Abstract
The Libyan economy remains saddled with extensive controls, restrictions, and subsidies that continue to distort prices and resource allocations, hinder efficiency and competitiveness, and impede the performance of the economy. Executive Directors commended the liberalizing of the economy, and stressed the need to improve macroeconomic management, remove trade restrictions, accelerate structural reforms, and tighten monetary and fiscal policies. They supported the authorities' request for technical assistance from the IMF in the areas of statistics, financial programming, development of money markets, and financial instruments, and tax reform.
August 18, 2003
One of the main economic developments since the return of the mission in May 2003 has been the adoption in June of the budget for 2003. Finalization of the budget was delayed by protracted discussions within the government on how to reduce the non-oil fiscal deficit. Following are the key elements of the new budget:
Presentation-wise, the 2003 budget departs from previous budgets in that oil receipts are not presented as revenue (with the exception of a small portion earmarked for government debt service), but rather as financing of the non-oil deficit. In the staffs view, this presentation is welcome, since it focuses attention on the underlying non-oil balance and will help strengthen fiscal management. Indeed, the approach is similar to that proposed by the staff as an option for reforming Libya’s Oil Reserve Fund (ORF) in Chapter IV of the Selected Issues paper. However, the new presentation does not address the concerns raised by the staff regarding the transparency and accountability of the ORF. In the approved budget, current expenditures are limited to projected non-oil revenues, while capital expenditures are financed from oil revenues received by the ORF.
The budget is much less expansionary than staffs projections for 2003, with current expenditure about 3 percentage points of GDP below, and revenue about 5 percentage points of GDP above staffs projections. As a result, the non-oil deficit is projected to decline to 19 percent of GDP in 2003, compared with projections of about 27 percent of GDP in the staff report.
Although the staff has had the opportunity to discuss briefly the approved 2003 budget with the Libyan authorities, these discussions have not been comprehensive. The following are a number of preliminarily observations:
1. In the staffs view, the projected fiscal consolidation is unsustainable. The need to match non-oil revenue with current expenditure has resulted in the mobilization of all possible sources of revenue together with deep cuts in some current expenditure items. In particular, nontax revenue was inflated relative to past budgets by the inclusion of privatization proceeds and a one-off payment of deferred central bank profits for 2000-02.
2. The staff encourages the authorities to closely monitor actual budgetary outcomes, and to stand ready to reassess their overall fiscal stance reflected in the budget, while still achieving their objective of strengthening the fiscal position.
3. The new budget does not adequately address concerns raised by the staff regarding budget transparency. In particular (i) subsidies on essential goods have been reclassified as capital expenditure; (ii) privatization receipts have been classified as revenue; and (iii) extrabudgetary expenditures remain an issue.
4. Given the importance of strengthening fiscal reporting, the staff welcomes the authorities’ recent request for a technical assistance mission from the Fund on Government Finance Statistics; STA consideration is being given to the timing of this assistance.
The above new information does not fundamentally alter the thrust of the staff appraisal.