Fiscal deficit narrows
by 53 percent in first semester

IIF expects debt-to-GDP

to drop in 2017 and 2018

The fiscal deficit narrowed by 53 percent to LL1,368 billion ($908 million) in the first half of 2017 compared with the same period last year.

The improvement in the fiscal deficit was mainly driven by a one-off factor consisting of taxes on the profits realized by banks on the ‘unconventional’ financial operations that were carried out by the Central Bank (BDL) in 2016, said Garbis Iradian, Chief Economist at the Institute of International Finance (IIF). A rise in value added tax (VAT) and property tax also contributed to the narrowing of the deficit.

The financial operations, which consisted of swap transactions with the banks, are described by BDL as ‘financial engineering operations’.

Total tax revenues jumped by 23 percent to $4.72 billion. VAT and property tax rose by eight percent and 20 percent respectively thanks to the moderate improvement in economic activity, according to ‘Economic Views: Lebanon’, a concise report published by the IIF. Nontax revenues however fell by nine percent to $1.04 billion due to fewer transfers from the telecom sector.

The full-year fiscal deficit is expected to narrow by 21 percent to $3.93 billion in 2017 thanks to the one-off factors and the recent tax hike, according to the report. “The significant improvement in fiscal performance in the first half supports our forecast of a declining deficit, from 9.9 percent of GDP in 2016 to 7.3 percent in 2017,” Iradian, said.

The implementation of the new tax measures combined with additional financial operations currently underway could narrow the fiscal deficit further to seven percent of GDP in 2018, according to Iradian. This would also reduce the debt-to-GDP ratio to143 percent next year from 149 percent in 2016. “Nonetheless, further fiscal adjustment is needed and should rely more on sustainable elements including improvement in tax compliance, rationalization of current spending, and structural reforms,” Iradian said.

Public debt stood at $77.3 billion at the end of August, up by 4.3 percent compared with the same month a year earlier.

Earlier this month, Parliament approved the first state budget since 2005 that included additional taxes to finance a 16-percent increase in public sector wages and pensions.