* Lebanon’s debt “unsustainable”, immediate reform needed - IMF
* Pressure to form gov’t quickly to maintain confidence in economy
* Donors demand reform in return for investment
* New government formation might be drawn out
By Lisa Barrington
BEIRUT, May 23 (Reuters) - After Lebanon’s first parliamentary election in nine years, the dire economic situation and unsustainable public debt levels are top priorities for the next government.
Before the May 6 vote, leaders from across the deeply divided political establishment sounded the alarm about the state’s finances and economy.
They agree a new government, which is expected to contain the main parties, must be formed quickly, although wrangling over cabinet portfolios could take time, even months.
“The risk is if they really don’t form a government and don’t make any headway with policy in the remainder of this year,” Toby Iles of ratings agency Fitch said.
Lebanon is the world’s third-most indebted nation with a debt-to-GDP ratio of more than 150 percent. It climbed from around 130 percent in 2011, before war in neighbouring Syria, and the arrival of more than a million refugees, depressed growth and paralysed government decision-making.
The International Monetary Fund has said Lebanon’s debt trajectory is unsustainable and needs immediate action, otherwise debt-to-GDP could hit 180 percent by 2023.
Annual growth rates have fallen to between 1 and 2 percent, from between 8 and 10 percent in the four years before the Syrian war. Two former pillars of the economy, Gulf Arab tourism and high-end real estate, have suffered.
Outgoing Prime Minister Saad al-Hariri has said the unemployment rate exceeds 30 percent and UNDP says the number of people in poverty has risen by nearly two-thirds since 2011.
“I believe everyone has realised now that the ship might sink with everyone aboard,” leading Christian politician Samir Geagea said in a recent interview, describing the economic risks.
Absent an effective government, the central bank has for years maintained stability using stimulus packages and unorthodox financial operations, made possible by the billions of dollars deposited into Lebanese banks by the large diaspora.
Attracted by high interest rates and confidence in the country’s resilience and banks, diaspora deposits have helped Lebanon’s finances survive shocks including the assassination of Rafik al-Hariri - Saad’s father - and conflicts between Hezbollah and Israel.
But the risk of an increasing dependence on remittances became clear in November when Saad al-Hariri resigned unexpectedly. Some Lebanese moved their money out of local currency or overseas.
Central bank foreign assets fell by $1.6 billion that month as it defended the Lebanese pound’s peg to the dollar, according to released data. The crisis was short-lived, but the increasingly poor state of national finances has increased the risk that Lebanon might not weather a larger shock so well.
The quicker the government is formed and gets to work, the more support this gives to vital financial inflows.
Despite losing more than a third of his MPs, Hariri is expected to lead the next government.
Central bank policies have kept growth ticking over and foreign reserves high, but they have increased risk in the financial system. The central bank and IMF say such policies should not continue long-term and government policymaking needs to step in.
The finance ministry has met its foreign currency financing needs for 2018 through a $5.5 billion debt swap with the central bank. The transaction will reduce debt-servicing costs and boost central bank reserves, the government said.
Sectarian politics and corruption have for years stalled reforms needed to boost growth and bring down debt. International donors want to see reforms to release more than $11 billion of investment pledged in April to boost the economy.
“It will be extremely challenging for the next Lebanese government to live up to these reforms. We know how hard it is to change the way things work here, and addressing the vested interests is hard. But there is no alternative way forward,” a western diplomat said.
Beirut hailed the money pledged in Paris as a sign of confidence in the government.
Donors want to preserve stability as war drags on in Syria, but say assistance depends on Beirut working to a credible economic plan and under international oversight to ensure reforms happen.
“We are going to be tough on this and I don’t see anyone else being less tough,” another western diplomat said.
In Paris, Hariri promised to reduce the budget deficit as a percentage of GDP by 5 percent over five years.
Reforming the subsidised power sector, widely seen as deeply corrupt, would be a big help.
Last year the government spent $1.3 billion subsiding the state power provider - 13 percent of primary expenditures. Meanwhile, most homes depend on expensive private generators because state provision is so patchy.
Hariri has led calls for reform since a years-long political deadlock was broken at the end of 2016 and parliament began to take decisions such as launching an offshore oil and gas exploration and passing the first government budget since 2005. (Reporting by Lisa Barrington Editing by Tom Perry)