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BEIRUT, July 2 (Reuters) - Lebanon’s projected budget deficit for 2019 will likely be well above the government’s target of 7.6% of gross domestic product (GDP), an International Monetary Fund mission said on Tuesday.
“IMF staff preliminary estimate is that the budget measures will reduce the cash-basis fiscal deficit to around 9.75 percent of GDP,” The IMF Article IV mission said in a statement.
Parliament is debating the 2019 draft budget, which cabinet approved in May. The IMF said that “on the basis of current information, the projected deficit is likely to be well above the authorities’ stated target”.
As part of the budget, the government aims to shave some 1 trillion Lebanese pounds ($660 million) from debt servicing costs by issuing low-interest treasury bonds.
The IMF said buying the Lebanese government’s proposed low-interest debt would worsen the central bank’s balance sheet and undermine its credibility. The IMF added that there should be no pressure on private banks to buy the debt instead.
The Lebanese government, saddled with one of the world’s heaviest public debt burdens, has moved in recent months to launch long-stalled reforms in an effort to control spending and stave off a crisis.
The 2019 state budget, seen as a critical test of the government’s will to reform, aims to cut the deficit from 11.5% of GDP in 2018, as previously declared by the government.
Lebanon’s central bank governor said last week he backed the bid to cut debt servicing costs, but there was no deal yet on how to do that and nothing would be imposed on commercial banks.
The IMF said Lebanon’s central bank should step back from “quasi-fiscal operations” and from government bond purchases, letting the market determine yields on government debt.
The Lebanese state’s biggest expenses are its bloated public sector, debt servicing costs and large transfers to the loss-making public power company.
The budget could help unlock some $11 billion in financing pledged at a Paris conference last year for investment in the economy, if it wins the approval of donors.
The IMF deemed the budget and a power sector reform plan, approved in April, as “the first steps on a long path” to rebalancing the economy. The Lebanese government “now has an opportunity to implement reforms and turn the tide,” it said.
“IMF staff projects that a primary surplus of around 4.5 percent of GDP would be needed to noticeably reduce the debt-to-GDP ratio over the medium to long run,” it added.
To achieve this, it encouraged the government to pinpoint and carry out additional permanent fiscal measures. The IMF said revenue measures should include raising the value added tax (VAT), fighting tax evasion, and increasing fuel excises.
If the government strongly implements fiscal adjustment efforts in 2019-2020 and planned structural reforms, this may shore up confidence and unlock donor funding, the IMF said. But it warned that risks remain for Lebanon, and the failure to meet targets or advance reforms could erode confidence. (Reporting by Ellen Francis and Tom Perry; editing by Jonathan Oatis and James Dalgleish)