June 25, 2019 / 8:10 AM / 4 months ago

UPDATE 2-Lebanon c.bank backs debt servicing cost cuts plan; no deal yet

(Adds Salameh comment on bank deposits and loans)

By Tom Perry and Ellen Francis

BEIRUT, June 25 (Reuters) - Lebanon’s central bank governor backs government efforts to cut public debt servicing costs in the 2019 budget, but an agreement has yet to be reached on how that will be done, he said on Tuesday.

The debt totals around 150% of economic output and cutting those costs is an important factor in a budget draft that aims to slice the deficit to 7.6% of output from 11.5% in 2018 and cushion the impact of a looming economic crisis.

Approved by the cabinet last month, the budget - viewed as a critical test of the government’s will to launch reforms put off for years in a state riddled with corruption and waste - is being debated in parliament.

The finance minister aims for it to incorporate a cut about 1 trillion Lebanese pounds ($660 million) in debt servicing through issuing low-rate treasury bonds in coordination with the Lebanese banking sector.

Asked if banks and the government had reached a deal on that, Central Bank head Riad Salameh said: “No. We are going to have discussions after the budget but the figures will be achieved”.

“...We back it as a central bank, but nothing will be imposed on the (commercial) banks,” he told Reuters on the sidelines of a Euromoney conference in Beirut on Tuesday.

Salameh also said the central bank assumed the economy would have zero percent economic growth for 2019 though this could improve due to better tourism. “I think the outlook could be better starting in the second half of this year,” he said.

Salameh told reporters he did not foresee any problems for Lebanon in repaying maturing Eurobonds this year and the government’s solvency was not at stake.

He said it was the view of the finance ministry and central bank not to issue new dollar-denominated debt “until the future picture becomes clear”. “We are not in a rush because we have liquidity,” he said.

He said remittances to Lebanon were stable at around $7-$8 billion a year. Asked if this was enough to meet Lebanon’s financing needs, Salameh said if not, then any gap would be filled by the central bank.

Financial transfers into the Lebanese banking sector from the country’s large diaspora have been critical in supporting an economy that is heavily dependent on imports.

Donor states and institutions have pledged some $11 billion in financing, conditional on the country undertaking the long-delayed reforms.

Salameh said Lebanon was going through a deleveraging seen in a decline in outstanding deposits of $3 billion and in outstanding loans of $6 billion. This means “you still have the inflows in the country”, he said.

Reporting by Tom Perry and Ellen Francis in Beirut; Editing by Andrew Heavens and John Stonestreet

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