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French Version

Bank group: Interest tax is hurting capital markets (Daily Star)

Bank group: Interest tax is hurting capital markets - Many transactions have shifted abroad - The Daily Star

The 5 percent tax on interest earned by bank deposits has started to slow the growth of the Lebanese capital market, the president of the Association of Banks in Lebanon, Joseph Torbey, said Friday.

Speaking to officials from the Central Bank, Torbey said that some banking transactions have already moved from Beirut to other markets in neighboring countries.
The government, desperate to reduce the budget deficit to 25 percent at the end of this year, endorsed the 5 percent tax in December of 2002 to generate needed revenues.

Finance Minister Fouad Siniora, who has yet to sign the full version of the 5 percent tax law, hopes to generate more than LL160 billion from the new tax.

The tax is part of several steps by the government to reduce the $31 billion public debt, which represents more than 176 percent of the gross domestic product. The move received sharp criticism from many bankers, who claim that they have already done more than their share to help the government control the deficit.

The tax has been applied on the deposits of Lebanese and non-Lebanese residents, as well as all the inter-bank transactions and private bank operations. This means that investors buying US bonds and foreign mutual funds through Lebanese banks will have to pay the 5 percent tax.

Torbey urged the government to amend parts of new tax law to protect the capital market. He added that the association would form a committee to conduct a wide survey of all the laws that were affected by the tax."This will definitely hurt the Lebanese capital market, because investors can easily buy foreign bonds and stocks through parties operating outside Lebanon and avoid taxes," one leading banker told The Daily Star.

The banker pointed out that the commercial banks have already agreed to use some 10 percent of their total deposits to buy two-year Treasury bills at zero percent."In 2000, the Central Bank also issued a memo calling on all banks to place 15 percent of their US dollar and Lebanese pound deposits as permanent reserves for the Central Bank," the banker said. The Central Bank adopted this step to help protect the Lebanese pound. He added that 25 percent of the banks' deposits have been kept in the coffers of the Central Bank for several years. Bankers say that they fully support the government's efforts to reduce the public debt, provided that such measures don't have any dire impact on the banking sector.

Another banker said that the new tax would constrain the growth of Lebanese banks."I don't think we will see good growth in deposits as in previous years," the banker said, adding that government should have at least exempted non-Lebanese residents from the new levy.

Less than 20 percent of the $43 billion in bank deposits belong to non-Lebanese residents."If the government adopted the 5 percent tax on Lebanese residents only, it could easily fetch LL160 billion, but if it included everybody that it will generate more than LL220 billion," a banker said. Meanwhile, Central Bank Governor Riad Salameh told the bankers during the meeting that the balance of payments in the month of January alone achieved a surplus of $650 million.

This was mainly achieved due to $950 million in soft loans Lebanon received from Kuwait, the United Arab Emirates, Malaysia and Oman. Salameh also urged the bankers to reduce interest rates on loans to the private sector.

Beirut 03-03-2003
Osama Habib
The Daily Star

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