## 1. Germany: Unification of the Central Bank in 1990

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### Context
- Libya remains a fragile state trapped in political uncertainty; the transition Government of National Unity (GNU) has maintained control of Tripoli but envisaged elections have not taken place and the country remains de facto divided between the West and the East and fragmented among various militias.
- Reunification of the central bank has advanced: the Central Bank of Libya (CBL) in 2023 agreed to accept the past obligations of its Eastern branch; some US$9 billion in commercial banks’ balances at the Eastern branch has already been consolidated.
- Reunification efforts have led to improved coordination in monetary policy, banking system liquidity and supervision; monetary policy is de facto coordinated across the country as long as the agreement holds, though payment systems remain separate.

### Recent macroeconomic developments
- Natural disasters and external shocks:
  - Tropical storm Daniel (September 2023) caused devastating floods; World Bank estimates losses and damages at US$1.7 billion (3.6 percent of GDP).
  - Conflict in Gaza and Red Sea shipping disruptions did not affect Libya’s economy meaningfully.
- Growth and production:
  - Real GDP is estimated to have expanded by 10 percent in 2023, largely owing to a rebound from the oil production stoppages of 2022.
- Fiscal developments and money supply:
  - 2023 saw a fiscal expansion despite a 30-percent fall in hydrocarbon prices and a concurrent 20-percent boost to oil production.
  - Fiscal expenditures surged, driven by an almost 30 percent increase in the wage bill and higher-than-expected energy subsidies.
  - Public debt increased and the money supply has grown at its fastest pace since the fall of the Ghaddafi regime.
- Fiscal table (2022 → 2023, percent change):
  - Revenues: 178,561 → 155,911, -13%
  - Expenditures: 129,448 → 138,500, 7%
  - Salaries: 47,100 → 60,000, 27%
  - Subsidies: 55,848 → 51,000, -9%
  - Development, Goods and Services: 26,500 → 27,500, 4%
  - Balance: 49,113 → 17,411, -65%
  - Balance as a % of GDP: 24% → 8%
- Foreign exchange policy measures and exchange rates:
  - In February 2024 the CBL tightened restrictions on issuance of letters of credit and lowered limits on individuals’ foreign exchange purchases, widening the gap between the parallel and official exchange rates.
  - In early 2024 authorities imposed a temporary 27 percent tax on all foreign exchange purchases, to be applied until end-2024 (rate could be adjusted earlier if deemed necessary).
  - Reported inflation stayed low despite depreciation of the parallel exchange rate; reported CPI has limited product and geographic coverage and a new CPI index is expected to be available in 2025.
- External sector and reserves:
  - In 2023 the current account surplus is estimated to have declined in line with the fall in oil prices.
  - Libya’s external position was broadly in line with fundamentals and desirable policy settings.
  - The CBL has maintained reserves at a comfortably high level, at around three years of imports (*34.4 months of imports).

### Outlook and risks
- Hydrocarbons dominate the outlook:
  - Hydrocarbon production is projected to reach 1.5 million barrels per day by 2026.
  - GDP is estimated to grow by close to 8 percent in 2024 and continue to expand at lower rates in the outer years.
  - Baseline projection indicates declining fiscal and external balances over the coming years in line with a projected decline in global oil prices.
  - The CBL is expected to maintain the current stock of international reserves and the country will continue to have no public debt in the standard sense.
- Balance of risks:
  - Tilted to the downside with high uncertainty due to continuing political stalemate and possible geopolitical spillovers.
  - Key global risk: lower oil prices due to lower-than-expected worldwide growth.
  - Domestic/global risk: higher global food prices could raise inflation, add to fiscal burden through higher subsidies, and lead to social discontent and renewed migration pressures.
  - Medium-term risk: failure to diversify away from hydrocarbons could lead to substantially lower fiscal revenues and undermine prospects; transition to clean energy faster than anticipated could cause disorderly adjustment.

### Policy discussions and recommendations — A. Improving policy coordination through proper budgeting
- Short-term:
  - Proper budgeting would help (i) mitigate the procyclical bias in spending and (ii) improve coordination between fiscal and monetary policies.
  - Improve costing tools and develop a fiscal framework for resource management as an important first step.
- Medium-term:
  - Payroll analysis, harmonization of public investment and recurrent budget processes, and production of more complete budget-related reports.
  - Reduce distortions due to high public sector wages and subsidies to improve incentives and resource allocation.
  - Reprioritize spending to enhance growth and efficiency and support intergenerational equity.
  - Tax policy should aim to diversify sources of revenue away from oil.
- SOE-related fiscal risks:
  - Identify the budgetary impact of state-owned enterprises (SOEs); streamline ownership structures and tighten control, especially of state-owned public banks.
  - Undertake stock-taking of existing public sector bank accounts and develop a roadmap toward a Treasury Single Account.
  - Consider gradual and selective privatization to support private sector development and diversification away from hydrocarbons.

### Policy discussions and recommendations — B. Completing central bank reunification and maintaining financial stability
- Complete reunification requires integration of the payment system and unification of accounting procedures.
- Limiting monetary financing by the CBL’s Eastern branch will alleviate pressure on the exchange rate and on banking sector liquidity and facilitate policy coordination.
- Implement CBL regulatory and governance reforms in the banking sector to strengthen banks and maintain financial stability.
- Address underlying pressures on the exchange rate: preserve efficient functioning of the foreign exchange market; assess measures influencing demand for foreign exchange against impacts on the parallel market, inflation and reserves.
- In absence of conventional monetary policy tools, controlling fiscal expenditure is the preferred policy response consistent with Libya’s macroeconomic policy framework.
- Maintain integrity of the means of payment; recent steps to withdraw compromised banknotes are welcome, but ensure alternative modes of payment are available and that the unbanked are not penalized.
- Continue reforms in banking law and governance, AML/CFT framework, supervision, disclosure requirements, establishment of a financial stability committee, development of Islamic finance, fit and proper requirements, and separation between CBL’s ownership and supervisory functions.
- CBL actions already taken include issuing guidance for banks to increase capital, reinforcing the Financial Information Unit (FIU), and promoting financial inclusion through enhancements in electronic payments.

### Policy discussions and recommendations — C. Strengthening institutions and building capacity
- Governance reforms across the public sector are necessary; corruption remains a significant concern and Libya ranks below MENA averages on several governance indicators.
- Recommended actions:
  - Strengthen the anticorruption legal framework to align with Libya’s obligations under the United Nations Convention Against Corruption.
  - Create effective systems for preventing conflicts of interest and asset declarations.
  - Adopt and implement an updated National Anticorruption Strategy with adequate monitoring mechanisms.
- Capacity development (CD) needs:
  - Prioritize CD for compiling national accounts and PFM reforms, including strengthening macro-fiscal and budget preparation functions, improving cash management controls and oversight.
  - CD for statistics should prioritize national accounts and the external sector due to significant gaps.
  - Set up a coordinating body to facilitate CD provision and implementation to avoid duplication and improve information-sharing across institutions.
- Note: Significant data gaps hamper analysis and policy advice; the 2025 Article IV consultation is expected to undertake a comprehensive review of governance, anticorruption, and the rule of law.

### Policy discussions and recommendations — D. Policies for diversifying away from hydrocarbons and private sector development
- Medium-term key policy objective: diversification away from hydrocarbons while promoting stronger and more inclusive private sector growth.
- Reform sequencing and a stable political and security environment, together with institutional development and support from the Fund and other partners, are necessary for successful reform implementation.

### Longer-term economic strategy and structural reforms
- Objective: Diversify away from hydrocarbons and foster stronger and more inclusive private sector-led growth.
- Structural reform priorities:
  - Strengthen institutions and the rule of law.
  - Develop a clear economic vision for the country.
  - Scale up development spending to alleviate growth bottlenecks and reduce fiscal costs associated with high spending on public sector wages and subsidies.
  - Promote labor-intensive non-oil activity by capitalizing on comparative advantages: location, landmass, natural resources, and access to energy and labor.
- Structural facts and constraints:
  - Almost 90 percent of the formally employed population work for the public sector.
  - Estimates of the unemployment rate range from 15 and 19 percent.
  - Energy subsidies account for about one quarter of government spending.

### Authorities’ views
- Broad agreement with staff’s macroeconomic policy objectives:
  - Need for a unified budget.
  - Curbing public expenditure.
  - Reforming energy subsidies.
  - Diversifying away from hydrocarbons in the medium term.
- CBL views:
  - Exchange rate is the nominal anchor for the Libyan economy.
  - Tax on foreign exchange purchases is intended as a temporary measure to safeguard reserves; distortions acknowledged but judged necessary until spending is restrained.
  - Commitment to enhance financial sector regulation and supervision: directing banks to raise capital, developing the FIU and AML/CFT framework, withdrawal of 50-dinar banknotes to preserve currency credibility.
- Governance, data, and capacity:
  - Progress noted in data quality for external statistics, monetary and financial statistics, and fiscal outturns; ongoing work to update CPI basket and labor statistics.
  - Authorities request further technical assistance on: budget preparation, monetary policy, national accounts, labor market statistics, CPI rebasing, developing the macro-fiscal unit and PFM functions.
- Political context:
  - Significant progress in reunifying the central bank across most departments, but de-facto full reunification requires comprehensive political reconciliation.

### Staff appraisal and selected recommendations
- Resource envelope and risks:
  - Hydrocarbon production and exports will determine Libya’s available resource envelope in the short and medium term.
  - Baseline projection indicates declining fiscal and external balances in line with a projected decline in global oil prices.
  - Key downside risks: lack of fiscal prudence, volatility of world oil prices, faster-than-expected worldwide transition to clean energy technology.
- Selected policy recommendations:
  - Control fiscal expenditure to address underlying pressures on the exchange rate; an agreed-upon budget is vital to manage resources and avoid ad hoc/procyclical spending.
  - Preserve adequate foreign exchange reserves and ensure efficient functioning of the foreign exchange market; assess measures that influence foreign exchange use against impacts on the parallel market, inflation, and reserves.
  - Maintain integrity of means of payment and continue banking sector reforms:
    - Improve NPL reporting and monitoring of bank capitalization.
    - Divest from commercial banks where appropriate.
    - Conduct a national assessment of money laundering and terrorist financing risks to prioritize AML/CFT mitigation measures.
    - Reduce banks’ operational risk, reform legal and administrative procedures, and further develop Islamic finance products.
    - Ensure alternative modes of payment are available following withdrawal of 50-dinar notes.
  - Strengthen the fiscal framework:
    - Increase transparency and improve tax administration and compliance.
    - Stock-take existing public sector bank accounts and establish a Treasury Single Account.
    - Gradual and selective privatization to promote private sector development and diversification away from hydrocarbons.
    - Strengthen macro-fiscal and budget preparation functions and broader PFM reforms.
  - Confront corruption and strengthen the rule of law:
    - Strengthen anticorruption legal framework and align with obligations under the United Nations Convention Against Corruption.
    - Adopt and implement an updated National Anticorruption Strategy with adequate monitoring mechanisms.
    - Conduct a comprehensive governance review during the 2025 Article IV consultations.
  - Enhance data provision and statistical capacity:
    - Resume economic surveys paused after the revolution.
    - Build capacity for compiling national accounts.
    - Set up a coordinating body to facilitate delivery and implementation of capacity development (CD) and avoid duplication among providers.
- Institutional and sequencing priorities:
  - Durable political settlement is needed to complete central bank reunification, integrate the payment system, and unify accounting procedures.
  - Better coordination between fiscal and monetary policies to enhance credibility and decrease the gap between official and parallel exchange rates.
  - Staff engagement to assess Libya’s exchange system for consistency with Article VIII obligations.
  - Recommendation: next Article IV consultation to be held on the standard 12-month cycle.

### Key statistics and projections (selected figures reported exactly)
- Employment and subsidies:
  - Almost 90 percent of the formally employed population work for the public sector.
  - Unemployment rate estimates range from 15 and 19 percent.
  - Energy subsidies account for about one quarter of government spending.
- Selected macro projections (exact values):
  - Real GDP (annual percent change): 2021: 28.3; 2022: -8.3; 2023: 10.2; 2024: 7.8; 2025: 6.9; 2026: 4.2; 2027: 2.0; 2028: 2.1; 2029: 2.3; 2030: 2.5.
  - Hydrocarbon real GDP (annual percent change): 2021: 45.0; 2022: -17.0; 2023: 17.8; 2024: 10.2; 2025: 7.7; 2026: 3.6; 2027: 0.0; 2028: 0.0; 2029: 0.0; 2030: 0.0.
  - Nominal GDP in billions of Libyan dinars 1/: 2021: 159.0; 2022: 208.2; 2023: 212.0; 2024: 221.9; 2025: 232.3; 2026: 240.3; 2027: 244.5; 2028: 250.6; 2029: 258.6; 2030: 270.8.
  - Nominal GDP in billions of U.S. dollars 1/: 2021: 35.2; 2022: 43.3; 2023: 44.0; 2024: 46.0; 2025: 48.3; 2026: 50.2; 2027: 51.3; 2028: 52.8; 2029: 54.4; 2030: 57.0.
  - CPI inflation (period average): 2021: 2.9; 2022: 4.5; 2023: 2.4; 2024–2030: 2.6 (where listed).
  - Central government overall balance (percent of GDP): 2021: 14.8; 2022: 23.6; 2023: 8.2; 2024: 1.5; 2025: 1.3; 2026: 0.5; 2027: 0.1; 2028: 0.0; 2029: 0.0; 2030: 1.2.
  - Gross official reserves (in billions of U.S. dollars): 2021: 69.4; 2022: 74.1; 2023: 78.3; 2024: 79.0; 2025: 79.5; 2026: 79.8; 2027: 79.8; 2028: 79.8; 2029: 79.8; 2030: 80.6.
  - Crude oil production (mbd): 2021: 1.2; 2022: 1.0; 2023: 1.2; 2024: 1.3; 2025: 1.4; 2026: 1.5; 2027: 1.5; 2028: 1.5; 2029: 1.5; 2030: 1.5.
  - Crude oil price (US$/bbl, WEO adjusted for Libya): 2021: 64.4; 2022: 89.6; 2023: 75.0; 2024: 72.3; 2025: 68.6; 2026: 65.9; 2027: 63.3; 2028: 60.8; 2029: 58.4; 2030: 56.1.
- External and fiscal flows (selected):
  - Current account (in millions of U.S. dollars): 2021: 5,683; 2022: 12,401; 2023: 6,390; 2024: 6,835; 2025: 7,020; 2026: 6,295; 2027: 6,237; 2028: 6,178; 2029: 5,712.
  - Exports (f.o.b, in millions of U.S. dollars): 2021: 32,343; 2022: 37,519; 2023: 31,363; 2024: 31,567; 2025: 32,103; 2026: 31,829; 2027: 30,624; 2028: 29,705; 2029: 28,839.
  - Imports (f.o.b, in millions of U.S. dollars): 2021: -16,981; 2022: -17,176; 2023: -17,579; 2024: -19,126; 2025: -19,525; 2026: -19,320; 2027: -18,116; 2028: -17,412; 2029: -17,193.
  - Total foreign assets (in billions of U.S. dollars) 1/: 2021: 79.7; 2022: 84.2; 2023: 88.5; 2024: 89.3; 2025: 89.9; 2026: 90.2; 2027: 90.2; 2028: 90.2; 2029: 90.2.
  - Gross official reserves (in months of next year's imports): 2021: 33.6; 2022: 34.6; 2023: 34.0; 2024: 33.9; 2025: 34.5; 2026: 36.9; 2027: 38.5; 2028: 39.0; 2029: 40.2.
- Monetary and financial sector indicators (selected):
  - Broad money (in millions of Libyan dinars): 2018: 111,566; 2019: 108,889; 2020: 126,271; 2021: 100,656; 2022: 112,714; 2023: 144,577.
  - Net claims on government (Libyan dinar, billion): 2018: -94.1; 2019: -114.9; 2020: -110.9; 2021: -114.8; 2022: -117.8; 2023: -119.0.
  - Regulatory capital to risk-weighted assets (percent): 2018: 17.8; 2019: 18.4; 2020: 19.2; 2021: 16.6; 2022: 15.7; 2023: 15.3.
  - Nonperforming loans to gross loans (percent): 2018: 21.0; 2019: 34.2; 2020: 34.1; 2021: 29.6; 2022: 24.1; 2023: 22.2.

### Annex I — Risk Assessment Matrix (high-level)
- Risk scenarios and likelihoods (selected):
  - Low-Medium: Higher food prices add to fiscal burden; higher energy prices would reduce fiscal and external vulnerabilities.
  - Medium: Higher food prices and lower energy prices would erode fiscal space.
  - High: Sharp global growth slowdown leading to sustained decline in oil and gas prices will turn surpluses into deficits and significantly weaken fiscal and external positions.
  - High: Libya is vulnerable to climate shocks; recent floods exemplify large fiscal and human costs.
  - High: Fragile political status could revert into active conflict and oil blockades.
  - High: Fiscal and external positions deteriorate leading to loss of FX reserves and financial sector instability.
  - High: Higher current expenditure will put the fiscal position on an unsustainable path and erode available fiscal space.
- Domestic risks, likelihoods and policy responses (selected):
  - Political instability turns into active conflict — Likelihood: High — Response: target subsidies and share oil wealth more equitably.
  - Wasteful fiscal spending to gain popular support — Likelihood: High — Response: phase out broad-based allowances; increase capital expenditure; structural reforms to create jobs.
  - Extreme climate events — Likelihood: High — Response: invest in climate-resilient infrastructure and agriculture; accelerate diversification.
  - Social discontent — Likelihood: Medium — Response: governance and anti-corruption reforms; build fiscal and FX reserve buffers; adopt a medium-term fiscal anchor.
  - Abrupt global slowdown — Likelihood: Medium — Response: avoid procyclicality; replace broad subsidies with targeted social support.
  - Deepening geoeconomic fragmentation — Likelihood: High — Response: accelerate fiscal and structural reforms; incentivize export diversification.
- Global risks (selected):
  - Intensification of regional conflicts — Likelihood: High — Response: targeted support for the vulnerable; accommodate FX demand and provide liquidity.
  - Commodity price volatility — Likelihood: High — Response: energy subsidy reform; targeted social programs.

### External sector findings and policy guidance (selected)
- Overall assessment: Libya’s external position in 2023 was broadly in line with fundamentals.
- EBA-lite current account (CA) model: CA gap estimated at -1 percent.
- Share of hydrocarbons in total exports: over 90 percent.
- Current account surplus: declined from 28.6 percent of GDP in 2022 to 14.5 percent of GDP in 2023.
- REER Gap (in percent): 3.1 (staff assesses the REER to be overvalued by about 3.1 percent).
- Official peg: Since January 2021, the official rate has been SDR 0.1555 per LYD 1.
- Gross official reserves: US$78.3 billion at the end of 2023 (more than 200 percent of GDP and covering more than 3 years of imports).
- Projection: reserves projected to reach more than US$79.8 billion by 2029 assuming fiscal spending remains contained.

### Debt sustainability and fiscal projections (selected figures)
- Public debt (Percent of GDP): Actual 2023: Public debt 91.5; 2024: 83.4; 2025: 79.9; 2026: 77.6; 2027: 76.8; 2028: 76.0; 2029: 74.0; 2030: 73.2.
- Primary deficit (Percent of GDP): 2023: -8.7; 2024: -5.0; 2025: -4.0; 2026: -3.6; 2027: -2.9; 2028: -2.1; 2029: -1.8; 2030: -0.4.
- Other identified flows (Percent of GDP): 2023: 8.7; 2024: 5.0; 2025: 4.0; 2026: 3.6; 2027: 2.9; 2028: 2.1; 2029: 1.8; 2030: 0.4.
- Memo projections:
  - Real GDP growth (percent): 2023: 10.2; 2024: 7.8; 2025: 6.9; 2026: 4.2; 2027: 2.0; 2028: 2.1; 2029: 2.3; 2030: 2.5.
  - Inflation (GDP deflator; percent): 2023: -7.5; 2024: 1.8; 2025: -2.4; 2026: -1.1; 2027: -0.9; 2028: -1.0; 2029: 0.3; 2030: -1.3.
  - Nominal GDP growth (percent): 2023: 1.9; 2024: 9.7; 2025: 4.4; 2026: 3.0; 2027: 1.0; 2028: 1.1; 2029: 2.6; 2030: 1.2.

### Monetary policy, financial sector, data and capacity development
- Monetary policy and Islamic finance:
  - A law that prohibits interest rates, the CBL divide, and the civil war have prevented the CBL from developing Islamic finance instruments to manage excess system liquidity and complicated issuance of prudential regulations.
  - Authorities should work to develop Islamic monetary policy tools.
- Financial sector governance, regulation, and supervision:
  - Address weak governance; strengthen regulations and supervision; increase capacity within supervisory and regulatory institutions; remove impediments to credit growth.
- Data issues and corrective actions:
  - The data provided to the Fund has shortcomings; many surveys stopped in 2011 or earlier (last establishment census 2012; last agricultural census 2007).
  - Libya is expected to start reporting IIP and quarterly BOP by the end of 2024.
  - CD priorities: national accounts (SUT, 2008 SNA), CPI rebasing, external sector statistics, financial soundness indicators, PFM reforms, budget preparation and cash management.

### Recommendation on exchange restriction and MCP arising from the 27 percent FX tax
- Staff recommends approval of the exchange restriction and MCP arising from the 27 percent tax on all foreign exchange transactions.
- The 27 percent tax on all foreign exchange transactions was introduced for balance of payments reasons and does not discriminate among members.
- The measure will sunset at end-2024, creating a timeline for removal.
- Administrative/legal details:
  - The 27 percent “fee” became effective March 15, 2024 (Decree No. 15 of 2024).
  - Proceeds are to be temporarily parked at the CBL and used to cover future development spending and/or to repay public debt.
  - The fee expires at end-2024, conditions permitting, but could be adjusted prior to expiration.
  - Since introduction, the parallel exchange rate has appreciated by 10 percent and held steady, but still has a 10 percent premium over the official rate plus the fee.

### Selected social, fiscal and climate notes
- Public sector and social context:
  - Libya has been a welfare state with wide distribution of hydrocarbon income; the wage bill and subsidies together account for close to two-thirds of total government spending.
  - Public sector accounts for 90 percent of formal employment and some 2.2 million persons (about 30 percent of the total population) are on government payroll.
  - High government wages, benefits, and insufficient controls have created tens of thousands of ghost workers.
  - Subsidized fuel prices (among the lowest in the world) have perpetuated lucrative smuggling through porous borders.
- Climate risks and Derna tragedy:
  - Derna experienced unprecedented heavy precipitation in September 2023; reportedly over 400 mm of rain fell in 24 hours compared with an average precipitation of about 1.5 mm in the Derna region in September.
  - The flash floods caused a human tragedy with 4,000 confirmed dead and 10,000 missing at sea and presumed dead, and at least 34,000 persons displaced.
  - Initial damage and losses were estimated at 3.6 percent of Libya’s 2022 GDP, and the disaster impacted about 1.5 million people.

*Source: 1lbyea2024001-print-pdf - IMF staff report content as provided in the supplied PDF chapter/section.*

### 1. Germany: Unification of the Central Bank in 1990 ______________________________________________ 8

### 1. Germany: Unification of the Central Bank in 1990

### Context
- Libya remains a fragile state trapped in political uncertainty; the transition Government of National Unity (GNU) has maintained control of Tripoli but envisaged elections have not taken place and the country remains de facto divided between the West and the East and fragmented among various militias.
- The reunification of the central bank has advanced: the Central Bank of Libya (CBL) in 2023 agreed to accept the past obligations of its Eastern branch; some US$9 billion in commercial banks’ balances at the Eastern branch has already been consolidated.
- Reunification efforts have led to improved coordination in monetary policy, banking system liquidity and supervision; monetary policy is de facto coordinated across the country as long as the agreement holds, though payment systems remain separate.

### Recent Macroeconomic Developments
- Natural disasters and external shocks:
  - Tropical storm Daniel (September 2023) caused devastating floods; World Bank estimates losses and damages at US$1.7 billion (3.6 percent of GDP). The disaster had only a small impact on GDP growth because Libya’s GDP is mainly based on energy exports.
  - Conflict in Gaza and Red Sea shipping disruptions did not affect Libya’s economy meaningfully.
- Growth and production:
  - Real GDP is estimated to have expanded by 10 percent in 2023, largely owing to a rebound from the oil production stoppages of 2022.
- Fiscal developments and money supply:
  - 2023 saw a fiscal expansion despite a 30-percent fall in hydrocarbon prices and a concurrent 20-percent boost to oil production.
  - Fiscal expenditures surged, driven by an almost 30 percent increase in the wage bill and higher-than-expected energy subsidies (the latter despite the lower oil prices).
  - Public debt increased and the money supply has grown at its fastest pace since the fall of the Ghaddafi regime.
- Text Table 1. Fiscal Revenues and Expenditures (2022–2023 percent change)
  - Revenues: 178,561 → 155,911, -13%
  - Expenditures: 129,448 → 138,500, 7%
  - Salaries: 47,100 → 60,000, 27%
  - Subsidies: 55,848 → 51,000, -9%
  - Development, Goods and Services: 26,500 → 27,500, 4%
  - Balance: 49,113 → 17,411, -65%
  - Balance as a % of GDP: 24% → 8%
- Foreign exchange policy measures and exchange rates:
  - In February 2024 the CBL tightened restrictions on issuance of letters of credit and lowered limits on individuals’ foreign exchange purchases, widening the gap between the parallel and official exchange rates.
  - In early 2024 authorities imposed a temporary 27 percent tax on all foreign exchange purchases, to be applied until end-2024 (rate could be adjusted earlier if deemed necessary).
  - Reported inflation stayed low despite depreciation of the parallel exchange rate; reported CPI has limited product and geographic coverage and a new CPI index is expected to be available in 2025.
- External sector and reserves:
  - In 2023 the current account surplus is estimated to have declined in line with the fall in oil prices.
  - Libya’s external position was broadly in line with fundamentals and desirable policy settings (see Annex II).
  - The CBL has maintained reserves at a comfortably high level, at around three years of imports (chart note: * 34.4 months of imports).

### Outlook and Risks
- Hydrocarbons dominate the outlook:
  - Hydrocarbon production is projected to reach 1.5 million barrels per day by 2026.
  - GDP is estimated to grow by close to 8 percent in 2024 and continue to expand at lower rates in the outer years.
  - Baseline projection indicates declining fiscal and external balances over the coming years in line with a projected decline in global oil prices.
  - The CBL is expected to maintain the current stock of international reserves and the country will continue to have no public debt in the standard sense (see Annex III).
- Balance of risks:
  - Tilted to the downside with high uncertainty due to continuing political stalemate and possible geopolitical spillovers (Annex I).
  - Key global risk: lower oil prices due to lower-than-expected worldwide growth.
  - Domestic/global risk: higher global food prices could raise inflation, add to fiscal burden through higher subsidies, and lead to social discontent and renewed migration pressures.
  - Medium-term risk: failure to diversify away from hydrocarbons could lead to substantially lower fiscal revenues and undermine prospects; transition to clean energy faster than anticipated could cause disorderly adjustment.

### Policy Discussions and Recommendations
A. Improving Policy Coordination Through Proper Budgeting
- Short-term:
  - Proper budgeting would help (i) mitigate the procyclical bias in spending and (ii) improve coordination between fiscal and monetary policies.
  - Improve costing tools and develop a fiscal framework for resource management as an important first step.
- Medium-term:
  - Payroll analysis, harmonization of public investment and recurrent budget processes, and production of more complete budget-related reports.
  - Reduce distortions due to high public sector wages and subsidies to improve incentives and resource allocation.
  - Reprioritize spending to enhance growth and efficiency and support intergenerational equity.
  - Tax policy should aim to diversify sources of revenue away from oil.
- SOE-related fiscal risks:
  - Identify the budgetary impact of state-owned enterprises (SOEs); streamline ownership structures and tighten control, especially of state-owned public banks.
  - Undertake stock-taking of existing public sector bank accounts and develop a roadmap toward a Treasury Single Account.
  - Consider gradual and selective privatization to support private sector development and diversification away from hydrocarbons.

B. Completing Central Bank Reunification and Maintaining Financial Stability
- Complete reunification requires integration of the payment system and unification of accounting procedures.
- Limiting monetary financing by the CBL’s Eastern branch will alleviate pressure on the exchange rate and on banking sector liquidity and facilitate policy coordination.
- Implement CBL regulatory and governance reforms in the banking sector to strengthen banks and maintain financial stability.
- Address underlying pressures on the exchange rate: preserve efficient functioning of the foreign exchange market; assess measures influencing demand for foreign exchange against impacts on the parallel market, inflation and reserves.
- In absence of conventional monetary policy tools, controlling fiscal expenditure is the preferred policy response consistent with Libya’s macroeconomic policy framework.
- Maintain integrity of the means of payment; recent steps to withdraw compromised banknotes are welcome, but ensure alternative modes of payment are available and that the unbanked are not penalized.
- Continue reforms in banking law and governance, AML/CFT framework, supervision, banks’ disclosure requirements, establishment of a financial stability committee, development of Islamic finance, fit and proper requirements, and separation between CBL’s ownership and supervisory functions.
- CBL actions already taken include issuing guidance for banks to increase capital, reinforcing the Financial Information Unit (FIU), and promoting financial inclusion through enhancements in electronic payments; further work needed to ensure compliance and strengthen the banking sector.

C. Strengthening Institutions and Building Capacity
- Governance reforms across the public sector are necessary; corruption remains a significant concern and Libya ranks below MENA averages on several governance indicators.
- Actions recommended:
  - Strengthen the anticorruption legal framework to align with Libya’s obligations under the United Nations Convention Against Corruption.
  - Create effective systems for preventing conflicts of interest and asset declarations.
  - Adopt and implement an updated National Anticorruption Strategy with adequate monitoring mechanisms.
- Capacity development (CD) needs:
  - Prioritize CD for compiling national accounts and PFM reforms, including strengthening macro-fiscal and budget preparation functions, improving cash management controls and oversight.
  - CD for statistics should prioritize national accounts and the external sector due to significant gaps (see Annex V).
  - Authorities should set up a coordinating body to facilitate CD provision and implementation to avoid duplication and improve information-sharing across institutions.
- Note: Significant data gaps hamper analysis and policy advice; the 2025 Article IV consultation is expected to undertake a comprehensive review of governance, anticorruption, and the rule of law.

D. Policies for Diversifying Away from Hydrocarbons and Private Sector Development
- The medium-term key policy objective remains diversification away from hydrocarbons while promoting stronger and more inclusive private sector growth.
- Reform sequencing and a stable political and security environment, together with institutional development and support from the Fund and other partners, are necessary for successful reform implementation.

*Source: 1lbyea2024001-print-pdf - 1. Germany: Unification of the Central Bank in 1990 (IMF).*

### 18.       The longer-term economic strategy should aim to diversify away from

### 1lbyea2024001-print-pdf - 18.       The longer-term economic strategy should aim to diversify away from

### Longer-term economic strategy and structural reforms
- Objective: Diversify away from hydrocarbons and foster stronger and more inclusive private sector-led growth.
- Structural reform priorities:
  - Strengthen institutions and the rule of law.
  - Develop a clear economic vision for the country.
  - Scale up development spending to alleviate growth bottlenecks and reduce fiscal costs associated with high spending on public sector wages and subsidies.
  - Promote labor-intensive non-oil economic activity by capitalizing on comparative advantages: location, landmass, natural resources, and access to energy and labor.
- Notable structural facts and constraints:
  - Almost 90 percent of the formally employed population work for the public sector.
  - Estimates of the unemployment rate range from 15 and 19 percent.
  - Energy subsidies account for about one quarter of government spending.
  - Political-economy constraints currently hinder implementation of energy subsidy reform.

### Authorities’ views
- Broad agreement with staff’s macroeconomic policy objectives:
  - Need for a unified budget.
  - Curbing public expenditure.
  - Reforming energy subsidies.
  - Diversifying away from hydrocarbons in the medium term.
- Central Bank of Libya (CBL) views:
  - Exchange rate is the nominal anchor for the Libyan economy.
  - Tax on foreign exchange purchases is intended as a temporary measure to safeguard reserves; distortions acknowledged but judged necessary until spending is restrained.
  - Commitment to enhance financial sector regulation and supervision: directing banks to raise capital, developing the FIU and AML/CFT framework, withdrawal of 50-dinar banknotes to preserve currency credibility.
- Governance, data, and capacity:
  - Authorities recognize governance needs to improve, including anticorruption and transparency measures.
  - Progress noted in data quality for external statistics, monetary and financial statistics, and fiscal outturns; ongoing work to update CPI basket and labor statistics.
  - Authorities request further technical assistance on: budget preparation, monetary policy, national accounts, labor market statistics, CPI rebasing, developing the macro-fiscal unit and PFM functions.
- Political context:
  - Significant progress in reunifying the central bank across most departments, but de-facto full reunification requires comprehensive political reconciliation.

### Staff appraisal and recommendations
- Resource envelope and risks:
  - Hydrocarbon production and exports will determine Libya’s available resource envelope in the short and medium term.
  - Baseline projection indicates declining fiscal and external balances in line with a projected decline in global oil prices.
  - Key downside risks: lack of fiscal prudence (partially materialized), volatility of world oil prices, faster-than-expected worldwide transition to clean energy technology.
- Policy recommendations (selected):
  - Control fiscal expenditure to address underlying pressures on the exchange rate; an agreed-upon budget is vital to manage resources and avoid ad hoc/procyclical spending.
  - Preserve adequate foreign exchange reserves and ensure efficient functioning of the foreign exchange market; assess measures that influence foreign exchange use against impacts on the parallel market, inflation, and reserves.
  - Maintain integrity of means of payment and continue banking sector reforms:
    - Improve NPL reporting and monitoring of bank capitalization.
    - Divest from commercial banks where appropriate.
    - Conduct a national assessment of money laundering and terrorist financing risks to prioritize AML/CFT mitigation measures.
    - Reduce banks’ operational risk, reform legal and administrative procedures, and further develop Islamic finance products.
    - Ensure alternative modes of payment are available following withdrawal of 50-dinar notes.
  - Strengthen the fiscal framework:
    - Increase transparency and improve tax administration and compliance.
    - Stock-take existing public sector bank accounts and establish a Treasury Single Account.
    - Gradual and selective privatization to promote private sector development and diversification away from hydrocarbons.
    - Strengthen macro-fiscal and budget preparation functions and broader PFM reforms.
  - Confront corruption and strengthen the rule of law:
    - Strengthen anticorruption legal framework and align with obligations under the United Nations Convention Against Corruption.
    - Adopt and implement an updated National Anticorruption Strategy with adequate monitoring mechanisms.
    - Conduct a comprehensive governance review during the 2025 Article IV consultations (as expected).
  - Enhance data provision and statistical capacity:
    - Resume economic surveys paused after the revolution.
    - Build capacity for compiling national accounts.
    - Set up a coordinating body to facilitate delivery and implementation of capacity development (CD) and avoid duplication among providers.
- Institutional and sequencing priorities:
  - Durable political settlement is needed to complete central bank reunification, integrate the payment system, and unify accounting procedures.
  - Better coordination between fiscal and monetary policies to enhance credibility and decrease the gap between official and parallel exchange rates.
  - Staff engagement to assess Libya’s exchange system for consistency with Article VIII obligations.
  - Recommendation: next Article IV consultation to be held on the standard 12-month cycle.

### Key statistics and projections (selected figures reported exactly)
- Employment and subsidies:
  - Almost 90 percent of the formally employed population work for the public sector.
  - Unemployment rate estimates range from 15 and 19 percent.
  - Energy subsidies account for about one quarter of government spending.
- Table 1 (selected rows, exact values as reported):
  - Real GDP (annual percent change): 2021: 28.3; 2022: -8.3; 2023: 10.2; 2024: 7.8; 2025: 6.9; 2026: 4.2; 2027: 2.0; 2028: 2.1; 2029: 2.3; 2030: 2.5.
  - Hydrocarbon real GDP (annual percent change): 2021: 45.0; 2022: -17.0; 2023: 17.8; 2024: 10.2; 2025: 7.7; 2026: 3.6; 2027: 0.0; 2028: 0.0; 2029: 0.0; 2030: 0.0.
  - Nominal GDP in billions of Libyan dinars 1/: 2021: 159.0; 2022: 208.2; 2023: 212.0; 2024: 221.9; 2025: 232.3; 2026: 240.3; 2027: 244.5; 2028: 250.6; 2029: 258.6; 2030: 270.8.
  - Nominal GDP in billions of U.S. dollars 1/: 2021: 35.2; 2022: 43.3; 2023: 44.0; 2024: 46.0; 2025: 48.3; 2026: 50.2; 2027: 51.3; 2028: 52.8; 2029: 54.4; 2030: 57.0.
  - CPI inflation (period average): consistently reported as 2.6 across 2024–2030 where listed; historical: 2021: 2.9; 2022: 4.5; 2023: 2.4.
  - Central government overall balance (percent of GDP): 2021: 14.8; 2022: 23.6; 2023: 8.2; 2024: 1.5; 2025: 1.3; 2026: 0.5; 2027: 0.1; 2028: 0.0; 2029: 0.0; 2030: 1.2.
  - Gross official reserves (in billions of U.S. dollars): 2021: 69.4; 2022: 74.1; 2023: 78.3; 2024: 79.0; 2025: 79.5; 2026: 79.8; 2027: 79.8; 2028: 79.8; 2029: 79.8; 2030: 80.6.
  - Crude oil production (mbd): 2021: 1.2; 2022: 1.0; 2023: 1.2; 2024: 1.3; 2025: 1.4; 2026: 1.5; 2027: 1.5; 2028: 1.5; 2029: 1.5; 2030: 1.5.
  - Crude oil price (US$/bbl, WEO adjusted for Libya): 2021: 64.4; 2022: 89.6; 2023: 75.0; 2024: 72.3; 2025: 68.6; 2026: 65.9; 2027: 63.3; 2028: 60.8; 2029: 58.4; 2030: 56.1.
- External and fiscal flows (selected figures from Table 4):
  - Current account (in millions of U.S. dollars): 2021: 5,683; 2022: 12,401; 2023: 6,390; 2024: 6,835; 2025: 7,020; 2026: 6,295; 2027: 6,237; 2028: 6,178; 2029: 5,712.
  - Exports (f.o.b, in millions of U.S. dollars): 2021: 32,343; 2022: 37,519; 2023: 31,363; 2024: 31,567; 2025: 32,103; 2026: 31,829; 2027: 30,624; 2028: 29,705; 2029: 28,839.
  - Imports (f.o.b, in millions of U.S. dollars): 2021: -16,981; 2022: -17,176; 2023: -17,579; 2024: -19,126; 2025: -19,525; 2026: -19,320; 2027: -18,116; 2028: -17,412; 2029: -17,193.
  - Total foreign assets (in billions of U.S. dollars) 1/: 2021: 79.7; 2022: 84.2; 2023: 88.5; 2024: 89.3; 2025: 89.9; 2026: 90.2; 2027: 90.2; 2028: 90.2; 2029: 90.2.
  - Gross official reserves (in months of next year's imports): 2021: 33.6; 2022: 34.6; 2023: 34.0; 2024: 33.9; 2025: 34.5; 2026: 36.9; 2027: 38.5; 2028: 39.0; 2029: 40.2.
- Monetary and financial sector indicators (selected figures):
  - Broad money (in millions of Libyan dinars): 2018: 111,566; 2019: 108,889; 2020: 126,271; 2021: 100,656; 2022: 112,714; 2023: 144,577.
  - Net claims on government (Libyan dinar, billion): 2018: -94.1; 2019: -114.9; 2020: -110.9; 2021: -114.8; 2022: -117.8; 2023: -119.0.
  - Regulatory capital to risk-weighted assets (percent): 2018: 17.8; 2019: 18.4; 2020: 19.2; 2021: 16.6; 2022: 15.7; 2023: 15.3.
  - Nonperforming loans to gross loans (percent): 2018: 21.0; 2019: 34.2; 2020: 34.1; 2021: 29.6; 2022: 24.1; 2023: 22.2.

*Source: IMF staff report content as provided in the supplied PDF chapter/section.*

### Annex I. Risk Assessment Matrix

### Annex I. Risk Assessment Matrix

### Risk scenarios and likelihoods
- Low-Medium: Higher food prices add to fiscal burden through higher indirect subsidies or social discontent if domestic price pressures are not contained, while higher energy prices would reduce fiscal and external vulnerabilities.
- Medium: Higher food prices add to fiscal burden through higher indirect subsidies, while lower energy prices would significantly erode fiscal space and weaken the external position.
- High: Sharp global growth slowdown leading to sustained decline in oil and gas prices will turn current account and the overall balance surpluses into deficit and significantly weaken the fiscal and external poistions.
- Medium: Deepening geoeconomic fragmentation could disrupt trade flows and hamper economic diversification attempts. Libya could nevertheless benefit in the short-term if there is, an increase in hydrocarbon prices.
- High: Libya is vulnerable, recently experiencing deadly floods, to climate shocks. In addition to the impact on lives and livelihoods, these shocks could entail large fiscal costs and add to inflationary pressures.
- High: The fragile status quo could revert into active conflict and oil blockades to be used again to exert political pressure. This would endanger fiscal sustainability and exacerbate external imbalances.
- High: Fiscal and external positions deterriorate leading to loss of FX reserves and financial sector instability.
- High: Higher current expenditure will put the fiscal position on an unsustainble path and errode available fiscal space from the oil windfall, leaving the country vulnurable to future shocks.

### Domestic risks, expected impacts, and policy responses
- Political instability turns into active conflict. Political tensions could lead to active conflict or the reuse of oil facilities and export terminal blockade to push political demands.
  - Likelihood: High
  - Policy response and recommendations:
    - Initiate reforms to target subsidies and share oil wealth more equitably across the country.
- Wasteful fiscal spending to gain popular support; political rivals could engage in more wastful current expenditure such as grants and allowances to shore up support.
  - Likelihood: High
  - Policy response and recommendations:
    - Phase out broad-based allowances and grants and, if needed, replace them with social support measures that target the vulnerable.
    - Increase capital expenditure to rebuild necessary infrastructure.
    - Initiate structural reforms that will strengthen the private sector and create jobs.
- Extreme climate events (loss of human lives, severe damage to infrastructure, supply disruptions, lower growth, financial instability).
  - Likelihood: High (also listed as Medium elsewhere)
  - Policy response and recommendations:
    - Invest in climate-resilient infrastructure and agriculture.
    - Accelerate economic diversification away from hydrocarbons.
- Social discontent (high inflation, real income loss, spillovers from conflicts, worsening inequality, disputed elections).
  - Likelihood: Medium
  - Policy response and recommendations:
    - Proceed with wide ranging governance and anti-corruption reforms.
    - Build adequate fiscal and FX reserve buffers.
    - Adopt a medium-term fiscal anchor and transparently communicate fiscal goals to the public.
- Abrupt global slowdown (synchronized sharp growth downturn, adverse spillovers).
  - Likelihood: Medium
  - Policy response and recommendations:
    - Avoid procyclicality of fiscal spending by reducing wastful current spending and build fiscal space to allow for gradual adjustment.
    - Replace broad subsidies with targeted social support to the vulnurable.
- Deepening geoeconomic fragmentation (trade and FDI disruption, supply disruptions, protectionism, payments systems fragmentation).
  - Likelihood: High
  - Policy response and recommendations:
    - Accelerate fiscal and structural reforms to boost potential growth.
    - Incentivize the diversification of the export base away from oil and enhance the competitiveness of the non-oil export sector.

### Global risks, expected impacts, and policy responses
- Intensification of regional conflicts (Gaza and Israel, Russia’s war in Ukraine, other regional conflicts or terrorism).
  - Likelihood: High
  - Policy response and recommendations:
    - Initiate targeted support for the most vulnerable to protect against rising food prices.
    - Accommodate demand on FX and provide domestic liquidity as needed.
- Commodity price volatility (recurrent supply disruptions and demand fluctuations).
  - Likelihood: High
  - Policy response and recommendations:
    - Initiate energy subsidy reform, replacing broad subsidies with targeted support for the most vulnerable.
    - Replace untargetted grants and allowances with well designed social support programs targetting the most vulnurable.

### Key external sector findings and policy guidance
- Overall external assessment:
  - Overall Assessment: Libya’s external position in 2023 was broadly in line with the levels implied by fundamentals and desirable policy settings.
  - EBA-lite current account (CA) model: CA gap is estimated at -1 percent.
- Current account and hydrocarbons:
  - The share of hydrocarbons in total exports: over 90 percent.
  - Current account surplus: declined from 28.6 percent of GDP in 2022 to 14.5 percent of GDP in 2023.
  - Projected medium-term hydrocarbon production: increase to 1.5 million barrels per day will not be sufficient to offset an expected decline in oil prices.
- Model results and exchange rate:
  - EBA-lite CA model estimate: CA Gap -1.0
  - Elasticity used: -0.3
  - REER Gap (in percent): 3.1 (staff assesses the REER to be overvalued by about 3.1 percent)
  - Official peg: Since January 2021, the official rate has been SDR 0.1555 per LYD 1.
- Capital and financial accounts:
  - Background: driven primarily by other investments, concentrated in the oil sector as reinvestments by oil companies.
  - Policy guidance: Diversify away from hydrocarbons and develop the private sector; improve business climate and policy predictability to attract investment.
- Reserves and FX intervention:
  - Gross official reserves: US$78.3 billion at the end of 2023 (more than 200 percent of GDP and covering more than 3 years of imports).
  - Projection: reserves projected to reach more than US$79.8 billion by 2029 assuming fiscal spending remains contained.
  - Assessment: Reserves are adequate for precautionary buffers and savings for future generations given heightened political and security risks.

### Key debt sustainability and fiscal projections (selected figures)
- Staff commentary: Under budget law, the central bank can provide advances to the government up to one fifth of estimated revenues in the budget, and the advances should be repaid at the end of the fiscal year. However, monetary financing has been used in years where oil revenues have fallen short; this financing is denominated in domestic currency, carries no interest, has no repayment schedule, and can be forgiven administratively.
- Public debt (Percent of GDP):
  - Actual 2023: Public debt 91.5
  - 2024: 83.4
  - 2025: 79.9
  - 2026: 77.6
  - 2027: 76.8
  - 2028: 76.0
  - 2029: 74.0
  - 2030: 73.2
- Primary deficit (Percent of GDP):
  - 2023: -8.7
  - 2024: -5.0
  - 2025: -4.0
  - 2026: -3.6
  - 2027: -2.9
  - 2028: -2.1
  - 2029: -1.8
  - 2030: -0.4
- Other identified flows (Percent of GDP):
  - 2023: 8.7
  - 2024: 5.0
  - 2025: 4.0
  - 2026: 3.6
  - 2027: 2.9
  - 2028: 2.1
  - 2029: 1.8
  - 2030: 0.4
- Memo projections:
  - Real GDP growth (percent): 2023: 10.2; 2024: 7.8; 2025: 6.9; 2026: 4.2; 2027: 2.0; 2028: 2.1; 2029: 2.3; 2030: 2.5
  - Inflation (GDP deflator; percent): 2023: -7.5; 2024: 1.8; 2025: -2.4; 2026: -1.1; 2027: -0.9; 2028: -1.0; 2029: 0.3; 2030: -1.3
  - Nominal GDP growth (percent): 2023: 1.9; 2024: 9.7; 2025: 4.4; 2026: 3.0; 2027: 1.0; 2028: 1.1; 2029: 2.6; 2030: 1.2

### Country engagement strategy priorities and opportunities
- Context and constraints:
  - Political situation remains unsettled; authorities follow a policy of equal but untargeted distribution of hydrocarbon wealth to maintain social stability.
  - Post-Revolution fragmentation, strengthened tribal influence, competing militias, lack of government monopoly on force, and weak accountability (almost inoperative judiciary, weak civil society and media).
  - Climate shock example: Storm Daniel—warmer-than-usual Mediterranean water; some areas received the yearly dose of rainfall in a day; Derna was most affected after two dams collapsed.
- Sources of resilience and opportunities:
  - Libya has no public debt, high foreign exchange reserves, and a sovereign wealth fund—currently frozen per UN Security Council resolution—valued at US$72 billion.
  - Potential diversification areas:
    - Fisheries: FAO estimates fishing production around 32,000 tones (below 2009 peak of 52,000).
    - Tourism: rich heritage and strategic location; constrained mainly by political instability and infrastructure needs.
    - Industry: access to low-cost labor markets in Africa, proximity to Europe, abundance of space and raw commodities, cheap energy—requires political stability and structural reforms.
    - Agriculture: imports around 90 percent of cereal consumption; only one half of the 470,000 hectares suitable for irrigation are currently in use due to concerns over depletion of underground water.
- Engagement and reform focus:
  - The Fund will support rebuilding the economy, diversify away from hydrocarbons, and foster private sector-led growth.
  - Revenue diversification: improve tax and customs revenue collection, widen the tax base, provide TA on public financial management (PFM), budget preparation, tax administration, compliance, digitization, upgrade customs systems, and assist with introduction/calibration of a value added tax (VAT).
  - Subsidy and social benefit reforms: transition from costly and inefficient broad subsidies and social benefits to a more targeted and efficient system that protects the most vulnerable, with fiscal savings to be channeled to development expenditure (infrastructure, health, education).

*Annex I. Risk Assessment Matrix and related annexes as provided in the IMF staff report.*

### 11. Monetary policy and the financial sector should be strengthened to promote

### 11. Monetary policy and the financial sector should be strengthened to promote

### Monetary policy and Islamic finance
- A law that prohibits interest rates from being levied, the CBL divide, and the civil war have prevented the CBL from developing Islamic finance instruments to manage excess system liquidity and complicated the issuance of key prudential and conduct regulations.
- Authorities should work to develop Islamic monetary policy tools.

### Financial sector governance, regulation, and supervision
- Weak governance in the financial sector has impeded development and effective oversight.
- Authorities should:
  - Address weak governance in the financial sector.
  - Strengthen regulations and supervision.
  - Increase capacity within supervisory and regulatory institutions.
  - Remove impediments to credit growth.

### Capacity development (CD) priorities and IMF support
- The Fund will continue to support capacity building at Libyan institutions.
- The CD strategy emphasizes building and improving capacity at key Libyan institutions, such as:
  - the CBL,
  - MoF,
  - Ministry of Planning,
  - the National Bureau of Statistics and Census.
- The strategy focuses on:
  - training staff to use the latest frameworks, tools, and methods to guide economic policy making,
  - strengthening governance and anticorruption measures,
  - improving economic data through survey design and data collection,
  - supporting the budget preparation process,
  - strengthening PFM.
- IMF staff collaborates with other IFIs and international partners to facilitate capacity development, avoid duplication, and support better information-sharing across institutions.

### Data issues, adequacy, and corrective actions
- The data provided to the Fund is adequate for surveillance in some respects but has shortcomings; overall assessments described include:
  - "The data provided to the Fund has some shortcomings but is broadly adequate for surveillance."
  - "The data provided to the Fund has some shortcomings that somewhat hamper surveillance."
  - "The data provided to the Fund has serious shortcomings that significantly hamper surveillance." (contextual language in the assessment matrix)
- Key data weaknesses and rationale for staff assessment:
  - Lack of coordination among authorities responsible for preparing and disseminating key economic data creates significant delays and inconsistencies.
  - Most surveys for national accounts stopped in 2011; last establishment census was conducted in 2012; last industry survey was conducted in 2012 (2016 for large establishments); last agricultural census in 2007.
  - Major political, economic, and demographic changes since those dates create a pressing need to restart periodic surveys and adopt the System of National Accounts 2008.
  - External Sector Statistics (ESS) rating reflects gaps in compilation of balance of payments statistics due to weak institutional setting, political uncertainties, and sizeable informal economic activities.
  - Unavailability of sound data sources on unregistered informal transactions hampers balance of payments statistics and affects the External Sector Assessment (ESA).
  - Sources and methods used to compile the National Account Statistics (NAS) are unclear; there is a lack of coverage and low response rate.
- Other data gaps identified:
  - Import and export price indices,
  - Industrial production indices,
  - Construction activity,
  - National disposable income.
- Corrective actions and capacity development priorities:
  - An IMF Technical Assistance Mission (November 2023) identified key areas requiring development and prepared a roadmap for addressing those gaps.
  - Libya is expected to start reporting IIP and quarterly BOP by the end of 2024.
  - CD for NAS includes technical assistance and increasing staff capacities for improving GDP compilation methods, implementing the supply and use (SUT) framework and implementing the 2008 SNA in the Libyan national accounts.
  - CD on prices will focus on updating the CPI basket.
  - Further capacity development is needed for compiling national accounts and an expanded list of financial soundness indicators.
  - PFM framework reforms, including strengthening macro-fiscal and budget preparation functions, are needed to improve cash management controls and oversight.

### Exchange rate arrangements, FX measures, and Fund engagement
- De jure and de facto exchange rate arrangements: conventional peg vis-à-vis the SDR.
  - In June 2003, the CBL adopted a conventional fixed peg to the SDR at a rate of LD 1 = SDR 0.5175.
  - On January 3, 2021, the CBL devalued the LD to the rate of LD 1 = SDR 0.1555.
- Controls and measures:
  - On April 30, 2015, controls were imposed on foreign currency, requiring CBL approval for import letters of credit (LCs) and limiting the amount of foreign currency for personal use.
  - The January 3, 2021 measures relaxed currency controls by increasing limits available for LCs and allowing access to FX for SMEs through a preloaded card.
  - Gap between the official and the parallel exchange rates narrowed after the January 3, 2021 measures but has been widening since November 2023, and stood at around 50 percent in March 2024.
  - In early 2024, the authorities imposed a temporary 27 percent tax on all foreign exchange purchases, while announcing the relaxation of some previously enacted restrictions on imports of non-essential goods and services.
- Fund engagement on exchange system assessment:
  - Staff is engaging with the authorities to assess Libya’s exchange system to determine if any measures are inconsistent with obligations under Article VIII.
  - Staff identified measures subject to Fund approval under Article VIII, Sections 2(a) and 3, including:
    - an exchange restriction arising from removal of normal short-term banking and credit facilities for importers (documentary credits),
    - an exchange restriction arising from requirement to provide a tax clearance certificate and a certificate of payment of social security obligations in support of documentary credits,
    - an exchange restriction arising from limitations on availability of foreign exchange for invisible transactions (personal purposes, studies abroad and medical treatment abroad),
    - an exchange restriction arising from limitations on the transferable percentage of expatriate workers’ salaries that can be remitted,
    - an exchange restriction and an MCP arising from the imposition of a 27 percent tax on all foreign exchange transactions.
  - Authorities’ views: the authorities acknowledged that the above measures are subject to Article VIII, Sections 2(a) and 3 but consider the restrictions necessary for balance of payments reasons as well as to curb money laundering and the financing of terrorism and smuggling. The authorities plan to ease restrictions as conditions allow.

### Technical assistance and recent missions (selected)
- Since the Article IV in 2023, engagement has continued through a Staff Visit in November 2023 and providing technical assistance. Missions covered AML/CFT, PFM, revenue administration, national accounts, balance of payments and price statistics, financial regulation, and supervision.
- Selected TA missions listed:
  - May 2024 (upcoming): MCM TA – Islamic Banking Supervision and Regulation
  - 2023: FAD mission to review functioning of core revenue administration processes
  - 2023: FAD mission on restoring core Public Financial Management (PFM) functions
  - 2023: ICD TA on Macroeconomic frameworks – Ministry of Finance
  - 2023: STA mission – Financial Institutions
  - February 2023: METAC mission on the compilation of Producer Price Indices (PPIs)
  - January 2023: METAC mission on the digitalization of the tax administration (Second mission)
  - December 2022: FAD/METAC mission on reviewing public financial management framework and identifying reform priorities and further CD needs
  - November 2022–February 2023: FAD Peripatetic advisor for ASYCUDA functionalities development
  - November 2022: METAC mission on the digitalization of the tax administration (first mission)
  - August 2022: METAC/FAD mission on the implementation of core custom functions in ASYCUDA World (AW) IT management system
  - July 2022: STA mission on compiling the monetary and financial statistics for the central bank and depository corporations
  - January 2022: METAC mission on the methodology to update the CPI and developing an indicative roadmap
  - June 2022: METAC mission on good practices of taxpayer register
  - January 2022: METAC mission on budget preparation process and draft budget circular
  - January 2022: METAC mission on the compilation of annual national accounts
  - January 2022: FAD mission on Review of revenue administration reform plan and priorities
  - November 2021: METAC mission to restore core Public Financial Management functions
  - September 2021: METAC follow-up mission on cash forecasting
  - April 2021: METAC mission on cash management

*Source: Staff Report for the 2024 Article IV Consultation — Informational Annex and Supplement (as presented in the provided content).*

### 3. Staff recommends approval of the exchange restriction and MCP arising from the

### 3. Staff recommends approval of the exchange restriction and MCP arising from the tax on FX transactions

### Recommendation on the exchange restriction and MCP
- Staff recommends approval of the exchange restriction and MCP arising from the 27 percent tax on all foreign exchange transactions.
- The 27 percent tax on all foreign exchange transactions was introduced for balance of payments reasons and does not discriminate among members.
- The measure will sunset at end-2024, creating a timeline for removal.
- Staff concludes this measure meets the conditions for approval.

### Key administrative and legal details
- The 27 percent “fee” on the US$ selling rate by commercial banks became effective March 15, 2024 (Decree No. 15 of 2024).
- Proceeds from the fee are to be temporarily parked at the CBL and used to cover future development spending and/or to repay public debt.
- The fee expires at end-2024, conditions permitting, but could be adjusted in either direction prior to the expiration.
- Since introduction of the fee, the parallel exchange rate has appreciated by 10 percent and held steady, but still has a 10 percent premium over the official rate plus the fee.

### Political context and constraints on reforms
- Libya is a fragile state with fragmented institutions and competing authorities; progress in reforms remains contingent on a durable political reconciliation.
- Political disagreements have impeded progress toward national elections and broader reforms.

### Social context and fiscal pressures
- Libya has been a welfare state with wide distribution of hydrocarbon income; the wage bill and subsidies together account for close to two-thirds of total government spending.
- Public sector accounts for 90 percent of formal employment and some 2.2 million persons (about 30 percent of the total population) are on government payroll.
- High government wages, benefits, and insufficient controls have created tens of thousands of ghost workers.
- Subsidized fuel prices (among the lowest in the world) have perpetuated lucrative smuggling through porous borders.

### Recent economic developments and outlook
- Libya’s growth, government revenue and balance of payments are highly dependent on hydrocarbon production and volatile international energy prices.
- Authorities plan to increase oil production from the current level of 1.2 million barrels per day (mbd) to initially 1.5 mbd over the next 2-3 years and ultimately to 2 mbd over a longer horizon.
- The planned increase requires large investments by the National Oil Corporation.
- Despite fluctuations, inflation has been subdued due to administratively fixed prices; Libya imports around half of the households’ consumption basket and as high as 90 percent of its cereals needs.
- Libya’s internal and external balances have recorded sizable yet declining surpluses in recent years.
- The CBL’s sizable FX holdings include foreign assets of the Libyan Investment Authority (LIA); a significant portion of LIA’s overall foreign assets has been frozen since 2011.

### Fiscal and monetary framework issues
- Fiscal spending surged in 2023, reflecting a large (unwarranted) increase in the wage bill and higher-than-expected energy subsidies, financed by CBL money creation.
- The rate of increase in broad money in 2023 was the highest since 2011, and public debt rose to over 90 percent of GDP.
- Libya has no external debt and is an external creditor due to past financial support to low-income countries.
- With limited monetary policy instruments, the exchange rate acts as the nominal anchor; the FX fee was considered a second-best solution to curb excessive FX demand and safeguard reserves.
- The imposition of the FX fee permitted the CBL to remove some earlier FX restrictions; remaining restrictions are viewed by authorities as necessary for balance of payments purposes and to curb money laundering, terrorism financing and smuggling.

### Issue of 50-dinar bank notes
- Two different sets of similar looking 50-dinar notes—clear counterfeits of unknown origin and quantity—began circulating in the East in late 2023.
- The CBL decided to withdraw all 50-dinar notes and replace the stock of CBL-issued 50-dinar notes plus the first set of redeemable notes originating in the East with newly issued 10-dinar notes, with a neutral impact on overall liquidity once all bills are replaced.
- The surrender period is through August 2024.
- Authorities believe lower denomination notes may help curb cross-border cash transactions mostly involving smuggling and other illicit activities.

### Central bank reunification and financial sector stability
- The CBL has been a pillar of stability; in late 2022 the reunification process began with consolidation of the CBL Board and appointment of the eastern branch governor as deputy governor of the reunified CBL.
- Reunification has improved coordination in banking system liquidity, management and supervision; the CBL has enhanced the prudential framework and guided banks to increase capital.
- The Financial Information Unit has been strengthened to investigate suspicious financial activities, including money laundering and terrorism financing.
- Further integration (payment systems, unification of accounting procedures) depends on the pace of political reconciliation.
- Authorities are determined to promote financial stability and undertake comprehensive banking system reform in line with the 2023 Article IV Consultation roadmap.

### Climate risks and the Derna tragedy
- Derna experienced unprecedented heavy precipitation contributing to the collapse of two Wadi Derna dams in September 2023; experts characterized the event as occurring once in a few centuries.
- Reportedly, over 400 mm of rain fell in 24 hours compared with an average precipitation of about 1.5 mm in the Derna region in September.
- The flash floods caused a human tragedy with 4,000 confirmed dead and 10,000 missing at sea and presumed dead, and at least 34,000 persons displaced.
- Initial damage and losses were estimated at 3.6 percent of Libya’s 2022 GDP, and the disaster impacted about 1.5 million people.
- The Derna floods highlight climate-related risks for Libya, where the main climate concern is water scarcity.

### Economic diversification priorities
- Authorities recognize the need to diversify away from hydrocarbons to bolster resilience and reduce exposure to oil market volatility.
- Medium-to-longer term objectives include leveraging energy and financial resources and labor availability from Africa to strengthen the non-hydrocarbon base, reduce state presence in non-strategic activities, and encourage private sector participation.
- Immediate opportunities identified include fisheries and agriculture to improve food security and reduce vulnerability to international food price shocks.

### Governance and capacity development
- Authorities acknowledge governance challenges and agree stronger efforts are needed to improve governance, fight corruption and increase transparency and accountability.
- The Libya Audit Bureau is the independent office ensuring compliance of government agencies with established rules and regulations; its senior officials regularly participate in staff discussions.
- Libya has an immense need for capacity development (CD); authorities appreciate IMF technical support in institution building, tax and customs administration, and addressing data gaps.
- Authorities requested further technical support in budget preparation, monetary policy, national accounts, labor market statistics, CPI rebasing, PFM and developing a macro fiscal unit.
- Authorities agree better coordination of technical support from multiple multilateral and bilateral sources is needed and are determined to improve such coordination.

*Statement by Mr. Bijani, Executive Director for Libya and Mr. Sassanpour, Senior Advisor to Executive Director; July 1, 2024.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1lbyea2024001-print-pdf.pdf_