Bloomberg/Sima Diab

Economy

Lebanon’s debt fix now hinges on central bank as lenders baulk

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Lebanon, one of the world’s most indebted nations that spends almost half its fiscal revenue just on interest payments, has relied on commercial lenders and the central bank to keep its finances afloat.

Tuesday 25, June 2019

(Bloomberg) --Lebanese lenders are turning against a government plan to persuade them into buying treasury bonds at lower interest rates, leaving Banque du Liban (BdL) to go it alone as regional turmoil and budget delays keep the market on edge.

In May, Ali Hassan Khalil, the Lebanese finance minister said that the government wanted to issue LBP 11 trillion ($7.3 billion) of the securities at a rate of one per cent, allowing it to cut LBP 1 trillion from the cost of servicing debt under this year’s draft budget.

The central bank is expected to handle the programme alone, with the details made clearer after parliament approves the final version of the budget.

With at least three times as many Lebanese living abroad than at home, the economy has been sustained by remittances, mainly from the Gulf and Africa, which banks then use to buy government debt.

Despite the risk of further increasing Lebanon’s cost of funding, the finance ministry last year issued treasury bills at market rates for the first time in seven years to appeal to local lenders, which have instead been depositing their money at the central bank for higher rates.

The Lebanese government approved its much delayed 2019 budget last month, along with spending cuts, additional taxes and fees and a hiring freeze in the public sector.

The government projected a deficit of 7.6 per cent of gross domestic product, down from 11.4 per cent in 2018 as well as a lower cost of debt servicing under the minister’s plan.

Lebanon committed itself last year to a drop in its deficit by a percentage point annually in the next five years along with other measures to unlock $11 billion in funding pledged by international donors. In a sign that investors are losing confidence, Lebanese eurobonds have entered distressed territory as political squabbles stall economic reforms.

Prime Minister Saad Hariri has been critical of the parliamentary committee’s work on the budget as lawmakers have been discussing and scrapping some revenue-generating measures introduced by the government.

According to the International Monetary Fund (IMF), Lebanon’s public debt is estimated at 160 per cent of GDP and is projected to rise to near 180 per cent by 2023.

TAGS : Banque du Liban, Lebanese finance ministery, Prime Minister Saad Hariri , IMF, public debt, remittances, eurobonds

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