 15% tax on corporate profits. This does not include the 10 percent tax on the dividends distributed by the banks!

In fact and  according to the latest available data published by the Ministry of Finance (MOF), banks paid in 2015 LBP 539 billion (USD 364 million),  representing about 48.9% of total income tax on companies, private institutions and free enterprises. The global taxes collected from all institutions in 2015 have reached LBP 1103 billion (USD 750 million).

What is strange is not the fact that the bulk of the collected taxes came from banks compared to other private institutions and enterprises, but it is the relatively small size of collected taxes from other institutions apart from the banking sector.

This clearly shows the scandalous shortcomings of tax collection that deprives the Treasury from enormous amount of revenues. We wish that the MOF discloses the size of tax evasion and announces the results to the public.

The second category lies in the windfall profits achieved by banks, for one time, due to the swap operation conducted and decided by the Central Bank council. This swap operation has allowed the banks to achieve a net amount of USD 5 billion in income.

Despite the circulars of both the Central Bank and the Banking Control Commission, these banks were obliged to allocate that income to buttress their capital base in anticipation for the implementation of the capital adequacy ratio and to constitute sufficient provisions to implement International Financial Reporting Standard (IFRS) better known as IFRS 9.

Despite these two requirements, and based on the correspondence between ABL and the MOF, it was decided that banks should pay a tax on the profits generated from this swap with a rate of 15% based on tax declaration in May 2017  relating to the operations done in 2016.

For unknown reason, officials at the MOF and specifically the tax revenue department did not add this large sum of money (USD 800 million) in the budget revenues which was discussed at the Cabinet!

It is likely that after the various discussions across the country, this tax generated by the windfall profits will be added by the MOF to the budget revenue in its new version which will be sent to the parliament for discussion.

These exceptional revenues cover the cost of salary scale until the new era and its first government hammer away an economic and fiscal vision for the next stage.

And we explain to the “weak believers” who claimed in their articles that banks will dodge paying taxes on the swap operation or any required cost if they were endorsed after May 2017.

We would like to explain to those people that the windfall taxes are by their nature selective taxes settled outside the annual tax declaration of most banks if this measure was endorsed by the parliament.

Our second observation on the draft budget relates to the enormous quantity of taxes and fees that were submitted to the Cabinet.

It was a good thing that the government decided to shorten the list of taxes and/or review the proposed tax increases in the original draft budget. This should be credited to the efforts and struggle of the civil societies that mirrored the pain and agony of large segments of tax payers and the agony of a big number of subjugated people.

The civil societies and public opinion won the first round because the cost of corruption and graft on the country and its people was way too high and unbearable and thus the people can no longer afford to live under this system.

By sheer magic, most if not all political parties under the umbrella of authority in Lebanon deceitfully focused their accusations on the profits of banks in the hope that such an approach would cover up or justify the charges of corruption to this authority. The most important thing is that the public opinion is not hoodwinked by the claims of the political class.

Hasty judgment and hence the mistake in determining the fields and mechanism of change and reforms could lead to the furtherance of the same policy which the majority of the people protest and condemn. This could also lead to the continuation of system of corruption and waste,  estimated by some reports at over USD 4 billion annually, or 7.5% of Lebanon’s GDP!...

Our third observation goes beyond the 2017 draft budget and relates to the global economic and social situation.

It is no longer acceptable and even unfair that the income of most Lebanese wage-earners and even the revenues of the owners of small and medium enterprises remain so low, this would increase the social share of Lebanese, both individuals and households, who live on the brink of poverty.

The weak income in absolute terms and its poor distribution form two sound reasons, among other factors, for the weak economic growth through the mechanism of demand which is better known as the Keynes theory.

Thus, Lebanon falls in the crisis of the suffering global economy in general.

Some renowned US newspapers have written articles in the past few years about the income gaps and made some of their authors have won Nobel Prize in economy (Krugman and Stigler) and others such as Thomas Friedman.  This was one of the reasons for the rise of radical right wing parties, and Britain’s Brexit from the European Union, and the success of Donald Trump.

We can also refer to a good article on the economic policy recently published by the Lebanese “Al Akhbar” newspaper.

This decline in in the level of income has become a factor for the departure of the Lebanese youths from Lebanon in search for better jobs and opportunities in regional and international labor markets.

The absence of proper business environment that embraces new, innovative and creative ideas by the youths has exacerbated the unemployment crisis in the country. The operating institutions in Lebanon are unable to provide jobs with adequate income that would allow them to live decently regarding the decrease of their productivity as well as to the small market. 

The situation of these institutions became even worse with the shrinking investments and the rise of their debts to the banking sector compared to their capital.

It is not easy to get out of this bottleneck without making many breakthroughs, some at the political level, some on the level of livelihood, some at the institutional level, and finally at the state level.

This state, with its administration and public institutions, hinders the growth and development of the economy and prosperity.

What is required in this regard is the state’s intelligent and qualitative intervention in the economic activity through a clear economic vision which the state is keen to pursue this goal. Let’s hope for the best.

In conclusion, the banking sector with its current financial and human resources capacities and the Lebanese army, constitute the two pillars of monetary, financial and social stability of the country.

It alone has the financial capacity to keep up with any useful and deliberate plan for the presidency and its first Government matched with a serious will to put it into practice.

Of course, banks, in view of the surround risks, are being besieged from abroad.

The banks are also coming under a diabolic campaign from inside the country. Instead of concentrating general and private efforts on the development of productive sectors in industry, agriculture, handcrafts and knowledge technologies. And instead of focusing all efforts on encouraging investment, innovation and good governance of institutions, so they can flourish and develop along the lines of the banking sector, some seem keen to harm a sector that has succeeded in attracting Lebanese savings and keeping up with professional rules and financing the state and the economy and the central bank alike!

Success requires capital, qualified human resources, modern business techniques and systems.
It also requires quality, international standards and efficiency in competition. Banks at this level represent a model for the development of activities and other sectors.

For this reason, it is not useful on the national level to mistreat banks, as if there is a desire to undermine this sector instead of boosting the performance of remaining sectors to the same levels of the banking sector.

The missing Imam Sayyed Mousa al Sader once told his companions as he was passing through the fields of tobacco in Nabatyeh, Tyre and Bent Jbeyl, “Some leftist and politicians, on the pretext of equality and justice, want to make the big tobacco pipe equal to the small seed instead of growing the small seedling to equal the flowering and flowering seedlings."

We hope that the state would increase the size of the economy so it can increase its share from taxes and fees.

We also hope that the enlightened people strive for the prosperity of the economy.

Banks are a vital factor for the success of the required policies. Let us not desecrate it unjustly and for free.

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Last Updated on April 12, 2017
 
 
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