After the lifting in 2003–04 of international sanctions, which had lasted more than 10 years, Libya decided to undertake structural reforms and accelerate its transition to a market economy. While the authorities have recently made progress in liberalizing the economy, it remains largely state-controlled and nondiversified. Three-fourths of employment is still in the public sector, private investment is minuscule (2 percent of GDP), and the oil sector is dominant.
Libya’s macroeconomic performance in 2005 was relatively strong, according to the IMF’s annual economic review. Growth was about 3½ percent, inflation was low, the fiscal and external current accounts registered large surpluses, and international reserves increased. Unlike in previous years, the non-oil economy was the primary driver of growth, mainly as a result of increased government spending. Activity grew 7 percent in trade, hotels, and transportation, and 5 percent in construction and services.
|(annual percent change, unless otherwise noted)|
|Real nonhydrocarbon GDP||4.7||2.2||4.1||4.6|
|Overall fiscal balance (percent of GDP)||5.2||14.2||17.5||32.6|
|Gross international reserves (billion dollars)||15.0||19.5||25.6||39.3|
In 2005, the authorities continued to reform and open up the economy. In particular, they streamlined the tariff schedule; partially liberalized interest rates; and passed laws to reinforce the central bank’s independence, allow foreign banks to operate in Libya, and fight money laundering. They also broadened the privatization program and the scope for foreign investments to include downstream activities in the oil, health care, transportation, and insurance sectors; and launched the privatization of a major public bank.
The IMF Executive Board welcomed Libya’s strong macroeconomic performance. It commended recent structural reforms and stressed the importance of accelerating the transition to a market economy. Noting the lack of a comprehensive medium-term plan, the Directors urged the authorities to take advantage of Libya’s comfortable financial situation to pursue their reform agenda, using as a blueprint the medium-term strategy prepared by IMF staff at the authorities’ request. They stressed that successful implementation of reforms would depend on careful prioritization and sequencing and effective coordination among government institutions. The Directors underscored that economic diversification would require a sustained effort, including, in particular, enhancements to the government’s privatization strategy and improved conditions for foreign investment.