May 21, 2019 / 10:32 AM / 4 months ago

UPDATE 5-Lebanon cabinet set to complete 2019 draft budget

* Lebanon has one of world’s highest public debt burdens

* Cabinet aims to cut budget deficit to 7.6 pct of GDP

* Plans have triggered protests, strikes

* Markets will welcome efforts to slash deficit - analyst (Releads with information minister, adds finance minister quote and context)

By Ellen Francis and Tom Perry

BEIRUT, May 21 (Reuters) - Heavily-indebted Lebanon is close to finalising its draft 2019 budget aimed at cutting the deficit to 7.6% of gross domestic product despite social protests over feared benefits losses.

The deficit was 11.2% of GDP in 2018.

The cabinet has met daily to debate the state budget that tries to rein in one of the world’s heaviest public debt burdens, at 150% of GDP.

Lebanon’s ministers will convene again on Wednesday for a final reading of the draft budget, Information Minister Jamal Jarrah said after Tuesday’s session.

“Today is an important stop with the achievement of the budget with encouraging deficit numbers and a real path of reform,” Finance Minister Ali Hassan Khalil said earlier.

While Lebanon has dragged its feet on reforms for years, its sectarian leaders appear more serious this time, warning of disastrous consequences if there is no serious action.

Their plans have triggered protests and strikes by state workers and army retirees worried about their pensions.

President Michel Aoun on Tuesday repeated his call for Lebanese to sacrifice: “(If) we want to hold onto all privileges without sacrifice, we will lose them all.”

“We import from abroad, we don’t produce anything ... So what we did was necessary and the citizens won’t realise its importance until after they feel its positive results soon,” Aoun said, noting Lebanon’s $80 billion debt mountain.

A copy of the draft budget seen by Reuters included a three-year freeze on all forms of hiring and a cap on bonus and overtime benefits.

The budget will also have a 2% levy on imports including refined oil products and excluding medicine and primary inputs for agriculture and industry, said Youssef Finianos, minister of public works and transport.

Foreign Minister Gebran Bassil had suggested earlier that the debate may go on, telling reporters: “The budget is done when it’s done.”

“COMFORT TO INVESTORS”

Marwan Mikhael, head of research at Blominvest Bank, said investors would welcome the additional efforts in the latest draft to cut the deficit.

“There will be some who claim it is not good because they were hit by the decline in spending or increased taxes, but it should be well viewed by the international community,” he said.

Jason Tuvey, senior emerging markets economist at Capital Economics, said: “The numbers will be of some comfort to investors, but the devil will be in the detail.”

“Even if the authorities do manage to rein in the deficit, it probably won’t be enough to stabilise the debt ratio and some form of restructuring looks increasingly likely over the next couple of years,” Tuvey added.

The government said in January it was committed to paying all maturing debt and interest payments on the predetermined dates.

Lebanon’s main expenses are a bloated public sector, interest payments on public debt and transfers to the loss-making power generator, for which a reform plan was approved in April. The state is riddled with corruption and waste.

Serious reforms should help Lebanon tap into some $11 billion of project financing pledged at a Paris donors’ conference last year.

Once approved by cabinet, the draft budget must be debated and passed by parliament. While no specific timetable is in place, Aoun has previously said he wants the budget approved by parliament by the end of May.

On Monday, veterans fearing cuts to their pensions and benefits burned tyres outside the parliament building where the cabinet met. Police used water cannon to drive them back.

Reporting by Ellen Francis and Tom Perry; Editing by Gareth Jones and Andrew Cawthorne

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