Enabling environment for SME’s in Lebanon Role of Fiscal Policy

1. Enabling environment for SME’sin LebanonRole of Fiscal Policy Charbel Nahas September 28th & 29th, 2005

2. What can be the best contribution of • The Economic and Social Council • The Economic and Social Fund • The European Community in studying the « role of fiscal policies » in « enabling the environment for SMEs », today If not launching the debate about: what is / can be the place of the topic in the Lebanese Government Plans for “Economic Reform” and in its agenda to the “International Conference” Putting questions and expliciting trade-offs becomes therefore more important than sketching unilateral ideas of solution

3. Who are SME’s in Lebanon? Should the definition of SMEs be absolute or relative to the effective business structure?

4. Who are SME’s in Lebanon? Apart from schools and hospitals, 200 firms in Lebanon have more than 100 workers Sectors where 5% or more of the workforce is engaged in enterprises with 50 workers or more :

5. Fiscal situation of SMEs In comparison with larger corporations, SMEs seem to enjoy fiscal advantages, though mainly unintended: • Exemption from VAT below 225 millions LBP turnover (impact on profit through price and volume effects) • De facto exemption from taxes on profit (for non declaration and for family exemptions in family businesses) • Exemption from NSSF for non stable wage earners (lowering cost of labour) • Benefit from subsidized lending schemes but • They will be subject to the new professional tax in 2006

6. What are the problems - objectives? The first step is a precise diagnosis, factual and operational : • Facts are immediate: SMEs are the norm in the economy and practically enjoy relative fiscal advantages • But action needs an understanding of causal relations: SMEs need to be put in their economic context Where does the main problem come from: • Specific importance or fragility of SMEs, within the economy • General problems in the economy, that mainly affect or can be affected by SMEs There is probably need for a matrix of cross influences

7. Problems specific to SMEs SMEs’ specificity as opposed to what: • To other business structures: micro or mega or public? • Are SMEs discriminated against to deserve fiscal compensation? (matters of scale, information and transaction costs or beyond) • Are SMEs more important, and in what respect, to justify positive fiscal discrimination (SME as a necessary stage) • To depletion of resources: emigration, unproductive assets? • Do SMEs show a more productive use of resources? • Are SMEs more reactive to positive actions or more resilient to negative effects ? the matter is no longer specific and relates to the general environment In both respects, are specific fiscal tools suited to the purpose?

8. Place of SMEs with general problems What is the nature of the general economic problems: Are they accidental or structural? • If accidental and related to public debt • Effects of the problem: cost of financing and crowding out • Effects of the suggested remedy: more fiscal pressure • If structural and rooted in the “Dutch disease” economic model • Effects of the problem: • Distortions in relative prices (tradables, non-tradables), • Misallocation of labor and capital, • Unbalanced direct and induced demand, … • Is there a will to remedy?

9. Place of SMEs with general problems Specific impact of general economic problems on SMEs: With accidental financial diagnosis? With structural economic diagnosis: • Unbalanced competition with imports on: • intermediary goods, • tradables • mobile labor • Crowding in on final demand and non tradables • Reduction of incentives for productivity gains through scale and investment because of: • the types of profitable activities • affordability of factors • protections

10. Place of SMEs with general problems Specific effect on general economic problems through SMEs: What predominant concern, what objective and what constraints: • continuity of financing • growth and jobs creation • income inequality • redistribution and socio-political stability, • anticipation of crisis management? What role is / can be devoted to SMEs; • Provoke a positive impact on income in general? • Provoke a sustainable impact on production? • Why SME’s : more reactive, more exposed to foreseeable risks?

11. What type of fiscal actions? Differences in orientation • In a “soft landing” or in a “restructuring” perspective? • With or without contingency plans and anticipatory measures? • The easiest or the less distortive? Differences in impact • Measures that impact businesses • directly: operations and factor remuneration • indirectly: upstream-inputs, downstream-demand, • Measures that impact activity and trades • specifically: increasing or alleviating burden on specific households’ or businesses’ behavior through excises and tariffs • generally: modifying the distribution of the fiscal burden between factors, businesses and households, Coordination with monetary policy: external distortion effects

12. What effective policy choice? In light of a strenuous fiscal situation, a basic duality arises and is expressed in the outline: • can the government engage in fiscal instruments to promote and support SMEs? • what fiscal instruments can be introduced to promote and support SMEs Put in policy words: What importance would-should be given to the corporate structure in the trade-offs that shape financial restructuring plans?

13. What approach to external assistance? Where will be the starting point for Lebanon? • evaluating how much external funding could be obtained and how much external involvement could be avoided for a political price that would remain bearable at home • assessing the types of external assistance and the keenness of their need to ease and secure the transition process that would derive from the adoption of a domestic explicit social and economic pact on reforms To get an answer, the Lebanese are expecting: • the release of the paper presented to New York Conference • the draft of the 2006 budget law