BEIRUT-  The Lebanese government will discuss a law on Thursday allowing the central bank to use its mandatory reserve to keep subsidising fuel imports after the bank decided to halt a subsidy that has drained its coffers, a ministerial source said.

The government attacked governor Riad Salameh over the decision announced late on Wednesday, calling it a unilateral move that would have serious consequences as Lebanon grapples with a crippling financial meltdown.

The central bank defended its decision, saying it told the government a year ago that legislation would be needed to use the mandatory reserve, a portion of deposits that must be preserved by law.

A loss of fuel subsidies would open a new phase in the financial crisis that has cut the value of Lebanon's currency by more than 90% since 2019 and thrown more than half the population into poverty.

The ruling elite has failed to chart a course out of the crisis, Lebanon's worst since the 1975-90 civil war, even as supplies of fuel and medicine have run out.

President Michel Aoun summoned Salameh to the presidential palace for a meeting at which the governor refused to back down on the decision, saying use of the mandatory reserve required legislation, the ministerial source said.

This would be discussed at an emergency meeting of Prime Minister Hassan Diab's caretaker cabinet on Thursday, they said.

Diab said he was opposed to subsidies being ended before an alternative was on offer. Progress was being made towards rolling out a prepaid cash card for the poor and the decision could have waited until it was available.

"It is a decision that contravenes the law," he said on Twitter, referring to the June law establishing the cards.

"Its damages are much greater than the gains of protecting the mandatory reserves in the central bank" because it would take the country into the unknown.

MPs from the powerful Shi'ite group Hezbollah rejected Salameh's move, saying the prepaid cards must be rolled out before any other step to end or reduce subsidies.

Since the onset of the crisis, the central bank had been effectively subsidising fuel by using its dollar reserves to finance imports at exchange rates well below the rates on the parallel market.

The fuel subsidy has been costing about $3 billion a year.

The central bank said that while it had spent more than $800 million on fuel in the last month and the bill for medicines had multiplied, those goods were still absent from the open market, and being sold at prices that exceed their value.

"This proves the necessity of moving from subsidising commodities, which benefits traders and monopolists, to supporting citizens directly," the bank said.



Gebran Bassil, who heads the party founded by Aoun and is his son-in-law, called the move a sudden and unilateral step and urged his followers to get ready to mobilise.

Druze leader Walid Jumblatt said however that subsidies would have to end, saying subsidised goods were being smuggled to Syria and warning that eventually not one penny would be left in the reserve.

The central bank said on Wednesday that it would offer credit lines for fuel imports at market rather than subsidised exchange rates, and this would apply from Thursday.

The government's oil directorate said that fuel prices released on Wednesday still applied and were binding on distributors.

Unsubsidised, the price of 95 octane gasoline was projected at more than four times its previous price in a schedule reported by a Lebanese broadcaster on Wednesday.

While sharply higher prices would make fuel less affordable for the growing number of Lebanese poor, some economists say crippling fuel shortages should be alleviated for those who can pay, by removing the incentive to smuggle and hoard.

Most recently, the central bank had been extending credit for fuel imports at a rate of 3,900 pounds to the dollar, compared with a parallel market rate of more than 20,000 pounds.

The central bank's reserves have sunk from more than $40 billion in 2016 to $15 billion in March.

(Reporting by Nafisa Eltahir/Tom Perry; Writing by Tom Perry; Editing by Jacqueline Wong, Hugh Lawson and Giles Elgood) ((;))