The Institute of International Finance (IIF) says Lebanon's politically motivated move to suspend a new tax law is a setback for much needed new forms of revenue for the government to fund wage and pension increases for civil servants.

"It is unfortunate that the Constitutional Council has suspended the new tax law, which included tax measures that could raise additional revenues to compensate for the agreed large increase in the public wages and pensions," said Garbis Iradian, chief economist at the IIF.

The IIF said that several parliamentarians looking to get re-elected in May 2018 believe their prospects are better without the tax law now and think that a crackdown on corruption and tax evasion will cover the public salary increases. Those hikes, which will kick in this month, are expected to add $1.2 billion, or 2.3 per cent of gross domestic product, to the wage bill, it said.

But that may be ambitious in a country with a big underground economy, widespread corruption and weak rule of law, says Mr. Iradian.

"Establishing an environment in which citizens are induced to comply with tax laws is difficult in Lebanon with a large informal sector, widespread corruption, an ineffective and uncertain legal system, and entrenched mistrust of government," he said.

"Experience from many developing and emerging economies suggests that reducing corruption and tax evasion significantly is a difficult and long process."

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The IIF said that enforcement of tax collection and a crackdown on corruption would not be enough to boost government coffers and that tax raising was also needed. The institute noted that tax capacity in Lebanon is estimated at 30 per cent of gross domestic product versus more than 60 per cent in Morocco and Tunisia and a global average of 70 per cent.

Meanwhile, tax revenue to GDP ratios in Lebanon are among the lowest in the Middle East. Those revenues fell by 3.2 percentage points of GDP from 2010 to 2016 after the government slashed gasoline excises by 50 per cent in May 2011, leading to a $350 million loss in revenue, or 0.8 per cent of GDP. Tax revenues also dropped during that period due to a slowdown in economic growth, the IIF said.

Mr. Iradian pointed out that rescinding the fuel excise tax of 2011 would raise additional revenue of $500m, or 1 per cent of GDP, noting that in Turkey, where gasoline prices cost twice as much, tax revenue from the domestic consumption of fuel is equivalent to 2.1 per cent of GDP.