IMF Warns Against Lebanon’s $7.3 Billion Plan to Cut Debt Costs

(Bloomberg) -- The International Monetary Fund said Lebanon's central bank risks undermining its credibility if it agrees to a government proposal to buy Treasury bills at below-market rates.

Finance Minister Ali Hassan Khalil has proposed issuing 11 trillion pounds ($7.3 billion) of Treasury bonds to commercial banks at a rate of 1% -- about a 10th of the market rate -- in order to cut 1 trillion pounds from debt-servicing costs. Banks have turned down the offer and an official said the central bank was likely to take up the proposal on its own.

The central bank, known as the Banque Du Liban, should let the market determine yields on government debt, the IMF said in its report Wednesday.

“Buying the proposed low-interest government debt would worsen the BdL's balance sheet and undermine its credibility,” the IMF said. "The BdL should gradually phase out its financial operations once fiscal adjustment and the subsequent decline in yields demanded by investors allow it to do so.”

Governor Riad Salameh has said the central bank is still in negotiations with the Finance Ministry on how to reduce servicing costs on public debt, which is estimated at 160% of gross domestic product.

Lebanon's Debt Fix Hinges on Central Bank After Lenders Balk

The government's 2019 draft budget sets a deficit target of 7.6% of GDP, but the IMF expects the gap to reach 9.75%. The government plans to pare the deficit primarily by reforming its ailing electricity sector and cutting public sector benefits.

“The measures proposed in the budget, together with savings from electricity sector reforms, are projected to reduce the primary deficit in 2020-22 but leave debt on a rising path,” the IMF said.

Khalil, on Twitter, said the IMF report was “not all encouraging,” while noting that it did praise the 2019 draft budget as a major step in the right direction. He said he would submit the 2020 draft budget on time, before the end of August.

Lebanon's parliament has not yet approved the 2019 draft budget, which is being revised in committee.

To contact the reporter on this story: Dana Khraiche in Beirut at dkhraiche@bloomberg.net

To contact the editors responsible for this story: Alaa Shahine at asalha@bloomberg.net, Amy Teibel, Michael Gunn

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