- Basic data
- Public finances and the state budget
- Banking system
- Tax system
Lebanon has been experiencing one of the world’s worst economic and financial crises since the fall of 2019, the only solution to which is the adoption of painful structural economic reforms. The devastating explosion at the port of Beirut in August 2020 and the COVID-19 pandemic only exacerbated the country’s economic decline. Nominal GDP fell from nearly $52 billion in 2019 to an estimated $22 billion in 2021. The local currency lost more than 90 percent of its value in secondary foreign exchange markets, and inflation rose 145 percent from December 2019 to December 2020, in 2021 reached a hyperinflationary level above 200%. Economic activity fell sharply. The sudden stoppage of capital inflows from abroad (Arab countries – investments, diaspora) in conjunction with the continuing large current account deficit meant a permanent depletion of foreign exchange reserves in the central bank. Lebanon’s financial sector is insolvent and unable to meet its dollar obligations; as a result, banks have imposed informal capital controls that prohibit Lebanese from transferring money overseas or withdrawing dollars from their bank accounts, even though 80 percent of Lebanese bank accounts are denominated in US dollars. Check ebizdir for economical facts of Lebanon.
In the last year, Lebanon witnessed a dramatic collapse of basic services, caused by the depletion of foreign exchange reserves of the central bank, which for many years subsidized the purchase of many commodities (flour, milk…….), medicine, fuel and energy. As a result of the depletion of the central bank’s foreign exchange reserves, state subsidies were completely removed, leading to shortages of basic food, medicine and fuel in the market. Electricity supplies from the EdL state power plant have decreased to 2 hours a day. Real GDP fell a further 15.2% in 2021, after falling 21.4% in 2021. A rare source of growth is the tourism sector, where tourist arrivals increased by 101.2% in the first 7 months of 2021 compared to the previous year. Public finances paradoxically improved in 2021 as expenditure fell faster than income. Revenues fell to 6.3% of GDP in the year (compared to 13.1% of GDP in 2020). Spending in 2021 fell to 7.3% of GDP.
Poverty is rising sharply, more than 50% of the population lives below the poverty line. The collapse of the Lebanese economy was fully manifested in March 2020 (even before the outbreak of the pandemic) with the inability to pay off approximately USD billion in government bonds, and was subsequently exacerbated by the devastating explosion of ammonium nitrate in the port of Beirut in August 2020. Lack of freely convertible foreign currency on the market, state-restricted withdrawals and domestic and foreign transfers resulted in further decline in purchasing power, growth in unemployment, uncontrolled increase in retail prices of goods and services, and impossibility for importers to finance imported purchases.
The fault of the Lebanese economy is its strong dependence on imports (approx. 80% of goods are imported) and minimal domestic production (outdated infrastructure and lack of production investment). In connection with the slowdown in economic growth, the drop in exports, the lack of domestic production and the drop in significant financial transfers from the Lebanese diaspora, one of the largest national debts has increased even more (more than 180% of GDP in 2021).
Outlook: Real GDP is projected to contract by a further 6.5% in 2022, assuming continued disproportionate macro-policy responses and a minimal level of stability in the political and security arena. The inflation rate will remain in the triple digits, dampened only by the central bank’s ability to control the low money supply. The effects of COVID-19 will carry over into 2021, while the state’s macroeconomic policy responses remain inadequate. A possible new outbreak of COVID-19, the complete depletion of foreign exchange reserves, and a global increase in commodity prices (especially oil and grain) must also be taken into consideration. Lebanon can experience a positive shift if all stabilization macroeconomic measures are adopted and the reform program required by the IMF is implemented.
Table from MOP + additionally balance of payments, indebtedness/GDP.
|GDP growth (%)||-6.7||-21||-15.2||-3.1||2.3|
|Export of goods (billion USD)||3.7||3||3.9||3.8||4.1|
|Import of goods (billion USD)||19.2||8.7||13.6||12.3||12.8|
|Trade Balance (Billion USD)||-13.4||-6.6||-9.7||-7.3||-7.4|
|Industrial production (% change)||ON||ON||ON||ON||ON|
|OECD export risk||07.VII||07.VII||07.VII||ON||ON|
Source: EIU, OECD, IMD
Public finance and state budget
|State budget balance (% of GDP)||-1.0|
|Public debt (% of GDP)||180|
|Current account balance (billion USD)||-1.0|
Lebanon does not have an approved state budget for 2022. The draft budget submitted for Parliament’s approval projected state budget expenditures of $1billion and revenues of $9 billion, resulting in a budget deficit of $billion. The USD figures were converted according to the official exchange rate (1507 LBP/1 USD), although the market value of the USD in December 2021 was around 23,000 LBP/USD. The 2021 budget proposal contains random tax and non-tax measures that are not part of any medium-term fiscal framework, and does not contain a plan to address the crises facing Lebanon.
Lebanon’s public finances have been in deficit for a long time. We estimate that the public debt will reach a value of more than USD 100 billion at the end of 2021, which represents an increase of about 5% compared to the value at the end of 2020 (USD 9billion).
The largest expenditure by the state in 2021 was spent on servicing the public debt, on salaries in the public sector and on the purchase of freely convertible funds, which were used for subsidized purchases of basic commodities, fuel and medicine. Debt fundamentally limits the government’s ability to invest in inadequate infrastructure (water in the water supply network is not drinkable, electricity suffers from blackouts and is in short supply, public transport is basically non-existent). Expenses associated with the presence of Syrian refugees and displaced persons have also been a huge burden in recent years. Large expenses go to the operation and subsidies of the state energy company Electricité du Liban (EDL), whose operation the state subsidized more than 2 billion USD in 2021.
The collapse of the Lebanese economy dates back to March 2020, when the Lebanese government was unable to repay Eurobonds worth $ billion. It also announced in March 2020 that Lebanon would freeze payments on all its outstanding Eurobonds. At the end of 2020, a total of $billion in bonds were outstanding. The Central Bank of Lebanon holds more than half of public debt in 2021, followed by commercial banks, non-bank financial institutions, investors, multilateral institutions and foreign governments. Revenues to the state budget in 2021 continued to decrease, by approx. 8% compared to 2020, which was caused by the ongoing economic crisis and the limited volume of capital inflows from abroad. The corporate sector generates almost no funds for the state budget.
Compared to 2020, a slight increase in the receipt of foreign exchange funds was recorded, especially from the Lebanese diaspora from abroad, and also with a slight development of the tourism industry. Foreign exchange reserves, which experienced a sharp decline in 2020, continued to decline in 2021. The decline stopped at about USD 18 billion, which represents the value of the required reserves of commercial banks, which the governor of the Central Bank of Lebanon refused to touch, which caused the gradual cessation of state subsidies from the summer of 2021. In October 2021, the central bank proceeded to sell gold worth approx. 900 million USD with the aim of preventing the escalation of social tension in the country, which was growing markedly as a result of the cancellation of fuel subsidies in autumn 2021. The state will continue to subsidize only the import of wheat and selected medicines.
View:Fiscal policy In 2022, the government will remain in debt default and its spending capacity – including high wage costs – will be constrained by continued financial problems and political gridlock. However, in light of social instability and a limited but still extensive subsidy program, and given the rise in international commodity prices, spending will remain elevated. From 2023, higher debt servicing costs will increase spending. Income growth will not keep pace with inflation in 2022-23 due to limited international support and the fiscal deficit will widen. The projected fiscal deficit in 2022-23 will average around 3.2% of GDP annually. Adjustments to the pension and tax systems will be central to fiscal reform efforts, but may be problematic due to their political sensitivity. BdL’s monetary policy and the commercial banking sector face a period of restructuring. Lebanon’s banks are effectively insolvent after the state defaulted on its debts (about 40% of which were held by the banking sector, representing about 70% of total commercial bank deposits). Measures to restructure the banking sector, including mergers, divestments and closures, will be strongly opposed by the Association of Banks in Lebanon and will need broad political support, which may be difficult even after the 2022 elections, especially given the scale of financial sector losses (estimated total about US$69 billion by 2021).
Economic growth: The performance of the Lebanese economy will continue to decline in 2022. Political stagnation, diplomatic tensions and economic difficulties related to the pandemic, further fueled by the economic impact of the Ukrainian conflict, will exacerbate the unfolding financial, fiscal, debt and currency crises. Inadequate and unreliable energy supplies will remain the main short-term constraint on economic activity. Fragile (though improving) relations with investment and trading partners (and major sources of tourists) in the Gulf will limit the scope of the recovery for exporters, the construction sector and service-driven industries. Fiscal consolidation efforts will dampen government and private consumption. As a result, real GDP is expected to contract by a further 3.1% in 2022. Growth will resume in 2023-26, as economic activity picks up in the post-pandemic context and as efforts to strengthen domestic manufacturing capacity begin to increase output. Real GDP growth will average 3% per year in 2023-24, helped by disbursements of donor funds and rising investment. Growth will further accelerate to an average of 4.2% per annum in 2025-26. Even in 2026, however, real GDP will be 25.8% lower than in 2019.
The banking sector collapsed in 2020 due to the intensifying economic and financial crisis, and commercial banks lost the trust of depositors. Lebanese banks are insolvent. The government’s April 2020 economic plan estimated losses in Lebanon’s financial sector at US$83 billion; today, losses are estimated at $100 billion. Banks no longer serve their basic functions: making productive loans or allowing those with dollar deposits to withdraw them. Clients cannot freely transfer money abroad. Lebanon must adopt formal capital control legislation, which is one of the IMF’s conditions for granting a financial loan to Lebanon. At the behest of the central bank, in April 2020, banks began providing Lebanese lira at rates higher than the official peg to customers with dollar accounts, but at less than 60 percent of the market value of the notes in USD. Lebanon relied on dollar inflows from abroad to finance imports and public spending and maintain the Lebanese lira’s peg to the USD. These dollars were deposited in Lebanese banks, which then lent them to the state in the form of deposits in the central bank.
In 2019, when the inflow of USD from abroad stopped and the assets of the banking sector were tied to long-term deposits with the central bank and illiquid debt instruments, banks had problems meeting their dollar obligations to clients, which led to a crisis in the banking sector. The default on Lebanon’s foreign debt in USD in March 2020 further worsened the position of Lebanese banks. Financial experts estimated that 40 percent of loans from Lebanese banks were in default in December 2020. Correspondent banks abroad have stopped providing credit lines to Lebanese banks.
According to the Heritage Foundation, Lebanon had the most liberal banking system in the entire Middle East until 2019, 6 Lebanese banks (Audi Saradar, BLOM, BankMed, Byblos, Fransabank and Banque Libano-Française) were ranked among the top 1000 best in the world. 4 banking houses had the largest level of capitalization and number of clients: Blom, Audi-Saradar, Bank of Beirut and Byblos. 50% of all deposits remained frozen in these 4 Lebanese banks. From the end of October 2019, these banks also ceased to fulfill their commercial role, branches were closed and a ban was issued on cash withdrawals in USD and, to a limited extent, in the local currency LBP. The banks continued to remain members of the Association of Banks of Lebanon, albeit only formally. In 2020, the Association of Lebanese Banks ceased to fulfill its role and lost all supervisory and decision-making powers.
The state lost the ability to manage state finances, there was a massive outflow of assets from Lebanese commercial banks without any control and supervision by the Central Bank of Lebanon. It can be stated that massive broad daylight theft occurred in the banking sector where lenders lost absolute control over their deposits and foreign transfers were only allowed to purchase strategic raw materials and commodities to keep the economy viable (petroleum products, wheat and medicine).
The interest rate on USD deposits fell from 5-8% pa to 0%, i.e. to the negative due to the payments for keeping accounts with a zero interest rate and the impossibility of withdrawing from these accounts. It applies to both private and corporate accounts. Interest on LBP deposits: the same situation as for USD accounts.
Lebanon’s banking sector continued to decline in 2021. It was a year in which the economic and financial crisis continued unabated and no remedial measures were taken to stop the further decline of the economy, (notably the reform program required by the IMF.) Failure to pass a capital control law (one of the conditions for the release of financial assistance from the IMF) since the beginning of the crisis led to the fact that banks had to resort to informal but porous control capital, especially in relation to international transfers. On the other hand, banks have been exposed to various regulatory measures by the Central Bank in the last two years (limits on financial withdrawals, application of different exchange rates for LBP/USD conversion, introduction of the Sayrafa platform)
In Lebanon, there are no legal restrictions on the ability of foreigners or non-residents to open a local or foreign currency bank account, provided they comply with Lebanese rules and regulations. Currently, however, most banks do not accept new clients and do not open new accounts.
The fiscal year in Lebanon coincides with the calendar year: from January 1 to December 31 of the current year. The tax system is clear and stable, however, everyone (private and state sector) tries to circumvent it, the system lacks control mechanisms and therefore the collection of taxes is only theoretical compared to all forecasts.
Basic taxes and fees:
- Corporate Income Tax: The standard corporate income tax rate is 17%. For oil and gas companies, the rate is 20%
Tax residency: A legal entity is considered resident if it is incorporated or registered in accordance with Lebanese law. An entity is considered a resident if it commences business activity from a permanent location in Lebanon for a period exceeding six months in any consecutive 12-month period for contractual activities and for a period exceeding three months for other activities.
Basis: Resident companies are taxed on all their income unless they earn it through foreign branches or subsidiaries. Branches in Lebanon are taxed in the same way as subsidiaries and branches of foreign entities – subject to an additional 10% transfer tax regardless of whether profits are actually remitted.
Taxable income: Income tax is levied on taxable income related to all business activities, unless such income is exempted by law. Taxable income is generally calculated as income less eligible expenses. However, for insurers of public suppliers, oil refineries and international transport operators, taxable income is calculated as a percentage of total income.
- Personal income tax : progressive tax 4% to 25%
Tax residency: Individuals are considered residents if they meet one of the following conditions: • Have a permanent place of business in Lebanon; • have a permanent residence in Lebanon that serves as their habitual residence or the habitual residence of their family; or • continuous stay in Lebanon for more than six months, or intermittently in a consecutive period of 12 months.
Basis: Self-employed persons are taxed on income derived from services provided in Lebanon or related occupations in Lebanon, unless the income was earned through a permanent establishment outside Lebanon. Non-residents are taxed only on income in Lebanon.
Taxable Income: Taxable income includes income from a profession or personal business and income from a partnership.
Rates: An individual is taxed at a progressive rate from 4% to 25%. Income from foreign stocks and bonds is taxed at a rate of 10%.
Capital Gains: Gains on the sale of fixed assets are generally subject to a 15% capital gains tax. The tax on capital gains from the sale of real estate owned by non-taxable individuals is gradually reduced by 8% per year from the date of acquisition. Gains from the sale of up to two primary residences per individual are tax exempt. Deductions and Allowances: Family deductions are provided while calculating taxable income. Foreign Tax Credit: There is no foreign tax credit.
- Taxes on income from movable property: 10%
- Inheritance tax: 12% – 45% depending on the level of kinship
- Compulsory contribution to social security funds: There are three compulsory social security schemes (i) family contribution of 6% of employees’ earnings up to 18 million LBP per year, (ii) health insurance contribution of 11% of earnings up to 30 million LBP per annum (of which 3% is the employee share) and (iii) a contribution to the end-of-service compensation scheme of 8.5% of total earnings. Contributions are paid by the employer. 2
- Property tax: ranges from 0 to 14%
- Value added tax: 11%;
You can find more about the tax system and tax reliefs and exemptions on the website of the Investment Development Agency of Lebanon (IDAL) in the Tax system chapter. In 2017, there was a partial reform of the tax system in Lebanon. The reforms included the increase of some taxes (value added tax, corporate income tax), the introduction of new taxes (tax on financial income) and changes in banking and construction taxation. The main goal is to increase revenues to the state budget and to convince foreign donors of the country’s ability to carry out the necessary reforms.
The IMF also conditions the provision of financial aid and loans to Lebanon with the reform of the tax system with the aim of increasing the revenue part of the state budget, which has not yet been approved for 2022. In it, the Lebanese government proposes, among other measures, a general increase in VAT from 11% to 15%.