The International Monetary Fund has advised the Lebanese government to seriously consider raising taxes on gasoline and fuel oil, adding that such measures would boost revenues, reduce pollution and give an incentive to improve public transportation.
“Higher fuel taxes could lead to improved public health, lower environmental costs, less congestion and more efficient fuel use,” the IMF said in a comprehensive report on Lebanon.
The IMF said that over the short term, the authorities should look beyond the temporary impact of lower oil prices and deliver a credible policy mix with sustained adjustment and a falling public debt ratio.
“Revenue measures should be broad-based, starting from increases in fuel taxation; while spending composition should move away from transfers to the electricity company toward capital projects and social programs,” the IMF said.
The price of gasoline and fuel oil in Lebanon fell by more than 40 percent in 2014 thanks to the sharp drop in oil prices in international markets. This decline significantly reduced allocations to state-owned Electricite du Liban, allowing the Finance Ministry to reduce the budget deficit in 2014.
The IMF said fiscal adjustment would also reduce the financial and institutional burden on the Central Bank and ultimately promote interest rate flexibility.
The fund warned that rising uncertainty is taking a toll on the economy, but incomes and consumption are receiving a temporary boost from lower oil prices.
“Lebanon’s traditional growth sectors – tourism, real estate, and construction – have all taken a significant blow, and a strong rebound is unlikely in the immediate future,” the IMF explained.
It added that early indications point to a marked softening of the construction sector in 2015, particularly for high-end residential projects.
“However, the pass-through of global oil prices to local fuel prices is relatively high in Lebanon, so the recent drop in global prices will boost local incomes,” the IMF said.
It noticed that remittance inflows, a significant portion of which come from oil-exporting Gulf countries, have been stable in the face of volatile oil prices. “Projections also suggest that activity in key oil-exporting countries will remain steady, as financial buffers are expected to cushion any adverse impact on growth,” the report said.
But the suggestion to raise taxes on fuel oil was not well received by trade unions and some political parties who claimed that such a tax hike could affect low-income families and prompt taxis to increase their fares.
“Currently gasoline is subject to 10 percent VAT and low excises, at less than 20 U.S. cents per liter (excises were lowered significantly in 2011, with a subsequent minimal increase in January 2015),” the IMF said.
The IMF added that “green” and “red” diesels for transportation and heating, respectively, are totally tax free, as they were made VAT exempt in 2012 and have never been subject to excises.
But it argued that lower fuel taxes may not be the best policy.
“Revenue losses have been significant (the cost of the VAT exemption on diesel was originally estimated at some 0.5 percent of GDP, but consumption has increased since 2012 in line with the growing refugee presence, suggesting that losses are probably larger),” the report said.
“Furthermore, the gains associated by implicitly subsidizing road transport are not distributed fairly: by income, the poorest 20 percent of the population receives only 6 percent of the subsidy, while the richest 20 percent receives 55 percent,” IMF said.
The report added that in setting the optimal tax level, consideration should be given to the complete set of social externalities associated with fuel use.
The IMF acknowledged that the idea to increase taxes on fuel oil may face political opposition.
“Though politically difficult, these measures could be framed as part of a broader set of steps to ensure that fiscal adjustment is as growth-friendly and equitable as possible,” the report said.
It reminded that experience in other countries suggests that fuel-tax changes are best-received when part of a more general strategy that also addresses public transportation and infrastructure shortcomings.