UPDATE 4-Lebanese cabinet finalises draft budget to cut deficit, hopes to avert crisis

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* Draft budget trims deficit to 7.5% of GDP

* Draft to go to presidency, then parliament

* “We are still sceptical” – fund manager (Adds time of final budget meeting)

By Tom Perry and Ellen Francis

BEIRUT, May 24 (Reuters) – The heavily indebted Lebanese government approved a draft budget to cut its large deficit on Friday, aiming to ward off a financial crisis which top leaders have warned is bearing down on the country unless it carries out reforms.

The draft 2019 budget, which will cut the deficit to 7.5% of GDP from 11.5% in 2018, is seen as a critical test of the government’s will to launch reforms that have been put off for years by a state riddled with corruption and waste.

Lebanon’s bloated public sector is its biggest expense, followed by the cost of servicing a public debt equal to some 150% of GDP, one of the world’s heaviest debt burdens.

The budget could help unlock some $11 billion in financing pledged at a Paris donors’ conference last year for infrastructure investment, if it wins the approval of donor countries and institutions.

“Now, praise God, we are done. The budget is complete,” Information Minister Jamal Jarrah said after a cabinet session.

One more meeting to seal the process will be held at the presidential palace on Monday before the draft is referred to parliament for approval.

Fears the budget would lead to cuts to state salaries, pensions or benefits triggered weeks of strikes and protests by public sector workers and military veterans.

Measures to rein in the public sector wage bill include a three-year freeze in all types of state hiring and a cap on extra-salary bonuses. State pension will also be taxed.

However a temporary public sector salary cut mooted by some early in the process was not included.

A big chunk of the deficit cut stems from tax increases including a 2% import tax and a hike in tax on interest payments. The government also plans to cut some $660 million from the debt servicing bill by issuing treasury bonds at 1% interest rate to the Lebanese banking sector.

“THE JURY’S STILL OUT”

The final cabinet approval had been obstructed by a dispute over whether more needed to be done to bring the deficit lower.

But Finance Minister Ali Hassan Khalil, speaking to local media, said “all the clauses and articles” had been agreed. Nobody had raised any objections when Prime Minister Saad al-Hariri said “we are done” at the end of the session, he added.

Foreign Minister Gebran Bassil, who had been demanding further debate, signalled no objection to the cabinet decision.

“We have started along the path of controlling the deficit and reducing it and we will continue through subsequent budgets,” Al-Jadeed television quoted him saying.

Deputy Prime Minister Ghassan Hasbani, speaking to Reuters on Thursday, said the draft budget would stabilise the financial situation and avoid “catastrophe” but it fell short of the major structural reforms Lebanon needs.

Economists in Lebanon say it will give a “positive shock” to market confidence against a backdrop of years of low economic growth, concern over a slowdown in the growth of bank deposits and falling central bank net foreign assets.

Aberdeen Standard Investments emerging markets fund manager Kevin Daly said: “We are still sceptical because they still have very little room in the budget.” Wages and subsidies made up a large proportion of the deficit, he noted.

“I think the market will come back after the weekend and take a closer look … the jury is still out on these guys”.

Nassib Ghobril, chief economist at Lebanon’s Byblos Bank, said the draft budget had stopped increases in government spending but had not reduced them.

“They might reduce the deficit to an acceptable level. But it is not a reform budget or an austerity budget, it is a budget based heavily on taxes,” he said.

“This is the easy way out for the government to reduce the deficit. If we believe the figure, it is a significant reduction in the deficit, but it is not the way to do it in a stagnating economy, in an economy in need of liquidity.”

Jason Tuvey, senior emerging markets economist at Capital Economics, said: “Markets might react positively initially in as far as they’ve actually managed to agree on a budget after several weeks of deliberations.

“But over longer horizon, we still think that markets in Lebanon will come under pressure again.” (Reporting by Tom Perry, Ellen Francis and Angus McDowall in Beirut, Marc Jones in London; Writing by Tom Perry; Editing by Mark Heinrich, Kevin Liffey and Raissa Kasolowsky)

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