A. Introduction

1. Libya’s decision to open up and liberalize its economy will have a significant impact on the tax and customs departments. In particular, the recent decision of the General People’s Congress (GPC) to reduce the government’s budget reliance on oil resources will require major efforts to reshape and strengthen revenue administration.²

2. The current activities of the tax and customs departments are characterized by a wide network of regional and local operations, with most activity concentrated in the major urban centers. However, revenue collections are weak and among the lowest in the Middle East, reflecting major shortcomings in tax administration (Box 1).

B. Reform Priorities for Tax Administration

3. The tax department needs to undergo an extensive modernization program. The sequencing of reforms must be carefully determined and take into account the tax department’s capacity constraints, the ability of staff and public to adjust to the reforms, and the need to ensure the effective management of current operations. A successful start in the implementation of reform is likely to facilitate implementation of later stages of the reform program and may impact revenue mobilization. The main steps in the proposed reform process are as follows:

•Establish a steering committee to oversee the reforms.

•Implement key tax policy reforms to establish a strong policy foundation on which to modernize tax administration.

•Restructure the tax department: On a phased basis, beginning with headquarters, implement a function-based organizational structure. Restructuring at regional level will require moving from a tax-type structure (where each type of tax is administered by a separate division performing all administrative functions) to separate divisions for each major function (e.g., audit, taxpayer services, and so on).

•Establish a large taxpayer office (LTO) in Tripoli to secure tax revenues and provide appropriate services to the large taxpayers. The LTO could also be used as a vehicle for introducing modern tax administration practices and systems. The LTO will need to be extended to cover other regions at a later stage.

•Introduce self-assessment procedures and systems covering all key functional areas, including identification and registration of taxpayers; processing of returns and payments; collection enforcement; taxpayer services; taxpayer audits; and internal support systems. These new procedures and systems should be applied first to the largest taxpayers, and extended progressively to other categories of taxpayers.

•Strengthen human resource development and training: Recruit, develop, and train staff in headquarters and regions.

•Upgrade tax office buildings and equipment.

•Develop necessary legislation: This includes enacting legislation to support introduction of self-assessment procedures. In the longer-term, consideration should be given to introducing a tax procedures code to consolidate key administrative provisions for all taxes.

C. Reform Priorities for Customs Administration

4. The customs department (CD) is in need of a deep reform of its procedures and systems. The latter are necessary if the CD is to comply with the requirements of the new, market-based economy that the authorities are trying to build. Implementation of these reforms will require new working methods, new skills, substantial training, and external technical assistance. The main steps in the proposed reform process are as follows:

•Establish a high-level reform steering committee to monitor and manage the reform program. The committee should include representatives from tax and other stakeholder departments.

•Develop a plan to communicate the vision of a modernized customs department to internal and external stakeholders.

Implement key customs policy and legislation reforms: implement IMF recommendations on tax policy; and amend the new customs law and introduce provisions that will enable new customs procedures, for example acceptance of electronic declarations and advance manifests.

•Introduce risk-based controls: replace the current heavy and inefficient clearance system based on full documentary and physical examination of consignments with a more selective approach that targets customs resources to the areas of highest risk.

•Introduce automation to customs import processing: Consider implementing internationally-used customs-processing IT application that could be adapted to meet the specific needs of the customs administration. In particular, replace the current systems by an integrated system that will process declarations and provide the operational and management information support necessary for a modern customs service.

•Change procedures to meet WTO obligations: Reform the current customs valuation procedures, and adopt WTO requirements and recommended policies in this area. In particular, establish a post clearance audit unit whose purpose will be to review selected transactions, undertake audits, and issue reassessments where undervaluation is detected.

• Strengthen human resource (HR) development and training.

• Improve office buildings and equipment.

• Develop management information systems and performance measures.

A. Background

1. Libya’s budget is highly dependent on oil, which is estimated to have contributed about 80 percent to government revenue in 2000–05. Given the volatility and unpredictability of oil prices and their impact on fiscal cash flows, there is a strong macroeconomic case for Libya to save part of this wealth both to achieve long-term fiscal sustainability and for intergenerational equity. This could be done through the establishment of a stabilization and saving fund (SSF), the proper design and implementation of which are crucial if the above objectives are to be achieved. The purpose of this appendix is to discuss the situation of the Oil Reserve Fund (ORF) in Libya, and provide some suggestions for the design of an SSF.¹

B. Libya’s Experience with the ORF

2. The ORF was established in 1995 with the objectives of (a) mitigating the impact of the short-term volatility of oil prices on government expenditure, and (b) shielding the budget from political pressure to spend when oil revenue is high. However, to this day, the ORF’s status remains unclear as no legislation has been enacted stating the ORF’s purpose, its operating principles, the agency that controls it, and the ORF’s relations with the budget. In practice, the ORF is not integrated in the budget, and its operations are governed by an accumulation rule—the ORF is the recipient of all oil revenues above a reference oil price set in the budget law—and the government has full discretion regarding the ORF’s spending decisions. In 2005, the authorities decided to eliminate all extrabudgetary spending from the ORF.

3. Libya’s experience with the ORF does not seem to have been consistent with the two main objectives assigned to it. Indeed, available information indicates that the non-integration of the ORF in the budget and the absence of an oversight authority have complicated fiscal management, led to an inefficient allocation of resources, and contributed to increased lack of transparency in government operations. Overall, the ORF has not constrained the government’s fiscal policy in any way: it has not helped stabilize government expenditure, nor has it performed any long-term savings function.

4. Available data summarized in Table 1 indicate that prior to the establishment of the ORF in 1995 and during the first two years of its existence, Libya pursued a rather prudent fiscal policy. In 1992–94, responding to a sharp drop in oil revenues (by some 12 percentage points of GDP), the authorities reduced the non-oil fiscal deficit by more than 3 percentage points of GDP and managed to contain the overall fiscal deficit at about 3 percent of GDP. In 1995–96, although oil revenues more than doubled in terms of GDP to about 27 percent of GDP, the non-oil deficit increased only by about 2 percentage points of GDP. However, starting in 1997–98, there was a break in the government’s fiscal discipline, which resulted in increased recourse to the ORF to finance discretionary extrabudgetary spending; the latter averaged some 6 percent of GDP in 1999–02, but increased to about 10 percent of GDP in 2003–05. These developments have weakened the ORF’s intended stabilization purpose and its long-term savings objective. They have also raised serious transparency issues, since large amounts of the ORF’s resources have been spent in off-budget operations, on most of which no information is available.

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Libya: Oil Revenues and Government Expenditure, 1990–2005

(In percent of GDP)

Citation: IMF Staff Country Reports 2006, 137; 10.5089/9781451823080.002.A001

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Libya: Oil Revenues and Government Expenditure, 1990–2005

(In percent of GDP)

Citation: IMF Staff Country Reports 2006, 137; 10.5089/9781451823080.002.A001

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Libya: Oil Revenues and Government Expenditure, 1990–2005

(In percent of GDP)

Citation: IMF Staff Country Reports 2006, 137; 10.5089/9781451823080.002.A001

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5. The situation did not improve much in 2005. Indeed, while the government increased the oil reference price to US$26 (from US$22 in 2003-04) and decided to refrain from extrabudgetary spending, it allocated off-budget LD 3 billion of ORF resources to specialized banks, mainly to finance an ambitious housing program and provide subsidized loans to private farmers and entrepreneurs.² Also, the government established a new extrabudgetary fund, the Investment Fund (IF), further complicating fiscal policy, already exacerbated by the existence of three different budgets (current budget, development budget, subsidy budget) managed by three different ministries (the ministries of finance, planning, and economy), and a multitude of off-budget operations.³

C. Why an SSF for Libya

6. There are many factors that would justify the establishment of an SSF in Libya. These factors include: (i) the high dependence of the budget on—and hence its vulnerability to—volatile oil revenues, which makes a stabilization fund highly desirable; and (ii) the limited absorptive capacity of the Libyan economy, the willingness of the authorities to reduce progressively the public sector’s share in the economy, the need to shield the economy against Dutch disease, and prudence and intergenerational equity, all of which indicate the need for a saving function.

7. The two main objectives of an SSF are: (i) to reduce the impact of volatile revenue on public finances and the economy; and (ii) to save part of the oil revenue for future generations. During upswings in oil prices, the existence of the SSF could help the government resist spending pressures by formally limiting the resources available to the budget, thus dampening inflationary pressures and containing the potential appreciation of the exchange rate. During oil price downturns, the recourse to SSF resources would help maintain expenditure stability. These objectives would enable the government to implement strong macroeconomic policies, and thereby achieve strong non-inflationary sustainable economic growth.

8. It has to be stressed, however, that the establishment of an SSF as such cannot substitute for the commitment of the government to pursuing a sound fiscal policy. In the case of Libya, an oil producing country, this means a sensible medium-term budget framework (MTBF) that focuses on the non-oil fiscal deficit. Without it, fiscal policy will fail with or without an SSF. Such a framework could help the government design multi-year expenditure plans based on stable expenditure policies, and focus on the requirements of long-term fiscal sustainability, which in turn could foster increased political support in favor of saving part of the oil revenue. More concretely, under this scheme, the government will first target a non-oil fiscal deficit, and then derive the level of the budget oil revenue—that is the amount of oil revenues to be earmarked to the budget—that would balance the budget.

D. The Establishment of the SSF

9. The SSF should be established by a comprehensive law that covers all the issues relevant to the success of the new fund.⁴ The law should:

•Include a clear definition of the purpose and objectives of the SSF, in order to facilitate performance evaluation and swift intervention if corrective action is needed, and its location.

•State the nature and source of the SSF’s resources, and the rules governing the accumulation and use of these resources. In particular, reference in the law to (i) a contingent budget rule for accumulation in the SSF can mitigate pressure on the government to spend and facilitate the political acceptance of safeguarding part of the country’s oil wealth for future generations; and (ii) a budget rule for withdrawal from the SSF would clarify the relations with the budget, including the instances when withdrawal from the SSF for budget financing purposes is allowed.⁵

•Address the issues related to the integration of the SSF in the fiscal framework, including the need to integrate the SSF in the budget process in a coherent manner that would preserve the unity of the budget and keep control of fiscal policy under the responsibility of the ministry of finance (MoF). In particular, all transfers to and from the fund should appear as explicit line items in the budget.

•Stipulate guidelines for the establishment of operating and asset management regulations for the SSF.

•Address the governance, transparency, and accountability issues related to the management of the SSF. The roles and responsibilities for managing the fund, the requirements for reporting, auditing (both internal and external), and evaluating performance (both management and financial), and the sanctions if rules and procedures are not followed should also be stated in the law.

E. Operating and Asset Management Regulations of the SSF

10. The operating and asset management regulations of the SSF should aim to preserve the fund from risky investments, or from being subject to poor governance, while ensuring full transparency in its operations. In this context:

•There is a strong case for the SSF’s resources to be invested abroad. Such an option could be justified by the need to sterilize these resources and hence avoid the destabilizing effect of their investment in domestic financial assets, through transmission of oil revenue volatility to the economy. Also, the noninvestment of the SSF’s assets domestically would be consistent with the government’s divestiture strategy and its strong willingness to enhance the role of the private sector in the economy, and the need to preserve the competitiveness of the non-oil economy.

•The SSF’s investment policies should be prudent. The SSF should not be permitted to borrow or to lend, and its assets should not be used as collateral for government borrowing.

•The SSF’s budget should be prepared annually and integrated together with the regular budget ⁶ in a consolidated budget that would be submitted to parliament for approval. The MoF could be charged with the responsibility of preparing the SSF’s budget, and ensuring its consistency with the regular budget and the overall macroeconomic objectives.

•The operating regulations of the SSF should provide for a mechanism that would allow withdrawals from the SSF to bridge the budgetary gaps that would result from budget oil revenues falling below target.

•Full transparency in SSF operations would require regular and frequent disclosure and reporting, as well as regular audits, preferably by independent agencies of international repute, with reports presented to parliament and the public on a timely basis.

11. Implementation of the proposed reform could require twelve to eighteen months and be completed by the time of the preparation of the 2008 budget, hence giving the government the opportunity to prepare and submit to Parliament a consolidated 2008 budget, including the regular budget and the SSF’s budget.

A. Background

1. The Libyan banking sector remains predominantly in the hands of the public sector, which represents 90 percent of Libya’s banking business. The government, through the Central Bank of Libya (CBL), fully owns three banks—the National Commercial Bank, Umma Bank, and Jamhouria Bank—and has a majority share in the capital of Wahda Bank (87 percent) and Sahara Bank (82.7 percent, before the start of the privatization). The private sector owns four banks and 48 small regional banks.

2. The banking sector is characterized by substantial excess liquidity and a high ratio of nonperforming loans (NPL), reflecting a limited financial deepening and an inefficient allocation of resources, resulting from a monetary policy dominated until recently by directed credit and interest rate controls.¹ Also, it suffers also from the unfavorable business climate, which constrains private sector development, and the lack of expertise and modern banking skills.

B. Fund Staff’s Recommended Approach²

3. Restructuring Libya’s banking system is urgently needed and will require a comprehensive and properly sequenced program of reforms, and enhanced expertise. These reforms include the development of institutions, markets, and instruments; the building-up of an effective banking supervision capability; and changes to the legal and regulatory framework.

4. The transfer of direct ownership of the state-owned commercial banks to a Bank Restructuring Agency (BRA) is key to the success of the proposed approach. The BRA’s mission will be to serve as the owner of the public commercial banks during an interim period of a minimum of two years, but not to exceed five years. It will have the responsibility to appoint the boards and key managers of the banks, and issue general instructions. The BRA should have a clear written mandate and a board composed mainly of independent persons. In particular, its chairman should be a widely respected figure from the private sector or academia. The BRA should also be financially independent, with a budget that could be funded through a levy on the banks it manages. It should be given authority to hire the required expertise, both domestically and internationally, from consulting, accounting, and law firms, and investment banks.

5. Enforcement of adequate safeguards will be necessary during the interim period. The BRA should ensure that the substantial liquidity held by the commercial banks is carefully safeguarded before a decision is made about the future of each bank.

6. During the interim period, the concerned banks will need to undergo a process of operational restructuring that could start just after the establishment of the BRA, in parallel with the safeguards mentioned above. This process should include the introduction of modern techniques for interbank transfers and risk management and control, as well as merging or closing unprofitable branches and starting to consolidate redundant staff.

7. A proper due diligence will need to be undertaken, including at least two components: an audit of the financial statements based on internationally understood valuation norms; and an operational review to assess procedures and systems, including information technology. A preliminary assessment indicates that all public commercial banks have substantial bad assets in addition to their low operational efficiency. The CBL should initiate a due diligence process of all public commercial banks. Once the banks are transferred to the BRA, this agency should continue monitoring the due diligence.

•International best practices require a due diligence for public banks as a first step because, depending on the findings, there could be several possible resolution approaches, privatization being only one of them.

•Since external audits are now required by the new Banking Law, it is suggested that they be carried out for each bank’s last fiscal year; be performed jointly by two accounting firms, a local one and an international one; and be based on International Financial Reporting Standards (IFRS). This should apply also to Sahara Bank, regardless of the results of the privatization currently underway.

•The second component of the due diligence process—the operational review—should start at the same time as the audit, and be performed by relevant international firms.

8. The selection of a resolution strategy for each bank should follow the completion of the due diligence, and be made by the BRA, in coordination with the board and the management of the concerned bank. In doing so, the BRA could request the assistance of relevant specialized international firms. It is unlikely that the same solution will fit all banks. For each bank, all options should be considered, including operational and financial restructuring followed by a privatization, with or without the participation of foreign investors; merger; a split between good assets and bad assets; and even voluntary liquidation, after repayment of all liabilities. Any privatization strategy should also include which banks to privatize, when, and in what order. Once adopted, the strategy should be made public.

9. Banks’ financial restructuring, including management of bad assets, will aim to improve their financial structure to make them financially viable: solvent, profitable and liquid. For a weak public bank, this often includes removing bad loans and replacing them with good assets to allow the bank to focus on its normal business. In some cases, it might be appropriate to go further and split the bank into two parts, a good one and a bad one. Another BRA responsibility will be to take over and manage any bad assets removed from the banks as part of their financial restructuring, and to maximize their value.

10. The transfer of responsibility for each bank to its new owners and managers will be the last step. At this stage, the BRA’s responsibility for each bank can end. While the general objective is to complete the restructuring process expeditiously, the absorptive capacity of the potential investors and the level of interest of the targeted buyers, domestic or foreign, should also be taken into account to determine the timetable for the completion of this operation.

C. Additional Reform Measures

11. Reform the corporate and commercial laws. It is necessary to identify the reforms needed to improve the legal framework for the corporate sector and the financial markets. In particular, the government should repeal the legal provision that limits private ownership to 4 percent of capital for banks (and 5 percent for companies), which prevents the emergence of a leading shareholder. Also, the government should introduce a law that makes the share registry of larger private companies, including banks, publicly available, and treats local and international investors equally.

12. Develop a plan to open the banking sector to foreign banks. International banks will introduce advanced systems and techniques, and increase competition. The demonstration effect will be considerable domestically, and the signaling effect--that Libya is now open for business with the rest of the world--will be particularly strong.

13. Accelerate capacity-building in banking supervision, which is urgent, and will require substantial technical assistance. Also, the supervision of the specialized banks³ by the CBL should start immediately, as required by the new law, and the consolidation of the 48 regional banks into a single entity should be completed expeditiously.

14. Improve the environment for banking activities. The most important reforms include:

• Further liberalizing interest rates.

• Adopting the IFRS both for banks and other large corporate entities.

•Establishing a privately-owned Tripoli Stock Exchange (TSE). The TSE should be a separate legal entity, owned and controlled by the participants in the financial market. The privatization of Sahara Bank will provide the opportunity to start trading on a modest scale.

•Accelerating the modernization of the payment system, in order to enhance banks’ performance by expanding and improving service delivery and reducing costs.

A. Background

1. Libya needs a professionally operated statistical system to support its economic reforms, bolster economic policy decisions, and monitor the well-being of its population. At present, the data producing agencies work largely in isolation from one another, and core datasets are weak.

2. National accounts statistics follow the outdated 1968 System of National Accounts (1968 SNA) framework and are under the responsibility of the Ministry of Planning (MoP). Their compilation is hampered by ineffective legal and institutional arrangements, the absence of human resources, and lack of an efficient data collection program. Inadequate interagency coordination and methodological weaknesses are other impediments.

3. Government finance statistics are compiled by the Ministry of Finance (MoF), but overall responsibility for producing these data is not clearly established. At present, there is no comprehensive set of data that consolidate the three government budgets.² Other shortcomings include the misclassification of expenditure items; non-coverage of the social security, social solidarity, and employment funds; and the non-recording of the Oil Reserve Fund (ORF) operations.

4. Monetary statistics are compiled by the Central Bank of Libya (CBL), but their institutional coverage is incomplete. In addition, weaknesses in the valuation and accrual accounting practices in the source data limit the reliability of the data and generate inconsistencies with balance of payments statistics.

5. The CBL has a well-established practice for collecting, processing, and compiling balance of payments statistics, but has no legal authority to do so. There are no discussions or cross-checks on balance of payments data with other institutions. Therefore, inconsistencies in methodological, recording, and valuation practices are not addressed by data producers, and formal regulations about the confidentiality of data are absent.

B. Adopt an Overall Vision for Statistical Development

6. The authorities’ expressed commitment to strengthen the statistical system is a basic condition for compiling official statistics in line with international standards. To that effect, a National Statistical Council should be created to discuss and approve the national statistical program and to monitor progress in building a high quality statistical system within the framework of the IMF General Data Dissemination System (GDDS). The data producing agencies must work together to ensure that data are consistent across datasets.

7. The GDDS, which is used in over 80 countries, offers a comprehensive approach and a vision to build official statistics. GDDS spells out international best practices in statistics and allows participants to set progress, in achieving these objectives, according to their own pace and through self-defined strategies. GDDS participation will serve Libya well.³

C. Create a Coordination Mechanism Among Data Producing Agencies

8. The data producing agencies must work together to ensure that data are consistent across datasets. A National Statistical Council should be created to discuss and approve the national statistical program, and to monitor progress in building a high quality statistical system within the framework of the GDDS.

D. Strengthen Real Sector Statistics

9. Real sector statistics are needed to monitor and analyze economic growth, business activity, inflation, labor market developments, household income and wealth, and other social developments. These statistics are closely related to other macroeconomic datasets and are derived from censuses, household and economic surveys, and administrative data sources.

10. The compilation of more accurate and reliable national accounts statistics should be given a high priority, and appropriate resources must be allocated. Compilation and dissemination of national accounts statistics should be combined into one organizational unit with other real sector statistics. This would allow integration with other data sources and the realization of efficiency gains. In the present circumstances, the Census and Statistical Department of the National Information, Documentation, and Telecommunication Authority (NIDA) appears to be the obvious choice for becoming the central unit for real sector statistics.⁴

E. Establish Government Finance Statistics

11. Government finance statistics are needed to determine the fiscal stance in a transparent way, to inform fiscal policy decision, and assess fiscal sustainability and vulnerability. The establishment of government finance statistics should be reinforced and the overall responsibility for fiscal statistics centralized in the MoF. The authorities should adopt the Government Finance Statistics Manual (GFSM 2001), which harmonizes the system used to report fiscal statistics with other macroeconomic statistical systems and most notably with the 1993 System of National Accounts (1993 SNA).

F. Develop External Sector Statistics

12. While the Libyan statistical legislation does not assign any responsibility to the CBL for the collection, compilation and dissemination of balance of payments statistics, the CBL has a well-established practice through the activities of the Research and Statistics Department (RSD). A Balance of Payments Division within the RSD and additional staff for this division would permit a formal designation of responsibilities and a clear separation of tasks for the compilation of a comprehensive set of external sector statistics in line with the Balance of Payments Manual, fifth edition (BPM5).

G. Strengthen Monetary Statistics

13. The format of monetary statistics compiled by the CBL’s RSD is broadly consistent with the structure of the Monetary and Financial Statistics (MFSM)’s Depository Corporations Survey. However, there is a need to broaden the institutional coverage and improve the valuation and accounting practices in the source data, in order to ensure greater consistency between monetary and balance of payments statistics.

H. Recommendations

14. Short Term

•Create a National Statistical Council to strengthen collaboration among agencies and to support the (future) national statistical agency.

•Amend the Banking law in order to set out provisions for mandatory reporting of data for BOP statistics.

•Move responsibility for national accounts statistics to the Census and Statistical Department. Start the process of strengthening national accounts statistics by creating 6-10 additional permanent staff positions.

•Establish a government finance statistics unit with 4-6 staff at the MoF, responsible for compiling a comprehensive set of fiscal data consistent with the GFSM 2001 framework.

•Create a balance of payments division in the Central Bank of Libya and appoint sufficient staff for this division.

15. Medium Term

•Establish a National Statistical Agency with authority to produce and disseminate official statistics and to coordinate the national statistical program.