* Blueprint fails to commit to ending sectarian patronage
* IMF will push hard for real reform in return for help
* Banks say plan unfairly penalises them for state waste
* Gruelling talks expected, despite official confidence
By Samia Nakhoul
BEIRUT, May 18 (Reuters) - A recovery plan Lebanon is negotiating with the IMF expertly diagnoses the bankrupt state's colossal losses but fails to commit to radical reform, the vital ingredient needed for a financial bailout of the country's sinking economy.
The 53-page rescue plan, agreed by the government in April after months of haggling, is recognised by officials, economists and diplomats as the most searching examination of how Lebanon came to pile up debts several times the size of its economy.
But sources familiar with the IMF talks say the plan fails to set out a clear roadmap of reforms for a patronage-ridden public sector, looted for decades by the sectarian power-brokers and former warlords who dominate Lebanon's confessionally-based politics and have run its state onto the rocks.
They believe the political elite will shy away from real reform as with four previous aid and soft-loan packages since Lebanon's civil war - and that they are underestimating how hard the IMF will push for deep changes before agreeing to help.
"They are trying to present a plan that the IMF will buy into, and that the international community and creditors will buy into, without really addressing the deeper problems in the country: reforms", said Nasser Saidi, a former economy minister and vice-governor of the central bank.
"The current blueprint is extremely light on the reforms to the public sector," adds Camille Abousleiman, an international finance lawyer and a minister who resigned from the last government over its reform failures.
The losses in the government document are startling. It estimates total sovereign debt at about $90 billion or 176% of GDP -- one of the highest debt ratios in the world. It calculates total bank losses to be $83 billion and "embedded losses" at the central bank at over $40 billion.
The burden that these figures impose is rising with the rapid decline of economy, which shrank by 6.9% last year, according to the government, and will contract around 13.8% this year, with the coronavirus pandemic compounding the crisis.
One senior Lebanese government official claims that an agreement with the IMF is "70% done". People familiar with the talks are not convinced, predicting gruelling negotiations.
LACK OF ENTHUSIASM FOR REFORM
Although the current government has respected technocrats, it is under the sway of sect leaders as much as the previous one - which was brought down by mass protests against corruption.
The difference is that this cabinet reflects more closely the power of Hezbollah, the Iran-backed Shi'ite paramilitary movement which dominates Lebanon in alliance with the largest Christian party and the Shi'ite Amal party. Pro-Western Sunni, Christian and Druze parties have stayed out.
There is, however, little difference in the lack of enthusiasm for reform of Lebanon's real ruling class.
Last week, the government fielded a team to talk to the IMF drawn from the presidency, finance ministry, central bank and prime minister's office. The team voiced contrasting opinions, a source close to the talks says. The talks resume later on Monday.
The sources say the plan focuses overwhelmingly on the banks and the central bank, which together lent more than 70% of total deposits in the banking system to an insolvent state at increasingly inflated interest rates put in place by central bank governor Riad Salameh.
But the banks were not responsible for the devastating waste, pillage and payroll padding in the public sector – about which this plan has little detailed to say.
Economists and donor country officials say any rescue plan must send strong signals of change, "that this is not just about attacking the banks", as one official puts it, or selectively going after the illicit wealth of a few people – the enemies of the Hezbollah-influenced coalition behind the government.
As things stand, the government aims to shrink the banking sector by mergers, acquisitions, closures and recapitalisation, "haircuts" on the value of big depositors, and repatriation of dividends and interest revenue earned in the past five years.
The Association of Banks in Lebanon has angrily rejected this approach. Banks -- traditionally mostly owned by Christians and Sunni Muslims -- believe there is a systematic agenda by the Hezbollah-dominated government to bring them down.
"The state has to bear a significant portion, but the way they have it, it's all on the banks," Abousleiman said.
The three areas identified as priorities by all reform-minded analysts and officials are the state power company Electricite du Liban (EdL); Telecom, customs and ports; public pensions and the state payroll.
HEZBOLLAH IS UNDER PRESSURE
Losses at EdL, more a party fief than a power utility, have run into billions of dollars since the war. Still it cannot keep the lights on, a job that falls to vested interests of private generator and diesel suppliers no government dared tangle with.
Customs, ports and border crossings are also party fiefs parcelled out as smuggling rackets to evade import levies. The public payroll continues to swell. All parties, without exception, use the system to reward their followers.
Abousleiman argues the government didn't need to wait for the IMF and can start reforms now.
But the Hezbollah-dominated coalition behind the government is baulking at all three measures, and especially at changes to customs arrangements that are important sources of revenue.
The IMF is understood to be wary of being held responsible for a financial meltdown "made in Lebanon", as one official put it, adding it is "a reputational risk" for the Fund unless the adjustment plan is seen to be both fair and efficient.
Hezbollah, which also provides social welfare, is under pressure from poorer Shi'ite supporters who have been hit hard already by hundreds of thousands of private sector job losses and face many more to come in the public sector.
Added to this is what one former Shi'ite minister describes as "extremely vocal" pressure from wealthy diaspora Shi'ites, especially in West Africa, who placed large deposits in Lebanon's banks they now stand to lose.
"We supported you and now we're being strangled", these expat Lebanese are saying, and "Hezbollah is feeling the heat for acting as a shield for the corruption of their government allies", the former minister said.
(Created by Samia Nakhoul, Editing by William Maclean)
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