Libya-Concluding Statement of the 2012 Staff Visit

January 30, 2012

Describes the preliminary findings of IMF staff at the conclusion of certain missions (official staff visits, in most cases to member countries). Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, and as part of other staff reviews of economic developments.

January 26, 2012

I. Overview

1. The mission is grateful to the Libyan authorities for their hospitality, collaboration and valuable input during technical and policy discussions. It benefited greatly from interactions with government and central bank officials.

2. While the challenges are daunting, economic activity could recover quickly when the security situation normalizes. Restoration of hydrocarbon production is well-advanced at over half of pre-revolution levels and remains critical to economic recovery; and reconstruction will boost non-hydrocarbon economic activity. In the short term, the key challenges for the authorities are to exercise budget discipline and resuscitate the banking system while maintaining macroeconomic stability. Most of the UN sanctions that froze Libya’s foreign assets (a total of 200 percent of 2010 GDP) were lifted on December 16, 2011, which will allow the Central Bank of Libya (CBL) to support the exchange rate. Medium-term issues include rebuilding infrastructure, reorienting the economy away from hydrocarbon dependence, and setting up a governance framework that promotes private sector development, job creation and inclusive growth.


II. Recent Economic Developments

3. GDP is estimated to have contracted by 60 percent in 2011 while consumer prices increased by 14 percent. During the conflict, crude oil production fell from an average of 1.77 million barrels per day in 2010 (2 percent of global output) to 22,000 barrels per day in July 2011. Non-hydrocarbon economic activity was also affected by the destruction of infrastructure and production facilities, the departure of expatriate workers, disruptions to banking activity, and limited access to foreign exchange. Accordingly, hydrocarbon GDP is estimated to have contracted by 71 percent in 2011, while non-hydrocarbon output declined by 50 percent. Inflation picked up significantly in 2011, reflecting constraints on imports, domestic supply limitations, and monetary expansion.1

4. The loss of hydrocarbon income has reduced the current account balance. Exports declined from $48.9 billion in 2010 to $19.2 billion in 2011, while imports declined from $24.6 billion to $14.2 billion in the same period due to the lack of access to foreign exchange. Accordingly, the current account balance decreased from a surplus of 21 percent of GDP in 2010 to 4½ percent of GDP in 2011.

5. As of end-2011, the Libyan dinar (LYD) was trading at a 20 percent discount on the parallel market.2 The value of the LYD fell on the parallel market in 2011 due to the inability of the CBL to sell foreign exchange because of the lack of access to its foreign assets. As of January 15, 2012, the spread between the official and parallel market exchange rates had narrowed to below 10 percent.3

6. Budget revenue declined sharply due to the fall in hydrocarbon revenues while current expenditure increased in 2011. Revenue is estimated to have declined by 69 percent from 57 percent of GDP in 2010 to 39 percent of GDP in 2011. In 2010, expenditures on wages, subsidies, and transfers were equivalent to 21 percent of GDP. The budget for 2011 was reallocated to accommodate: (i) first-quarter policy changes including increased salaries; (ii) the drop in oil revenues; (iii) humanitarian needs; and, (iv) a disruption of most capital expenditure. Spending on wages rose by approximately 60 percent, driven by a March 2011 public sector wage increase. The 2011 budget was financed by domestic borrowing of LYD 13.5 billion, revenues from hydrocarbon exports LYD 15.8 billion, as well as estimated arrears of LYD 6 billion.

7. Despite the removal of UN sanctions on the CBL the public sector’s financial situation remains precarious. The bulk of foreign assets was unfrozen on December 16, 2011, and the authorities have mostly regained access.4 As of end-November 2011 around $3 billion had been made available to Libya and further amounts were made available toward the end of last year. The government is financing itself by borrowing from the CBL and drawing down its deposits.5 The counterpart to this on the CBL balance sheet is money creation, primarily through an increase in currency in circulation as well as in commercial bank balances at the CBL.

8. The money supply increased significantly in 2011 due to monetization of the budget deficit. Currency in circulation doubled from LYD 7.5 billion at end-2010 to LYD 15.4 billion at end-2011.6 In response to a shortage of banknotes—vault cash held by the CBL and commercial banks is largely exhausted—the CBL imposed a limit on cash withdrawals by individuals. Demand deposits increased by 13 percent, linked to forced savings caused by the limits on cash withdrawals.

9. In 2011, credit to the private sector declined by about 6 percent, compared to an increase of 14.3 percent in 2010. The change in the stock of credit during 2011 was affected by loan repayments, primarily through salary deductions, and limitations on trade financing due to constraints on access to foreign exchange. Linkages between the financial system and the real economy are weak, with the ratio of credit to GDP in 2010 less than 20 percent. Nevertheless, reduced bank lending to the private sector is likely to have had an adverse impact on non-hydrocarbon economic activity.

10. Commercial banks had adequate capital buffers before the conflict, but the quality of their assets has deteriorated. Non-performing loans (NPLs) in the banking system were 17.2 percent of total loans at end-2010—one of the highest in the MENA region. Nevertheless, risk-weighted capital adequacy was 17.3 percent—well in excess of statutory requirements—and provisioning was 85 percent. Given the depth and length of the conflict, NPLs will have increased sharply due to economic disruption (which will delay some repayments) and because of a deterioration in asset quality (including physical destruction). Some loans may have been made to elements of the former regime and may be irrecoverable. Moreover, the threat of legal challenges to property seized by the former regime creates potential risks for the banking sector, particularly if these properties had been used as collateral.7 The magnitude of these losses has not been estimated.


III. Economic Outlook

11. Economic activity is projected to recover in 2012, concurrent with an improvement in the security situation. The mission prepared a preliminary macroeconomic framework, which is set out in Table 1. Crude oil production increased from 22,000 barrels per day in July to an average of 980,000 barrels in December 2011. Hydrocarbon output, including natural gas, is expected to increase by over 100 percent in 2012 and reach the pre-conflict level during 2014. Non-hydrocarbon GDP is expected to recover by 2014, driven mainly by reconstruction. Although consumer prices increased significantly during 2011, consumer price inflation is expected to ease significantly once imports have resumed and the CBL withdraws money from the system by selling foreign exchange.8 The external current account surplus in 2012 will increase with the restoration of hydrocarbon and non-hydrocarbon exports.

12. Risks to the outlook include delays in normalizing the security situation and lower international prices for oil and gas. Uncertainties in the security environment would constrain private sector economic recovery and could impede the return of expatriate workers that are needed to alleviate workforce bottlenecks. Intensifying strains in the euro area and fragilities elsewhere have resulted in deteriorating financial conditions and escalated downside risks to global growth. Although hydrocarbon prices remain high, the risk of a widespread economic slowdown could lower petroleum prices and present additional challenges to Libya’s hydrocarbon-dependent economy.


IV. Policy Issues

13. The discussions focused on issues related to short and medium-term priorities as well as fiscal sustainability. Medium-term issues will continue to be addressed as part of the continuing dialogue between the Fund staff and the authorities. A key issue will be the establishment of governance and policy frameworks that promote sustainable growth and job creation while maintaining macroeconomic stability.

14. The mission encouraged the authorities to establish a policy framework to set out fiscal and monetary objectives. These objectives should include macroeconomic stability and private sector led and inclusive growth. This framework should integrate the activities of the Libyan Investment Authority (LIA), which should receive and transfer revenues to the budget, and not undertake public spending on behalf of the government.

15. The mission encouraged the government and the CBL to coordinate fiscal with monetary policy. The Ministry of Finance should start preparing projections of the in-year profile of cash flows through its accounts at CBL, in coordination with line ministries and the tax and customs departments. These projections should be updated during the year and discussed with the CBL’s liquidity management operations.

Exchange Rate and Monetary Policy

16. The mission welcomed the announcement that the exchange rate peg to the SDR will be maintained by the CBL to maintain confidence in the currency and it will be important to ensure that adequate foreign exchange is made available to the market.9 The peg has been associated with generally low consumer price inflation, providing a policy anchor and a low degree of exposure to foreign currency risks. Moreover, the peg has helped underpin confidence in the currency during the conflict. Looking forward, maintaining the exchange rate peg will help ensure rapid macro-financial normalization. This policy must be accompanied by fiscal restraint to prevent fuelling inflation and a damaging appreciation of the real exchange rate.

Banking System

17. The mission noted that the current shortage of dinar cash in the banking system is linked to the slow normalization of the foreign exchange market. The lack of access to foreign exchange constrained the operation of commercial banks, undermined public confidence in banks, and prompted the private sector to hold dinar cash outside the banking system. The unfreezing of CBL’s foreign assets will allow it to provide foreign exchange liquidity to banks, which should normalize the demand for dinar banknotes and commercial banking operations. The restoration of the non-cash payment system should also help to reduce the demand for cash. The mission suggested that the authorities consider introducing an explicit guarantee of deposits, albeit with adequate safeguards to avoid the moral hazard of an indefinite blanket guarantee.

18. The development of Islamic banking needs appropriate institutions and regulatory framework. In the short term, Islamic banking activities could be limited to Islamic facilities at licensed commercial banks. A draft amendment to the banking law is expected to be prepared by end-January on Islamic banking. The mission offered to assist the authorities with drafting legislation, drawing on international experience. It also urged the authorities to proceed cautiously, ensuring that appropriate legislative and accounting principles are in place, supervisory staff is trained, and Islamic banking products are presented to the public in a transparent manner.

19. The mission urged the authorities to develop a framework for addressing NPLs. For 2012, net credit to the private sector is expected to be broadly unchanged, with write offs of NPLs offset by a pickup in new credit. By February, the central bank expects to have information on NPLs as of end-2011. It will be important for the CBL, as banking supervisor, to verify that the commercial banks obtain as clear a picture as possible of the impact on their balance sheets of the recent conflict, and to ensure that they have sufficient capital to cover losses and to support credit creation during the reconstruction period.

Fiscal Policies and Framework

20. The mission underscored the need to balance short-term spending pressures against fiscal sustainability and prospects for private sector development. The mission recognized the need to address urgent needs resulting from the conflict. Wage increases implemented by the previous regime will raise the wage bill from 9 percent of GDP in 2010 to 18.7 percent of GDP in 2012. A high level of public sector wages will reduce the incentive for individuals to seek employment in the private sector and undermine efforts to advance economic diversification. The envisaged increase in subsidies will raise their cost from 11.7 percent of GDP in 2010 to 15.9 percent of GDP in 2012.

21. The mission discussed with the authorities the 2012 budget. Revenues are expected to be LYD 55.9 billion (57.9 percent of GDP), expenditures to be LYD 62.4 billion (64.7 percent of GDP), and the deficit of LYD 6.6 billion (6.8 percent of GDP) financed through the issuance of government bonds and a drawdown in government deposits at the CBL.10 Although the government can afford to finance elevated current spending in the short-term, the mission cautioned that the level of recurrent spending is likely to be inconsistent with appropriate budgetary prioritization and fiscal sustainability, and put upward pressure on the real exchange rate.

22. The mission discussed with the authorities the need to develop a medium-term budget framework linked to sustainable fiscal policies. The large increase in current spending will require medium-term consolidation to provide the needed space for capital and reconstruction spending while preserving long-term fiscal sustainability. Capital spending, constrained in the short-term by capacity constraints, will have to be reassessed given urgent reconstruction needs, efficiency considerations and the need to assess absorptive capacity of the economy.

23. Reforms will be needed to contain the wage bill and increase the efficiency of the public sector. Medium-term measures that have been implemented successfully in other countries include retrenchment of government employees, decompressing the wage structure, aligning civil service remuneration with the market, monetizing allowances to make compensation more transparent, introducing performance-based incentives, computerizing payroll and personnel systems, and, strengthening the recruitment system to depoliticize government hiring and professionalize the civil service.

24. The mission noted that subsidy reform over the medium term should aim to reduce the economic inefficiencies while better protecting low-income households. Universal subsidies, particularly fuel subsidies, are not targeted and disproportionately benefit higher income households. Subsidies affect consumption and production patterns as well as the allocation of resources, with negative implications for the budget, expenditure composition, and private sector development. Subsidy reform is usually difficult to implement due to the absence of a social safety net to shield low-income households. If the implementation of a sophisticated social safety net is not feasible, the government could consider: (i) limiting the speed at which prices of goods primarily consumed by low-income are raised; (ii) identifying a package of short-term measures to mitigate the adverse impact of price increases on the low-income households; (iii) utilizing some of the savings from subsidy reform to increase public spending to benefit low-income households; and, (iv) using a range of methods to improve targeting of low-income households, such as categorical or geographical application or linking benefits to a self-targeting work program or schooling requirement. Although such measures are imperfect, they are more cost-effective in protecting low-income households than universal subsidies.

Growth Strategy

25. Institutional reforms are necessary to reorient the economy away from hydrocarbon dependence and to promote job creation and inclusive growth. In the decade prior to the conflict, average non-hydrocarbon growth was 8 percent. Nevertheless, the economy remained dependent on the hydrocarbons, social development and governance indicators remained poor, job creation for nationals was lackluster, and dependence on expatriate workers increased. According to the Ministry of Labor, the unemployment rate was estimated at 26 percent and the conflict is likely to have had an adverse effect on the labor market. Redressing unemployment will require a substantial increase in the rate of economic growth. Since unemployment is a structural problem, particularly among youth, it is critical to identify policy measures and structural reforms that would raise employment elasticity and create jobs. In this connection, diversification from hydrocarbons is key to promote job creation and inclusive growth. Accordingly, it will be important for to enact institutional reforms to improve the business environment, deepen the domestic financial system, and clear the path for the development of a competitive private sector.


V. Other Issues

26. The mission discussed the technical assistance strategy for the CBL and explored options to implement PFM technical assistance recommendations. At the CBL, technical assistance could focus, inter alia, on rebuilding and continuing modernization of the CBL.11 Similarly, the Fund offered to provide assistance to implement PFM recommendations with resident advisors and experts, funded through a dedicated subaccount at the Fund.

27. The mission urged the authorities to unify the compilation of national statistics under the umbrella of an independent agency. The mission emphasized the importance of improving the coverage, quality and timeliness of statistics and offered to provide technical assistance in this area.


Table 1. Libya: Selected Economic and Financial Indicators, 2008–14
(Quota = SDR 1,123.7 million)
(Population: 6.42 million, 2009 estimate)
(Per Capita GDP: US$9,100, 2009 estimate)
(Main Export: Crude Oil)
 
       

est.

Projection  
  2008 2009 2010 2011 2012 2013 2014
 

 

 

 

 

 

 

 

 

  (Annual percentage change, unless otherwise indicated)

National income and prices

             

   Real GDP

5.6 0.5 2.9 -60.0 69.7 20.5 6.6

    Nonhydrocarbon

7.9 6.0 7.0 -50.0 20.0 15.0 10.0

    Hydrocarbon

3.6 -4.6 -1.2 -70.9 163.3 25.2 4.0

   Nominal GDP in billions of Libyan    dinars

119.8 79.3 102.4 45.7 96.5 116.3 120.1

   Nominal GDP in billions of U.S. dollars

98.0 63.3 80.9 37.4 77.7 93.4 96.2

   Per capita GDP in thousands of U.S.    dollars

15.6 9.9 12.3 5.8 11.8 13.9 14.0

   CPI inflation

             

    Period Average

10.4 2.0 2.5 14.1 1.9 -2.3 5.0

    End of period

9.8 5.1 3.3 19.2 -10.4 5.0 5.0
               
  (In percent of GDP)

Investment and saving

             

   Gross capital formation

26.5 32.3 33.7 19.0 26.7 26.9 29.7

    Public

20.9 24.3 25.8 12.8 20.1 18.2 19.5

    Private

5.6 8.0 7.9 6.1 6.6 8.7 10.2

   Gross national savings

64.3 47.1 54.5 23.4 37.9 48.3 49.3

    Public

52.0 38.1 33.0 -28.8 15.0 23.5 23.5

    Private

12.3 9.0 21.5 52.2 22.8 24.8 25.7

   Saving-investment balance

37.8 14.8 20.8 4.4 11.2 21.5 19.6
               
  (In percent of GDP)

Central government finances

             

   Revenues, of which:

66.7 61.3 56.9 39.0 57.9 59.8 61.4

    Hydrocarbon

60.4 55.6 51.8 34.7 52.4 54.2 55.7

   Expenditure and net lending, of which:

37.4 49.7 52.0 81.7 64.7 56.0 59.1

    Capital expenditures

22.7 26.4 28.1 13.9 21.8 19.7 21.2

   Overall balance

29.3 11.7 4.9 -42.8 -6.8 3.8 2.3

   Non-hydrocarbon balance

-31.1 -44.0 -46.9 -77.4 -59.2 -50.4 -53.5

   Non-hydrocarbon balance in percent of    non-hydrocarbon GDP

-171.6 -146.3 -181.8 -233.0 -304.7 -275.6 -258.7
               
  (Changes as a percent of beginning of the year money stock)

Money and credit

             

   Money and quasi-money

48.8 22.6 -4.9 25.4 -20.5

   Net credit to the government

-44.9 9.4 2.7 37.5 10.9

   Credit to the economy

5.0 0.5 3.8 -2.8 0.0
               
  (In billions of U.S. dollars; unless otherwise indicated)

Balance of payments

             

   Exports, of which

62.1 37.1 48.9 19.2 46.1 58.2 60.2

    Hydrocarbon

60.7 35.7 47.5 18.7 44.6 56.2 58.1

   Imports

20.9 22.0 24.6 11.2 29.9 30.6 33.4

   Net factor income

0.7 0.6 0.0 -1.3 1.9 2.6 3.3

   Net current transfers

-1.0 -1.6 -1.8 -0.6 -2.0 -2.5 -3.0

   Current account balance

37.1 9.4 16.8 1.7 8.7 20.0 18.8

    (As percent of GDP)

37.8 14.8 20.8 4.4 11.2 21.5 19.6

   Overall balance

15.7 5.2 4.5 3.0 -24.3 3.5 2.2

    (As percent of GDP)

16.0 8.2 5.6 8.1 -31.3 3.8 2.3
               

Reserves

             

   Total foreign assets (incl. LIA    investments)

126.1 138.3 171.7 174.5 174.1 190.7 205.9

    Of which: gross official reserves

91.9 100.3 102.5 106.4 82.1 85.6 87.8

     In months of next year's imports

40.7 39.2 77.8 33.8 25.5 24.4 23.1
               

Exchange rate

             

   Official exchange rate (LD/US$, period    average)

1.22 1.25 1.27 1.22 1.24 1.25 1.25

   Real effective exchange rate (change    in percent)

4.6 4.0 -0.6 ... ... ... ...
               

Crude oil production (millions of barrels per day - mbd), 1/ of which:

1.88 1.79 1.77 0.51 1.35 1.69 1.76

   Exports

1.51 1.40 1.35 0.41 0.94 1.28 1.35

Crude oil price (US$/bbl)

97.0 61.8 79.0 104.2 99.1 95.5 92.1
 

Sources: Libyan authorities; and Fund staff estimates and projections.

1/ The quarterly profile of crude oil production in 2011 is 1.18 mbd, 0.17 mbd, 0.05 mbd, and 0.79 mbd. Projections for 2012 are 1.11 mbd, 1.13 mbd, 1.14 mbd, and 1.60 mbd, and for 2013 they are 1.66 mbd, 1.69 mbd, 1.71 mbd, and 1.72 mbd in 2013.

Table 1. Libya: Selected Economic and Financial Indicators, 2008–14
(Quota = SDR 1,123.7 million)
(Population: 6.42 million, 2009 estimate)
(Per Capita GDP: US$9,100, 2009 estimate)
(Main Export: Crude Oil)
 
       

est.

Projection  
  2008 2009 2010 2011 2012 2013 2014
 

 

 

 

 

 

 

 

 

  (Annual percentage change, unless otherwise indicated)

National income and prices

             

   Real GDP

5.6 0.5 2.9 -60.0 69.7 20.5 6.6

    Nonhydrocarbon

7.9 6.0 7.0 -50.0 20.0 15.0 10.0

    Hydrocarbon

3.6 -4.6 -1.2 -70.9 163.3 25.2 4.0

   Nominal GDP in billions of Libyan    dinars

119.8 79.3 102.4 45.7 96.5 116.3 120.1

   Nominal GDP in billions of U.S. dollars

98.0 63.3 80.9 37.4 77.7 93.4 96.2

   Per capita GDP in thousands of U.S.    dollars

15.6 9.9 12.3 5.8 11.8 13.9 14.0

   CPI inflation

             

    Period Average

10.4 2.0 2.5 14.1 1.9 -2.3 5.0

    End of period

9.8 5.1 3.3 19.2 -10.4 5.0 5.0
               
  (In percent of GDP)

Investment and saving

             

   Gross capital formation

26.5 32.3 33.7 19.0 26.7 26.9 29.7

    Public

20.9 24.3 25.8 12.8 20.1 18.2 19.5

    Private

5.6 8.0 7.9 6.1 6.6 8.7 10.2

   Gross national savings

64.3 47.1 54.5 23.4 37.9 48.3 49.3

    Public

52.0 38.1 33.0 -28.8 15.0 23.5 23.5

    Private

12.3 9.0 21.5 52.2 22.8 24.8 25.7

   Saving-investment balance

37.8 14.8 20.8 4.4 11.2 21.5 19.6
               
  (In percent of GDP)

Central government finances

             

   Revenues, of which:

66.7 61.3 56.9 39.0 57.9 59.8 61.4

    Hydrocarbon

60.4 55.6 51.8 34.7 52.4 54.2 55.7

   Expenditure and net lending, of which:

37.4 49.7 52.0 81.7 64.7 56.0 59.1

    Capital expenditures

22.7 26.4 28.1 13.9 21.8 19.7 21.2

   Overall balance

29.3 11.7 4.9 -42.8 -6.8 3.8 2.3

   Non-hydrocarbon balance

-31.1 -44.0 -46.9 -77.4 -59.2 -50.4 -53.5

   Non-hydrocarbon balance in percent of    non-hydrocarbon GDP

-171.6 -146.3 -181.8 -233.0 -304.7 -275.6 -258.7
               
  (Changes as a percent of beginning of the year money stock)

Money and credit

             

   Money and quasi-money

48.8 22.6 -4.9 25.4 -20.5

   Net credit to the government

-44.9 9.4 2.7 37.5 10.9

   Credit to the economy

5.0 0.5 3.8 -2.8 0.0
               
  (In billions of U.S. dollars; unless otherwise indicated)

Balance of payments

             

   Exports, of which

62.1 37.1 48.9 19.2 46.1 58.2 60.2

    Hydrocarbon

60.7 35.7 47.5 18.7 44.6 56.2 58.1

   Imports

20.9 22.0 24.6 11.2 29.9 30.6 33.4

   Net factor income

0.7 0.6 0.0 -1.3 1.9 2.6 3.3

   Net current transfers

-1.0 -1.6 -1.8 -0.6 -2.0 -2.5 -3.0

   Current account balance

37.1 9.4 16.8 1.7 8.7 20.0 18.8

    (As percent of GDP)

37.8 14.8 20.8 4.4 11.2 21.5 19.6

   Overall balance

15.7 5.2 4.5 3.0 -24.3 3.5 2.2

    (As percent of GDP)

16.0 8.2 5.6 8.1 -31.3 3.8 2.3
               

Reserves

             

   Total foreign assets (incl. LIA    investments)

126.1 138.3 171.7 174.5 174.1 190.7 205.9

    Of which: gross official reserves

91.9 100.3 102.5 106.4 82.1 85.6 87.8

     In months of next year's imports

40.7 39.2 77.8 33.8 25.5 24.4 23.1
               

Exchange rate

             

   Official exchange rate (LD/US$, period    average)

1.22 1.25 1.27 1.22 1.24 1.25 1.25

   Real effective exchange rate (change    in percent)

4.6 4.0 -0.6 ... ... ... ...
               

Crude oil production (millions of barrels per day - mbd), 1/ of which:

1.88 1.79 1.77 0.51 1.35 1.69 1.76

   Exports

1.51 1.40 1.35 0.41 0.94 1.28 1.35

Crude oil price (US$/bbl)

97.0 61.8 79.0 104.2 99.1 95.5 92.1
 

Sources: Libyan authorities; and Fund staff estimates and projections.

1/ The quarterly profile of crude oil production in 2011 is 1.18 mbd, 0.17 mbd, 0.05 mbd, and 0.79 mbd. Projections for 2012 are 1.11 mbd, 1.13 mbd, 1.14 mbd, and 1.60 mbd, and for 2013 they are 1.66 mbd, 1.69 mbd, 1.71 mbd, and 1.72 mbd in 2013.


1 The collection of data on consumer prices during the conflict was limited and may underestimate inflation. End-2011 inflation is estimated at 19.2 percent.

2 Since June 14, 2003 the official current exchange rate has been pegged to the SDR.

3 The CBL suggested that the remaining discount on the parallel market rate is partially attributable to the selling of dinar holdings by individuals with close links to the former regime.

4 Foreign assets consist of approximately $140 billion in liquid assets (almost 200 percent of pre-conflict GDP) and roughly $30–40 billion in other assets.

5 The government increased its borrowing from the CBL in the first 10 months of 2011 by LYD 9 billion.

6 Currency in circulation was equivalent to approximately $12 billion at end-2011. The CBL issued the equivalent of $2 billion in LYD in newly-printed notes and reissued banknotes that had been withdrawn from circulation, the equivalent of $4 billion. The CBL plans to replace the entire stock of currency in circulation in the coming months beginning with the denomination of the LYD 50 note by mid-March. The CBL expects that some currency held by elements of the former regime will be identified during this process.

7 Starting in the late 1970s, tens of thousands of residential and commercial premises were confiscated by the former regime—under Law No 4—and were given, sold or rented at below market rates to new occupants.

8 Significant private capital outflows are expected once access to foreign assets is restored.

9 Temporary controls on conversion of large amounts of LYD cash into foreign exchange may be necessary to mitigate the extent to which assets that were obtained illegally, fraudulently, or on the basis of unscrupulous activity are transferred abroad. These controls should not prevent the authorities from meeting bona fide requests for foreign exchange for making payments or transfers for current international transactions.

10 The mission also highlighted the importance of clarifying current banking arrangements for government cash flows and balances, including the roles and responsibilities of different stakeholders (the Ministry of Finance, the CBL, and the LIA).

11 The mission could provide additional advice, including: (i) supervision issues related to the appropriate balance between write offs and forbearance on non-performing loans; (ii) AML/CFT issues, including verifying ownership of accounts and the source of deposits; and, (iii) in due course, a possible exchange of banknotes.




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