BEIRUT (Reuters) - Lebanon formed a new national unity government on Thursday, ending nine months of wrangling, and Prime Minister Saad al-Hariri said bold moves were needed without delay to address chronic problems facing the heavily indebted state.
The government of Hariri, who has Western backing, includes most parties including the heavily armed, Iran-backed Hezbollah, which emerged stronger from the parliamentary election last May thanks to gains by its allies. Hezbollah chose the new health minister.
Some Lebanese bond prices jumped to their highest level since August in response to the news, and celebratory fireworks burst over Beirut shortly after the deal was announced.
Hariri must now deliver on promises to rein in public spending to address the dire state finances with reforms that could unlock billions of dollars in pledged aid and loans for infrastructure investment.
In a statement read from the presidential palace, Hariri apologised to the people of Lebanon for the time it had taken to form the government and noted that they were “living in concern” over the economy.
The time for “painkillers” was over, he said. “No one can put their head in the sand any more ... All the problems are known and the causes of the corruption and waste and administrative deficiency are also known,” he said.
“The solution is with a clear programme and bold reforms ... and developing laws that cannot be delayed.”
Earlier on Thursday he said the new government would be forced to “take difficult decisions” to reduce spending.
Concerns have grown over the state of the economy and government finances. Finance Minister Ali Hassan Khalil - who retained his post - warned last month that Lebanon was in an economic crisis that has “started to turn into a financial one”.
Lebanon’s public debt is one of the highest in the world set against the size of its economy, and it has suffered low growth for years for reasons including regional turmoil.
Gebran Bassil, a political ally of Hezbollah who is the son-in-law of President Michel Aoun and leads the political party he founded, remained foreign minister.
The defence portfolio, significant partly due to major U.S. military aid, went to another Aoun loyalist, Elias Bou Saab.
Hariri nominated Rayya Hassan, a former finance minister, to the post of interior minister. She is one of four women in this cabinet, compared with only one in the last cabinet.
While not a Hezbollah member, Health Minister Jamil Jabak’s appointment has been seen as a signal of its determination to exercise more direct sway over government after playing marginal roles in past cabinets.
The ministry has the fourth-biggest budget in the state.
Hezbollah, which is designated as a terrorist group by Washington and has come under fresh U.S. sanctions, also has two other cabinet seats.
The anti-Hezbollah Lebanese Forces party, which nearly doubled its number of MPs last May, has ceded ground at least twice in the negotiations, enabling the government to be formed.
Hezbollah together with groups and individuals that support its possession of weapons, won more than 70 of parliament’s 128 seats in the May election.
Hariri lost more than a third of his lawmakers but kept his status as the leading Sunni and so returns as premier for the third time. The post is reserved for his sect under Lebanon’s sectarian system of rule.
The last big hurdle was a dispute over how Hezbollah’s Sunni allies should be represented in cabinet, resolved by the inclusion of Hassan Mrad, the son of the pro-Hezbollah and pro-Damascus MP Abdul Rahim Mrad.
While Lebanon’s economy and financial system have shown resilience during previous periods of political paralysis, investor concerns have been reflected of late in bond prices.
Jason Tuvey, senior emerging markets economist at Capital Markets in London, said the government would need to show it was able to implement tough reforms.
“It’s taken them nine months to put together a government, let alone how long it will take to agree on the very harsh fiscal consolidation that would be needed to put the debt position on a firmer footing,” he said.
The formation of the government is the third boost for Lebanese bonds in two weeks. They rose last week when Qatar said it was investing $500 million in them, and again when Saudi Arabia said it would support continue supporting Lebanon.
Reporting By Laila Bassam, Tom Perry and Angus McDowall in Beirut and Sujata Rao in London; Editing by Kevin Liffey