Monetary Fund (IMF) concluded the Article IV consultation with the Socialist People’s Libyan Arab Jamahiriya.1
Background
Nonhydrocarbon growth has been solid, against the backdrop of high domestic demand. It grew by an estimated 6 percent in 2009, mainly driven by investments in construction and in services. Meanwhile, hydrocarbon output declined significantly due to compliance with the OPEC quota, resulting in a contraction of overall real Gross Domestic Product (GDP) by an estimated 1.6 percent. Overall growth increased markedly by an estimated 10 percent in 2010 reflecting a sharp increase in oil production. Nonhydrocarbon growth also strengthened (to about 7 percent) as a result of large public expenditures. However, unemployment has remained high, particularly among the youth. Inflation is estimated to have picked up to about 4.5 percent in 2010 as higher oil revenue increased domestic liquidity and international commodity prices increased.
After a sharp decline in 2009, the fiscal surplus is estimated to have increased in 2010 mainly owing to the recovery in oil revenue. The fiscal surplus narrowed substantially to about 7 percent of GDP in 2009 as a result of a sharp decline in oil revenue that more than offset the reduction in public outlays. The latter reflects the net effect of a large decline in capital spending and a smaller increase in current outlays. In 2010, current expenditure increased by an estimated 19 percent compared to 2009, largely due to full explicit accounting of energy subsidies and a 15 percent increase in the wage bill. The ongoing prioritization of investment projects has allowed for an increase in capital expenditure by an estimated 18 percent.
The external current account surplus increased to an estimated 20 percent of GDP in 2010, from 16 percent of GDP in 2009. Export earnings rebounded in line with the recovery in crude oil output and prices. Imports, while also picking up due to strong domestic demand, have been steadier and remain about a third lower than exports. Net foreign assets of the Central Bank of Libya (CBL) and the LIA are estimated to have reached $150 billion at end-2010 (the equivalent of almost 160 percent of GDP).
Broad money is estimated to have grown by about 10 percent in 2010, compared to 11 percent in 2009. Commercial bank lending to the private sector and nonfinancial public enterprises has been constrained by lack of adequate borrower documentation, tightening of regulation, and high liquidity at public enterprises. The latter’s demand for bank services has been largely limited to letter of credits and guarantees. Excess liquidity has remained high in the banking system, and financial intermediation is weak compared to neighboring countries.
An ambitious program to privatize banks and develop the nascent financial sector is underway. Banks have been partially privatized, interest rates decontrolled, and competition encouraged. Ongoing efforts to restructure and modernize the CBL are underway with assistance from the Fund. Capital and financial markets, however, are still underdeveloped with a very limited role in the economy. There are no markets for government or private debt and the foreign exchange market is small.
Structural reforms in other areas have progressed. The passing in early 2010 of a number of far- reaching laws bodes well for fostering private sector development and attracting foreign direct investment. The success of the new laws, however, hinges on promoting inter-agency coordination and open consultation with the legal and business communities, and establishing permanent bodies to monitor, assess, and oversee implementation. A comprehensive civil service reform is needed to facilitate more effective wage and employment policies that would address the needs of a young and growing labor force.