## ENERGY SUBSIDY REFORM IN LIBYA

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---

### Introduction
- Energy subsidies in Libya are "extremely generous and poorly targeted."
- Gasoline prices have not changed since the 1970s; the price of gasoline in Libya is "currently the lowest in the world."
- Subsidies are typically regressive, give disproportionate benefits to wealthier segments, and generate corruption and wide-scale smuggling.
- Subsidies divert resources from public goods: development spending on education and health together account for less than 1 percent of total spending, whereas subsidies alone take up more than one third of the total budget.

### Size and Burden of Energy Subsidies
- Direct energy subsidies:
  - Accounted for one third of revenues and 20 percent of GDP in 2024 (adjusted to include the crude oil swap).
- Total energy subsidy bill in 2024:
  - Reaches US$17 billion in 2024 (35 percent of GDP) when adding the cost of crude oil refined locally and natural gas used for electricity generation (estimated at an additional US$3.9 billion and US$4 billion, respectively).
- Fuel imports:
  - Jumped from an average of US$3 billion in 2016-2019 to US$9 billion in 2024 (Libyan Audit Bureau).
  - Imports currently account for around 90 percent of gasoline consumption and around 70 percent of diesel consumption.
- Crude oil swap (initiated by NOC in late 2021):
  - Imported quantities of fuel products have jumped 50 percent; imports are based on stated requirements of fuel distribution companies and state enterprises, which are typically exaggerated.
- Electricity sector specifics:
  - Electricity tariffs in Libya are US$0.008 per kWh.
  - In 2023, electricity generation utilized 10 billion cubic meters of natural gas and 5 million barrels of crude oil at a cost of US$4.4 billion.
  - Generation capacity increased by around 40 percent between 2020 and 2024.
  - Libya’s per capita electricity consumption is "already one of the highest in the region."
- Smuggling and leakage:
  - Authorities estimate that as much as 30 percent of the imported fuel is being smuggled.
  - The distribution network is the suspected source of leakage to the black market and cross-border smuggling.
- Revenue collection failures:
  - Significant gaps exist between estimated revenues from local sales of fuel and electricity and the actual revenues transmitted to the government.
  - Majority of citizens do not settle electricity bills despite very low tariffs.
- Figure- and chart-based findings reflected in text:
  - Sharp divergence between estimated and collected revenues from sale of fuel products (Million Dinars).

### Barriers to Implementation
- Opposition from entrenched interest groups:
  - Smuggling of subsidized fuel yields about US$0.7 per liter, generating an annual revenue of around US$3 billion to key beneficiaries.
  - Reform threatens these revenue streams and could provoke violent resistance.
- Political fragmentation:
  - Absence of a unified government and competing militias complicates consensus-building and long-term reform implementation.
- Trust and social contract concerns:
  - Subsidies are regarded as part of the social contract; previous reform attempts were reversed due to political pressure and public discontent.
  - Libya previously phased out food subsidies in 2014, which could provide lessons.
- Inflationary and second-round effects:
  - Direct effect on inflation is limited by the small share of energy in the consumer basket, but price adjustments will raise energy spending as a share of household expenditure.
  - Second-round effects (through costs of services, transport, electricity generation, and wages) could be significant; data limitations prevented quantifying these effects in the report.

### Proposed Reform Plan (Sequencing and Key Measures)
- Overall approach:
  - Successive phases with political consensus and an open dialogue among political groups; IMF approach (IMF, 2013) endorsed.
- Establishing actual fuel needs:
  - Create an independent committee representing different entities to assess real fuel requirements in line with international consumption norms for individuals and institutional consumers.
  - Limit imports to established quantities, accounting for local refining capacity.
  - Quantify the real cost of subsidy and reflect it properly in fiscal accounts.
- Restructure distribution and collection systems before price increases:
  - Secure the distribution network with a digitalized monitoring system tracking fuel from production to retail to identify leakages (including fuel sold to the electricity company and local refineries).
  - Implement an effective collection system to ensure pass-through of price increases to all consumers equally, including state enterprises.
  - Allocate a temporary subsidy to the electricity company to cover losses until tariffs reflect real production costs.
  - Convert residential and commercial electricity meters to prepaid systems and terminate illegal connections.
  - Note: A system in the South of Libya uses weekly gasoline quotas via QR codes; this could be expanded nationwide.
- Communication strategy:
  - Implement a clear, transparent communication plan to disclose the budget allocated to energy subsidies, explain welfare losses under the existing system, and describe how the public will be compensated.
  - Emphasize that citizens face both inflated parallel-market prices and bear the cost of subsidies they do not receive.
- Pricing and anti-smuggling objective:
  - Price increases should be sufficient to eliminate smuggling; given large price disparities, a front-loaded increase may be essential despite preference for gradualism elsewhere.
- Automatic pricing mechanism:
  - After total elimination of the subsidy, introduce an automatic fuel pricing mechanism that passes through changes in international fuel prices to domestic prices using a formula accounting for international prices, transportation costs, taxes, and potentially a smoothing factor (monthly or quarterly revisions).

### Illustrative Gradual Phaseout Scenario (price and phaseout schedule)
- Gasoline (Unit: Liter)
  - Current price (LYD): 0.15
  - Current price (US$): 0.027
  - Target price (LYD): 3.3
  - Year 1 (LYD): 1.5
  - Year 2 (LYD): 2.5
  - Year 3 (LYD): 3.3
  - Year 4 (LYD): Automatic pricing
  - Year 5 (LYD): Automatic pricing
- Diesel (Unit: Liter)
  - Current price (LYD): 0.15
  - Current price (US$): 0.027
  - Target price (LYD): 3.3
  - Year 1 (LYD): 1.5
  - Year 2 (LYD): 2.5
  - Year 3 (LYD): 3.3
- LPG (Unit: Liter)
  - Current price (LYD): 0.05
  - Current price (US$): 0.012
  - Target price (LYD): 2.1
  - Year 1 (LYD): 0.5
  - Year 2 (LYD): 0.9
  - Year 3 (LYD): 1.3
  - Year 4 (LYD): 1.7
  - Year 5 (LYD): 2.1
- Kerosene (Unit: Liter)
  - Current price (LYD): 0.09
  - Current price (US$): 0.016
  - Target price (LYD): 3.1
  - Year 1 (LYD): 0.7
  - Year 2 (LYD): 1.3
  - Year 3 (LYD): 1.9
  - Year 4 (LYD): 2.5
  - Year 5 (LYD): 3.1
- Electricity (Unit: kWh)
  - Current price (LYD): 0.04
  - Current price (US$): 0.005
  - Target price (LYD): 0.8
  - Year 1 (LYD): 0.2
  - Year 2 (LYD): 0.4
  - Year 3 (LYD): 0.5
  - Year 4 (LYD): 0.7
  - Year 5 (LYD): 0.8
- Estimated savings (US$ million):
  - 4,736
  - 8,568
  - 11,863
  - 13,004
  - 14,146

### Policy Recommendations and Implementation Notes
- Prioritize establishing accurate fuel needs and reflecting full subsidy costs in fiscal accounts (including crude oil refined locally and fuels used for electricity generation).
- Restructure distribution and implement digital tracking and robust collection systems before raising prices.
- Use prepaid electricity meters and enforce termination of illegal connections to ensure compliance with new tariffs.
- Design a targeted mitigation package (social transfers) to contain social impact from price adjustments.
- Consider a front-loaded initial increase in fuel prices to reduce smuggling, followed by a phased removal and eventual automatic pricing mechanism to prevent future price gaps.
- Communicate transparently with the public about the scale of subsidies and compensation measures to build trust and reduce social unrest.

### Mitigation Plan to Accompany Subsidy Reform Plan — Design considerations
- A well-structured mitigation plan is vital to minimize negative impacts and ensure a smooth transition.
- International experience suggests countries with broad-based and relatively generous social protection programs covering a large segment of the population faced fewer implementation challenges and less pushback during early stages of reform (IMF, 2013).
- In Libya, direct cash transfers may be the easiest to implement and the most accepted by the public.
- Several existing social programs could be expanded to incorporate subsidy reform transfers.
- Key tradeoffs the social protection plan needs to consider:
  - Target groups: whether to target the lowest deciles of the population (lowest 40-50 percent) based on income or to extend the transfers to all citizens uniformly.
  - Type of program: whether to expand existing programs or design new ones exclusively for subsidy reform.
  - Size of budgetary savings: whether to redistribute all savings or re-invest them in other sectors.
  - Timeline: whether the transfers will be permanent or temporary.

### Illustrative Cash Transfer Scenario and Fiscal Impact
- Based on the 2022 household spending survey:
  - Average household spending on energy and transportation is LYD 78 per family with an average family size of 5.
- The illustrative scenario shows transfers can cover the average welfare loss per family and still have sizable savings starting from the third year after smuggling is contained and the gasoline and diesel subsidies are fully phased out.
- Recommended reinvestment:
  - Transfers should be reinvested in health, education, and public infrastructure—coordinated with the budget process—according to a pre-determined and communicated plan with the public.

- Table 2. Libya: Illustrative Cash Transfers to Accompany Gradual Phaseout of Subsidies
  - Year 1
    - Illustrative cash transfer per citizen/month US$: 39.5
    - LYD (ER=5.5 /US$): 217.1
    - Transfers cost US$ million: 3,315
    - Budgetary savings US$ million: 1,421
  - Year 2
    - Illustrative cash transfer per citizen/month US$: 61.2
    - LYD (ER=5.5 /US$): 336.6
    - Transfers cost US$ million: 5,141
    - Budgetary savings US$ million: 3,427
  - Year 3
    - Illustrative cash transfer per citizen/month US$: 70.6
    - LYD (ER=5.5 /US$): 388.4
    - Transfers cost US$ million: 5,931
    - Budgetary savings US$ million: 5,931
  - Year 4
    - Illustrative cash transfer per citizen/month US$: 85.1
    - LYD (ER=5.5 /US$): 468.3
    - Transfers cost US$ million: 7,152
    - Budgetary savings US$ million: 5,852
  - Year 5
    - Illustrative cash transfer per citizen/month US$: 92.6
    - LYD (ER=5.5 /US$): 509.4
    - Transfers cost US$ million: 7,780
    - Budgetary savings US$ million: 6,366

### Implementation and Communication Priorities
- Thorough design of the chosen compensation system is essential.
- Establishing a credible and sustainable automatic pricing mechanism requires institutional conditions to ensure transparency and effectiveness, including a clear legal and regulatory framework and appropriate infrastructure.
- A clear and effective communication strategy with the public early on would facilitate adjustment and minimize potential public rejection.
- Budgetary savings realized from subsidy phaseout should be reinvested in health, education, and public infrastructure according to a pre-determined and communicated plan.

### Conclusion — key findings
- Energy subsidy reform has become crucial for Libya.
- The fiscal cost of subsidies is large, and Libyans are bearing the burden of a subsidy that they do not fully receive.
- Energy subsidies lead to overconsumption of energy, eventually leading to premature resource depletion.
- Given significant price disparities and considerable levels of smuggling, slow price gradual adjustments are unlikely to be effective in Libya.
- Libya has an opportunity to:
  - Gradually phase out subsidies,
  - Compensate citizens for the anticipated welfare loss,
  - Realize budgetary savings.
- Early, clear, and effective public communication would facilitate adjustment and minimize potential public rejection.

*Italic: IMF Country Report No. 25/149, Selected Issues — "Energy Subsidy Reform in Libya", prepared by IMF staff; completed on May 30, 2025.*

### Section 1

### ENERGY SUBSIDY REFORM IN LIBYA

### Introduction
- Energy subsidies in Libya are "extremely generous and poorly targeted."
- Gasoline prices have not changed since the 1970s, leaving the price of gasoline in Libya "currently the lowest in the world."
- Subsidies are typically regressive, giving disproportionate benefits to wealthier segments and generating corruption and wide-scale smuggling.
- Subsidies divert resources from public goods: development spending on education and health together account for less than 1 percent of total spending, whereas subsidies alone take up more than one third of the total budget.

### Size and Burden of Energy Subsidies
- Direct energy subsidies accounted for one third of revenues and 20 percent of GDP in 2024 (adjusted to include the crude oil swap).
- Total energy subsidy bill reaches US$17 billion in 2024 (35 percent of GDP) when adding the cost of crude oil refined locally and natural gas used for electricity generation (estimated at an additional US$3.9 billion and US$4 billion, respectively).
- Fuel imports:
  - Jumped from an average of US$3 billion in 2016-2019 to US$9 billion in 2024 (Libyan Audit Bureau).
  - Imports currently account for around 90 percent of gasoline consumption and around 70 percent of diesel consumption.
- Under the crude oil swap (initiated by NOC in late 2021), imported quantities of fuel products have jumped 50 percent; imports are based on stated requirements of fuel distribution companies and state enterprises, which are typically exaggerated.
- Electricity sector specifics:
  - Electricity tariffs in Libya are US$0.008 per kWh.
  - In 2023, electricity generation utilized 10 billion cubic meters of natural gas and 5 million barrels of crude oil at a cost of US$4.4 billion.
  - Generation capacity increased by around 40 percent between 2020 and 2024.
  - Libya’s per capita electricity consumption is "already one of the highest in the region."
- Smuggling and leakage:
  - Authorities estimate that as much as 30 percent of the imported fuel is being smuggled.
  - The distribution network is the suspected source of leakage to the black market and cross-border smuggling.
- Revenue collection failures:
  - Significant gaps exist between estimated revenues from local sales of fuel and electricity and the actual revenues transmitted to the government.
  - Majority of citizens do not settle electricity bills despite very low tariffs.
- Figure- and chart-based findings reflected in text include:
  - Sharp divergence between estimated and collected revenues from sale of fuel products (Million Dinars).

### Barriers to Implementation
- Opposition from entrenched interest groups:
  - Smuggling of subsidized fuel yields about US$0.7 per liter, generating an annual revenue of around US$3 billion to key beneficiaries.
  - Reform threatens these revenue streams and could provoke violent resistance.
- Political fragmentation:
  - Absence of a unified government and competing militias complicates consensus-building and long-term reform implementation.
- Trust and social contract concerns:
  - Subsidies are regarded as part of the social contract; previous reform attempts were reversed due to political pressure and public discontent.
  - Libya previously phased out food subsidies in 2014, which could provide lessons.
- Inflationary and second-round effects:
  - Direct effect on inflation is limited by the small share of energy in the consumer basket, but price adjustments will raise energy spending as a share of household expenditure.
  - Second-round effects (through costs of services, transport, electricity generation, and wages) could be significant; data limitations prevented quantifying these effects in the report.

### Proposed Reform Plan (Sequencing and Key Measures)
- Overall approach: successive phases with political consensus and an open dialogue among political groups; IMF approach (IMF, 2013) endorsed.
- Key sequential priorities:
  - Establishing actual fuel needs:
    - Create an independent committee representing different entities to assess real fuel requirements in line with international consumption norms for individuals and institutional consumers.
    - Limit imports to established quantities, accounting for local refining capacity.
    - Quantify the real cost of subsidy and reflect it properly in fiscal accounts.
  - Restructure distribution and collection systems before price increases:
    - Secure the distribution network with a digitalized monitoring system tracking fuel from production to retail to identify leakages (including fuel sold to the electricity company and local refineries).
    - Implement an effective collection system to ensure pass-through of price increases to all consumers equally, including state enterprises.
    - Allocate a temporary subsidy to the electricity company to cover losses until tariffs reflect real production costs.
    - Convert residential and commercial electricity meters to prepaid systems and terminate illegal connections.
    - Note: A system in the South of Libya uses weekly gasoline quotas via QR codes; this could be expanded nationwide.
  - Communication strategy:
    - Implement a clear, transparent communication plan to disclose the budget allocated to energy subsidies, explain welfare losses under the existing system, and describe how the public will be compensated.
    - Emphasize that citizens face both inflated parallel-market prices and bear the cost of subsidies they do not receive.
  - Pricing and anti-smuggling objective:
    - Price increases should be sufficient to eliminate smuggling; given large price disparities, a front-loaded increase may be essential despite preference for gradualism elsewhere.
  - Automatic pricing mechanism:
    - After total elimination of the subsidy, introduce an automatic fuel pricing mechanism that passes through changes in international fuel prices to domestic prices using a formula accounting for international prices, transportation costs, taxes, and potentially a smoothing factor (monthly or quarterly revisions).

### Illustrative Gradual Phaseout Scenario (Table summary)
- Table header: Libya: Illustrative Gradual Phaseout Scenario
- Price and phaseout schedule (units and exact numeric values preserved):
  - Gasoline
    - Unit: Liter
    - Current price (LYD): 0.15
    - Current price (US$): 0.027
    - Target price (LYD): 3.3
    - Year 1 (LYD): 1.5
    - Year 2 (LYD): 2.5
    - Year 3 (LYD): 3.3
    - Year 4 (LYD): Automatic pricing
    - Year 5 (LYD): Automatic pricing
  - Diesel
    - Unit: Liter
    - Current price (LYD): 0.15
    - Current price (US$): 0.027
    - Target price (LYD): 3.3
    - Year 1 (LYD): 1.5
    - Year 2 (LYD): 2.5
    - Year 3 (LYD): 3.3
  - LPG
    - Unit: Liter
    - Current price (LYD): 0.05
    - Current price (US$): 0.012
    - Target price (LYD): 2.1
    - Year 1 (LYD): 0.5
    - Year 2 (LYD): 0.9
    - Year 3 (LYD): 1.3
    - Year 4 (LYD): 1.7
    - Year 5 (LYD): 2.1
  - Kerosene
    - Unit: Liter
    - Current price (LYD): 0.09
    - Current price (US$): 0.016
    - Target price (LYD): 3.1
    - Year 1 (LYD): 0.7
    - Year 2 (LYD): 1.3
    - Year 3 (LYD): 1.9
    - Year 4 (LYD): 2.5
    - Year 5 (LYD): 3.1
  - Electricity
    - Unit: kWh
    - Current price (LYD): 0.04
    - Current price (US$): 0.005
    - Target price (LYD): 0.8
    - Year 1 (LYD): 0.2
    - Year 2 (LYD): 0.4
    - Year 3 (LYD): 0.5
    - Year 4 (LYD): 0.7
    - Year 5 (LYD): 0.8
- Estimated savings (US$ million) listed in the table:
  - 4,736
  - 8,568
  - 11,863
  - 13,004
  - 14,146

### Policy Recommendations and Implementation Notes
- Prioritize establishing accurate fuel needs and reflecting full subsidy costs in fiscal accounts (including crude oil refined locally and fuels used for electricity generation).
- Restructure distribution and implement digital tracking and robust collection systems before raising prices.
- Use prepaid electricity meters and enforce termination of illegal connections to ensure compliance with new tariffs.
- Design a targeted mitigation package (social transfers) to contain social impact from price adjustments (referenced as necessary in the report).
- Consider a front-loaded initial increase in fuel prices to reduce smuggling, followed by a phased removal and eventual automatic pricing mechanism to prevent future price gaps.
- Communicate transparently with the public about the scale of subsidies and compensation measures to build trust and reduce social unrest.

*Italic: IMF Country Report No. 25/149, Selected Issues — "Energy Subsidy Reform in Libya", prepared by IMF staff; completed on May 30, 2025.*

### Section 2

### E. Mitigation Plan to Accompany Subsidy Reform Plan

### Design considerations for the social protection plan
- A well-structured mitigation plan is vital to minimize negative impacts and ensure a smooth transition.
- International experience suggests countries with broad-based and relatively generous social protection programs covering a large segment of the population faced fewer implementation challenges and less pushback during early stages of reform (IMF, 2013).
- In Libya, direct cash transfers may be the easiest to implement and the most accepted by the public.
- Several existing social programs could be expanded to incorporate subsidy reform transfers.
- Key tradeoffs the social protection plan needs to consider:
  - Target groups: whether to target the lowest deciles of the population (lowest 40-50 percent) based on income or to extend the transfers to all citizens uniformly,
  - Type of program: whether to expand existing programs or design new ones exclusively for subsidy reform,
  - Size of budgetary savings: whether to redistribute all savings or re-invest them in other sectors,
  - Timeline: whether the transfers will be permanent or temporary.

### Illustrative cash transfer scenario and fiscal impact
- Based on the 2022 household spending survey:
  - Average household spending on energy and transportation is LYD 78 per family with an average family size of 5.
- The illustrative scenario shows transfers can cover the average welfare loss per family and still have sizable savings starting from the third year after smuggling is contained and the gasoline and diesel subsidies are fully phased out.
- Transfers should be reinvested in health, education, and public infrastructure—coordinated with the budget process—according to a pre-determined and communicated plan with the public to ensure transparency.

- Table 2. Libya: Illustrative Cash Transfers to Accompany Gradual Phaseout of Subsidies (values preserved exactly)

  - Year 1
    - Illustrative cash transfer per citizen/month US$: 39.5
    - LYD (ER=5.5 /US$): 217.1
    - Transfers cost US$ million: 3,315
    - Budgetary savings US$ million: 1,421

  - Year 2
    - Illustrative cash transfer per citizen/month US$: 61.2
    - LYD (ER=5.5 /US$): 336.6
    - Transfers cost US$ million: 5,141
    - Budgetary savings US$ million: 3,427

  - Year 3
    - Illustrative cash transfer per citizen/month US$: 70.6
    - LYD (ER=5.5 /US$): 388.4
    - Transfers cost US$ million: 5,931
    - Budgetary savings US$ million: 5,931

  - Year 4
    - Illustrative cash transfer per citizen/month US$: 85.1
    - LYD (ER=5.5 /US$): 468.3
    - Transfers cost US$ million: 7,152
    - Budgetary savings US$ million: 5,852

  - Year 5
    - Illustrative cash transfer per citizen/month US$: 92.6
    - LYD (ER=5.5 /US$): 509.4
    - Transfers cost US$ million: 7,780
    - Budgetary savings US$ million: 6,366

### Implementation and communication priorities
- A thorough design of the chosen compensation system is essential.
- Establishing a credible and sustainable automatic pricing mechanism requires institutional conditions to ensure transparency and effectiveness, including a clear legal and regulatory framework and appropriate infrastructure.
- A clear and effective communication strategy with the public early on would facilitate adjustment and minimize potential public rejection.
- Budgetary savings realized from subsidy phaseout should be reinvested in health, education, and public infrastructure according to a pre-determined and communicated plan.

### F. Conclusion — key findings
- Energy subsidy reform has become crucial for Libya.
- The fiscal cost of subsidies is large, and Libyans are bearing the burden of a subsidy that they do not fully receive.
- Energy subsidies lead to overconsumption of energy, eventually leading to premature resource depletion.
- Given significant price disparities and considerable levels of smuggling, slow price gradual adjustments are unlikely to be effective in Libya.
- Libya has an opportunity to:
  - Gradually phase out subsidies,
  - Compensate citizens for the anticipated welfare loss,
  - Realize budgetary savings.
- Early, clear, and effective public communication would facilitate adjustment and minimize potential public rejection.

*Source: 1lbyea2025002-print-pdf - Section 2*

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_Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1lbyea2025002-print-pdf.pdf_