The tax hikes recently approved by Parliament will pave the way for the ratification of the first public budget since 2005. This would be credit positive for the country, according to Moody's. Currently, the rating is ‘B2 negative' by the agency.
A normalized budget process would also allow the government to reduce its fiscal deficit. This is expected to drop from 9.5 percent of GDP in 2016 to 8.9 percent in 2017 and 8.7 percent in 2018, the credit rating agency said in a recent research paper titled ‘Lebanon's Tax Hike Paves Way for Credit-Positive Budget Approval.'
"Parliamentary ratification of the annual budget would be credit positive for Lebanon because it would improve the transparency and predictability of public finances, allow further reforms, and facilitate donor funding," Moody's said.
The World Bank recently agreed on loans and grants of more than $400 million for local road projects on condition the country passes a budget.
"If the government can demonstrate it is forming a coherent policy agenda, further concessional funding is likely to become available, easing the burden on the country's public infrastructure ,and boosting currently weak growth prospects," Moody's said.
The government expects the new taxes to add $1.2 billion to the budget revenue. The taxes aim to finance salary scale adjustments for public sector employees.
The tax package is a sign of a renewed fiscal reform momentum since it is the first revenue reform undertaken since the 2007 Paris III Conference on Assistance to Lebanon, according to the Moody's research paper.