BEIRUT: Employees may not enjoy the full impact of recently enacted wage increase as price hikes are expected to overshadow improvements in real income, warned economists interviewed by The Daily Star Friday.

In other words, if the wage increases are not gradually matched with an equivalent increase in economic productivity, Lebanon could see a rapid acceleration in inflation rates.

Higher inflation would then wipe out the hike’s positive impact on GDP growth, which is otherwise expected from the resulting boost in public and private spending.

Lebanese employees are scheduled to receive their long-awaited salary increases at the end of February, after the official Gazette published the relevant decree last month.

Employees will receive an increase ranging from LL175,000, for those earning the minimum wage, up to LL299,000 for those who earn salaries above LL1.5 million.

“The positive side of the story is that the wage increase will pump some additional $1.6 billion into the economy. This would give a boost to growth across sectors, especially during the first two quarters of the year,” said Nicolas Chammas, the head of Beirut Traders Association.

But at the same time, Chammas added, the raise would risk creating significant inflationary pressure on markets that could struggle to cover a sharp increase in demand.

“It would be impossible for suppliers to cater to the sudden hike in the demand on goods and services,” he said. “We should expect an additional 3 to 4 percent increase on inflation levels resulting from the wage increase alone, adding to yearly inflation rates.”

According to Chammas, to cover the market gap, employees and businesses across the economy’s sectors would need to shore up productivity, allowing for the expansion of the economy.

“If production soars, this would give a strong boost to the currently sluggish economic growth and help preserve the real economic value of the wage increase,” he said.

Nassib Ghobril, chief economist at Byblos Bank, said he expected inflation rates to accelerate after the wage hike decision becomes effective later in February. The 2012 inflation rate, he said, will reach 6 percent up by 1 percent from its 2011 levels.

“Of course the prices will go up,” he said, adding: “Mere news that the government intended to hike the Value Added Tax by 2 percent pushed prices up a few months ago.”

Ghobril said accelerating inflation could end up hurting the very social groups the wage hike decision was aimed at helping.

Ghobril revealed some retail businesses were already considering price hikes as high as 25 percent to cover additional costs incurred on their employees’ salaries, he said.

If this proves true, higher production costs and higher demand would also contribute in pushing up inflation rates.

Ghazi Wazni, an independent economist, said the wage increases would likely give a desperately needed boost to growth, which had retreated as a result of local and regional instability persisting throughout 2011.

Still, Wazni concurred that inflation would be a major downside risk to the wage hikes.

The rather dim view was also outlined by Zuhair Berro, head of Consumers Lebanon, a consumer protection group, who said prices had been progressively increasing since deliberations over the wage increase started last November.

“Prices have already increased by some 4 percent since October after mere talks about the raise,” he said, adding that “there was no other reason for the price increases.”

But for Berro, the reason behind inflationary pressure is the lack of government price monitoring and regulation. He said the Economy Ministry, responsible for these activities, has failed repeatedly to combat arbitrary price hikes.

“There is a conflict of interest,” he said, adding that “the Economy Ministry cannot protect both the traders and the consumers, and they have indeed taken the traders’ side.”

A recently issued study forecasted wages will increase by an average of 6.5 percent in 2012. It expected the increase to be offset by a 5.8 rise in inflation.

All interviewed experts agreed that the wage increase would increase the public deficit by a hefty $700 million, further burdening the already-struggling government finances.