## Libya beyond the Revolution: Challenges and Opportunities

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---

### Conflict Devastates the Economy
- Hydrocarbons accounted for more than 70 percent of GDP, more than 95 percent of exports, and approximately 90 percent of government revenue.
- Pre-revolution output: 1.77 million barrels per day of crude oil and close to 0.2 million barrels-equivalent of natural gas.
- 2004–10: average real GDP growth approximately 5 percent; annual consumer price inflation averaged less than 4 percent; official foreign assets increased from $20 billion at end-2003 to $170 billion at end-2010.
- Timeline highlights:
  - Violent protests erupted on February 17, 2011.
  - UN sanctions imposed February 26, 2011; broadened March 17, 2011.
  - NTC declared liberation October 23, 2011; transitional government announced November 22, 2011; parliamentary elections planned by June 23, 2012.
  - Bulk of foreign assets unfrozen December 16, 2011.
- Economic impact in 2011:
  - Crude oil production fell to 22,000 barrels per day in July 2011; restored to half pre-conflict level in last quarter of 2011.
  - Estimated 50 percent contraction in non-hydrocarbon output; total real GDP in 2011 was 60 percent lower than in 2010.
  - CPI estimated to have increased by about 20 percent in 2011.
  - Current account: exports declined from $48.9 billion in 2010 to $19.2 billion in 2011; imports dropped from $24.6 billion to $14.2 billion; current account surplus narrowed from 21 percent of GDP in 2010 to less than 4½ percent of GDP in 2011.
- Fiscal response and financing in 2011:
  - 2011 budget reallocated to humanitarian needs, with increased salaries and disruption of capital expenditures.
  - Revenue declined by 69 percent in nominal terms, from 57 percent of GDP in 2010 to 39 percent of GDP in 2011.
  - Spending on wages rose by approximately 60 percent (driven by March 2011 public-sector wage increase).
  - 2011 budget financed by domestic borrowing of LD 13.5 billion and arrears estimated at LD 6 billion.
- Monetary and liquidity developments:
  - Central Bank of Libya (CBL) lacked access to foreign assets during conflict; parallel market dinar fell to half official value at one point.
  - Official peg: LD1 = SDR 0.5175 since June 14, 2003.
  - Currency in circulation doubled from LD 7.5 billion at end-2010 to LD 15.4 billion at end-2011 (equivalent to approximately $12 billion at end-2011).
  - CBL issued equivalent of $2 billion in newly printed notes and reissued equivalent of $4 billion in withdrawn banknotes.
  - Statutory limit on monthly cash withdrawals: equivalent to $600 (commercial banks imposed lower limits).

- Key tabled projections and estimates:
  - Real GDP, annual percentage change: 2010 = 2.9; 2011 = –60.0; 2012 (Proj.) = 69.7.
    - Non-hydrocarbon: 2010 = 7.0; 2011 = –50.0; 2012 (Proj.) = 20.0.
    - Hydrocarbon: 2010 = –1.2; 2011 = –70.9; 2012 (Proj.) = 163.3.
  - CPI inflation end-period: 2010 = 3.3; 2011 = 19.2; 2012 (Proj.) = –10.4.
  - CPI inflation period average: 2010 = 2.5; 2011 = 14.1; 2012 (Proj.) = 1.9.
  - Overall budget balance, percent of GDP: 2010 = 4.9; 2011 = –42.8; 2012 (Proj.) = –6.8.
  - External current account, percent of GDP: 2010 = 20.8; 2011 = 4.4; 2012 (Proj.) = 11.2.
  - Total foreign assets ($ billion): 2010 = 172; 2011 = 174; 2012 (Proj.) = 174.
    - Gross official reserves: 2010 = 103; 2011 = 106; 2012 (Proj.) = 82.
  - Oil production, millions of barrels per day: 2010 = 1.77; 2011 = 0.51; 2012 (Proj.) = 1.35.

### Financial Sector Reforms on Hold
- Pre-revolution reforms: partial privatization and foreign partners in six out of 16 banks; five largest commercial banks had been fully owned by CBL prior to 2007.
- Commercial bank assets: increased from LD 14.5 billion at end-2003 to LD 65.4 billion at end-2010.
- Financial soundness indicators (2004 → 2010):
  - Nonperforming loans declined from 35.5 percent to 17.2 percent.
  - Loan provisioning increased from 51.8 percent to 85 percent.
  - Regulatory capital ratio increased from 10.4 percent to 17.3 percent.
- Conflict-related deterioration:
  - Asset quality likely worsened due to physical destruction and potentially irrecoverable loans to former-regime entities.
  - Legal challenges over seized property used as collateral create risks.
  - Systemic liquidity crunch occurred despite doubling of currency in circulation; public hoarding of cash and breakdown in banking infrastructure.
  - Credit to the private sector declined by about 6 percent in 2011 (compared to 14.3 percent increase in 2010).
  - Weak financial intermediation: ratio of credit to GDP in 2010 was less than 20 percent.
- Post-unfreeze developments:
  - Unfreezing of Libya’s foreign assets allowed CBL to provide foreign exchange liquidity and narrow spread between official and parallel exchange rates to less than 10 percent in early 2012.
  - CBL announced intent to maintain current exchange rate peg.
  - Restoration of non-cash payment system expected to reduce demand for cash.

- Selected financial indicators (2004 → 2010):
  - Regulatory capital to risk-weighted assets: 2004 = 10.4; 2010 = 17.3.
  - Nonperforming loans to gross loans: 2004 = 35.5; 2010 = 17.2.
  - Loan provisions to nonperforming loans: 2004 = 51.8; 2010 = 85.0.
  - Liquid assets to total assets: 2004 = 49.8; 2010 = 74.3.
  - Return on assets: 2004 = 0.4; 2010 = 1.0.
  - Return on equity: 2004 = 6.8; 2010 = 15.0.

### Economic Recovery Takes Hold amid Risks
- Near-term expectations:
  - Economic activity expected to show recovery in 2012 with improved security.
  - Crude oil production exceeded 1 million barrels per day as of early 2012; expected to reach pre-conflict level in 2014.
  - Non-hydrocarbon GDP expected to recover by 2014, driven mainly by reconstruction.
  - CPI expected to ease as imports resume and CBL withdraws domestic currency by selling foreign exchange.
  - External current account surplus in 2012 expected to increase with restoration of hydrocarbon and non-hydrocarbon exports.
- Key risks:
  - Delays in normalizing security conditions and the return of expatriate workers.
  - Lower international prices for crude oil and natural gas (e.g., deepening euro-area crisis or global slowdown).
  - Diminished fiscal and external buffers, requiring policy coordination among institutions.
  - Need for peaceful political transition, good governance, and rule of law to secure economic progress.

### Rapid Recovery Allows for Early Action on Medium-Term Reform
- Objective: harness short-term recovery to support inclusive medium-term growth.
- Need for a medium-term budget framework ensuring sustainable fiscal policies.
- Short-term trade-offs:
  - Balance recurrent spending pressures against fiscal sustainability and private-sector development.
  - Public-sector wage increases by previous regime will raise wage bill from 9 percent of GDP in 2010 to about 19 percent of GDP in 2012.
  - Envisaged increase in subsidies will raise expenditures on subsidies from 11.7 percent of GDP in 2010 to 15.9 percent of GDP in 2012.

### Fiscal outlook and 2012 budget figures
- Revenues in 2012 are expected to reach LD 55.9 billion (57.9 percent of the GDP).
- Expenditures in 2012 are estimated at LD 62.4 billion (64.7 percent of the GDP).
- The 2012 deficit is foreseen to reach LD 6.6 billion (6.8 percent of the GDP) and is to be financed through the issuance of government bonds and a drawdown in government deposits at the CBL.
- Elevated current (recurrent) spending in the short term is affordable but likely inconsistent with appropriate budgetary prioritization and fiscal sustainability and will exert upward pressure on the real exchange rate.

### Medium-term fiscal consolidation and capital spending
- Fiscal consolidation required to:
  - Offset the large increase in current spending in 2011 and 2012.
  - Provide space for capital and reconstruction spending while preserving long-term fiscal sustainability.
- Capital spending constraints:
  - Subject to capacity constraints; must be reassessed given urgent reconstruction needs, efficiency considerations, and the economy’s absorptive capacity.

### Public sector wage bill and civil service reform
- Reforms needed to contain the wage bill and increase public-sector efficiency.
- Medium-term reform options include:
  - Reducing reliance on the public sector as the main employer.
  - Decompressing the wage structure.
  - Aligning civil service remuneration with that of the market.
  - Monetizing allowances to make compensation more transparent.
  - Introducing performance-based incentives.
  - Computerizing payroll and personnel systems.
  - Strengthening the recruitment system to depoliticize government hiring and professionalize the civil service.

### Subsidies, transfers, and building a comprehensive social safety net
- Subsidies and transfers will increase from 11.7 percent of GDP before the revolution to 15.9 percent of GDP in 2012, equivalent to 25 percent of total expenditure.
- Subsidies will remain elevated and create fiscal pressure, affecting consumption and production patterns and the allocation of resources.
- Subsidy reform objectives:
  - Reduce economic inefficiencies.
  - Better protect low-income households.
- Observations and options:
  - Universal subsidies, particularly fuel subsidies, are not targeted and disproportionately benefit higher-income households.
  - If a sophisticated social safety net is not feasible, consider identifying a package of short-term measures to mitigate the adverse impact of price increases and use some savings from subsidy reform to increase public spending that benefits low-income households.
  - Targeting methods include categorical or geographical application, or linking benefits to a self-targeting work program or schooling requirement.

### Strengthening Public Financial Management (PFM)
- Key PFM challenges and needs:
  - Set up a clear macro-fiscal policy framework with a consistent fiscal rule reflecting the volatile nature of hydrocarbon-based revenues.
  - Fully integrate the sovereign wealth fund (SWF) managed by the Libya Investment Authority (LIA) and the Budget Reserve Account at the CBL into this framework.
  - Create a macro-fiscal policy unit at the Ministry of Finance to enhance fiscal policy formulation and link national policy objectives to macroeconomic performance.
- Budget process reforms:
  - Move from a fragmented, bottom-up budget toward a unified budget process (including full integration of recurrent and capital budgets).
  - Introduce a medium-term perspective to inform the annual budget.
  - Strengthen the policy context of budgeting and adopt a comprehensive and clear budget presentation.
  - Establish a budget preparation calendar specifying roles and functions of agencies.
- Institutional roles and systems:
  - Ministry of Finance central to fiscal management and economic policymaking; assess investment projects to decide priorities within the 2012 development budget.
  - Develop and implement an internationally accepted budget classification and associated chart of accounts.
  - Establish a Government Financial Management Information System (GFMIS).

### Treasury operations, cash management, and market development
- Treasury single account (TSA) at the CBL should be developed to consolidate all cash resources; sub-accounts can enable accounting and control.
  - Close non-core treasury accounts and link the TSA to the SWF system.
  - Sweep excess cash balances at line ministry commercial bank accounts into the TSA on a daily basis.
- Payments system reforms:
  - Make the payments system more dynamic and centralized.
  - Once a GFMIS is implemented, integrate payments with accounting and control.
- Cash planning and forecasting:
  - Build capacity for cash flow forecasting at the Ministry of Finance and line ministries.
  - Use forecasting to calculate TSA cash buffer requirements linked to the SWF system for stabilization.
- Market development:
  - Develop the T-bill market over the medium term for cash management purposes.

### Sovereign Wealth Fund (SWF) system improvements
- Improve SWF system (LIA and Budget Reserve Account) with clearly defined inflow and outflow rules.
- Consider merging the Budget Reserve Account and the LIA portfolio into a single system with two sub-portfolios aligned to stabilization and savings purposes.
- SWF governance and investment rules:
  - Base the SWF on well-specified and regulated investment criteria.
  - Eliminate domestic investments that could adversely impact monetary policy or lead to conflicts of interest and fragmentation of the budget framework.
  - Outflow rules should relate only to long-term objectives or specified contingency events; channel all development spending through the budget.

### Diversification and new growth strategy
- Dependency on hydrocarbons:
  - Non-hydrocarbon activity accounted for no more than 30 percent of GDP pre-conflict and a negligible part of total exports.
- Employment and hydrocarbons:
  - Unemployment appears structural, particularly among youth.
  - Hydrocarbon industry is capital intensive and can make only a limited contribution to employment growth.
- Diversification opportunities and prerequisites:
  - Scope for diversification into tourism and trade given archeological sites, Mediterranean climate, and proximity to European markets.
  - Legal infrastructure for private-sector development adopted in 2010; next step is effective implementation requiring agency coordination and an efficient and reliable judiciary.
  - Upgrade basic infrastructure (roads, electricity) with investment targeted at removing obstacles to economic development.

### Governance, legal framework, and private-sector development
- Improving governance requires a transparent framework with clear accountability rules to foster private-sector development and attract foreign expertise and the skilled diaspora.
- By early 2010, 22 new laws were passed affecting commerce, customs, income tax, the stock market, labor, communication, and land registry.
- Despite reforms, Libya ranked low on measures of governance, business conditions, and competitiveness, including financial market development, innovation, labor market efficiency, business sophistication, and goods market efficiency.

### Human capital and labor market
- Demographics and skills:
  - Close to 50 percent of the population are below 25 years of age.
- Policy priorities:
  - Strengthen education and training programs to provide language, computer, and other skills demanded by the private sector.
  - Establish training programs for workers and job seekers.
  - Reduce the size of the civil service and contain public-sector wages to limit growth in the reservation wage.
  - Strengthen social safety nets to support those in need while allowing the labor market to operate freely.

### Financial sector development
- Financial intermediation is necessary to foster private-sector development and broaden access to finance for small and medium-sized enterprises.
- Banking sector recovery priorities:
  - CBL, as banking supervisor, should verify the impact of the conflict on commercial banks’ balance sheets.
  - Ensure banks have sufficient capital to cover losses and continue lending during reconstruction.
  - Prudential policies should ensure banks have diversified funding sources as TSA implementation will reduce reliance on government deposits.
- Domestic debt market development:
  - Develop fixed-income instruments, including central bank bills regularly auctioned, to manage short-term liquidity.
  - An actively traded government bond market could provide a basis to price dinar-denominated corporate bonds.

### Comprehensive reform agenda and policy anchors
- Libya has an opportunity to modernize infrastructure, create private-sector employment, and reorient the economy, supported by natural resource wealth and hydrocarbon recovery.
- Key requirements for success:
  - Sustained commitment to comprehensive reforms.
  - Maintain the exchange rate peg to the SDR, accompanied by fiscal restraint to prevent inflation and damaging appreciation of the real exchange rate.
  - Advance structural reforms to support private-sector growth, diversification, and employment creation.
  - Enhance access to finance by developing the nascent financial sector.
  - Strengthen the education system and increase human capital.
  - Establish efficient and comprehensive social safety nets to mitigate transition costs.
  - Improve the compilation of national statistics under an independent agency to enhance decision making.
  - Increase transparency to reduce uncertainty and attract skilled diaspora, foreign expertise, and investment.

*Source: IMF staff report "Libya beyond the Revolution: Challenges and Opportunities" (based on data available as of January 2012).*

### 1. Libya–Economic conditions. 2. Libya–History–Civil War, 2011– . 3. Petroleum indus-

### Libya beyond the Revolution: Challenges and Opportunities

### Conflict Devastates the Economy
- Hydrocarbons accounted for more than 70 percent of GDP, more than 95 percent of exports, and approximately 90 percent of government revenue.
- Pre-revolution output: 1.77 million barrels per day of crude oil and close to 0.2 million barrels-equivalent of natural gas.
- 2004–10: average real GDP growth approximately 5 percent; annual consumer price inflation averaged less than 4 percent; official foreign assets increased from $20 billion at end-2003 to $170 billion at end-2010.
- Timeline highlights:
  - Violent protests erupted on February 17, 2011.
  - UN sanctions imposed February 26, 2011; broadened March 17, 2011.
  - NTC declared liberation October 23, 2011; transitional government announced November 22, 2011; parliamentary elections planned by June 23, 2012.
  - Bulk of foreign assets unfrozen December 16, 2011.
- Economic impact in 2011:
  - Crude oil production fell to 22,000 barrels per day in July 2011; restored to half pre-conflict level in last quarter of 2011.
  - Estimated 50 percent contraction in non-hydrocarbon output; total real GDP in 2011 was 60 percent lower than in 2010.
  - CPI estimated to have increased by about 20 percent in 2011 (supply bottlenecks, monetary expansion, exchange rate depreciation on parallel market).
  - Current account: exports declined from $48.9 billion in 2010 to $19.2 billion in 2011; imports dropped from $24.6 billion to $14.2 billion; current account surplus narrowed from 21 percent of GDP in 2010 to less than 4½ percent of GDP in 2011.
- Fiscal response and financing in 2011:
  - 2011 budget reallocated to humanitarian needs, with increased salaries and disruption of capital expenditures.
  - Revenue declined by 69 percent in nominal terms, from 57 percent of GDP in 2010 to 39 percent of GDP in 2011.
  - Spending on wages rose by approximately 60 percent (driven by March 2011 public-sector wage increase).
  - 2011 budget financed by domestic borrowing of LD 13.5 billion and arrears estimated at LD 6 billion.
- Monetary and liquidity developments:
  - Central Bank of Libya (CBL) lacked access to foreign assets during conflict; parallel market dinar fell to half official value at one point.
  - Official peg: LD1 = SDR 0.5175 since June 14, 2003.
  - Currency in circulation doubled from LD 7.5 billion at end-2010 to LD 15.4 billion at end-2011 (equivalent to approximately $12 billion at end-2011).
  - CBL issued equivalent of $2 billion in newly printed notes and reissued equivalent of $4 billion in withdrawn banknotes.
  - Statutory limit on monthly cash withdrawals: equivalent to $600 (commercial banks imposed lower limits).

Key tabled projections and estimates (from Table 1):
- Real GDP, annual percentage change: 2010 = 2.9; 2011 = –60.0; 2012 (Proj.) = 69.7.
  - Non-hydrocarbon: 2010 = 7.0; 2011 = –50.0; 2012 (Proj.) = 20.0.
  - Hydrocarbon: 2010 = –1.2; 2011 = –70.9; 2012 (Proj.) = 163.3.
- CPI inflation end-period: 2010 = 3.3; 2011 = 19.2; 2012 (Proj.) = –10.4.
- CPI inflation period average: 2010 = 2.5; 2011 = 14.1; 2012 (Proj.) = 1.9.
- Overall budget balance, percent of GDP: 2010 = 4.9; 2011 = –42.8; 2012 (Proj.) = –6.8.
- External current account, percent of GDP: 2010 = 20.8; 2011 = 4.4; 2012 (Proj.) = 11.2.
- Total foreign assets ($ billion): 2010 = 172; 2011 = 174; 2012 (Proj.) = 174.
  - Gross official reserves: 2010 = 103; 2011 = 106; 2012 (Proj.) = 82.
- Oil production, millions of barrels per day: 2010 = 1.77; 2011 = 0.51; 2012 (Proj.) = 1.35.

### Financial Sector Reforms on Hold
- Pre-revolution financial sector reforms included partial privatization and foreign partners in six out of 16 banks; five largest commercial banks had been fully owned by CBL prior to 2007.
- Commercial bank assets: increased from LD 14.5 billion at end-2003 to LD 65.4 billion at end-2010.
- Financial soundness indicators (2004 → 2010):
  - Nonperforming loans declined from 35.5 percent to 17.2 percent.
  - Loan provisioning increased from 51.8 percent to 85 percent.
  - Regulatory capital ratio increased from 10.4 percent to 17.3 percent.
- Conflict-related banking sector deterioration:
  - Asset quality likely worsened due to physical destruction and potentially irrecoverable loans to former-regime entities.
  - Legal challenges over seized property used as collateral create risks.
  - Systemic liquidity crunch occurred despite doubling of currency in circulation because of breakdown in banking infrastructure and limited access to foreign exchange; public hoarding of cash.
  - Credit to the private sector declined by about 6 percent in 2011 (compared to 14.3 percent increase in 2010).
  - Weak financial intermediation: ratio of credit to GDP in 2010 was less than 20 percent.
- Post-unfreeze developments:
  - Unfreezing of Libya’s foreign assets allowed CBL to provide foreign exchange liquidity to banks and narrow spread between official and parallel exchange rates to less than 10 percent in early 2012.
  - CBL announced intent to maintain current exchange rate peg, bolstering confidence.
  - Restoration of non-cash payment system expected to reduce demand for cash.

Selected financial indicators (Table 3, selected years 2004–2010):
- Regulatory capital to risk-weighted assets: 2004 = 10.4; 2010 = 17.3.
- Nonperforming loans to gross loans: 2004 = 35.5; 2010 = 17.2.
- Loan provisions to nonperforming loans: 2004 = 51.8; 2010 = 85.0.
- Liquid assets to total assets: 2004 = 49.8; 2010 = 74.3.
- Return on assets: 2004 = 0.4; 2010 = 1.0.
- Return on equity: 2004 = 6.8; 2010 = 15.0.

### Economic Recovery Takes Hold amid Risks
- Economic activity expected to show recovery in 2012 with improved security.
- Crude oil production exceeded 1 million barrels per day as of early 2012; expected to reach pre-conflict level in 2014.
- Non-hydrocarbon GDP expected to recover by 2014, driven mainly by reconstruction.
- CPI expected to ease as imports resume and CBL withdraws domestic currency by selling foreign exchange.
- External current account surplus in 2012 expected to increase with restoration of hydrocarbon and non-hydrocarbon exports.
- Key risks:
  - Delays in normalizing security conditions and the return of expatriate workers.
  - Lower international prices for crude oil and natural gas (e.g., deepening euro-area crisis or global slowdown).
  - Diminished fiscal and external buffers, requiring policy coordination among institutions.
  - Need for peaceful political transition, good governance, and rule of law to secure economic progress.

### Rapid Recovery Allows for Early Action on Medium-Term Reform
- Early planning for medium term intended to harness short-term recovery for inclusive medium-term growth.
- Need for a medium-term budget framework ensuring sustainable fiscal policies.
- Short-term trade-offs:
  - Balance recurrent spending pressures against fiscal sustainability and private-sector development.
  - Public-sector wage increases by previous regime will raise wage bill from 9 percent of GDP in 2010 to about 19 percent of GDP in 2012, reducing incentives for private-sector employment.
  - Envisaged increase in subsidies will raise expenditures on subsidies from 11.7 percent of GDP in 2010 to (table fragment indicates a rise; full projected figure not provided in supplied excerpt).

### Diversification, Governance, and Social Protection (themes highlighted)
- Libya faces a choice: remain overly reliant on finite hydrocarbon revenues or pursue sustainable, inclusive development led by private-sector activity.
- Medium-term priorities highlighted:
  - Capacity building and infrastructure renewal.
  - Private-sector development and job creation.
  - Improving education.
  - Establishing an effective social safety net and cost-effective subsidy reform within transparent and accountable governance.
- Structural issues pre-dating the revolution:
  - Small private sector constrained by state dominance and institutional failures.
  - Poor social and governance indicators and lackluster job creation; increased dependence on expatriate workers.
  - Exports highly undiversified (almost exclusively hydrocarbons).

*Source: IMF staff report "Libya beyond the Revolution: Challenges and Opportunities" (based on data available as of January 2012).*

### 15.9 percent of  GDP in 2012. In 2012, revenues are expected to reach LD

### _1201mcd - 15.9 percent of  GDP in 2012. In 2012, revenues are expected to reach LD

### Fiscal outlook and 2012 budget figures
- Revenues in 2012 are expected to reach LD 55.9 billion (57.9 percent of the GDP).
- Expenditures in 2012 are estimated at LD 62.4 billion (64.7 percent of the GDP).
- The 2012 deficit is foreseen to reach LD 6.6 billion (6.8 percent of the GDP) and is to be financed through the issuance of government bonds and a drawdown in government deposits at the CBL.
- Elevated current (recurrent) spending in the short term is affordable but likely inconsistent with appropriate budgetary prioritization and fiscal sustainability and will exert upward pressure on the real exchange rate.

### Medium-term fiscal consolidation and capital spending
- Fiscal consolidation will be required over the medium term to:
  - Offset the large increase in current spending in 2011 and 2012.
  - Provide space for capital and reconstruction spending while preserving long-term fiscal sustainability.
- Capital spending is subject in the short term to capacity constraints and must be reassessed given:
  - Urgent reconstruction needs.
  - Efficiency considerations.
  - The need to assess the limits of the economy’s absorptive capacity.

### Public sector wage bill and civil service reform
- Reforms are needed to contain the wage bill and increase public-sector efficiency.
- Medium-term reform options (examples implemented successfully elsewhere) include:
  - Reducing reliance on the public sector as the main employer.
  - Decompressing the wage structure.
  - Aligning civil service remuneration with that of the market.
  - Monetizing allowances to make compensation more transparent.
  - Introducing performance-based incentives.
  - Computerizing payroll and personnel systems.
  - Strengthening the recruitment system to depoliticize government hiring and professionalize the civil service.

### Subsidies, transfers, and building a comprehensive social safety net
- Subsidies and transfers will increase from 11.7 percent of GDP before the revolution to 15.9 percent of GDP in 2012, equivalent to 25 percent of total expenditure.
- Subsidies will remain elevated and create fiscal pressure, affecting consumption and production patterns and the allocation of resources, with negative implications for:
  - Government budget.
  - Expenditure composition.
  - Private-sector development.
- Subsidy reform objectives:
  - Reduce economic inefficiencies.
  - Better protect low-income households.
- Observations on universal subsidies:
  - Universal subsidies, particularly fuel subsidies, are not targeted and disproportionately benefit higher-income households.
- If a sophisticated social safety net is not feasible, consider:
  - Identifying a package of short-term measures to mitigate the adverse impact of price increases.
  - Using some savings from subsidy reform to increase public spending that benefits low-income households.
- Targeting methods to improve protection of low-income households include:
  - Categorical or geographical application.
  - Linking benefits to a self-targeting work program or schooling requirement.
- Such targeted measures, though imperfect, are more cost-effective for protecting low-income households than universal subsidies.

### Strengthening Public Financial Management (PFM)
- Key PFM challenges and needs:
  - Set up a clear macro-fiscal policy framework with a consistent fiscal rule reflecting the country’s objectives and the volatile nature of hydrocarbon-based revenues.
  - Fully integrate the sovereign wealth fund (SWF) managed by the Libya Investment Authority (LIA) and the Budget Reserve Account at the CBL into this framework.
  - Create a macro-fiscal policy unit at the Ministry of Finance to enhance fiscal policy formulation and make the budget a strategic tool linking national policy objectives to macroeconomic performance.
- Budget process reforms needed:
  - Move from a fragmented, bottom-up budget toward a unified budget process (including full integration of recurrent and capital budgets).
  - Introduce a medium-term perspective to inform the annual budget.
  - Strengthen the policy context of budgeting and adopt a comprehensive and clear budget presentation.
  - Strengthen linkage between policy priorities and budgetary allocations.
  - Establish a budget preparation calendar specifying roles and functions of agencies.
- Institutional roles:
  - The Ministry of Finance must be central to fiscal management and economic policymaking to integrate capital and current expenditure decisions, especially with a re-established Ministry of Planning.
  - An assessment of investment projects is necessary to decide priorities within the 2012 development budget.
- Transparency and systems:
  - Develop and implement an internationally accepted budget classification and associated chart of accounts.
  - Establish a Government Financial Management Information System (GFMIS) to improve comprehensiveness, reliability, and timeliness of budgetary information.

### Treasury operations, cash management, and market development
- Treasury single account (TSA) at the CBL should be developed to consolidate all cash resources.
  - Sub-accounts could enable accounting and control mechanisms for budget execution.
  - Close non-core treasury accounts and link the TSA to the SWF system.
  - Excess cash balances at line ministry commercial bank accounts—including trust and escrow funds—should be swept into the TSA on a daily basis.
- Payments system reforms:
  - Make the payments system more dynamic and centralized.
  - Once a GFMIS accounting system is implemented, the payments system can become fully centralized and integrated with accounting and control.
- Cash planning and forecasting:
  - Build capacity at the Ministry of Finance and line ministries for cash flow forecasting.
  - Accurate cash planning will allow identification of forecasting errors and methodology to calculate TSA cash buffer requirements.
  - The cash buffer will link to the SWF system for stabilization purposes.
- Market development:
  - Develop the T-bill market over the medium term for cash management purposes.

### Sovereign Wealth Fund (SWF) system improvements
- Improve the SWF system (LIA and Budget Reserve Account) with clearly defined inflow and outflow rules.
- Transition SWF to be dynamic, transparent, and accountable.
- Consider merging the Budget Reserve Account and the LIA portfolio into a single system with two sub-portfolios aligned to stabilization and savings purposes.
- SWF governance and investment rules:
  - Base the SWF on well-specified and regulated investment criteria.
  - Eliminate domestic investments that could adversely impact monetary policy or lead to conflicts of interest and fragmentation of the budget framework.
  - Outflow rules should relate only to long-term objectives or specified contingency events; outflows otherwise earmarked to support the budget directly.
  - Channel all development spending through the budget.

### Diversification and new growth strategy
- Libya is overly dependent on hydrocarbons:
  - Non-hydrocarbon activity accounted for no more than 30 percent of GDP pre-conflict and a negligible part of total exports.
  - Libya scores poorly on export diversification compared to other hydrocarbon-dependent economies.
- Employment and hydrocarbons:
  - Unemployment appears structural, particularly among youth; policy measures to create employment opportunities are critical.
  - Hydrocarbon industry is capital intensive and can make only a limited contribution to employment growth.
- Medium-term challenges:
  - Reorient the economy away from hydrocarbon dependence.
  - Promote job creation and inclusive growth.
- Diversification opportunities and prerequisites:
  - Scope for diversification into tourism and trade given archeological sites, Mediterranean climate, and proximity to European markets.
  - Legal infrastructure for private-sector development adopted in 2010; next step is effective implementation requiring agency coordination and an efficient and reliable judiciary.
  - Upgrade basic infrastructure (roads, electricity) with investment targeted at removing obstacles to economic development.

### Governance, legal framework, and private-sector development
- Improving governance requires a transparent framework with clear accountability rules to foster private-sector development and attract foreign expertise and the skilled diaspora.
- Pre-conflict legal reforms:
  - By early 2010, 22 new laws were passed affecting commerce, customs, income tax, the stock market, labor, communication, and land registry.
- Despite reforms, Libya ranked low on measures of governance, business conditions, and competitiveness, including:
  - Poor rankings on financial market development, innovation, labor market efficiency, business sophistication, and goods market efficiency.
- Improving governance is critical to attract investment and expertise.

### Human capital and labor market
- Demographics and skills:
  - Libya has a young population—close to 50 percent are below 25 years of age—with a large influx of entrants to the labor market expected in the next decade.
- Policy priorities:
  - Strengthen education and training programs to provide language, computer, and other skills demanded by private sector.
  - Establish training programs for workers and job seekers.
- Labor market transition:
  - Reduce the size of the civil service and contain public-sector wages to limit growth in the reservation wage.
  - Strengthen social safety nets to support those in need while allowing the labor market to operate freely and effectively.

### Financial sector development
- Financial intermediation is necessary to foster private-sector development and broaden access to finance for small and medium-sized enterprises.
- Banking sector recovery priorities:
  - The CBL, as banking supervisor, should verify the impact of the recent conflict on commercial banks’ balance sheets.
  - Ensure banks have sufficient capital to cover losses and continue lending during reconstruction.
  - Prudential policies should ensure banks have diversified funding sources as TSA implementation will reduce reliance on government deposits.
- Domestic debt market development:
  - Develop fixed-income instruments, including central bank bills regularly auctioned, to manage short-term liquidity and help institutions match long-term assets and liabilities.
  - An actively traded government bond market could provide a basis to price dinar-denominated corporate bonds.

### Comprehensive reform agenda and policy anchors
- Libya has an opportunity to modernize infrastructure, create private-sector employment, and reorient the economy, supported by natural resource wealth and hydrocarbon recovery.
- Key requirements for success:
  - Sustained commitment to comprehensive reforms.
  - Maintain the exchange rate peg to the SDR, accompanied by fiscal restraint to prevent inflation and damaging appreciation of the real exchange rate.
  - Advance structural reforms to support private-sector growth, diversification, and employment creation.
  - Enhance access to finance by developing the nascent financial sector.
  - Strengthen the education system and increase human capital.
  - Establish efficient and comprehensive social safety nets to mitigate transition costs.
  - Improve the compilation of national statistics under an independent agency to enhance decision making.
  - Increase transparency to reduce uncertainty and attract skilled diaspora, foreign expertise, and investment.

*Prepared by a staff team led by Ralph Chami, and comprising Ahmad Al-Darwish, Serhan Cevik, Joshua Charap, Susan George, Borja Gracia, Simon Gray, and Sailendra Pattanayak.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/dp/2012/_1201mcd.pdf_