New Tariffs May Hurt Profits of Lebanese Banks

The combined annual profitability of Lebanon’s banks could fall as much as 20% 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. “It can range between 5% to reach 20% on the small banks, but it will not create a situation of losses at banks,” thenational.ae reported.

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 $917 million pay rise for public sector workers by raising additional annual revenue of $1.2 billion.

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 Salameh.

Lebanon’s longest standing central bank governor expects banks to merge to cope with the new tax hikes, which represent 2.5% of Lebanon’s gross domestic product. 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.

Despite the tax hikes, Salameh said the banking sector in Lebanon remained strong and well-capitalized.

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% last year, is rising because of the slow growth and debt servicing costs. Lebanon’s public debt increased 4.4% to $77.3 billion in August, according to the ministry of finance.