BEIRUT (Reuters) – A top Lebanese banker warned on Thursday that a proposed hike in the tax on interest income would affect capital flows to Lebanon, weaken banks’ ability to play their financing role in the economy, and obstruct growth. The Lebanese government is currently discussing a draft 2019 budget that would raise the tax paid on deposit interest income to 10 percent from 7 percent. Interest income had been tax free until the levy was introduced last year. Lebanon is saddled with one of the heaviest public debt burdens in the world and Prime Minister Saad al-Hariri’s government has vowed to enact long-delayed reforms to put state finances on a sustainable path.

Joseph Torbey, chairman of the Association of Banks in Lebanon, said Lebanese banks hope to see the government succeed in agreeing an austerity budget, calling for a “fundamental reduction” in spending. But, addressing a Beirut economic conference, Torbey warned against underestimating the impact of “subjecting the banking system and its deposits to seasonal taxes at every opportunity – as happened last year” – a reference to the new levy in 2018. This “may be repeated today through raising the tax rate on deposit interest to 10 percent, affecting capital flows to Lebanon, weakening the ability of the banking sector to play its its financing role, negatively affecting interest rates and the cost of financing the Lebanese economy, and obstructing growth”. Finance Minister Ali Hassan Khalil told Reuters the draft budget projects a deficit of less than 9 percent of GDP compared to 11.2 percent in 2019.

The budget, seen as a critical test of Lebanon’s will to reform, is based on an economic growth forecast of 1.5 percent in 2019, which could rise to around 2 percent as the economy picks up, Khalil said. Lebanon’s public debt issome 150 percent of GDP. State finances are strained by a bloated public sector, high debt servicing costs and hefty subsidies spent on the power sector. Serious steps toward reform could unlock $11 billion in financing pledged at a donor conference last year to help Lebanon build infrastructure to boost economic growth. (Reporting by Tom Perry, Ellen Francis and Laila Bassam Editing by Mark Heinrich) Our Standards:The Thomson Reuters Trust Principles.