BEIRUT, Lebanon - Economists warned on Friday that raising taxes could worsen the country's economic slump and damage prospects for GDP growth in the coming years. "We are in a dilemma. If the government increased the ratio of the Value Added Tax and raised the prices of fuel oil in 2008 it will lead to one of two things: either a higher inflation or stagnation," economist Elie Yashoui told The Daily Star.

The government of Prime Minister Fouad Siniora presented a reform plan to attendees of the Paris III donor's conference last month that suggested raising the VAT from 10 percent to 12 percent in 2008.

The government also said it would increase its fees on every 20 liters of gasoline. Under the plan, the price of 20 liters of gasoline would rise from $14.66 to more than $20 based on current oil prices.

The news of possible tax increases triggered wide protests among anti-government parties and trade unions.

Hundreds of labor unions staged a sit in near the VAT building last month amid tight security measures.

Yashoui said if no reforms were implemented and no growth was achieved then people would be reluctant to buy more goods, which could lead to stagnation or deflation.

"However, if Lebanon suddenly experienced real economic growth of 6-7 percent and the GDP jumped to over $23 billion level, then inflation will rise to more than 7 percent," Yashoui said.

"The current inflation in Lebanon is now estimated at 7 percent. This ratio jumped after the July-August war in 2006," Yashoui explained.

Another leading economist shared the same view.

"Raising taxes does not necessarily lead to higher inflation if Lebanon saw its economy shrink. Sometimes a high inflation with prosperous economy may be seen as a positive indicator," Kamal Hamadan said.

He added that when the government introduced a 10 percent VAT four years ago, most economists expected inflation to hit 7 percent.

"Instead, inflation stood at 4 percent," Hamdan said.

He said the government did not calculate the impact of taxes on inflation very accurately.

"We had meetings with the prime minister and finance minister to explain the impact of inflation if taxes were raised. But these long meetings apparently led to nowhere," Hamdan said. http://www.dailystar.com.lb

According to the government's proposal, the introduction of the VAT in early 2002 was a major success, generating 5.1 percent of GDP in revenue in 2005.

The Lebanese VAT law exempts basic food staples and social items such as education and health services, medicine, books, and public transport, which make the bulk of low-income household consumption of goods and services (it is estimated that about 60 percent of low-income consumption is exempt from the VAT).

The government plans to raise the VAT from 10 percent to 12 percent in 2008 and from 12 percent to 15 percent in 2010.

"Over the medium-term, a 15 percent VAT will generate additional revenue of at least 2 percent of GDP. All this will bring the total contribution of the VAT to the budget to about 7.5 percent of GDP by 2010," the government plan said.

The government claimed that the contribution of the gasoline excise tax to the budget declined from $533 million in 2003 to about $240 million in 2005 and has almost become nil for the period May-August of 2006 (total collection of car gasoline excises for 2006 is not projected to exceed $166 million) due to the capping of the retail price at the May 2004 level, which has created additional economic distortions and eroded the gasoline excise revenue base.

But Yashoui feels that the government's expectations from the VAT maybe overambitious and "even unrealistic."

"The government said that it generated $1 billion or more from a 10 percent VAT. But this does not mean that revenues will jump by another $200 million if the VAT ratio increased by two percent in 2008."

He added that VAT revenues may decline if the current situation remained and growth reached negative levels.

Yashoui said that the remittances from Lebanese expatriates are one of the major factors which keep the economy stable, but that the average Lebanese citizen is in dire straits. "The government expects the consumers to endure higher taxes at a time when the minimum wage is still $200 a month," he said. -Daily Star