BEIRUT - Lebanon's new government, when formed, should make reforms to control public debt and avoid a possible financial crisis, a senior banking official said on Thursday.

Makram Sader, secretary general of the powerful Banks Association said the next government, buoyed by public support after the withdrawal of Syrian forces and elections last month, has a rare chance to control the $36 billion debt.

Prime Minister-designate Fouad Siniora, finance minister for most of the post 1975-1990 civil war period, is holding talks with parliamentary blocs and top officials to form the first government since Syrian forces left Lebanon in April.

"Lebanon has a historic chance to take independent decisions for the first time since the civil war to reduce the cost of the government and raise growth rates," Sader said.

Six years ago Sader helped draw up a restructuring plan that was not followed. It predicted debt, which has reached almost double the gross domestic product, to grow uncontrollably.

Debt service consumes more than half of government revenue and public spending comprises 40 percent of GDP. Some 42 percent of the debt is financed by Lebanon's banks, a figure far higher than in other countries where the rate is usually below 10 percent.

Sader, a leading French-educated economist, believes financial crisis is avoidable if the government takes immediate measures to cut spending and expand the tax base.

This includes "raising revenue from untaxed incomes and activities, recovering all the state's rights and resources, as well as reducing spending and all unnecessary transfers, grants and subsidies.

The state loses unknown revenue every year from electricity bills that go uncollected and from tax evasion. It also owns property that was taken over illegally during the civil war by politically connected groups, for which it has never been paid.

BANKS TO THE RESCUE

"A serious restructuring plan would mean also less borrowing, less reliance on the banks, lower interest rates and the encouragement of real investment," Sader said.

The Lebanese commercial banks have already committed more than half their $66 billion of assets to finance the debt or help defend the Lebanese pound.

They repeatedly placed dollar deposits with the central bank to bolster its hard currency reserves and defend the pound in times of crisis, such as the assassination of former premier Rafik al-Hariri on February 14.

The central bank also used high interest rates to maintain the Lebanese pound at 1,507.5 to the dollars and prevent capital flight that could bring down the currency.

The average yield on Lebanese pounds treasury bills stands at 7.5 percent and 6.9 percent on Lebanese eurobonds. The Beirut prime dollar lending rate is 6.8 percent.

"Depositors became accustomed to high rates at the expense on liquidity for other investment. Rates can fall by 100-150 basis points quickly with reform measures," Sader said.

Since the civil war ended in 1990, Lebanon has borrowed heavily to rebuild and finance social transfers, public payrolls and security forces, and to maintain the Lebanese pound peg to the dollar, depriving fiscal policy of flexibility.

Hariri started the heavy borrowing when he took office in 1992 and then tried to grow the economy out of the debt, saying constraints of Lebanon's sectarian systems prevented reform.

Siniora was a senior aide to Hariri. Growth recovered to an estimated five percent the last year Siniora was in office in 2004, compared with 2-3 percent in 2003 and stagnation for five years before.

Sader said the Lebanese economy can expand far more, which would reduce the crucial ratio of debt as a share of GDP.

"Bad policies and politics prevented the economic growth," Sader said. "Siniora knows very well that the situation is critical and gaining time is vital." (Reuters)