## cr1720 ## Source details **Canonical URL:** [cr1720](https://www.imf.org/-/media/files/publications/cr/2017/cr1720.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr1720.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr1720.pdf.json) --- ### Motivation and summary - Lebanon faces a pressing need for stronger, high-quality, and inclusive growth; output growth has fallen sharply since the onset of the Syrian crisis and is too low to accommodate new job seekers or to address the needs of vulnerable populations. - Low growth is taking a toll on public debt dynamics, raising the prospect of higher borrowing costs and constrained social and investment spending. - Recent refugee inflows are a key element of the policy challenge: - Paper 1 (“In the Eye of the Storm: Lebanon and the Syrian Refugee Crisis”) outlines the cost of hosting the refugees to the budget and to the economy broadly; authorities proposed a multi-year effort to stimulate growth and employment through targeted investment initiatives. - Paper 2 (“Conflicts and Lebanon’s Capital Stock”) notes the crisis affected living standards both by introducing unskilled labor (depressing the capital-labor ratio and average living standards) and by reducing investment, which has further lowered the capital-labor ratio. - Paper 3 (“The Potential of Human Capital in Lebanon”) highlights Lebanon’s strong human-capital endowment and the need for broader efforts to leverage talent via improvements in the business climate and infrastructure. - Paper 4 (“Revenue Mobilization Options for Lebanon”) argues that reform of the Value Added Tax (VAT)—without necessarily increasing the VAT rate—is one of the most promising avenues to increase tax revenue. - Paper 5 (“Oil Price Spillovers in Lebanon: The Role of Remittances”) estimates that recent oil-price movements could reduce remittance inflows by at least 19 percent (about 3 percent of GDP). - Prepared by Andrew Tiffin (MCD); material summarized from the IMF Lebanon Selected Issues chapters. ### A global problem and regional refugee distribution - Syrian crisis sixth year: out of a population of 26 million: - over one quarter million Syrians have been killed since the start of the civil war, - another million injured, - about 13 million—almost half the population—have had to leave their homes, - around 5 million have been forced to leave the country (Dionigi, 2016). - Officially registered refugee numbers: - Jordan and Lebanon stabilized toward the end of 2014 at around 600 thousand and 1.1 million, respectively, - Turkey reached around 2½ million by end 2015. - Refugee figures use UNHCR registration data; unregistered refugees in Lebanon could be as high as 300 thousand (government statements). ### Lebanese response and access restrictions - Early policy: open door; 1993 bilateral agreement with Syria allowed free movement and freedom of work, residence and economic activity. - Legal context: - Lebanon is not a signatory to the 1951 Convention or its 1967 protocol; government asserts Lebanon is not a country of asylum or a final destination. - Term “refugee” used in the paper for clarity despite Lebanon’s terminology (“displaced” and “de facto refugee”). - Policy tightening timeline and effects: - Refugee numbers rose from less than six thousand at end-2011 to around 100 thousand by mid-2012, then to half a million by mid-2013. - July 2013: GSO began stricter document checks; by May 2014 refugee numbers had doubled to reach one million. - June 2014: entry limited to Syrians from bordering conflict areas. - October 2014: Policy Paper on Syrian Displacement for 2015 to reduce refugee numbers via restrictions and encourage returns. - December 2014: GSO announced new entry requirements; only approved categories allowed entry; limited “humanitarian exemptions criteria.” - May 2015: UNHCR instructed to halt further registration and to deregister refugees who had entered since January 2015; new refugees not registered are ineligible for UN food or assistance. - Result: officially registered refugee numbers stabilized at around 1.1 million. ### Economic impact of the Syrian crisis on Lebanon - GDP growth fell from 8–10 percent prior to the crisis to an estimated rate of around 1–2 percent currently. - Key channel: deterioration of consumer and business confidence due to protracted conflict and potential security spillovers. - Other contributors: extended political deadlock, global financial volatility, substantial terms-of-trade shock for some key oil-exporting trade partners. - World Bank ESIA (2013) estimate: conflict lowered Lebanon’s annual GDP growth rate by an average of 2.9 percentage points. - Cumulative cost: conflict has cost Lebanon almost $14½ billion dollars so far, equivalent to a cumulative loss of almost 30 percent of GDP. - Data limitation: most recent finalized GDP figures are from 2012; much analysis relies on high-frequency indicators. ### Economic and fiscal impact of hosting Syrian refugees - Distinction: broader regional conflict costs versus specific costs of hosting refugees. - World Bank ESIA (2012–14) direct fiscal cost estimate: approximately $2.6 billion total over 2012–14, equivalent to about $0.9 billion each year, split as: - fall in revenues: $0.5 billion, - higher operating costs: $0.4 billion. - Authorities’ estimate: total Syria-related operating costs over 2011–15 of around $2 billion ($400 million each year). - Public infrastructure and service quality: - World Bank ESIA estimated an additional $2.5 billion (5 percent of GDP) required to bring service quality back to pre-crisis levels. - Refugees and domestic demand: - UNDP (2014) suggests the multiplier of humanitarian assistance for refugees receiving international aid is 1.6; without this assistance, growth could have been around 1.3 percent of GDP lower in 2014. ### Theoretical framework: short-run and long-run labor-market effects - Solow model implications for a large one-time migrant influx: - Lowers the wage of incumbents in the short run (lower capital-labor ratio). - Reduces number of employed incumbents as some exit the labor market. - Raises returns to capital and complementary factors in the short run. - Over the long run, investment responds, capital stock expands, and capital-labor ratio reverts to initial steady state, leaving wages at original level. - Key message: modern economies do not produce a fixed number of jobs; adjustment speed depends on market rigidities and investment climate. ### Lebanon-specific labor-market challenges and heterogeneities - Investment climate constraints: - Access to finance generally not a problem, but poor infrastructure, bureaucratic red tape, and political uncertainty hamper investment. - War in Syria and regional tensions have undermined confidence and reduced investment incentives. - Labor-market structure: - Almost half of the workforce employed in the informal sector (ILO, 2015), increasing competition for unskilled jobs. - Many informal workers lack social safety net coverage. - Scale and geography: - Refugee presence concentrated in already vulnerable regions, intensifying competition for unskilled jobs. - Public goods and infrastructure: - Assumption that public goods scale with capital is uncertain in Lebanon given fiscal constraints and political situation. - Empirical caveat: evidence from advanced economies with moderate inflows may not apply to Lebanon due to scale, informality, geographic concentration, and limited fiscal/institutional capacity. ### Policy implications and recommended international support - Lebanon’s ability to scale up production is limited; foreign support priorities include: - Funding for infrastructure: immediate job opportunities and productivity gains. - Stabilization support for host communities: mitigate short-term costs and match service capacity with demand. - Funding for active labor market policies: broaden employment benefits from expansion. ### London Conference proposal (authorities’ consolidated plan, 2016–20) - Overall funding request: over $11 billion for 2016–20. - Requested items presented: - $2½ billion for the 2016 Lebanese Crisis Response Plan (LCRP). - Almost $1½ billion for the education sector. - Around $¾ billion allocated to municipalities. - Over $¼ billion for an employment program to stimulate the economy. - $2 billion in direct budget support, to be used to subsidize future Eurobond issues. - Around $4¼ billion in concessional financing for over 130 priority infrastructure investments. - Three sectoral initiatives: - Subsidized Temporary Employment Program (STEP): expected to create around 100,000 jobs and cost $280 million over three years. - Reach All Children with Education (RACE II): aims to cover all children aged 3–18 (Syrian and Lebanese); expected cost: $350 million per year over four years. - Municipal support program: expected cost: $200 million per year over four years. - Budget support and concessional financing: - Direct budget support (interest subsidy): $400 million per year over five years. - Concessional financing for priority infrastructure investment: $860 million per year over five years. - Authorities’ projected impact: proposed interventions projected to create 300–350 thousand jobs, of which 60 percent would be for Syrian refugees. - Consolidated funding table (USD million): - Sectoral Grants: 2,480; 610; 650; 670; 550; Total 4,960 - LCRP: 2,480; -; -; -; -; Total 2,480 - STEP: -; 60; 100; 120; -; Total 280 - RACE-: -; 350; 350; 350; 350; Total 1,400 - Municipalities-: -; 200; 200; 200; 200; Total 800 - Budget Support Interest Subsidy: 400; 400; 400; 400; 400; Total 2,000 - Concessional Financing Infrastructure Projects: 860; 860; 860; 860; 860; Total 4,300 - Total (annual breakdown and sum): 3,740; 1,870; 1,910; 1,930; 1,810; Total 11,260 ### Labor-market access and livelihoods for Syrian refugees - Official position: Lebanon is not a country of asylum, final destination, or resettlement; permanent integration not viewed as viable. - London Conference commitments on labor-market access: - Authorities committed to streamline regulations, including periodic waiver of residency fees and simplifying documentary requirements such as waiving the “pledge not to work” requirement for Syrians, and easing access to the job market in certain sectors where they are not in direct competition with Lebanese. ### Regulatory framework and residency requirements (key statistics and dates) - Decree limiting formal labor participation: December 2014 — Decree 197 limiting Syrian participation to agriculture, construction, and cleaning services. - New GSO residency regulations: January 2015: - Required renewal of residency every six months for a fee of $200. - Applicants split into: (i) registered with UNHCR; (ii) not registered. - Both required $200 fee and certified copy of lease agreement or real-estate deed plus certified declaration from a village leader that the landlord owns the property. - Migrants not registered with UNHCR must provide a Lebanese sponsor for a work permit. - Registered refugees must provide a notarized pledge to abide by Lebanese law when seeking employment. - Footnote: $200 fee existed prior to 2015 but could be avoided by temporary exit and re-entry; post-2015 entry requirements removed that option. - Financial burden context: - Average refugee household monthly income (without assistance): $177 (UNHCR, 2016). - Share of Syrian refugees without valid residency permit: 9 percent in January 2015; 61 percent by July 2015 (Janmyr, 2016). - Humanitarian consequences: - Lack of valid residency forces illegal work, worsens bargaining position, increases abuse risk, restricts mobility, and encourages child labor (Human Rights Watch, 2016). ### Capital-labor ratio: trends, impacts, and policy challenges - Historical trend: - Capital stock increased markedly since 1990; capital-labor ratio tripled. - Plateau during 1998–2006; decline during 2006 Israeli conflict; increase 2007–10. - Syrian war and refugee inflow effects: - Decreased capital-labor ratio from 2011 trajectory via increased labor population and reduced capital growth due to lower investment and GDP growth. - Short-term magnitudes (2011–2014): - Labor force population grew by around 14 percent, versus non-Syrian-refugee adjusted baseline of 5 percent. - Average 3-year labor force growth rate between 2007 and 2011 was roughly 7 percent. - Investment-to-GDP projection: - Falls steadily from 27 percent in 2011 to 17 percent in 2019. - Capital-Labor Ratio Gap from Trend (percent) selected annual values: - 2012: -1.97 - 2013: -7.48 - 2014: -11.19 - 2015: -12.71 - 2016: -14.46 - 2017: -16.57 - 2018: -18.91 - 2019: -21.41 - Policy challenge: investment. Options and constraints: - Improve investment climate to boost private-sector capital formation. - Increase public investment directly, though fiscal space is severely constrained. - Fiscal rebalancing away from consumption toward capital spending preferred given limited fiscal space. - Infrastructure spending particularly helpful and would signal commitment to address public debt and imbalances. - Public investment context: - Average country public investment: roughly 8.2 percent of GDP. - Lebanon spends 1.7 percent of GDP on public investment. - Lebanon ranks fourth lowest in a sample of 111 countries. ### Measuring capital stock: methodology and sensitivity (Annex I highlights) - Method: Perpetual Inventory Method (PIM), K_{t+1} = (1-δ_t) K_t + I_{t+1}. - Real investment data: IMF World Economic Outlook database (gross capital formation in 2005 U.S. dollars). - Initial capital stock (K0) sensitivity: - Baseline K0 = Y0*2.6; low = (Y0*2.6)*.75; high = (Y0*2.6)*1.25. - Initial capital stock in 1970 ranged from 13 to 22 billion 2005 US dollars. - Capital stock in 2015 under scenarios ranged between 117 to 119 billion. - Depreciation and conflict adjustments: - Baseline PWT country-specific depreciation series used. - Conflict coefficient increased depreciation in conflict years (1975–1990; 2006). - Average depreciation rate results (1970–2011): - Lebanon baseline average: 3.87 percent (86 out of 166 countries; 52nd percentile). - Lebanon adjusted for 2006 conflict: 3.92 percent (54th percentile). - Lebanon adjusted for all conflict: 5.55 percent (97th percentile). - Conflict adjustments imply a drop in capital stock of roughly 3 billion in 2005 U.S. dollars (or 15 percent of GDP) in 2006. - Sensitivity scenarios vary K0, depreciation for heavy conflict years, and share of investment in structures. ### Conflicts’ one-off effects on capital stock - Civil war effect: capital stock decreases 42 percent immediately after the civil war. - Israeli conflict (2006): one-off event concentrated in a few months; smaller effect. - Combined worst-case vs baseline (no conflict adjustment): 6 percent reduction in capital stock for 2015. - PWT asset-type depreciation rates: - Structures: 2.0 percent - Equipment and transportation: 18.9 percent - Other machines and assets: 12.6 percent - Sensitivity: varying capital mix changes 2011 capital stock by +6.10 and -8.87 percent. ### The potential of the knowledge economy and Banque du Liban Circular 331 - Context: traditional growth drivers stalled since 2011; need diversification toward comparative advantage. - Human capital strengths: - Lebanese 8th graders performed comparatively much better than most peers in the region in mathematics (TIMSS). - Three Lebanese universities in top 20 Arab region (QS University Rankings, 2015). - Population about 4.5 million. - Percent of scholarly publications with at least one international collaborator ≈ 60 percent. - Underutilization indicators: - Very low patenting activity (WIPO). - ICT sector market size: below 1 percent of GDP (Investment Development Authority of Lebanon). - Network Readiness Index (WEF, 2015): rank 99. - ICT Development Rank (ITU, 2013): rank 62. - Global Innovation Index: rank 106. - AUB alumni (2014): 45 percent of alumni traced to living in Lebanon. - Endeavor Impact Report 2014: 52 percent of surveyed firms identified talent retention challenges; over 75 percent of those cited brain drain as main challenge. - BdL Circular 331 (August 2013): - Commercial banks may invest up to 4 percent of tier 1 capital in startups or venture funds. - BdL provides an interest-free loan to the bank to buy treasury bills; bank sells them back at a premium so ‘profit’ equals 75 percent of investment made by bank. - Banks receive immediate boost to capital equal to 75 percent of investment; profits split equally between bank and BdL. - Theoretical maximum total investment if full take-up: upwards of $450 million. - Actual uptake by Q3 2016: about $10 million invested in startups under the program. - Constraints and recommendations: - Easy financing can blunt venture-capital governance; guarantee level and program size large relative to investable projects. - Seed-stage and exit-stage gaps exist; recommend emphasis on seed funding, incubators, accelerators, and capital market development (finalize and implement capital market regulation and development plan). - Infrastructure and business climate obstacles: - Political instability and electricity main obstacles (Enterprise Surveys). - More than 50 percent of firms in 2013 identified electricity as major constraint. - Internet speed: Lebanon Q1 2016 average = 1.8 Mbps; global country average Q1 2016 = 6.3 Mbps. - Conclusions: need coordinated actions to improve political/business climate, strengthen infrastructure, and create transparent governance to build a knowledge-based hub. ### Tax and VAT performance — revenue mobilization options - Headline findings: - Lebanon tax performance significantly below potential; tax revenues weakened by 4 percentage points of GDP since 2010. - VAT reform (without increasing rate) offers promising avenue to strengthen revenue: removing exemptions, streamlining deductions/refunds, and improving compliance could improve VAT revenues by about 4 percentage points of GDP. - Central Government Revenue, 2010-15 (percent of GDP): - Revenue: 2010 22.1; 2011 22.8; 2012 21.8; 2013 19.8; 2014 21.8; 2015 18.8 - Tax revenue: 2010 17.4; 2011 16.4; 2012 15.3; 2013 14.1; 2014 13.8; 2015 13.5 - Nontax and Other revenue: 2010 4.7; 2011 6.4; 2012 6.4; 2013 5.7; 2014 8.0; 2015 5.4 - Drivers of tax decline (2010–15): - Syria crisis: VAT at customs dropped by 12 percent over 2013–15; 1,866 enterprises ceased operations and stopped paying income tax. - Policy changes: VAT exemptions introduced March 2012 (red and green diesel) revenue loss LL 295 billion in 2012 (~0.4 percent of GDP); gasoline excises reduced by half in May 2011 revenue loss LL 498 billion in 2011 (~0.8 percent of GDP). - Tax capacity and effort: - Tax capacity estimated at 34 percent of GDP. - Average tax revenue 15 percent of GDP implies tax effort only half of potential. - VAT-specific facts: - Private consumption 87 percent and imports 70 percent of 2013 GDP. - VAT collections fell from 5.6 percent in 2007 to 4.1 percent in 2015. - Potential gains from mobilizing VAT revenues could be up to 5 percent of GDP annually. - VAT gap (RA-GAP) findings: - Overall VAT gap estimated at 7.4 percent of GDP in 2013; widened from ~6 percent over 2009–13. - VAT compliance gap estimated at 3.3 percent of GDP in 2013. - Assessment gap accounts for majority of compliance gap. ### Definition and decomposition of the VAT gap (Box 2 highlights) - Overall VAT gap = difference between revenues collected and potential revenues that could have been collected in a year. - RA-GAP potential VAT revenues: revenues under existing economic conditions, full compliance, and all final consumption taxed at the standard rate. - Overall gap components: - Compliance gap = difference between potential collections under current policy framework and actual collections. - Subcomponents: assessment gap (estimated VAT that should have been declared minus declared/assessed VAT); collection gap (declared/assessed VAT minus VAT actually paid). - Policy gap = difference between potential revenues given full potential base and potential given current policy framework. - Subcomponents: expenditure gap (discretionary exemptions) and efficiency gap (pragmatic exemptions). - Lebanon (2009–13) specifics: - Collection gap rose from negligible in 2009 to 0.3 percent of GDP in 2013. - By 2013: policy gap = 4 percent of GDP; compliance gap = just under 3.5 percent of GDP. - Expenditure gap rose from 1.3 percent of GDP to 2.4 percent of GDP in 2013. - Efficiency gap peaked in 2010 at 2.2 percent of GDP and declined to 1.7 percent in 2013. - Box 3 (VAT exemptions summary): Lebanon’s VAT departs from typical exemption model; includes refunds on inputs for exempt suppliers (Article 59), refunds for non-registered persons, input exemptions in several sectors, and broad end-user exemptions. - Reform options suggested: limit exemptions, remove/limit refunds, revisit VAT refunds to diplomats and international organizations, evaluate taxing sales of new/substantially renovated residential properties and taxing non-life insurance services. ### VAT reform policy simulations and scenarios (selected outcomes) - Full and immediate elimination of VAT gap (illustrative): - Would increase total revenue by more than 7 percent of GDP, bringing VAT revenue close to 12 percent of GDP. - Primary balance would reach above 8 percent of GDP and overall balance converge towards zero by 2021. - Public debt would decline from current level of 140 percent of GDP to about 120 percent of GDP in 2021. - Noted as implausible in practice but presented for completeness. - Incomplete and gradual elimination (assumptions): - (i) compliance gap eliminated by half, - (ii) only expenditure part of policy gap eliminated, - (iii) gaps eliminated gradually over next five years. - Estimated impacts by 2021: - Primary balance increase from 1.1 percent to 5.2 percent of GDP. - Overall balance improve from -8.1 to -5.6 percent of GDP. - Public debt stabilize at about 150 percent of GDP in 2021. - Implementation of these measures alone would be sufficient to at least stabilize the debt-to-GDP ratio over the medium run. - Annex I — overall VAT gap and subcomponents (percent of GDP, selected entries): - Overall gap (2009–2013): 6.1; 6.3; 6.5; 7.1; 7.4 - Compliance gap (2009–2013): 3.1; 3.0; 3.0; 3.1; 3.3 - Assessment gap (2009–2013): 3.1; 2.9; 2.8; 2.8; 3.0 - Potential collections given current policy framework (2009–2013): 7.6; 7.6; 7.7; 7.3; 7.3 - VAT declared or assessed (2009–2013): 4.6; 4.7; 4.9; 4.5; 4.3 - Collection gap (2009–2013): 0.0; 0.1; 0.2; 0.3; 0.3 - Actual VAT collected (2009–2013): 4.6; 4.6; 4.7; 4.2; 4.0 - Policy gap (2009–2013): 3.1; 3.3; 3.5; 4.0; 4.0 - Efficiency gap (2009–2013): 1.8; 2.2; 2.1; 2.1; 1.7 - Potential VAT where all final consumption taxed at standard rate (2009–2013): 10.7; 10.9; 11.2; 11.2; 11.3 - Potential VAT with minimal exemptions (2009–2013): 8.9; 8.6; 9.1; 9.2; 9.6 - Expenditure gap (2009–2013): 1.3; 1.0; 1.4; 1.9; 2.3 - Memorandum GDP (2009–2013): 52,974; 57,300; 60,419; 66,481; 71,185 ### Oil-price spillovers and remittances - Net impact of lower oil prices on Lebanon is mixed due to tight linkages to oil-producing Arab countries. - Model framework: IMF’s Flexible System of Global Models (FSGM) with added remittance channel (Snudden, 2016); decomposes oil shock into demand and supply factors per April 2016 WEO approach. - Quantitative simulation findings: - Remittance inflows decline by about 19 percent relative to a counterfactual of no change in oil prices. - 19 percent decline ≡ about USD 1.5 billion or 3 percent of GDP. - Adding remittance/migration channel reduces GDP by an additional 0.4 percent in 2016–18 versus model without that channel. - Supply-driven oil price drop: real GDP increases due to higher household real incomes and wealth, more than compensating for lower remittances. - Demand-driven oil price drop: lower external demand depresses household real income and wealth, producing the opposite effect. - Caveats: - Model uses World Bank bilateral data that may downplay GCC role; results likely conservative lower bound. - Model addresses remittance inflows only; remittance outflows have been declining as seasonal workers now live in Lebanon or moved elsewhere—net remittances might decline by less than model suggests. - Data notes (Annex I): - Remittances measured in BPM6 via personal transfers and compensation of employees. - Lebanon compiling external sector stats per BPM5; mapping to BPM6 fairly straightforward. - BdL estimates remittances via bank transfers (ITRS), money transfer operators (monthly reports), and in-kind transfers. - Measuring remittances is difficult due to informal channels and small transaction sizes. *Prepared by IMF staff; material summarized from Lebanon Selected Issues chapters and IMF staff calculations.* ### 1. The Labor-Market Impact of Refugee Inflows: Theory and Findings _______________ 10 ### 1. The Labor-Market Impact of Refugee Inflows: Theory and Findings ### Motivation and summary - Lebanon faces a pressing need for stronger, high-quality, and inclusive growth; output growth has fallen sharply since the onset of the Syrian crisis and is too low to accommodate new job seekers or to address the needs of vulnerable populations. - Low growth is taking a toll on public debt dynamics, raising the prospect of higher borrowing costs and constrained social and investment spending. - Recent refugee inflows are a key element of the policy challenge: - The first paper (“In the Eye of the Storm: Lebanon and the Syrian Refugee Crisis”) outlines the cost of hosting the refugees to the budget and to the economy broadly; authorities proposed a multi-year effort to stimulate growth and employment through targeted investment initiatives. - The second paper (“Conflicts and Lebanon’s Capital Stock”) notes the crisis affected living standards both by introducing unskilled labor (depressing the capital-labor ratio and average living standards) and by reducing investment, which has further lowered the capital-labor ratio. - The third paper (“The Potential of Human Capital in Lebanon”) highlights Lebanon’s strong human-capital endowment and the need for broader efforts to leverage talent via improvements in the business climate and infrastructure. - The fourth paper (“Revenue Mobilization Options for Lebanon”) argues that reform of the Value Added Tax (VAT)—without necessarily increasing the VAT rate—is one of the most promising avenues to increase tax revenue. - The fifth paper (“Oil Price Spillovers in Lebanon: The Role of Remittances”) estimates that recent oil-price movements could reduce remittance inflows by at least 19 percent (about 3 percent of GDP). ### A global problem and regional refugee distribution - The Syrian crisis is in its sixth year; out of a population of 26 million: - over one quarter million Syrians have been killed since the start of the civil war, - another million injured, - about 13 million—almost half the population—have had to leave their homes, - around 5 million have been forced to leave the country (Dionigi, 2016). - Most Syrian refugees remain in the region—principally Turkey, Jordan, and Lebanon. Officially registered refugee numbers: - Jordan and Lebanon stabilized toward the end of 2014 at around 600 thousand and 1.1 million, respectively, - Turkey reached around 2½ million by end 2015. - Refugee figures in this note are based on official registration data from UNHCR; there are no agreed estimates of unregistered refugees in Lebanon, although government statements suggest these could be as high as 300 thousand. ### The Lebanese response and access restrictions - Early policy: Lebanon maintained an open door policy; Syrians entered unhindered and were subject to the same provisions in domestic law applying to other foreigners, aided by a 1993 bilateral agreement with Syria allowing free movement and freedom of work, residence and economic activity. - Legal and policy context: - Lebanon is not a signatory to the 1951 Convention or its 1967 protocol; the government has repeatedly reaffirmed that Lebanon is not a country of asylum or a final destination for refugees. - The paper uses the term “refugee” for clarity despite Lebanon’s official terminology (“displaced” and “de facto refugee”). - Policy tightening timeline and effects: - Refugee numbers rose from less than six thousand at end-2011 to around 100 thousand by mid-2012, then to half a million by mid-2013. - In July 2013 the General Security Office (GSO) began stricter document checks; by May 2014 refugee numbers had doubled again to reach one million. - June 2014: authorities announced only Syrians from bordering areas where there was fighting would be allowed entry. - October 2014: government approved a Policy Paper on Syrian Displacement for 2015, aiming to reduce refugee numbers via restrictions and encouraging returns. - December 2014: GSO announced new entry requirements; entry available only to those proving their stay fits approved categories; no categories for those fleeing armed conflict other than limited “humanitarian exemptions criteria” (unaccompanied children, disabled persons with relatives in Lebanon, those with urgent medical needs, or persons to be resettled in a third country). - May 2015: authorities instructed UNHCR to halt further registration and to deregister refugees who had entered since January 2015; new refugees not already registered with UNHCR are now ineligible for food or assistance through UN mechanisms. - Result: officially registered refugee numbers have since stabilized at around 1.1 million. ### Economic impact of the Syrian crisis on Lebanon - GDP growth fell sharply from 8–10 percent prior to the crisis to an estimated rate of around 1–2 percent currently. - The key channel: deterioration of consumer and business confidence due to protracted conflict and potential security spillovers. - Other contributing factors: extended political deadlock, global financial volatility, and a substantial terms-of-trade shock for some of Lebanon’s key oil-exporting trade partners. - World Bank ESIA (2013) estimate: the conflict in Syria lowered Lebanon’s annual GDP growth rate by an average of 2.9 percentage points. - Cumulative cost: the conflict has thus cost Lebanon almost $14½ billion dollars so far, equivalent to a cumulative loss of almost 30 percent of GDP. - Data limitations: most recent finalized GDP figures are from 2012; much analysis relies on high-frequency indicators. ### Economic and fiscal impact of hosting Syrian refugees - Distinction emphasized: broader costs of the regional conflict versus specific costs of hosting refugees; the two are linked but conceptually separable. - World Bank ESIA (2012–14) estimate of direct fiscal cost of the crisis: approximately $2.6 billion total over 2012–14, equivalent to about $0.9 billion each year, split as: - fall in revenues: $0.5 billion (from lower economic activity), - higher operating costs: $0.4 billion (increased demand for government services). - Authorities’ estimate: total Syria-related operating costs over 2011–15 of around $2 billion ($400 million each year). - On public infrastructure and service quality: - World Bank ESIA estimated an additional $2.5 billion (5 percent of GDP) would be required to bring service quality back to pre-crisis levels. - Refugees and domestic demand: - Refugees contribute to consumer demand by drawing on savings, borrowing from social networks, or channeling international assistance. - UNDP study (2014) suggests the multiplier of humanitarian assistance for refugees receiving international aid is 1.6; without this assistance, growth in Lebanon could have been around 1.3 percent of GDP lower in 2014. ### Policy implications and priorities highlighted - International burden-sharing is needed: Lebanon is providing a global public good by hosting refugees, and cannot be expected to shoulder the burden alone. - Restoring living standards requires additional capital; addressing reduced investment and the public investment gap is critical. - Stimulating growth and employment through targeted, multi-year investment initiatives is central to the authorities’ strategy. - VAT reform—without necessarily increasing the VAT rate—is identified as a promising avenue to expand fiscal space. - Short-term benefits from lower oil prices for an oil importer like Lebanon may be muted by reduced remittance inflows; model estimates suggest remittances could fall by at least 19 percent (about 3 percent of GDP). *Prepared by Andrew Tiffin (MCD); material summarized from the IMF Lebanon Selected Issues chapters.* ### 12. One of the most actively debated questions, however, concerns the impact of the ### cr1720 - 12. One of the most actively debated questions, however, concerns the impact of the ### Theoretical framework: short-run and long-run labor-market effects - Under a basic Solow model, a large one-time influx of migrants: - Lowers the wage of incumbents in the short run, reflecting a lower economy-wide capital-labor ratio. - Reduces the number of employed incumbents, as some will be induced to exit the labor market. - Raises returns to capital (and other complementary factors, such as high-skilled labor) in the short run, as extra labor makes capital more productive. - Over the long run, investment responds to higher returns, the capital stock expands, and with constant returns to scale the capital-labor ratio reverts to the initial steady state, leaving wages at their original level. - Key theoretical message: - A modern economy does not produce a fixed number of jobs; it will eventually scale up production in line with a larger labor force. - Market rigidities influence the pace of adjustment; flexible, investment-friendly economies adjust more rapidly. ### Lebanon-specific challenges and heterogeneities - The nature of Lebanon’s economy presents additional challenges that may slow or amplify short-run costs: - Investment climate constraints: - Access to finance is generally not a problem, but poor infrastructure, bureaucratic red tape, and political uncertainty hamper firms’ ability to invest. - The war in neighboring Syria and growing regional tensions have undermined local confidence and weakened the growth outlook, reducing investment incentives. - Labor-market structure: - Estimates suggest that almost half of the workforce is employed in the informal sector (ILO, 2015), increasing direct competition between residents and refugees for unskilled jobs. - Many informal workers are not covered by Lebanon’s social safety net, making them particularly vulnerable. - Scale and geography of the shock: - The scale of the Syrian refugee presence may outstrip Lebanon’s ability to respond smoothly. - Refugees have mostly settled in regions where poverty and social vulnerability are already high, intensifying competition for unskilled jobs. - Public goods and infrastructure: - Standard models implicitly assume public goods and infrastructure scale up with capital; Lebanon’s difficult political situation and limited fiscal space make this uncertain. ### Empirical evidence and applicability - Empirical studies (mostly on advanced economies and moderate inflows) generally find little adverse long-run impact of refugee or unskilled immigration: - Local wages generally remain unchanged in many studies; incumbents often move to occupations where local knowledge and linguistic ability confer advantages. - Many economies in these studies were able to scale up investment relatively smoothly. - Caveat: - These studies may not apply straightforwardly to Lebanon due to the scale of inflows, the high share of informal employment, concentrated geographic settlement of refugees, and limited fiscal/institutional capacity. ### Policy implications and recommended international support - Lebanon’s ability to accommodate a large refugee inflow by scaling up production is more limited than in many other countries and may require foreign support. Priority areas for support include: - Funding for infrastructure: - Would provide immediate job opportunities for both Lebanese and Syrians and improve productivity, growth, and employment prospects. - Stabilization support for host communities: - Would help mitigate short-term costs of the refugee presence and match government service capacity with increased demand. - Funding for active labor market policies: - Would help ensure the broadest employment benefits from economic expansion. ### London Conference proposal (authorities’ consolidated plan, 2016–20) - Overall funding request and composition: - The authorities presented a medium-term plan covering 2016–20 that requires over $11 billion in support. - The plan includes grants for refugee needs, loans for development projects, and concessional financing for infrastructure. - Specific requested items (as presented at the conference): - $2½ billion for the 2016 Lebanese Crisis Response Plan (LCRP). - Almost $1½ billion for the education sector. - Around $¾ billion allocated to municipalities. - Over $¼ billion for an employment program to stimulate the economy. - $2 billion in direct budget support, to be used to subsidize future Eurobond issues. - Around $4¼ billion in concessional financing for over 130 priority infrastructure investments. - Three highlighted sectoral initiatives (Box 2): - The Subsidized Temporary Employment Program (STEP): - Expected to create around 100,000 jobs and cost $280 million over three years. - The Reach All Children with Education (RACE II) program: - Aims to cover all children aged 3–18 (Syrian and Lebanese). - Expected cost: $350 million per year over four years. - Municipal support program: - Encompasses direct financial support to municipal centers and financing projects for waste management, renewable energy and transport. - Expected cost: $200 million per year over four years. - Budget support and concessional financing: - Direct budget support (interest subsidy) requested: $400 million per year over five years. - Concessional financing for priority infrastructure investment: $860 million per year over five years (largest identified needs in electricity generation and transmission, roads and transport, environment, and water management). - Authorities’ projected impact: - The combination of proposed interventions is projected to create 300–350 thousand jobs, of which 60 percent would be for Syrian refugees. - Consolidated funding table figures (USD million) as presented: - Sectoral Grants: 2,480; 610; 650; 670; 550; Total 4,960 - LCRP: 2,480; -; -; -; -; Total 2,480 - STEP: -; 60; 100; 120; -; Total 280 - RACE-: -; 350; 350; 350; 350; Total 1,400 - Municipalities-: -; 200; 200; 200; 200; Total 800 - Budget Support Interest Subsidy: 400; 400; 400; 400; 400; Total 2,000 - Concessional Financing Infrastructure Projects: 860; 860; 860; 860; 860; Total 4,300 - Total (annual breakdown and sum): 3,740; 1,870; 1,910; 1,930; 1,810; Total 11,260 ### Labor-market access and livelihoods for Syrian refugees - Policy stance and controversy: - Lebanon’s official position has been that it is not a country of asylum, final destination, or resettlement; permanent integration of Syrian refugees is not viewed as a viable solution. - Measures that raise the prospect of prolonged presence or impede repatriation have been controversial. - London Conference commitments on labor-market access: - Authorities committed to streamline regulations concerning labor-market access for Syrian refugees, stating they are: - “…seeking, in conformity with Lebanese Laws, ways to facilitate the streamlining of such regulations, including periodical waiver of residency fees and simplifying documentary requirements such as waiving the ‘pledge not to work’ requirement for Syrians, and, by so doing, ease the access of Syrians to the job market in certain sectors where they are not in direct competition with Lebanese.” *LEBANON — INTERNATIONAL MONETARY FUND (cr1720)* ### 20. Current regulations restrict the ability of refugees to legally enter the labor market, ### cr1720 - 20. Current regulations restrict the ability of refugees to legally enter the labor market, ### Regulatory framework and residency requirements - December 2014: Ministry of Labor issued Decree 197, limiting Syrian participation in the formal labor market to three sectors: agriculture, construction, and cleaning services. - January 2015: General Security Office (GSO) introduced new residency regulations for Syrians: - Required renewal of residency every six months for a fee of $200. - Applicants divided into two categories: (i) those registered with UNHCR as refugees; and (ii) those who are not. - Both categories required to pay the $200 fee and to provide a certified copy of a lease agreement or real-estate deed, plus a certified declaration from a village leader that the landlord owns the property. - Migrants not registered with UNHCR must provide a Lebanese sponsor for a work permit. - Refugees registered by UNHCR must provide a notarized pledge to abide by Lebanese law when seeking employment. - Footnote detail: The $200 fee existed prior to the 2015 regulations, but Syrian migrants could routinely avoid the fee by temporarily leaving the country and then receiving a new entry stamp at no charge. This option is no longer available as a result of the entry requirements introduced in 2015. ### Labor-market participation, informal work, and economic burden - Many Syrians enter the labor market informally; participation in the informal market predates the crisis but has been affected by the new requirements. - Financial and administrative burdens: - The $200 fee can be prohibitive given refugee household average monthly income (without assistance) of $177 (UNHCR, 2016). - Added administrative requirements impose further costs. - Legal status and enforcement: - Share of Syrian refugees without a valid residency permit rose from 9 percent in January 2015 to 61 percent by July 2015 (Janmyr, 2016). - Refugees without a valid permit are considered in breach of Lebanese law, exposing them to detention and possible return to Syria. - Humanitarian and protection consequences: - Lack of valid residency forces refugees to work illegally, worsening bargaining position and increasing risk of abuse. - Inability to secure valid residency raises the possibility of arrest and restricts mobility for income opportunities. - Encourages use of child labor, as children are less likely to be held up at domestic checkpoints (Human Rights Watch, 2016). ### Policy options under consideration and trade-offs - Authorities are exploring measures to ease humanitarian burdens without compromising the policy stance that Syrian refugees cannot expect to remain in Lebanon indefinitely (commitments at the London Conference). - Trade-offs and balance: - Regularization of labor-market access would imply added integration of Syrian refugees into Lebanese society and could shape incentives to return to Syria or seek resettlement elsewhere. - Surveys confirm most refugees want to return home at the earliest opportunity. - Humanitarian and fiscal rationale for easing restrictions: if refugees remain in Lebanon for some time, their ability to secure a stable livelihood would: - Reduce their drain on Lebanon’s budget. - Ease their claim on the humanitarian resources of the donor community, allowing greater scope for stabilization of Lebanese host communities. - Unclear impact on repatriation incentives: international experience suggests self-reliant refugees who enhance skills while in exile are often able to return to their origin country more rapidly (World Bank, 2015). ### Key statistics and dates (as reported in the source) - Decree limiting formal labor participation: December 2014. - New GSO residency regulations: January 2015. - Residency renewal frequency: every six months. - Residency renewal fee: $200. - Average refugee household monthly income (without assistance): $177 (UNHCR, 2016). - Share of Syrian refugees without valid residency permit: 9 percent in January 2015; 61 percent by July 2015 (Janmyr, 2016). *LEBANON — INTERNATIONAL MONETARY FUND* ### 13. Lebanon’s capital-labor ratio shows a general increase since the early 1990s, albeit ### 13. Lebanon’s capital-labor ratio shows a general increase since the early 1990s, albeit ### Trend in capital-labor ratio (1990s–2019) - Capital stock has increased markedly since 1990, with a capital-labor ratio that has tripled. - There is a decade-long plateau in the capital-labor ratio during 1998–2006. - Adjusted series shows a visible decline in the ratio during the 2006 Israeli conflict, and a return to an increasing capital-labor ratio between 2007–10 during a period of exceptionally high investment and growth. ### Effects of the Syrian civil war and refugee inflow - The Syrian civil war and influx of refugees significantly decreased the capital-labor ratio from its 2011 trajectory. - Decomposed drivers of the decline include: - Increased labor population from Syrian refugees (supply-side effect). - Reduced growth of the capital stock due to: - A fall in the investment-to-GDP ratio (at unchanged GDP growth rates). - Lower GDP growth (at an unchanged investment-to-GDP ratio). - Short-term magnitudes (2011–2014): - Labor force population grew by around 14 percent, compared to the non-Syrian refugee adjusted baseline of 5 percent. - The average 3-year labor force growth rate between 2007 and 2011 was roughly 7 percent. - Projected path and contribution shifts: - As the sudden influx effect dissipates after 2015 (projections use three year rolling average growth rates for underlying variables, except Syrian refugees which use the 2014–15 growth rate for every year), the share of the lost capital-labor ratio due to the investment slowdown grows rapidly. - Investment-to-GDP falls steadily from 27 percent in 2011 to 17 percent in 2019. ### Quantified impacts on capital-labor gap (selected annual values shown in figure) - Capital-Labor Ratio Gap from Trend (in percent) contributions by year (figure highlights): - 2012: -1.97 (Due to Slowdown in GDP Growth) plus larger components due to investment slowdown and refugees evident in series. - 2013: -7.48 - 2014: -11.19 - 2015: -12.71 - 2016: -14.46 - 2017: -16.57 - 2018: -18.91 - 2019: -21.41 - (Bars in figure split into: Due to Slowdown in GDP Growth; Due to Slowdown in Investment (as a percent of GDP); Due to Increased Labor Population from Syrian Refugees.) ### Policy challenges and recommendations - Key policy challenge: investment. Ability to accommodate refugee inflows depends on matching new workers with new investment and capital. - Lebanon’s investment climate constraints: - Access to finance generally not a problem. - Poor infrastructure, bureaucratic red tape, and political uncertainty hamper investment. - Policy options: - Improve investment climate to boost private-sector capacity to add to capital stock. - Authorities might add to capital growth directly by increasing public investment, though fiscal space is severely constrained. - Fiscal rebalancing away from consumption and toward capital spending is preferable to outright spending increases given limited fiscal space. - Infrastructure spending would be particularly helpful given infrastructure constraints on growth, and would also boost confidence by signaling commitment to addressing public debt and economic imbalances. ### Public investment context and potential gains - Cross-country comparison: - Average country spends roughly 8.2 percent of GDP on public investment. - Lebanon spends 1.7 percent of GDP on public investment. - Lebanon is the fourth lowest country in a sample of 111 countries. - Implication: a modest increase in Lebanon’s public investment, moving the economy closer to global norms, could make a substantive difference in mitigating the expected decline in the capital-labor ratio and in addressing infrastructure deterioration. ### Conclusions (summary points) - Lebanon’s capital ratios have been affected by conflicts inside its borders (civil war 1975–90; July 2006 conflict) that destroyed physical capital and reduced capital stock. - Post-civil war peace dividend and high public spending stabilized capital-output and raised capital-labor ratios. - The Syrian civil war spillover led to a marked drop in investment and a large, multi-year refugee influx, decreasing the capital-labor ratio and economy-wide output per worker. - The refugee crisis provided the greatest immediate effect; medium-term challenge is the slowing investment drag on per-capita productivity. - Restoring living standards requires greater investment and addressing the large public investment gap. ### Annex I — Measuring capital stock in Lebanon: methodology and sensitivity - Method: Perpetual Inventory Method (PIM) using law of motion for capital: K_{t+1} = (1-δ_t) K_t + I_{t+1} (notation and formula described in text). - Data sources for real investment: IMF World Economic Outlook database (gross capital formation in 2005 U.S. dollars). - Initial capital stock (K0) estimation: - Baseline assumption follows Penn World Tables (PWT) approach assuming capital-output ratio of about 2.6 for countries with little ICT assets. - Sensitivity scenarios: K0 = Y0*2.6 (baseline), K0 = (Y0*2.6)*.75 (low), K0 = (Y0*2.6)*1.25 (high). - Resulting initial capital stock in 1970 ranged from 13 to 22 billion 2005 US dollars. - Capital stock in 2015 under these scenarios ranged only between 117 to 119 billion (illustrating diminishing effect of K0 over time). - Depreciation rate adjustments and conflict accounting: - Baseline uses PWT country-specific depreciation series (weighted-average across asset classes). - Adjustments made for measurement error and physical destruction in conflict years (1975–1990 civil war; 2006 Israeli war) by applying a “conflict coefficient” to increase depreciation rates during those years. - Average depreciation rate results (1970–2011): - Lebanon baseline average: 3.87 percent (86 out of 166 countries; 52nd percentile). - Lebanon adjusted for 2006 conflict: 3.92 percent (54th percentile). - Lebanon adjusted for all conflict (civil war and 2006): 5.55 percent (97th percentile). - Application of conflict adjustments implies a drop in capital stock of roughly 3 billion in 2005 U.S. dollars (or 15 percent of GDP) in 2006. - The conflict coefficient construction used narrative-based adjustments due to lack of formal physical-destruction estimates; adjustments for 1975–1990 use the same ratio as derived from 2006 due to lack of direct civil war destruction data. - Additional sensitivity elements: - Alternative scenarios vary: - Initial capital stock (PWT, -25%, +25%). - Depreciation rate for heavy conflict years (PWT*(.75), PWT*(1.25)). - Share of investment in structures (PWT's = %SMS; low alternative = 0.75*SMS; high alternative = 100%). - Depreciation rate extended past 2011 to 2015 using prior three year rolling-average trends to project capital stock to 2015. *International Monetary Fund staff calculations based on World Bank, PWT, UNHCR, ILO, and IMF WEO/IFS data.* ### 12. The stock of capital is shown to have decreased because of the civil war, the Israeli ### cr1720 - 12. The stock of capital is shown to have decreased because of the civil war, the Israeli ### Impact of Conflicts on Capital Stock - Civil war effect: - Capital stock decreases 42 percent immediately after the end of the civil war. - Little consequence to the 2015 capital stock from the civil war alone because it was far back enough for the effects to be washed out. - Israeli conflict effect: - One-off event concentrated in a few months of 2006; shows even less effect on capital stock than the civil war. - Combined effects: - Combined effects are larger than individual events but still relatively small on the final level of capital in 2015. - Worst combined scenario versus baseline with no conflict adjustment: 6 percent reduction in the capital stock for 2015. - Data/units: - Capital stock figures presented in billions USD, constant 2005 prices. - Figure sources: PWT, WEO, IFS, and IMF staff calculations. ### Sensitivity of Capital Stock to Depreciation Rates and Asset Mix - PWT asset-type average depreciation rates used for Lebanon: - Structures: 2.0 percent - Equipment and transportation: 18.9 percent - Other machines and assets: 12.6 percent - Method: - Constructed time series based on three main asset types. - Manipulated relative share of assets by taking gross capital formation use data for Lebanon in 2011 and varying the implied amount of manufacturing that is structural by +/- 25 percent. - Applied ratios across the time series to generate high and low series for the share of capital in structures. - Findings: - Capital stock is relatively sensitive to alterations in the capital mix. - Using different series of depreciation rates, the high and low end change the 2011 capital stock by +6.10 and -8.87 percent, respectively. - Last year of analysis is 2011 because Penn World Table’s depreciation rates do not go past 2011. - When measuring PWT’s available depreciation rates across entities and averaging across time, Lebanon is not an outlier in either direction. - Implication: - The relative share of structures in Lebanon’s capital stock is highly important; using PWT’s implied capital mix as the main scenario is preferred until better analysis is conducted. ### The Potential of the Knowledge Economy in Lebanon - Motivation and context: - Traditional growth drivers (real estate, construction, tourism) have stalled since the onset of the Syrian crisis in 2011. - Need to diversify toward areas of comparative advantage to promote long-run, job-rich, sustainable growth. - Human capital endowment: - Lebanese 8th graders performed comparatively much better than most peers in the region in mathematics (TIMSS). - Lebanon has three universities in the top 20 universities in the Arab region (QS University Rankings, 2015). - Lebanon’s population is about 4.5 million (contextual comparison to Saudi Arabia and Egypt). - Scholarly production has grown substantially over 20 years; percent of scholarly publications with at least one international collaborator is about 60 percent in Lebanon. - Underutilization of human capital: - Patenting activity: Lebanon has very low patenting activity compared to peers (World Intellectual Property Organization). - ICT sector market size: below 1 percent of GDP (Investment Development Authority of Lebanon). - International ICT/technology rankings: - Network Readiness Index (WEF, 2015): Lebanon ranked 99. - ICT Development Rank (ITU, 2013): Lebanon ranked 62. - University–industry collaboration: Global Innovation Index rank for Lebanon is 106 (sample = Northern Africa and Western Asia), indicating low collaboration. - Brain drain: - AUB alumni distribution (2014): 45 percent of the entire alumni population can be traced to be living in Lebanon. - Endeavor Impact Report 2014 survey (73 top entrepreneurial firms): - Key recruitment issues: scarcity of experienced candidates (especially mid-management), shortage of knowledgeable candidates (especially in technology). - 52 percent of surveyed firms identified challenges in talent retention. - Among firms citing talent retention as a problem, over 75 percent identified brain drain as the main challenge. ### Current Challenges and Policy Response (Banque du Liban Circular 331) - Financing constraint identified by the central bank as a key impediment to knowledge-economy development; venture capital is highlighted as solving financing gaps for startups. - Banque du Liban (BdL) Circular 331 (introduced August 2013): - Allowed commercial banks to invest up to 4 percent of their tier 1 capital in startup companies directly or in venture capital funds. - Upfront guarantee mechanism: BdL provides an interest-free loan to the bank to buy treasury bills; bank sells treasury bills back to BdL at a premium so the ‘profit’ equals 75 percent of the investment made by the bank. - Result: banks receive an immediate boost to their capital equal to 75 percent of any investment in the knowledge economy; profits from investments split equally between the bank and the BdL. - Theoretical maximum if all banks invested the full 4 percent: total investment upwards of $450 million. - Actual uptake by Q3 2016: total amount invested in startups under the program stood at about $10 million. - Program outreach: - Significant public relations efforts to raise awareness among innovators, students, diaspora, banks, and venture capitalists. - BdL hosts an annual conference to promote innovative activity in Lebanon. _Italic: Sources: PWT; WEO; IFS; IMF staff calculations; PWT and BEA; PWT and CAS; Scopus; Trends in International Mathematics and Science Study (TIMSS, 2011); QS University Rankings, 2015; World Intellectual Property Organization; Investment Development Authority of Lebanon; World Economic Forum; International Telecommunication Union; Global Innovation Index; American University of Beirut FactBook, 2014; Endeavor Impact Report 2014; IMF staff._ ### 13. At the same time, easy financing can also create disincentives. Financing of ideas is a ### 13. At the same time, easy financing can also create disincentives. Financing of ideas is a ### Venture capital role, risks, and possible disincentives - Venture capitalists address information challenges and risks by: - developing a sophisticated mechanism to screen ideas, - structuring investments to ensure discipline among the entrepreneurs, - offering intensive oversight after the money is made available. - Beyond providing capital, venture capital is crucial to accelerate firm growth and ensure long-term success. - Ample cheap financing can blunt traditional venture capital incentives: - Too much money chasing too few ideas can weaken the screening process. - High availability of financing may reduce the non-financial governance and discipline that venture capitalists traditionally provide. ### Lebanon: BdL program scale and cross-country perspective - BdL intends to reach about $450 million of financing within half a decade of the program. - This would roughly need to translate to venture capital investments of about 0.2 percent of GDP annually. - The program features a high degree of guarantee: 75 percent of investments. - From a cross-country perspective, the guarantee level and the size of funding appear significantly large relative to potentially investable projects (as per Lebanon’s GDP). - Venture capital investments, 2014 (In percent of GDP): the chart lists multiple countries and shows Lebanon and a Lebanon 'Target' point; Lebanon is included among low values compared to OECD peers. ### Seed-stage funding and exits — lifecycle gaps - Current venture capital funds (presently 8) are mainly set up for startups in the middle of their life-cycle. - Both seed stage (very early stages) and exit stage remain relatively undeveloped. - Policy implications and recommendations: - Stronger emphasis on seed stage could: - help build a strong pipeline of projects, - incentivize a larger fraction of those at risk of brain drain. - Recent steps: increase the number of incubators and expand the number of firms that can benefit from accelerators (not quantified in the text). - Exit-stage hurdles: - Without adequate development of capital markets to enable initial public offerings, exits will rely on acquisitions by other corporations. - Such hurdles may tie up resources in existing projects for longer and favor only firms potentially acquirable by international corporations. - Recommendation: finalize and implement capital market regulation, and prepare and adopt a capital market development plan. ### Infrastructure, business climate, and firm constraints - Main obstacles identified by Lebanese firms (World Bank Enterprise Surveys - Lebanon): - Political instability and electricity were identified as the main obstacles for doing business. - Corruption, taxes, and access to finance were also identified as problems. - Electricity constraints: - More than 50 percent of firms surveyed in 2013 in Lebanon identify electricity as a major constraint. - Among countries surveyed in the region, only Yemen had a higher percent. - Enterprise Survey responses to electricity infrastructure in 2013 include metrics such as number of electrical outages in a typical month and proportion of electricity from a generator (chart present; numerical country comparisons provided in charts). - Internet connectivity: - Average internet speed in Lebanon in Q1 2016 was recorded at 1.8 Mbps. - Global country average internet speed in Q1 2016 was recorded at 6.3 Mbps. - Conclusion on environment: - Restoring political stability, improving infrastructure and strengthening the business climate are critical to realize the potential of Lebanon’s human capital for a knowledge-based hub. ### F. Conclusions — creating a knowledge-based hub - Creating a successful and self-sustained knowledge-based hub in Lebanon will require efforts from all stakeholders. - Challenges noted: - Difficult political and security environment, - Weak infrastructure base. - Required coordinated actions: - Create a better political and business climate, - Strengthen the country’s infrastructure, - Create a transparent process with proper governance. ### Tax and VAT performance (Revenue Mobilization Options for Lebanon: Narrowing the VAT Tax Gap) - Context and headline findings: - By regional and international standards, Lebanon tax performance is significantly below its potential. - Tax revenues have weakened by 4 percentage points of GDP since 2010. - Reforms of the complex VAT regime offer one of the most promising avenues to strengthen revenue. - Under the current VAT rate, removing exemptions, streamlining deductions and refunds, and gradually improving tax compliance could improve VAT revenues by about 4 percentage points of GDP. - Central Government Revenue, 2010-15 (percent of GDP): - Revenue: 2010 22.1, 2011 22.8, 2012 21.8, 2013 19.8, 2014 21.8, 2015 18.8 - Tax revenue: 2010 17.4, 2011 16.4, 2012 15.3, 2013 14.1, 2014 13.8, 2015 13.5 - Nontax and Other revenue: 2010 4.7, 2011 6.4, 2012 6.4, 2013 5.7, 2014 8.0, 2015 5.4 - Drivers of tax decline (2010–15): - Syria crisis effects: disruption of trade and tourism; VAT collected at customs dropped by 12 percent over 2013–15; 1,866 enterprises filed requests and were granted permission to cease operations and stop paying income tax. - Policy changes: VAT exemptions introduced in March 2012 (red and green diesel) with associated revenue losses estimated at LL 295 billion in 2012 (some 0.4 percent of GDP); gasoline excises reduced by half in May 2011 with associated revenue loss LL 498 billion in 2011 (about 0.8 percent of GDP). - Lebanon’s tax capacity and effort: - Tax capacity is estimated at 34 percent of GDP. - At an average tax revenue of 15 percent of GDP, Lebanon’s tax effort is only half of potential. - Comparators: average capacity around 33 percent of GDP and effort of 60 percent for similar MCD countries; world average capacity about 35 of GDP and effort 70 percent. - VAT-specific facts: - Lebanon’s economy orientation: private consumption 87 percent and imports 70 percent of 2013 GDP. - VAT collections fell from 5.6 percent in 2007 to 4.1 percent in 2015. - Potential gains from mobilizing VAT revenues could be significant, up to 5 percent of GDP annually. - Box 1: Tax category changes (2010–15) — selected figures (percent of GDP): - Tax revenue: 2010 17.4, 2011 16.4, 2012 15.3, 2013 14.1, 2014 13.8, 2015 13.5 - Taxes on income and profits: 2010 3.6, 2011 4.0, 2012 3.8, 2013 3.5, 2014 3.7, 2015 3.8 - Taxes on domestic goods and services, o/w: 2010 6.3, 2011 6.1, 2012 5.6, 2013 5.3, 2014 5.1, 2015 4.9 - VAT revenues: 2010 5.6, 2011 5.5, 2012 4.9, 2013 4.6, 2014 4.4, 2015 4.1 - Taxes on international trade: 2010 4.9, 2011 3.6, 2012 3.4, 2013 3.0, 2014 2.7, 2015 2.7 - Excise revenues: 2010 3.5, 2011 2.3, 2012 2.2, 2013 1.9, 2014 1.7, 2015 1.8 - VAT gap analysis (RA-GAP approach): - The overall VAT gap for Lebanon is estimated at 7.4 percent of GDP in 2013. - The overall gap widened from about 6 percent to 7.4 percent of GDP over 2009–13. - The VAT compliance gap is estimated at 3.3 percent of GDP in 2013 (increased from 3 percent over 2009–11 to 3.3 percent in 2013). - The assessment gap (amounts not declared or assessed as due) accounts for the great majority of the compliance gap in Lebanon. - Potential VAT revenues are defined as revenues under existing economic conditions, full compliance and all final consumption taxed at the standard rate. *International Monetary Fund — content unit as provided.* ### Box 2. Definition of VAT Tax Gaps ### Box 2. Definition of VAT Tax Gaps ### Definition and decomposition of the VAT gap - The overall VAT gap is the difference between revenues collected and the potential revenues that could have been collected during a particular year. - The RA-GAP approach defines potential VAT revenues as revenues that could have been collected under existing economic conditions, full compliance and all final consumption being taxed at the standard rate. - The overall VAT gap is broken down into two main components: - The compliance gap: the difference between potential collections given the current policy framework and actual collections. - The policy gap: the difference between the potential revenues given the overall potential base for the VAT at the chosen standard rate, and the potential revenues given the current policy framework (i.e., where all final consumption is taxed at the standard rate). ### Subcomponents of the compliance gap - The compliance gap can be broken down into: - The assessment gap: the difference between the estimated VAT that should have been declared and the VAT which has been declared or assessed. - The collection gap: the difference between VAT declared or assessed and the VAT actually paid. ### Subcomponents of the policy gap - The policy gap can be broken down into: - The expenditure gap: the difference between the potential VAT where most of final consumption is taxed at the standard rate, but where a set of minimal standard exemptions are maintained, and the potential VAT given the current policy framework. The expenditure gap is the component of the policy gap due to discretionary policy decisions. - The efficiency gap: the difference between the potential VAT if all final consumption were taxed at the current standard rate and the potential VAT where most of final consumption is taxed at the standard rate, but where a set of minimal standard exemptions are maintained. The efficiency gap is the portion of the policy gap that results from the typical VAT exemptions necessary due to pragmatic considerations in the design of a VAT. ### Lebanon — recent VAT gap findings (2009–13) - Collection gap: - The collections gap in Lebanon rose from negligible levels in 2009 to 0.3 percent of GDP in 2013. - The estimated collection gap rose from 2009 to 2013, and may be under-stated. - Policy vs. compliance gaps: - Over 2009–13, the policy gap accounted for slightly more than half of the overall VAT gap, rising more strongly than the compliance gap. - In 2009, the compliance and policy gaps were about the same size, equivalent to just over 3 percent of GDP. - By 2013: policy gap = 4 percent of GDP; compliance gap = just under 3.5 percent of GDP. - Policy-gap drivers: - Most of the policy gap in Lebanon is attributable to tax expenditures (the expenditure gap). - The expenditure gap rose from 1.3 percent of GDP to 2.4 percent of GDP in 2013, driven by the introduction of exemptions for diesel used in electricity generation and road vehicles in March 2012 and changes in the composition of GDP. - The efficiency gap peaked in 2010 at 2.2 percent of GDP and declined to 1.7 percent of GDP in 2013; this decline was more than compensated by the increase in the expenditure gap (from 1.3 percent of GDP to 2.4 percent of GDP in 2013). ### Box 3 — Exemptions under Lebanon’s VAT law (summary) - The Lebanese VAT system departs from the typical exemption model: - Provides for refunds of VAT paid on inputs by persons that make exempt supplies (Article 59). - Allows for refunds for non-registered persons. - Provides exemptions of inputs used in a number of economic sectors. - Examples of full VAT recovery on purchases of current and capital inputs: - Manufacturing of medicines; manufacturing of food products; hospitalization and medical laboratories; education; non-profit organizations; collective transport of persons; manufacturing of books, newspaper and magazines. - End-user exemptions include: health; education; non-profit organizations; agriculture; banking and insurance; betting, lotteries and other forms of gambling; real property; transportation. - State activities undertaken as public authorities and sales of non-built lands are exempted but without the right to claim refunds under Article 59. - Specific end-user exemptions apply to staple consumer foods. Input exemptions are provided in health and agriculture in addition to end-user exemptions. - Reform options suggested: - Limiting exemptions. - Removing or limiting refunds. - Revisiting VAT refunds to diplomats and international organizations. - Evaluating the feasibility of taxing sales of new or substantially renovated residential properties and taxing non-life insurance services. ### Policy simulations and fiscal impact scenarios - There is significant scope for revenue mobilization by eliminating current VAT gaps; improving compliance and eliminating the VAT expenditure gap offer large potential revenue gains. - Higher VAT revenue would have a more-than-proportional impact on public debt via lower deficits and lower cost of financing. - Two illustrative scenarios: - Full and immediate elimination of the VAT gap: - Would increase total revenue by more than 7 percent of GDP, bringing VAT revenue close to 12 percent of GDP. - The primary balance would reach above 8 percent of GDP and the overall balance would converge towards zero by 2021. - Public debt would continuously decline from the current level of 140 percent of GDP to about 120 percent of GDP in 2021. - Noted as implausible in practice but presented for completeness. - Incomplete and gradual elimination of the VAT gap (assumptions): - (i) the compliance gap is eliminated by half, - (ii) only the expenditure part of the policy gap is eliminated, - (iii) the gaps are eliminated gradually over next five years. - Estimated impacts by 2021: - Primary balance would increase from 1.1 percent to 5.2 percent of GDP. - Overall balance would improve from -8.1 to -5.6 percent of GDP. - Public debt would stabilize at about 150 percent of GDP in 2021. - Implementation of these measures alone would be sufficient to at least stabilize the debt-to-GDP ratio over the medium run. ### Conclusions on VAT reform potential - The paper provides an initial analysis of options for revenue mobilization and finds ample scope for increasing tax revenue by regional and international standards. - Reforms of the complex VAT regime offer one of the most promising avenues. - Stronger VAT yields could be generated via higher rates, broader base, and improved collections. - Lebanon’s VAT rate is among the lowest in the region; authorities have historically preferred not to increase it for political and social reasons. - The paper shows significant potential—under the current VAT rate—to boost VAT collections by leveraging the tax base, strengthening tax administration and improving tax compliance. - Other reforms with respect to limiting or removing exemptions, deduction and refunds could also help increase yields. ### Annex I — Overall VAT gap and subcomponents (In Percent of GDP), 2009–2013 (selected entries preserved exactly) - 1. Overall gap (2 + 8): 2009 = 6.1; 2010 = 6.3; 2011 = 6.5; 2012 = 7.1; 2013 = 7.4 - 2. Compliance gap (3 + 6): 2009 = 3.1; 2010 = 3.0; 2011 = 3.0; 2012 = 3.1; 2013 = 3.3 - 3. Assessment gap (4 - 5): 2009 = 3.1; 2010 = 2.9; 2011 = 2.8; 2012 = 2.8; 2013 = 3.0 - 4. Potential collections given the current policy framework: 2009 = 7.6; 2010 = 7.6; 2011 = 7.7; 2012 = 7.3; 2013 = 7.3 - 5. VAT declared or assessed: 2009 = 4.6; 2010 = 4.7; 2011 = 4.9; 2012 = 4.5; 2013 = 4.3 - 6. Collection gap (5 - 7): 2009 = 0.0; 2010 = 0.1; 2011 = 0.2; 2012 = 0.3; 2013 = 0.3 - 7. Actual VAT collected: 2009 = 4.6; 2010 = 4.6; 2011 = 4.7; 2012 = 4.2; 2013 = 4.0 - 8. Policy gap (9 + 12): 2009 = 3.1; 2010 = 3.3; 2011 = 3.5; 2012 = 4.0; 2013 = 4.0 - 9. Efficiency gap (10 - 11): 2009 = 1.8; 2010 = 2.2; 2011 = 2.1; 2012 = 2.1; 2013 = 1.7 - 10. Potential VAT where all final consumption is taxed at the standard rate: 2009 = 10.7; 2010 = 10.9; 2011 = 11.2; 2012 = 11.2; 2013 = 11.3 - 11. Potential VAT where most of final consumption is taxed at the standard rate but a set of minimal exemptions are maintained: 2009 = 8.9; 2010 = 8.6; 2011 = 9.1; 2012 = 9.2; 2013 = 9.6 - 12. Expenditure gap (11 - 13): 2009 = 1.3; 2010 = 1.0; 2011 = 1.4; 2012 = 1.9; 2013 = 2.3 - Memorandum Item: GDP — 2009 = 52,974; 2010 = 57,300; 2011 = 60,419; 2012 = 66,481; 2013 = 71,185 *International Monetary Fund — Box 2. Definition of VAT Tax Gaps (as provided in the source content).* ### 8. The net impact of lower oil prices on an oil importer like Lebanon is mixed, as ### 8. The net impact of lower oil prices on an oil importer like Lebanon is mixed, as ### Overview - Despite Lebanon’s large oil import bill, tight linkages to oil producing Arab countries imply that when those countries face strains, the Lebanese economy also faces strains. - The net impact of a global oil price decline on Lebanon depends on whether the decline is driven by global supply or global demand factors. ### Model and simulation framework - A quantitative model of the Lebanese economy incorporates international remittances using the IMF’s Flexible System of Global Models (FSGM), an annual, multi-region, general equilibrium model of the global economy. - The model includes a market for oil whose demand is driven by world demand, and where both demand and supply are relatively price inelastic in the short run. - Oil affects the economy through channels: inflation, the consumption basket, demand for capital and labor, and total factor productivity. - Snudden (2016) adds a remittance channel to the FSGM model; the model is calibrated to match dynamics of remittances and oil prices estimated through a Structural Vector Auto Regression (SVAR). - The recent oil price shock is decomposed into demand and supply factors following the approach outlined in the April 2016 World Economic Outlook (WEO). ### Quantitative findings from simulations - Simulating the recent oil price decline, the model suggests remittance inflows decline by about 19 percent relative to a counterfactual of no change in oil prices. - The 19 percent decline is equivalent to about USD 1.5 billion or 3 percent of GDP. - Comparing models with and without the remittance and migration channel for the same oil shock: the addition of the remittance channel reduces GDP by an additional 0.4 percent in 2016–18. - The impact of oil shocks differs by shock type: - If the drop in oil prices is purely supply driven, real GDP increases owing to higher household real incomes and wealth, which more than compensates for lower remittances flows. - If the drop is demand driven, lower external demand depresses household real income and wealth, producing the opposite effect. ### Caveats and additional factors - Model calibration uses World Bank bilateral data which tend to downplay the role of GCC countries; therefore, model results should perhaps be treated as a conservative lower bound and the actual impact may be larger than suggested by simulations. - The model speaks only to the impact of oil prices on remittance inflows; remittance outflows have been declining in Lebanon as many Syrians who used to come as seasonal workers are now either living in Lebanon or have moved to another country. - Implication: net remittances (inflows less outflows) might decline by less than suggested by a model that considers only the oil shock. ### Conclusions - Remittance inflows constitute a large and relatively stable source of foreign exchange in Lebanon, with a significant impact on the well-being of recipient households. - Micro-level survey data highlight the role of remittances in supplementing household income and allowing access to education and health services that would otherwise be unaffordable. - Simulations from a multi-country general equilibrium model suggest inflows could decline by at least 19 percent (about USD 1.5 billion or 3 percent of GDP). These results are likely to be conservative, but underscore the importance of remittances in the Lebanese economy and the broader impact of the recent oil shock. ### Data and measurement (Annex I summary) - Remittances are transfers between residents and non-residents and measured in BPM6 via personal transfers (secondary income) and compensation of employees (primary income). - Lebanon is still compiling external sector statistics according to BPM5; mapping to BPM6 is fairly straightforward. - Banque du Liban (BdL) estimates three channels of remittances (inflows and outflows) separately: bank transfers, money transfer operators (MTOs), and in kind. - Bank transfers data come from the International Transaction Reporting System (ITRS). - MTO data come from monthly reports these institutions make to the BdL. - In-kind cash transfers are derived from estimates of Lebanese abroad (credit) and work permits for foreigners (debit). - Measuring remittances is difficult: most transactions are small and largely through informal channels; there are large discrepancies globally between remittance receipts and remittance payments. - The impact of remittance inflows on economic activity is not well understood; challenges include changes in measurement, low power of panel regressions due to small transaction size and high variance, and migration-driven remittance increases that represent costs for source countries—muting the likely impact of remittances on GDP—while impacts on poverty and welfare are less contested. *International Monetary Fund—Lebanon: discussion of remittances and the impact of the recent oil price decline (excerpts).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr1720.pdf_