Lebanon’s recent approval of fiscal reforms, which include a tax on the profits of banks, are credit negative for the sector, according to Moody’s.
“Additional financial sector taxes would be credit negative for banks, further pressuring the poor returns that Lebanese banks are seeing in light of previous rounds of tax increases, and therefore their ability to absorb shocks,” Alexios Philippides, a Moody’s vice president, said in a statement on Wednesday.
This would further reduce shareholders’ incentives to invest in the country and incentives for lenders to attract deposits and invest in government paper, Philippides added.
In the wake of mass protests, the reforms highlight the enormous challenges facing the government and Banque du Liban, the country’s central bank, in maintaining financial sector stability, said Elisa Parisi-Capone, a Moody’s vice president. They also show the difficulty that the country faces in maintaining its currency peg with the US dollar and achieving fiscal consolidation to preserve government debt sustainability, she added.
The reforms approved by the government include cutting the salaries of current and former ministers by 50 percent and setting a salary cap for judges and government officials.
On October 21, the Lebanese cabinet, headed by President Michel Aoun, proposed lifting a 1956 banking secrecy law, which has been criticized for enabling money-laundering, illicit financing, and tax evasion. The banking sector in the country still functions under a high level of confidentiality.
For the past week, hundreds of thousands of Lebanese protesters have led demonstrations and sit-ins in the capital city of Beirut and across the country, calling on Prime Minister Saad Hariri and his government to resign over corruption allegations and mismanagement.
Banks in Lebanon were closed on Wednesday for the third consecutive day amid the ongoing political unrest, pushing the country further into economic paralysis.
In a statement seen by Al Arabiya, protesters rejected fiscal reforms made by Prime Minister Hariri and his government, adding that they will accept nothing short of a formal resignation by all cabinet members.
Lebanon has also been battered by the economic consequences of an eight-year war in neighboring Syria. The country is said to be hosting more than a million Syrian refugees.
The tipping point came on October 17 after mass protests broke out across the country in objection to a tax that was introduced on WhatsApp.
Since September, the Lebanese banking system has also witnessed a shortage of dollars that has sparked an economic crisis and sent unofficial exchange rates climbing from 1,580 Lebanese pounds (LBP), up to LBP 1,600 to $1.