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The Socialist People's Libyan Arab Jamahiriya

Author(s):
International Monetary Fund
Published Date:
May 2007
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I. Introduction

1. Libya is a hydrocarbon rich country, but has one of the least diversified economies in the Maghreb region and among the oil producing countries (Table 1 and Figure 1). It has a long legacy of central economic management and excessive reliance on the public sector, and started its transition to a market economy in 2002, after ten years of international economic sanctions related to the Lockerbie bombing of 1988. Since then, Libya has made efforts to liberalize its economy and foreign trade,1 achieving increasing economic growth while maintaining macroeconomic stability. The country’s current comfortable financial situation provides an ideal opportunity to deepen structural reform, and accelerate the transition to a market economy. Libya’s social indicators are favorable by Middle East and North Africa (MENA) standards (Table 2).

Table 1.Libya: Comparative Indicators, 2006(In percent of GDP unless otherwise specified)
LibyaMaghreb 1/OPEC 2/3/
GDP per capita (in US$)8,4303,5778,641
Non-hydrocarbon GDP per capita (in US$)2,2111,9357,022
Share of non-hydrocarbon GDP (in total)26.271.457.3
Real GDP growth5.67.16.5
Government expenditure32.331.130.3
Fiscal position (deficit -)38.69.913.3
Government revenue71.241.043.6
External trade balance (deficit -)51.512.619.3
Sources: WEO; and Fund staff estimates.

Figure 1.Libya: Comparative Indicators, 2006

Sources: World Economic Outlook, 2006; and Fund staff estimates.

Table 2.Libya: Demographic, Social, and Human Development Indicators, 1998–2005
MENA1/
Units199819992000200120022003200420052005
Demographic indicators
PopulationMillions5.105.205.315.415.525.635.745.85301.9
Aged 0-14Percent of total35.133.932.932.031.330.830.430.134.3
Aged 15-64Percent of total61.762.763.664.464.965.465.765.961.8
Aged 65 and abovePercent of total3.23.43.53.63.73.84.04.14.0
Age dependency 2/Ratio0.620.590.570.550.540.530.520.520.63
Urban populationPercent of total82.382.783.183.483.884.184.584.868.9
Total labor forceMillions1.761.841.921.992.062.142.252.34108.0
MalePercent of total77.576.976.275.975.575.373.772.974.5
FemalePercent of total22.523.123.824.124.524.726.327.125.5
Life expectancy at birthYears73.173.773.974.170.4 3/
MaleYears70.971.471.671.868.7 3/
FemaleYears75.576.176.376.572.2 3/
Infant mortality ratePer 1,000 live births20.018.032.7 3/
Immunization rate
MeaslesPercent of under 12 months92.092.092.093.091.095.099.091.7 3/
DPTPercent of under 12 months95.094.094.094.093.095.097.091.7 3/
Education indicators
Adult literacy rate (ages 15 and above)Percent of total77.878.879.980.881.777.3 3/
MalePercent of male89.490.190.891.391.885.0 3/
FemalePercent of female65.066.568.169.370.769.3 3/
Human development indicators
Human development index (HDI) 4/5/Index0.7600.7700.7720.7940.7990.7980.713 3/
Gender-related development index (GDI) 5/6/Index0.7380.7480.7530.710 3/
Sources: World Bank World Development Indicators, 2006 and UNDP’s Human Development Report, 2005.

2. The main political developments in 2006-07 include: (i) two cabinet reshuffles; (ii) the implementation of a major administrative reform that strengthens the role of the central government and aims to improve governance; and (iii) the reestablishment of full diplomatic relations with the United States.

II. Developments in 2006

3. In 2006, economic conditions continued to be satisfactory. Real GDP grew about 5½ percent, reflecting an increase of 4½ percent in the value added of the hydrocarbon sector, and a buoyant non-oil economy (6 percent) boosted by increased government spending and the liberalization of the trade, service, and tourism sectors. However, preliminary end-year data indicate that annual CPI inflation accelerated in the last quarter reaching 7.2 percent (year on year) in December (Table 3 and Figure 2).

Table 3.Libya: Basic Economic and Financial Indicators, 2002–07(Quota = SDR 1,123.7 million)Population (million): 5.85 (2005)
Est.Prel.Proj.
200220032004200520062007
(Annual percentage change, unless otherwise specified)
National income and prices
Real GDP 1/1.45.95.06.35.67.9
Non-hydrocarbons 1/2/4.72.24.15.56.18.0
Hydrocarbons 1/2/−7.917.77.48.34.47.4
Nominal GDP in billions of Libyan dinars25.230.839.854.566.178.4
Nominal GDP in billions of U.S. dollars 3/19.824.030.541.750.360.8
Per capita GDP in thousands of U.S. dollars 3/3.64.35.37.18.410.0
CPI inflation (average)−9.9−2.1−2.22.03.416.2
CPI inflation (e-o-p)−7.3−1.3−3.53.07.2
(In percent of GDP)
Central government finances
Revenue51.053.958.568.671.266.5
Of which: hydrocarbon40.347.150.663.765.958.1
Expenditure and net lending39.943.443.334.932.341.9
Of which: capital expenditure13.29.217.415.416.824.4
Overall position (deficit -)6.214.817.430.038.624.6
Non-oil deficit−34.1−32.3−33.3−33.7−27.3−33.5
Non-oil deficit (in percent of nonoil GDP)−72.1−80.3−95.9−118.4−104.4−91.8
(Changes as a percent of beginning of the year money stock)
Money and credit
Money and quasi-money10.98.19.229.220.228.4
Net credit to the government−10.0−32.8−104.2−85.5−110.2−78.9
Credit to the economy8.36.6−0.74.56.215.9
Of which: credit to the private sector−0.5−1.11.10.81.65.1
Deposit rate (1-year deposits, in percent)5.55.54.54.5
(In billions of U.S. dollars; unless otherwise indicated)
Balance of payments
Exports, f.o.b.9.814.620.430.938.839.8
Of which: hydrocarbons9.614.219.530.438.339.1
Imports, f.o.b.7.47.28.810.912.920.7
Current account balance0.75.27.417.324.415.6
(As percent of GDP)3.321.524.341.648.525.6
Overall balance (deficit -)0.33.14.615.418.716.4
(As percent of GDP)1.613.015.237.037.126.9
Reserves
Gross official reserves14.319.525.639.359.275.6
(In months of next year’s imports of GNFS)19.421.923.330.228.530.0
Exchange rate
Official exchange rate (LD/US$, period average)1.271.281.301.311.311.29
Official exchange rate (LD/US$, end of period)1.211.301.241.351.281.29
Libya crude oil production (millions of barrels per day)1.301.531.621.691.751.89
Libyan crude oil price (US$/bbl)24.428.236.951.962.559.1
Sources: Libyan authorities; and Fund staff estimates and projections.

Figure 2.Libya: Real GDP and Inflation

(Annual changes in percent)

Sources: Libyan authorities; and Fund staff estimates.

4. Based on preliminary data, the consolidated government operations registered a record overall cash surplus of about 39 percent of GDP, owing to a substantial increase (of 25 percent) in hydrocarbon revenues. Non-oil revenue performance grew even faster at 33 percent, partly owing to the reform of tax and customs administration currently underway. Government spending increased by about 12 percent, owing to: (i) a marked increase in the wage bill (14 percent), reflecting new hiring in the regions, and an average increase of 60 percent in the wages of university teachers, doctors, and members of the security forces; and (ii) an improved execution of the development budget (87 percent). Development spending increased to about 17 percent of GDP, concentrated on infrastructure and construction - (42 percent), social sectors - (32 percent), and hydrocarbons - (19 percent) (Table 4 and Figure 3).

Table 4.Libya: Consolidated Fiscal Operations, 2002-2007
200220032004200520062007
Prel.Proj.
(In millions of Libyan dinars)
Total Revenue12,85016,61423,27237,41347,08852,122
Hydrocarbon 1/10,15014,50620,14134,76443,56645,546
Nonhydrocarbon 2/2,7002,1083,1312,6503,5236,576
Nonhydrocarbon tax revenue1,1507251,6171,5261,7862,909
Taxes on income and profits506703093976911,142
Taxes on international trade379385602517527826
Other tax revenue266270705611569941
Nontax revenue9449621,2228731,4643,218
GMR revenue606421292251272450
Total expenditure and net lending10,06313,39617,23019,06021,37732,843
Total expenditure10,06313,39617,12916,64020,79732,243
Current expenditure6,72410,56410,1958,2459,69313,072
Administrative budget4,1834,2285,6117,1668,21912,265
Expenditure on goods and services3,6843,4994,6475,6696,65510,259
Wages and salaries2,5462,8123,4454,0074,5757,187
Other purchases of goods and services1,1396881,2021,6622,0803,072
Subsidies and other current transfers4997289641,4971,5642,006
Food subsidies4314808321,0501,050806
Other currrent transfers672481324475141,200
Defense894981769807
Extrabudgetary current expenditure2,5416,3363,690997050
Oil reserve fund 3/1,9665,6363,690997050
Defense575700
Capital expenditure3,3392,8326,9338,39511,10519,170
Development budget2,9362,2046,1357,57010,07919,170
Extrabudgetary capital expenditure4036287988251,0260
Net lending001022,420580600
Errors and omissions 4/1,229−1,333−8591,9792130
Overall balance1,5594,5526,90116,37425,49819,279
Nonhydrocarbon balance−8,592−9,955−13,240−18,389−18,068−26,267
Domestic financing−1,559−4,552−6,901−16,375−25,498−19,279
Banking system−1,134−4,207−6,654−15,877−19,874−18,814
Nonbank financing 5/−425−344−247−498−5,624−465
(In percent of GDP)
Total revenue51.053.958.568.671.266.5
Hydrocarbon 1/40.347.150.663.765.958.1
Nonhydrocarbon 2/10.76.87.94.95.38.4
Total expenditure and net lending39.943.443.334.932.341.9
Total expenditure39.943.443.130.531.541.1
Of which: current expenditure26.734.325.615.114.716.7
Wage bill10.19.18.77.36.99.2
Subsidies and other transfers2.02.42.42.72.42.6
Capital expenditure13.29.217.415.416.824.4
Budgetary expenditure28.220.931.828.828.841.1
Extra-budgetary expenditure11.722.611.31.72.60.0
Net lending0.00.00.34.40.90.8
Errors and omissions4.9−4.3−2.23.60.30.0
Sources: Ministry of Finance; and Fund staff estimates and projections.

Figure 3.Libya: General Government Operations

(In percent of GDP)

Sources: Libyan authorities; and Fund staff estimates.

5. Broad money grew by about 20 percent, reflecting mainly the impact of the nominal increase in the non-oil fiscal deficit on money supply and a sustained increase in credit to public enterprises (of over 20 percent). Bank credit to the private sector grew about 7 percent, the highest growth rate since 2000 (Table 5 and Figure 4).2

Table 5.Libya: Monetary Survey, 2002–07 1/
200220032004200520062007
Prel.Proj.
(In millions of Libyan dinars)
Net foreign assets19,12327,12334,23756,42279,435101,057
Central bank18,44026,57333,06654,44877,24198,863
Foreign assets18,44426,57833,07354,46077,25398,875
Foreign liabilities457121313
Deposit money banks6835501,1711,9742,1952,195
Foreign assets7787941,3122,0462,2992,299
Foreign liabilities9424414172105105
Net domestic assets−6,119−13,071−18,893−36,600−55,600−70,443
Domestic credit6,8993,486−11,253−23,688−44,312−59,331
Net claims on government−555−4,820−19,465−32,588−54,438−73,251
Central bank claims 2/7,0107,012828828828828
Governments’ deposits with central bank8,58712,96419,51932,56353,72172,534
Commercial banks’ claims 2/1,8111,811373373373373
Governments’ deposits with comm. banks7886781,1471,2271,9181,918
Claims on the rest of the economy7,4538,3058,2128,90010,12513,920
Claims on nonfinancial public enterprise 2/2,8383,7843,4774,2715,1487,722
Claims on private sector4,4384,2984,4524,5764,8916,112
Claims on specialized banking institutions827767457575
Claims on nonbank financial instit.9614621571111
Other items (net) 2/−13,018−16,557−7,640−12,912−11,288−11,112
Broad money13,00414,05215,34419,82223,83530,615
Money8,7059,02910,53714,02816,491
Currency in circulation2,6142,7642,6133,3093,920
Demand deposits (other than government)6,0926,2667,92410,71912,57116,039
Quasi-money4,2995,0234,8075,7947,3449,433
Memorandum items:
Net Claims on the Government excl. SSF3/−77−4,284−18,938−31,815−53,168−71,981
(Annual rate of change in percent)
Broad money10.98.19.229.220.228.4
Money13.03.716.733.117.6
Quasi-money7.016.8−4.320.526.8
Net claims on government−190.1769.0303.967.467.034.6
Claims on nonfinancial public enterprises55.033.3−8.122.820.550.0
Credit to the economy−190.1769.0303.967.467.025.0
(Percent change over beginning broad money stock)
Net foreign assets78.061.550.6144.6116.190.7
Domestic credit−1.7−26.2−104.9−81.0−104.0−63.0
Net claims on government−10.0−32.8−104.2−85.5−110.2−78.9
Claims on the economy8.36.6−0.74.56.215.9
Claims on nonfinancial public enterprises8.67.3−2.25.24.410.8
Claims on private sector−0.5−1.11.10.81.65.1
(As percent of GDP)
Domestic credit27.411.3−28.3−43.4−67.0−75.7
Net claims on the government−2.2−15.6−48.9−59.8−82.3−93.4
Broad money51.645.638.636.336.139.0
Nominal GDP (in millions of Libyan dinars)25,20030,83139,76954,54066,11278,411
Source: Central Bank of Libya.

Figure 4.Libya: Monetary Indicators

(Annual changes in percent of beginning-of-the-year money stock)

Sources: Libyan authorities; and Fund staff estimates.

6. On the external side, the - current account surplus is -80 estimated to have reached about - 48½ percent of GDP, reflecting - the growth of hydrocarbon exports resulting from higher export prices and volumes. Import growth was robust (18 percent) reflecting rising domestic demand, including increased government spending. Gross international reserves reached about $59 billion (29 months of 2007 imports) (Table 6 and Figure 5), and the real effective exchange rate (REER), based on the official CPI, remained stable (Figure 6).

Table 6.Libya: Balance of Payments, 2002–2011(In millions of U.S. dollars)
2002200320042005200620072008200920102011
Prel.Projections
1. Current account6525,1587,41017,32524,41915,57418,43320,36621,71223,052
A. Goods and services1,2596,29210,16518,24023,72815,59718,26119,68920,40421,098
a. Goods2,3957,44711,64220,07225,90519,08322,49624,46925,82827,278
Exports (fob)9,80314,64720,41030,94838,83139,78147,63552,84558,03063,965
Hydrocarbon sector 1/9,62014,15919,53330,44838,25139,11946,88351,99757,08062,976
Other exports184489877500579663752848950988
Imports (fob)−7,408−7,200−8,768−10,875−12,925−20,698−25,140−28,376−32,202−36,687
Of which: oil sector imports−626−950−1,271−1,378−2,800−3,271−4,103−5,144−6,455−8,107
b. Services−1,137−1,155−1,477−1,832−2,177−3,487−4,235−4,780−5,424−6,180
Debit1,5391,5971,9142,3202,6994,2395,1035,7116,4287,266
Credit4024424374885227528689301,0031,086
B. Income265540−246−281451,0331,4282,0872,8653,672
Direct investment income 2/−585−845−1,337−1,834−2,303−2,428−2,972−3,367−3,755−4,205
Other investment income8501,3851,0911,5532,3483,4614,4005,4546,6207,878
Government sector7401,2639661,4032,1903,2954,2275,2726,4297,677
Private sector110122125150158165174182191201
C. Current transfers−872−1,673−2,509−634646−1,055−1,256−1,411−1,557−1,718
General government 3/0−1,174−1,741−1121,190−120−126−132−139−146
Private−872−499−768−522−544−935−1,130−1,278−1,418−1,572
Oil sector−105−156−210−259−280−286−343−381−418−461
Other sectors (workers transfers abroad)−767−343−558−588−534−927−1,073−1,193−1,304−1,424
2. Capital and financial account78−316−1,83072−4,5447801,1191,6972,4353,376
Direct investment28179−6431,4991,5511,9422,3132,9263,7014,680
Portfolio investment−72−607−187−393−5,210−500−500−500−500−500
Other investment−131212−1,000−1,034−885−662−695−729−766−804
3. Errors and omissions and other capital−416−1,720−944−1,975−1,18800000
4. Overall balance3143,1224,63715,42218,68716,35519,55222,06324,14726,428
5. Reserve items−314−3,122−4,637−15,422−18,687−16,355−19,552−22,063−24,147−26,428
Memorandum items:
Official exchange rate, LD/US$ (pa)1.271.281.301.311.311.291.291.281.281.27
Official exchange rate, LD/US$ (eop)1.211.301.241.351.281.291.291.281.281.27
Gross official reserves (in billions of US$)14.319.525.639.359.275.695.1117.2141.3167.8
Gross official reserves, in months of next year’s imports19.421.923.330.228.530.033.536.438.640.3
Current account balance (in percent of GDP)3.321.524.341.648.525.625.725.624.924.1
Overall balance of payments (in percent of GDP)1.613.015.237.037.126.927.227.727.727.7
Nominal GDP (in billions of US$)19.824.030.541.750.360.871.879.687.195.6
Nominal nonhydrocarbon GDP (in millions of US$)9,5499,79810,94611,93213,20322,90926,53429,49432,25235,212
Sources: Central Bank of Libya; and Fund staff estimates and projections.

Figure 5.Libya: External Sector

(In percent of GDP)

Sources: Libyan authorities; and Fund staff estimates.

Figure 6.Libya: Exchange Rate Developments

(Average)

Sources: Libyan authorities; and Fund staff estimates.

*In February 1999, the parallel market rate was legalized for some transactions and called the “special” rate. The exchange rate was unified in January 2002.

7. Structural reform continued with the implementation of a wide range of measures. These reforms covered international trade and finance, banking and payments systems, fiscal management and taxation, and data collection (Box 1).

Box 1.Libya: Measures Implemented in 2006

  • Reduction of the floor on non-oil FDI from US$50 million to US$1.5 million.

  • State import monopolies are limited to petroleum products and weaponry.

  • Import bans for religious, health, and ecological reasons restricted to ten products.

  • Merger of 21 regional banks and development of a plan to restructure the public commercial banks.

  • Acceleration of efforts to strengthen banking supervision and modernize the payment system.

  • Establishment of a Large Taxpayers Office (LTO).

  • Establishment of the LIA to centralize oil revenue management.

  • Reduction of the consumption tax to 15-25 percent, exemption of all intermediate goods from the consumption tax, and some capital and intermediate goods from the 4 percent import service fee.

  • Opening of 51 offices across the country to expedite approval of business permits.

  • Downward adjustment of electricity tariffs for domestic use by enlarging the lowest tariff’s bracket.

  • Establishment of a negative list for non-oil FDI limited to retail and wholesale trade, and importation.

  • Issuance of a decree requiring that all FDI in the non-oil sector be undertaken through joint ventures with a minimum Libyan participation of 35 percent.

  • The ministry of planning’s national accounts unit has been reactivated, and field surveys have been developed.

III. Report on The Discussions

A. Medium-Term Outlook (2007-11)

8. The discussions took place at a time when Libya is facing difficult challenges of transition. Economic reform lacked a clear direction with: (i) the temptation to use the country’s substantial oil revenues to expand the public sector, on the one hand; and (ii) on the other hand, the recognized need to further liberalize the economy, enhance private sector development, and improve the business climate.

9. The authorities stressed that the country’s comfortable financial position has generated strong social and political pressure to improve the country’s social conditions and increase job creation. The authorities have responded with decisions to: (i) more than double the minimum wage, and increase wages in the civil service (frozen since 1981) by about 80 percent on average; (ii) give public enterprises more autonomy in recruitment and wage policy; (iii) launch a vast program of rehabilitation and enhancement of the economic and social infrastructure; and (iv) increase state intervention in strategic economic sectors.

10. Staff urged the authorities to revise downward their budgetary appropriations for 2007, stressing the short- and medium-term macroeconomic risks that the projected spending entails. Given the country’s projected large fiscal surpluses and the inadequate coverage of basic social services, staff supported an increase in nonwage expenditure of 15 percent. Also, in view of the government’s intention to cut the size of the civil service, and recognizing that government wages are low, staff supported an increase in wages of about 15 percent.

11. The authorities elaborated only in general terms on their medium-term macroeconomic and policy framework. In their view, Libya’s medium-term economic outlook remains highly favorable, owing to the projected increase in hydrocarbon export volumes, and expected positive effects of public spending on economic growth and job creation. They stressed that they were not as concerned as staff about the macroeconomic implications of the 2007 budget, arguing that: (i) the nonwage appropriations, which have been increased by more than 50 percent, will certainly not be fully executed due to limited implementation capacity; (ii) the wage increase in the civil service will not spread to private enterprises, whose wages are already relatively high; and (iii) contrary to staff estimates, the inflationary impact of the wage increase would not exceed 10 percent, owing to the high import content of the consumers’ basket. Staff argued that the CPI would increase by 15-20 percent in 2007,3 even assuming an import content of the consumer basket of 70 percent.

12. The authorities did not comment on staff’s medium-term scenario (2007-11). This assumes the return to a prudent policy stance starting in 2008 and slow progress in structural reform.4 In particular, staff has assumed an average annual increase in expenditure of about 12 percent in 2008-11, consistent with the annual increases in 2005-06 and the economy’s limited absorptive capacity.5 As a result, the non-oil fiscal deficit is projected to average 32 percent of GDP, well below the ceiling for Libya’s long-term sustainable non-oil fiscal deficit estimated by staff to be about 50 percent of GDP.6 These projections underscore that Libya’s medium-term financial outlook has only limited downside risks. In particular, even under an oil price US$15 a barrel below the WEO spot prices, the fiscal and external current account balances would still record large surpluses during the entire projection period (Figure 7).7

Figure 7.Libya: Sensitivity Analysis, 2006-2011

(In percent of GDP)

Source: Libyan authorities; and Fund staff estimates.

1/ Overall fiscal balance is close to zero.

2/ External current account surplus is close to zero.

B. Fiscal Policy

13. The 2007 budget, adopted in late January 2007, provides for total expenditure of about 42 percent of GDP, a nominal increase of 54 percent over the 2006 fiscal outturn. The current budget has been increased by 25 percent, including a nonmilitary wage bill growing by about 60 percent; excluding the redundant staff who are kept on the payroll but will not receive the wage increase, the average wage increase is about 80 percent. The development budget, which has been increased by 73 percent, places a particular emphasis on the priority sectors of infrastructure, education, health, human resource development, and hydrocarbons. With an estimated total revenue of about 67 percent of GDP, the overall fiscal surplus is projected at about 25 percent of GDP, and the non-oil fiscal deficit at 34 percent of GDP.

14. In order to implement the wage increase in the civil service, the authorities have: (i) reduced the subsidies budget by about 23 percent; and (ii) developed a plan to streamline the civil service, including the termination of about 300,000 redundant staff out of a total of about 910,000 staff. Terminated staff will be granted severance packages, including the payment of their salaries during three years, free training, and access to subsidized loans to establish businesses. The authorities stressed that the wage increase will be effective only after the redundant staff have been officially terminated; a civil service census is currently in progress to that effect. Staff strongly recommended a gradual implementation of the wage increase.

15. The authorities have established the LIA to centralize oil revenue management. The LIA is under the authority of the office of the prime minister, and charged with the investment of the financial assets of six extrabudgetary funds.8 It can invest domestically and abroad in a wide range of activities and its resources could be used to support the budget if oil prices drop below the budget oil price.

16. Staff considered that the establishment of the LIA will further complicate fiscal management and affect the coherence of fiscal policy. It argued that the decree establishing the LIA does not address the issue of oil revenue management, nor does it adequately establish rules for the transfer and withdrawal of resources.

17. The authorities underscored the recent improvements in budget preparation, including the incorporation of the subsidies and defense budgets into the current budget, and better coordination between the ministries of finance and planning. They reiterated that the operations of the various government funds are kept outside the budget mainly for efficiency reasons, given the complexity and cumbersome nature of Libya’s budgetary process.9

18. The authorities indicated that the implementation of staff recommendations on strengthening revenue administration have already resulted in higher collections. To further improve performance, they requested additional Fund technical assistance (TA) support to improve the monitoring and control of exemptions. Staff noted that progress in reform remained slow, and implementation did not fully reflect staff recommendations.

C. Monetary Policy and Financial Sector Development

19. In 2006, the authorities gave priority to the restructuring of the banking system and strengthening of banking supervision, while keeping the monetary framework unchanged since the partial liberalization of interest rates in September 2005. They emphasized that the CBL is working closely with a specialized international private firm to restructure the public commercial banks and design an entry strategy for foreign banks. A plan is being developed to transfer ownership of the public commercial banks from the CBL to the SEDF, with a mandate to privatize with a possible participation of foreign banks. So far, one bank has been transferred and the transfer of another bank is under discussion.

20. Staff welcomed the authorities’ intention to allow foreign banks to operate in Libya, but strongly advised against the involvement of the SEDF in the restructuring of the banking system, arguing that the SEDF’s purpose is largely of a social nature and that it does not have the expertise to restructure banks. Also, the authorities should reform the status of the specialized banks, which continue to lend on noncommercial grounds.

21. The authorities have also expressed their intention to restructure and modernize the CBL and requested the Fund’s support. To that effect, an MCM mission visited Tripoli in February 2007, and reached agreement on a framework for TA to support this process. Also, the authorities expressed their satisfaction with the TA on banking supervision provided by the Middle East Technical Assistance Center, and indicated that progress continues in the modernization of the domestic payment system.

D. External Sector Issues

22. Staff agreed with the authorities that the current exchange rate regime is serving Libya well, and the rate of the Libyan dinar has been, in recent years, appropriate and consistent with the country’s macroeconomic stability; the low level of non-oil exports reflects mainly lack of structural reform and investment. This view was shared by private importers who confirmed the absence of a parallel market or any delay or restriction on access to foreign exchange for current account transactions. Staff cautioned, however, that the acceleration of inflation at the end of 2006 could be an early indication of upward pressures on the exchange rate related to the fiscal and monetary expansions. Staff stressed that these pressures will increase in 2007 with the envisaged loosening of the fiscal stance. Regarding the medium term, the continued increase in oil revenues is expected to place upward pressure on Libya’s real effective exchange rate, with adverse effects on the non-oil tradable sector that would need to be addressed through far-reaching reforms to improve the business environment and enhance productivity.

23. The CBL is studying the option of moving to greater exchange rate flexibility, and sought staff’s advice on this issue. Staff stressed that such a move would need to be gradual and over the medium term, as the CBL would first have to switch to market-based monetary management and develop expertise in foreign exchange markets, risk management, and intervention policies.

E. Trade Reform and Private Sector Development

24. The authorities agreed with staff on the need to reform Libya’s legal and regulatory environment and make it more supportive of private investment and other commercial activities. They indicated that, over the medium term, they intend to implement international accounting standards and expedite the government’s privatization program.

25. The authorities emphasized that they simplified the trade regime further in 2006, by reducing the number of state import monopolies, limiting the number of import bans, and cutting by half the consumption tax rate on imported goods. They indicated, however, that they do not plan to incorporate all taxes and fees on imports into the tariff rate in the short run. Regarding Libya’s WTO accession discussions, the authorities indicated that the Memorandum of Foreign Trade Regime is well advanced, and expect negotiations to start in the second half of 2007.

26. The authorities stressed that the reduction in food subsidies in 2007 is a first step toward the replacement of the current system with a cash subsidy. They indicated that, given its political sensitivity, the reduction of the energy and water subsidies will be done over the medium term, gradually and in conjunction with the development of a social safety net.10

F. Other Issues

27. The authorities are keen to improve the country’s statistical system. Their efforts include participating in the IMF’s General Data Dissemination Standards (GDDS) (February 2006) and reinforcing the national account division at the ministry of planning. They expressed their satisfaction with the TA provided by the long-term resident advisor recommended by the Fund.

28. Staff received confirmation that rescheduling agreements have been reached with a number of Heavily Indebted Poor Countries (HIPCs) including Uganda, Tanzania, and Benin, but that negotiations with Nicaragua have not been successful (leading Libya to initiate litigation procedures). The authorities were encouraged by their recent contacts with the new Nicaraguan government and expect that this dispute will be settled amicably.

IV. Staff Appraisal

29. In the space of a few years, since the lifting of the UN sanctions, Libya has succeeded in increasing economic growth while maintaining macroeconomic stability. However, this improvement was mainly the result of fiscal stimulus, as the legacy of three decades of central economic management and ten years of international economic sanctions continue to hinder Libya’s transition to a market economy. The 2006 Article IV consultation discussions confirmed the lack of clear direction in Libya’s economic reforms, and underscored major differences of view between the authorities and staff in key areas, including the 2007 fiscal stance, oil revenue management, and bank restructuring.

30. Libya’s medium-term financial outlook is expected to remain strong. But the maturing of Libya’s economic expansion will depend largely on the authorities’ policy stance, the scope of their reform agenda, and their determination to avoid past shortcomings in policy formulation and implementation. In order to foster non-oil growth and address high unemployment, the authorities need to maintain macroeconomic stability, strengthen oil revenue management, reform the banking system, and improve the business climate, as recommended by staff in the medium-term strategy (MTS) to reform Libya’s economy and the 2006 report on strengthening public financial management (PFM) that it has prepared at the authorities’ request.11

31. Staff welcomes the authorities’ intentions to improve the business environment and enhance private sector development, but cautions that these objectives would be difficult to reach if macroeconomic stability is absent. In staff’s view, the loosening of fiscal conditions in 2007 poses a serious challenge to macroeconomic stability, given the economy’s limited absorptive capacity and the contagion effects of the wage increase in the civil service on public and private enterprises. The adverse effects include an inflation rate exceeding 15 percent in 2007 and rising further over the medium term, strong pressures on interest rates, and the deterioration of the competitiveness of the non-oil economy. All these are ingredients that would slow structural reform, inhibit private sector development, deter foreign investors, and limit job creation, whereas the gains in non-oil economic growth will remain fragile and unsustainable in the long run.

32. Libya urgently needs to restore fiscal prudence and develop a noninflationary wage policy linking government wage increases to productivity performance in the non-oil sector. Staff regrets that its advice to limit the wage increase in 2007 to about 15 percent has not been followed by the authorities. In order to limit the adverse effects of the budget, staff recommends that the authorities’ proposed wage increase be granted in four installments over an 18-month period, including a labor cost neutral installment by reducing the income tax rate on wages. To prevent slippages in the implementation of the budget, the authorities should establish quarterly reviews of budget execution, including physical reviews of projects, and strengthen project disbursement procedures. For the medium term, staff urges the authorities to implement the recommendations of the 2006 PFM mission, including improving the planning and budgetary presentation of the consolidated budget; strengthening project selection and assessing recurrent costs; and revising the budgetary nomenclature.

33. Staff welcomes the progress achieved in budget preparation. The staff noted, however, that the budgetary process continues to suffer from incomplete coverage with major financial government operations being undertaken outside the budget; and the lack of a medium-term perspective. The authorities were urged to implement staff recommendations to address these two weaknesses included in the PFM report.

34. Libya needs to develop a comprehensive strategy to strengthen oil revenue management. To that effect, the LIA’s current format should be significantly revised. In particular, there is a need to stipulate guidelines for the establishment of operating and asset management regulations; and address the governance, transparency, and accountability issues related to the management of the LIA.

35. Staff reiterates that all government investments should be undertaken through the budget. It stresses that the authorities’ intention to use the LIA to expand the public sector could lead to the marginalization of the private sector. Libya needs to focus on developing its physical infrastructure and human capital, improving basic public services, and continuing with trade reforms consistent with its strategy for WTO accession. These actions would generate, over time, substantial productivity gains and cost reduction that would promote private investment and economic diversification, and boost job creation.

36. Staff encourages the authorities to accelerate their efforts to streamline and modernize revenue administration, and ensure that implementation is in line with staff recommendations. It urges the authorities to give priority and devote more resources to this operation.

37. In light of the envisaged fiscal expansion, most of the burden of controlling inflation will fall on the CBL. To that effect, the CBL is urged to tighten monetary policy and consider far-reaching reforms to strengthen the monetary framework. Recommended measures include liberalizing interest rates and keeping them positive in real terms, rehabilitating the interbank market, and developing market-based instruments to absorb excess liquidity.

38. The current exchange rate regime is serving Libya well, and the rate of the Libyan dinar has been broadly appropriate. Regarding the medium term, Libya’s eventual move to greater exchange rate flexibility would need to be gradual, and preceded by a switch to market-based monetary management, and the development of an expertise in foreign exchange markets.

39. The Libyan banking system remains weak and in need of extensive restructuring. While the CBL’s objective to privatize the public commercial banks is commendable, its strategy, centered on the transfer of the public commercial banks to the SEDF, contains significant risks. To ensure the intended outcome of a vibrant and competitive banking sector that can support non-oil growth and job creation, the authorities are urged to reconsider their approach and adopt the strategy recommended by staff, including the establishment of a specialized and independent bank restructuring agency that would take over ownership of the public commercial banks.

40. Staff encourages the CBL to continue its efforts to modernize the payment system, enhance banks’ efficiency, and reduce the cost of financial intermediation. It welcomes the authorities’ intention to restructure the CBL, and supports the CBL’s request for TA in this area.

41. Staff encourages the authorities to continue their efforts to reform the trade regime, including integrating all taxes and fees on imports into the tariff rates. It emphasizes the advantages of anchoring reform through multilateral commitment via WTO accession and a possible association agreement with the EU. This would help reduce policy uncertainty and bolster investor confidence. In this context, staff advises that the authorities’ decision to restrict FDI in the non-oil sector to joint ventures with a minimum Libyan participation of 35 percent could be counterproductive and deter foreign investors. Other key actions that are needed to enhance private sector development include a comprehensive land reform, increased labor market flexibility, and implementation of international accounting standards.

42. Libya’s efforts to improve its statistical system should continue with reforms at the institutional level. Staff reiterates that the establishment of a National Statistical Council to improve coordination among data producers, and the creation of a National Statistical Agency with the authority to produce and disseminate official statistics, are key actions in this regard.

43. Since 2004, the Fund has provided Libya with a large amount of TA, but in a number of areas—bank restructuring and oil revenue management—implementation deviated from staff’s recommendations. Staff is of the view that unless there is tangible progress on implementation of staff recommendations, future Fund TA provision should be limited to areas not covered by previous TA and essential in preserving macroeconomic stability, or where staff advice has been followed.

44. It is proposed that the next Article IV consultation takes place on the standard 12-month cycle.

Table 7.Libya: Illustrative Medium-Term Scenario, 2002–2011
Est.Projections
2002200320042005200620072008200920102011
(Assumptions)
Crude oil production (in millions of barrels/day)1.301.531.621.691.751.892.132.362.602.88
Hydrocarbon exports (in billions of US$)9.614.219.530.438.339.146.952.057.163.0
Libyan crude oil export price (US$ per barrel)24.428.236.951.962.559.162.962.762.562.0
(In percent of GDP; unless otherwise indicated)
Official exchange rate (LD/US$, eop)1.211.301.241.351.281.291.291.281.281.27
Official exchange rate (LD/US$, p.a.)1.271.281.301.311.311.291.291.281.281.27
CPI (percent change; average)−9.9−2.1−2.22.03.416.26.95.03.83.7
GDP deflator (percent change)41.216.324.031.215.67.28.52.82.11.9
Real GDP growth rate (in percent) 1/1.45.95.06.35.67.98.16.96.46.8
Real nonhydrocarbon GDP (in percent) 1/4.72.24.15.56.18.06.65.55.15.3
Total revenue, of which:51.053.958.568.671.266.566.766.566.566.5
Hydrocarbon revenue40.347.150.663.765.958.158.658.458.458.5
Total expenditure39.943.443.334.932.341.939.139.840.041.6
Current26.734.325.615.114.716.715.014.513.012.9
Capital13.29.27.415.416.824.424.125.327.028.7
Overall budget balance6.214.817.426.538.624.627.626.726.524.9
Non-hydrocarbon balance (deficit -)−34.1−32.3−33.3−37.2−27.3−33.5−31.0−31.7−31.9−33.6
(In millions of U.S. dollars; unless otherwise indicated)
Exports, f.o.b., of which:9,80314,64720,41030,94838,83139,78147,63552,84558,03063,965
Non-oil exports184489877500579663752848950988
Imports7,4087,2008,76810,87512,92520,69825,14028,37632,20236,687
Current account balance6525,1587,41017,32524,41915,57418,43320,36621,71223,052
(In percent of GDP)3.321.524.341.648.525.625.725.624.924.1
Official reserves14,25919,49325,62339,33159,21275,56695,118117,181141,328167,755
(In months of next year’s imports of goods and services)19.421.923.330.228.530.033.536.438.640.3
Sources: Libyan authorities; and Fund staff estimates and projections.

See IMF Country Report Nos. 06/136 and 05/83.

In terms of GDP, bank credit to the private sector (15 percent) remains well below the level in Kuwait (59 percent), Tunisia (65 percent), Morocco (66 percent), and the UAE (70 percent).

Staff’s estimate is based on: (i) a labor content of the non-oil GDP of 80 percent; and (ii) increases in the economy’s average wage and import prices of 60 percent and 4 percent, respectively.

Under this scenario: (i) the hydrocarbon sector is projected to grow 10 percent per year on average; (ii) growth of the non-oil economy is projected at 6 percent per year on average, mainly driven by fiscal stimulus; (iii) inflation would recede progressively after 2007 to stabilize around 4 percent by end-201 1; and (iv) Libya will continue to accumulate large fiscal and external surpluses averaging 26 percent and 25 percent of GDP, respectively.

Available data indicate that, in Libya, capital expenditure represents a larger share of GDP than in comparator countries, with a lower impact on economic growth, which may reflect low efficiency in government spending partly resulting from the economy’s limited absorptive capacity.

This non-oil fiscal deficit remains sustainable in the long run, even if oil prices fall US$25 below WEO prices.

Other things being equal, it will take a decline in the oil price of US$30 below WEO prices for the fiscal surplus to be fully absorbed; for the external current account, the required drop is US$25.

Including the Oil Reserve Fund (ORF), the Long-Term Investment Portfolio, the Libya Africa Investment Fund (LAIF), the SEDF, the Libya Financial Investment Company, and the Oil Investment Company.

In 2006, the LAIF and SEDF received about US$11 billion from the ORF.

The quasi-fiscal deficit in the energy sector was estimated at about 15 percent of GDP in 2005.

See IMF Country Report No. 06/137.

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