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French Version

Bankers warn against raising tax on interest

Move can damage economy as depositors take funds elsewhere

Raising taxes on interest rates on bank deposits may force the migration of funds and capitals from Lebanon, leading bankers warned on Friday. "This is a very dangerous proposal by the government.

Banks are the main pillar of the local economy and this step would certainly cause serious damage to the sector," Adnan Kassar, chairman of Fransabank told The Daily Star.

According to a draft proposal, which is yet to be discussed and approved by the Cabinet and the Parliament, taxes on interest rates on bank deposits should rise from 5 percent to 8 percent.

The government of Premier Fouad Siniora, under pressure from the donor states to submit an effective economic plan as a prelude for financial assistance, will face an uphill struggle to sell his bold program not only to the Cabinet members but to the disillusioned private sector.

Banks deposits, which currently stand at $62 billion, stand at three times the size of Lebanon's GDP.

Lebanese banks succeeded to lure large funds from Lebanese and Arab investors over the past 10 years thanks to the high return on dollar and Lebanese pound deposits, free transfer of funds and a cherished banking secrecy law.

"We warned Siniora when he was a finance minister not to slap a 5 percent tax on bank deposits but unfortunately he did not heed our advice," Kassar said.

Every time the government needed money to increase state revenues they resort to the easiest way: "Raising taxes," he said.

"We keep telling them that raising taxes without serious reforms will not solve the public debt problem. The government must first cut waste in public departments and combat corruption," Kassar said.

Kassar and other bankers said that Lebanon is loosing its competitive edge because the interest rates offered by local banks are no longer appealing because many countries in the region such as Cyprus are offering similar rates.

They added that the LIBOR, London Inter-bank Offered Rate, has risen from one percent to nearly 5 percent which means that Lebanese banks' margin to increase interest rates on bank deposits is becoming very costly.

One banker said that depositors may start putting their money in Cyprus. "Why should they pay 8 percent interest on bank deposits while in Cyprus they don't have to pay any tax?"

Shadi Karam, chairman of BLC Bank, said the proposal to raise the tax is a major mistake by the government. "The entire economy is one-third of the banking sector. Banks are the driving engine behind the limited growth and job opportunities in the country."

He added that if the government proceeded with the tax proposal then "they are trying to kill the goose that lays the golden egg."

"If this erroneous decision was adopted to implement real reforms then I will reluctantly accept it. However, if this step will lead to more corruption and waste then I don't think it is the right decision."

He added that the tax will also be applied to non-Lebanese residents and this is quite dangerous.

It is widely believed that non-Lebanese hold as much as 20 percent of total bank deposits in Lebanon.

Other bankers also said that if funds left the country then the banks will not be able to finance the $38 billion public debt in medium and long terms.

Local banks hold most of the government's treasury bills and Eurobonds, increasing their risk exposure.

"Nonresidents in Switzerland do not pay any taxes on interest on deposits. But it seems that the Lebanese government wants to break the rule," one banker said.

Beirut 27-03-2006
Osama Habib
The Daily Star

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