It’s a hard road to economic health

Spiralling living costs and excessive levels of taxation are doing nothing to ease the burden on a population already struggling to keep its head above water

In a highly publicized speech at the end of July 2004, Maronite Patriarch Cardinal Nasrallah Butros Sfeir called on the government to review the minimum wage in Lebanon (which currently sits at $200 per month, 40% lower in real terms, than the minimum wage of 40 years ago) and pleaded for improved living conditions, which are pushing thousands of Lebanese to seek new lives abroad.

Sfeir’s call for economic reform came on the heels of headlines splashed across the front page of leading newspapers that almost 90% of the Lebanese population falls below the internationally recognized poverty line – a statistic, released in the wake of Mercer Consulting’s equally gloomy March 2004 survey, which ranked Beirut as the 37th most expensive city in the world, the only city in the Middle East (aside from Tel Aviv) to place in the top 50. Beirut, it said, was more expensive than San Francisco, Frankfurt, Munich, Prague, and Athens.

There is some doubt as to how the particular economist came to this figure, because by global standards the fact remains that Lebanon is a middle income country, while 20% of the world’s population earns less than $1 per day. Still, the average income per capita stands at $4,500 per year, or less than $400 a month and if the average person spends a mere $10 per day on food and drink, 75% of the monthly income is already depleted, and this is not including an allowance for gas and transportation, utility bills, schooling, housing, medical care, and other household expenditures. Apart from low income earners, there is also the crippling unemployment rate, which has reached staggering proportions in the past two years. According to recent economic publications, unemployment hit 20% by the end of 2003, which translates into one fifth of the whole labor force, or around 350,000 Lebanese citizens. The unemployment problem is aggravated by the fact that there are a high number of foreign workers filling low-paying jobs.

So, with spending needs for the average Lebanese exceeding monthly incomes by up to 75%, most people are forced to mortgage their cars, homes, or other possessions. Seeing such a high demand and necessity for borrowing, banks were not slow to respond to this demand. With interest rates at around 12%, this is tantamount to kicking a man when he is down.

Based on total non-commercial lending figures from Lebanese banks, and the latest estimates of the country’s population, the average Lebanese carries a debt burden of $1,710, which is sufficient to cover only an additional $140 of spending per month. Still, bank borrowing has not reached the magnitude expected, considering such low levels of income, mainly because of numerous credit facilities offered on most, if not all, consumer goods.

But with lackluster economic growth plaguing the country for almost seven years and little or no GDP growth, it is certainly a wonder why the cost of living has become so high. One explanation lies in the economic policy instituted by Prime Minister Rafik Hariri and Finance Minister Fouad Siniora. After years of growing public debt and recurrent large budget deficits, Hariri desperately needed to come up with new ways to improve government finances. Not much could be done on the expenditure side, at least not without stalling infrastructure works, which led to the government’s two-ply plan to increase government revenues: taxation and broad privatization and securitization.

Numerous attempts to implement a privatization and securitization plan failed over and over again and so taxation became the ultimate tool to offset part of the high interest paid on the debt in the form of municipal taxes, value added taxes, taxes on telecommunication, taxes on (often unreliable) utilities, airport taxes, taxes on deposits and interest, taxes on energy sources with sky-rocketing costs, and the list goes on. At current taxation levels, between 20% and 40% of any bill paid on any type of good or service in Lebanon goes towards government taxes. Typically, around 40% of a post-paid cellular telephone bill is taxes. However, the level of taxes is not the only problem – the way the tax system is structured forces many Lebanese to pay taxes even if they are not generating income. In that regard, the Lebanese taxation system forces business developers to pay taxes on every dime spent on establishing a company or buying a store, beginning with construction, licensing, decorating, and lasting for months, and maybe years, before they even start operating. Another expense burden for the average Lebanese has been increasing gasoline prices. With taxes and government fees constituting almost 75% of fuel costs in the country, and international fuel prices more than doubling over the past two years, it was only a matter of time before people took to the streets in outrage this past May and June. The result? The government capped the price of a 20-liter tank of gasoline at LL22,300, of which over 75% still goes to the government in the form of fees and taxes.

Such an increase in energy costs has created a domino-like effect on prices of consumables throughout the nation, as rising transportation costs have filtered down to various necessity products. Although no official inflation figures are disclosed, financial and economic experts place the annual inflation rate in Lebanon at close to 5% in 2003 and 2004.

But, as if that were not enough to daunt the majority of the Lebanese population, electricity costs are at record levels in Lebanon, matching some of the highest rates in the world, but failing to match their quality and reliability. Furthermore, high-income Gulf tourists have been flocking to the country in massive waves over the past three years, resulting in a sudden spike in demand for housing, clothing, and food and beverages, which leads to corresponding increases in prices across the board – or, in other terms, INFLATION. The ultimate victims of such developments end up being the local residents, which (a) do not contribute to the price increase, (b) do not benefit from increases in income levels, and (c) still have to purchase these, now more expensive, necessities.

With such dire economic conditions facing thousands of university graduates at graduation, it is of no surprise to see a rising trend in the emigration of Lebanese graduates, as it is becoming increasingly impossible to find jobs, establish careers, build families, and secure enough income to live an average life with only the most basic of necessities. So yes, Beirut is certainly an expensive city to live in. But while Lebanon is far from being the only country in the world facing economic woes, the difference remains that governments in most other countries respond to the needs of the people by either providing subsidies, easing taxes to stimulate economic growth, raising the minimum wage level, or imposing regulations for cost of living adjustments, which would allow companies to compensate workers for any significant increases in the cost of living. In Lebanon, however, the lack of economic growth should, “in the opinion of the current and recent governments,” be compensated by raising taxes.