IMF urges Lebanon to improve tax regime

• Income tax improvement needed
• Banking system undergoing changes
• IMF support contingent on reform

Lebanon must modernise its income tax framework if it hopes to achieve macroeconomic stability while meeting its development goals, an International Monetary Fund official has said.

IMF mission chief for Lebanon Ernesto Ramirez Rigo spoke after leading discussions with officials in Beirut in mid February. 

He called efforts by the government to develop a fiscal roadmap for the medium term “critically” important in backstopping a larger push to dig the country out of six years of deep economic turmoil. 

Lebanese authorities are working on a banking system overhaul, restructuring of sovereign debt, and an expansion of “much needed” spending on social and infrastructure development, among other steps, according to an IMF press release

The IMF has made its financial support for Lebanon contingent on such reforms. 

“Staff underscored the importance of ensuring that new expenditure commitments, including any further increases in public sector salaries and pensions, are in line with this framework and are accompanied by necessary revenue mobilization,” said Ramirez Rigo. 

To get there, the IMF mission chief said Lebanon needs to devise a “more modern and effective income tax law” in addition to continuing to boost collection under the existing regime. 

The meetings in Beirut were otherwise centred on Lebanon’s efforts to revamp its banking system after years of crisis and mismanagement, especially through a new Financial Stabilization and Depositor Recovery (FSDR) law the cabinet advanced in draft form in December. 

A financial collapse in 2019 locked customers out of their bank accounts and resulted in at least $70 billion in losses.

The draft law – widely known as the Gap Law – seeks to close this difference by having state coffers, commercial banks and depositors share the bill. 

People who lost up to $100,000 would see their funds returned over four years, while those that incurred bigger shortfalls would be repaid in securities backed by Banque du Liban assets.

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The legislation is a “first step” toward gradually re-establishing depositors’ access to their money, said Ramirez Rigo, who nevertheless urged Lebanese officials to align the draft more closely with “international principles.” 

He cited respecting a fair “hierarchy” of claims and making sure that “no losses would be allocated to depositors before they are allocated to shareholders or junior creditors” as top priorities.  

“In this regard, the bank restructuring strategy needs to be consistent with available liquidity in the system to provide the resources needed as bank deposits are gradually released and ensure that the contributions required by the state do not undermine efforts to restore public debt sustainability,” Ramirez Rigo said. 

The IMF separately reiterated its support of proposed tweaks to the Bank Resolution Law, which was approved in July, to secure “an independent, transparent, and effective” process that reflects international best practices.

“We hope that parliament can discuss and approve these amendments in the coming months,” Ramirez Rigo said.