Libya is an interesting example of a developing country which in a brief space of time ceased to be a poor country, yet has not escaped the difficulties of development.


Libya is an interesting example of a developing country which in a brief space of time ceased to be a poor country, yet has not escaped the difficulties of development.

Ali R. Bengur

LIBYA is, and has been for about 11 years now, an “oil country.” Apart from oil it is a land with little potential wealth. In area it is vast, approximating 680,000 square miles; but only two square miles in every hundred are arable. Only a small part of this arable land is actually used, mainly the areas around the port cities of Tripoli and Benghazi, where rainfall is relatively high. Both fishing and tourism may one day contribute to the economy, but neither contributes much as yet. Most of the population of one and a half million work on the land.

Before the exploration for oil began in 1956, Libya relied heavily on foreign financial support to supplement incomes derived from its otherwise meager resources. It was mainly this support that brought about a considerable rise in national income, characterized by an almost fourfold increase in imports between 1951 and 1957, However, this rise in income was not spread evenly over the economy. Data about the national income are not available for the years before 1958, but income from agriculture, in particular, appears to have changed little, though there was some increase in production as indicated by the rise in exports. In 1958, agriculture’s share of Libya’s gross domestic product (GDP) was estimated at only 25 per cent, the rest consisting largely of income earned in trade, construction, and services. Low agricultural income, seen against the high proportion of persons employed on the land, emphasizes the very uneven distribution of income among the different sectors of the economy.

Dramatic Rise in GDP

But if Libya’s GDP was already rising in the early 1950’s, since 1958 it has risen dramatically. It is estimated that the GDP quadrupled in the period 1958-1965. Agriculture contributed little to the rise in this period; between 1957 and 1960 agricultural production actually declined because of drought.

The great expansion that may be traced back to about 1958 was—not surprisingly—due mainly to the large investments of the foreign-owned oil companies in Libya and to the rapid rise in oil exports beginning in 1961. Thus, both before and after 1958, the expansion of national income was generated from abroad—with the difference that since then it was based upon a potentially rich national resource, oil.

Libya thus offers us something approaching a laboratory sample of a developing country which suddenly has removed from its path what many people consider to be the greatest obstacle to development—poverty. To what extent has it, a recently independent country and thus typical of much of the developing world, been able to use its new wealth for development? That is a question which most economists would ask. A sudden large influx of foreign exchange receipts, of course, brings with it a danger of inflation, which the government of any developing country might find it very difficult to avoid. Libya’s experience in dealing with new-found wealth and its dangers may throw some light both on economic development and monetary control. To see whether in fact it does so, we must take a closer look at the rapidly changing scene.

Foreign Exchange Receipts

The sources of Libya’s foreign exchange receipts before 1960 were diverse; in addition to exports (mainly agricultural), they included direct cash payments made by foreign governments, expenditures of foreign military personnel based in Libya, and aid for economic and technical assistance projects. The way in which these receipts have declined both absolutely and in relative terms, while exchange receipts from oil operations have increased sharply, is shown in the opposite table.

It will be seen that the amount of receipts from foreign governments levelled off between 1957 and 1960, then dropped; as a proportion of total foreign exchange receipts, they dropped from nearly 70 per cent in 1957 to 8 per cent in 1965. Nor was the drop relative only; it was absolute: in 1965 government receipts were about half what they were in 1957. It was a decrease across the board. Cash payments made by both the U.S. and U.K. Governments, as part of the arrangements for the use of military bases in Libya, were reduced. In addition, expenditure by foreign military personnel based in Libya gradually fell, as the number of these people and their dependents was reduced. The amount of aid for economic and technical assistance projects also declined sharply because certain aid programs were terminated recently.

By contrast, net exchange receipts from oil operations increased rapidly, rising from 12 per cent of total exchange receipts in 1957 to 84 per cent in 1965. The picture between 1957 and 1961 was, however, different from that provided by the past four years.

First Phase of Oil Receipts: Exploration

In the first phase, Libya’s oil receipts consisted largely of local expenditures (or at least of the foreign exchange equivalent) by the oil companies on exploring and preparing to operate the wells, rather than of payment to the Government of fees and dues. This came later. The rise in foreign exchange receipts owing to local expenditure up to 1961 was mainly caused by the accelerated pace of exploration and the laying of pipelines from the oilfields to the Mediterranean coast. One of the main reasons for the rapid pace of oil exploration was that the oil companies were required under the concession terms to cede to the Government, at intervals, specified proportions of areas assigned to them, starting five years from the date of the granting of the concession. This kept the companies on the move—and still does. Some concession areas have already been surrendered to the Government in this way and new concessions were granted in 1966. At the end of 1965 there were some 25 oil companies operating in Libya, with a total of 95 concessions. In all, 1,706 wells had been drilled, of which almost one half were classified as producing wells.

Second Phase: Exploitation

With the beginning of oil exports in September 1961, the second phase opened. To the exchange receipts from oil operations there were added the royalties and income tax paid by the oil companies to the Government. The amount of foreign exchange sold for Libyan pounds by the oil companies for the purpose of making such payments, as well as for financing their own local expenditures, rose from the equivalent of £L 21 million in 1960 to £L 131 million in 1965. The royalty is computed at 12½ per cent of the value of oil exported, based on the price of oil at the seaport. Profits from oil operations are shared equally between the Government and the concessionary companies. The amount of the tax payable to the Government previously was determined after deducting from the Government’s share of the profits the amount of royalties and various fees and dues paid by the companies.

However, late in 1965 the Petroleum Law was amended in accordance with the agreement worked out between the major oil companies and the Organization of Petroleum Exporting Countries (OPEC). The amendment provided for the treatment of royalty payments as an expense to be borne by the companies and not as an advance payment against the Government’s share in profit. Furthermore, the computation of profits was to be based on posted prices and not on realized prices. By early 1966 all companies had accepted the amended law and consequently the Government’s oil income was increased substantially.

During the past five years Libya has emerged as a leading oil producing country. Crude oil exports have risen from 5 million barrels in 1961 to 443 million barrels in 1965; in that year Libya ranked fifth among the oil producing countries in the Middle East and North Africa and attained the largest expansion in output, 41 per cent. With major fresh discoveries still being made exports will continue to rise although probably at a slower rate.

Of the other sources of exchange receipts mentioned in Table 1, only export receipts declined sharply after 1957. The decline up to 1960 was caused mainly by the fall in agricultural production resulting from the drought, and thereafter by the fact that goods that might once have been exported were now consumed locally. Miscellaneous receipts rose sharply between 1957 and 1965 because of increased expenditures by foreign tourists in Libya and growing income from Libya’s foreign investments.



(In millions of Libyan pounds)

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Source: International Monetary Fund, Balance of Payments Year book.


On a net basis including capital movements.

Including private transfer payments.

The Balance of Payments

As a result of these rising receipts of foreign exchange, Libya has had balance of payments surpluses—that is, has gained foreign exchange reserves—almost without interruption in every year since gaining its independence in 1951. Payments for imports and invisibles (e.g., transportation and travel), though rising sharply, have lagged behind the increase in foreign exchange receipts (see Table 2).


LIBYA: BALANCE OF PAYMENTS, 1957, 1960, 1963, 1964, 1965

(In millions of Libyan pounds)

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Source: International Monetary Fund, Balance of Payments Yearbook.


Excluding the oil sector.

As Table 2 indicates, imports of the domestic economy (i.e., excluding the imports of the oil sector) nearly quadrupled in the period 1957-1965, a rate about the same as the increase in GDP. Furthermore, along with the rise in imports, their composition also changed after 1957. Imports of food items as a proportion of total imports fell sharply between 1957 and 1962, while imports of manufactures increased.

Payments for invisibles, largely consisting of transportation, foreign travel, and government payments, rose from £L 7 million in 1957 to an estimated £L 40 million in 1965. The government payments include, in addition to consular expenditures, some imports under foreign aid projects. The total doubled between 1957 and 1963 and accounted for nearly one half of all current payments in 1963 other than for imports. The highest relative increase, however, was in expenditures for foreign travel, which rose from £L 1.7 million in 1957 to £L 7.5 in 1965.

Capital movements of the non-oil sectors have not been a significant factor in Libya’s balance of payments. Although there has been some outflow on account of emigrating Italians, a small net inflow has been recorded in recent years.

Reflecting the large and increasing balance of payments surplus the foreign exchange assets of the Bank of Libya rose from $53 million at the end of 1958 to $256 million at the end of 1965 and stood at $384 million at the end of September 1966, including $68 million in gold and the remainder in foreign exchange, mainly in sterling. Libya is of course a member of the International Monetary Fund and, like all members, is entitled to draw 25 per cent of its quota (the “gold tranche”) virtually automatically; in this way it adds $4.8 million to its reserves. The total of the Bank of Libya’s foreign exchange assets, including the Fund gold tranche position in December 1965, was almost equal to the value of its imports in 1965. Libya has virtually no external liabilities.

Domestic Finances

Between 1957 and 1964, the total holdings of money, savings, and time deposits by the public in Libya increased by 214 per cent; in 1965 the amount of liquidity increased by about half. Government deposits with the banks also rose in this period. On the other side of the banks’ balance sheets, the largest increase in assets was in their foreign exchange holdings. The banks also increased credit to the private sector—individuals and businesses—in this period, but less sharply. (See Table 3.)



(In millions of Libyan pounds)

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Source: International Monetary Fund, International Financial Statistics.


Government deposits with the banks increased in all years except in 1961 and 1962. The increase in government deposits between 1957 and 1960 was due to sustained budget surpluses derived from expanding public revenues. Customs receipts, in particular, rose in this period as imports expanded.

The rapid income expansion has led to a steep rise in wages and the cost of living; in 1960 and 1961 the minimum wage of government workers rose by 70 per cent. The cost of living index in Tripoli has not risen as sharply as elsewhere in Libya, but until 1964 this index did not give a very accurate idea of the expenditures of a working family. A revised index that is now being published shows an increase of 7 per cent in the cost of living during each of 1964 and 1965. As a result of the wage rise, there has been a steady movement of labor from the farms to the towns. Although farm production does not seem as yet to have been set back by this movement, the strain is showing nonetheless; in the towns, housing is very short, and the community services are overworked. Land speculation has also risen.

During the years 1961-62 the Government received its first royalties from oil exports but, as it adjusted the salaries of public servants to the rising cost of living and generally added to its services, expenditures rose faster than revenues even with this important addition. The result was budget deficits, which were financed by drawing down the Government’s deposits with the banking system.

In 1962 the Government began to receive taxes in addition to royalties from oil operations. This was a turning point, and since 1963 revenue has outrun expenditure, so that budget surpluses have accumulated. However, in 1965 revenues and expenditures were almost in balance as expenditures, particularly for development, had risen sharply. A five-year economic development plan, expected to cost almost £L 170 million, was put into operation in April 1963. But the actual rate of spending was much below the estimate because of administrative problems and lack of skilled manpower. However, since 1964 development expenditures have risen sharply, more than doubling during each of the past two fiscal years. Construction projects of one sort or another account for more than two thirds of total expenditures on development. Libya’s second development plan is currently being prepared with the view of further accelerating the development effort. To finance the plan the Government uses 70 per cent of its share of the oil profits; the other 30 per cent is allocated to financing the Government’s ordinary expenditures.

Bank credit to the private sector expanded continuously, but not evenly, in the period 1957-64. The rate of expansion slowed down during 1961 and 1962 but accelerated again in the following two years. The credit granted has been used mainly to finance imports and domestic trade, but recently more of it has gone into construction activity.

Previously, the commercial banks were either totally or partially foreign owned, with the exception of the Bank of Libya (formerly the National Bank of Libya). But in the recent past the policy of Libyanization of the banking sector has met with considerable success as some commercial banks, previously foreign-owned, acquired Libyan majority participation. Up to 1960, some foreign banks brought in funds from their head offices to help toward financing their operations in Libya, but this practice was discouraged by the Bank of Libya in 1960; since then the commercial banks have relied almost exclusively on their own resources for meeting the public’s credit needs, drawing very little either on their own head offices or on the facilities of the central bank.

The Bank of Libya did not exercise much control over the credit activities of the commercial banks before 1963, largely because its legal authority was inadequate. In 1963, however, a new banking law was enacted, greatly strengthening the powers of the Bank of Libya over the commercial banks’ operations, and providing for an internal reorganization of the Bank, placing more emphasis on its central banking than on its commercial banking functions. Since this law was enacted, the Bank has introduced measures requiring the commercial banks to maintain minimum reserves against their time and savings deposits and against their demand deposits. The Bank has also acted to reduce the spread between the rate of interest allowed on deposits and that charged on loans. A primary objective of the Bank of Libya is to improve the banking habits of the community. To this end, the Bank intends to increase the number of its own branches in Libya, and to sponsor the establishment of banks with joint Libyan and foreign partnership.

Libya’s brief experience as an oil-rich country suggests that a sudden large excess of foreign exchange offers, in itself, no magic aid to development. Although substantial progress has already been achieved, in Libya the development effort is still hindered by the scarcity of skilled manpower and of economic resources other than oil. But the country’s experience does show that, wisely handled, great increases in foreign exchange can be absorbed without permitting inflationary tendencies to get out of hand. In any event the country’s unusual situation and experience make it a focus of special interest in the developing world.

Letter to the Editor

I read with great interest Mr. David Williams’ article on “The Growth of Capital and Securities Markets” in the September 1966 issue of your review.

This article covers in a few pages a number of most important subjects. No doubt in the course of compressing the text, some of the author’s ideas were put in a form which could lead to misinterpretation. This might be the case for the three paragraphs on page 220, under the title “Foreign-Currency Issues” which suggest that for dollar bond issues managed by London or New York banks, effective interest costs tend to be lower than in most European centers.

Few continental bankers and few of their borrowing clients would agree. I think that such issues are if anything more costly to the borrower than comparable issues managed by continental banks.

Philippe Duvieusart

Deputy Manager


S.A. Luxembourgeoise