Tax revenues in Lebanon Vulnerable to Economic cycles in Remittance-Sending Countries
The International Monetary Fund indicated that remittance inflows constitute a channel that transmits external shocks to domestic public finances.
As such, it said that public finances in Lebanon would be vulnerable to a slowdown in the economic activity of remittance-sending countries, as reported by Lebanon This Week, Byblos Bank economic publication.
It estimated that GCC economies and North America account for about 70% and 10% of remittance inflows to Lebanon, respectively. The IMF said that remittances to Lebanon tend to be spent on consumption of both imported and domesti- cally produced goods, rather than on investment. It added that remittances are not directly taxed, but that they have an indirect effect on tax revenues through their impact on private aggregate demand. It noted that, by affecting consumption and imports, remittance inflows would affect the size of tax receipts.
A simulation by the IMF showed that a contraction of 0.26% in the economic activity of remittance-sending countries to Lebanon in 2009 would explain about 20% of the change in the primary fiscal balance. It considered that the change in total tax revenues due to the economic slowdown in 2009 would represent a sizable share of the deterioration of Lebanon's primary fiscal balance.
The simula- tion revealed that the contraction in remittance-sending countries' real GDP led to a net decline in remittances to Lebanon by 0.84% in 2009. In turn, this decline reduced Lebanon's total tax revenues by 0.27% of GDP. It specified that the fiscal impact of remittances is more pronounced for sales tax revenues, which dropped by 0.22% of GDP, than for trade tax revenues, which fell by 0.05% of GDP according to the simulation.
In parallel, the simulation showed that a recovery in real GDP growth of 3.88% in remittance-sending countries during 2010 would have led to an increase of 12.4% in remittances to Lebanon. It revealed that the recovery in the sending countries led to an increase in Lebanon's total tax revenues by 0.23% of GDP, which includes an increase of 0.18% of GDP in sales tax revenues and a rise of 0.06% of GDP in trade tax receipts.
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