## _cr06136

## Source details

**Canonical URL:** [_cr06136](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06136.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06136.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06136.pdf.json)

---

### Executive summary and 2004–05 developments
- Libya’s macroeconomic performance in 2004–05 was satisfactory with relatively strong economic growth, and large fiscal and external surpluses reflecting favorable developments in the oil market.
- Structural reform progress:
  - significant streamlining of the tariff schedule;
  - partial liberalization of interest rates;
  - broadening of the privatization program and the scope for foreign investments;
  - launching the privatization of a major public bank.
- Reform implementation constraints:
  - absence of a comprehensive medium-term plan;
  - lack of coordination between government institutions.
- Authorities agreed with staff on need for more vigorous and coordinated structural reform and received a draft Medium Term Strategy (MTS) prepared by Fund staff.
- Authorities acknowledged MTS implementation will require massive technical assistance, which Libya will need to finance for the most part.

### Macroeconomic performance and key 2004–05 indicators
- 2004:
  - higher oil prices (31 percent) and increased oil output (5.6 percent).
  - overall real GDP grew an estimated 4½ percent; non-oil sector value added grew 4 percent.
  - consumer prices declined by 2.2 percent (official data).
  - non-oil fiscal deficit of 33½ percent of GDP; overall fiscal surplus about 17½ percent of GDP.
  - oil revenues about 51 percent of GDP.
  - broad money grew 9.2 percent.
  - government’s net creditor position with the banking system about 50 percent of GDP.
  - credit-to-GDP ratio declined to 21 percent from 28 percent in 2003.
  - external current account surplus about 24 percent of GDP.
  - oil export earnings increased by 41 percent to about US$20 billion.
  - imports grew 22 percent to US$8.8 billion.
  - gross international reserves reached about 24 months of 2005 imports.
- 2005 (preliminary):
  - real GDP growth about 3½ percent.
  - fiscal surplus estimated at 32½ percent of GDP.
  - external current account surplus estimated at 41 percent of GDP.
  - official consumer inflation about 2.5 percent.
  - non-oil economy growth 4½ percent; oil sector growth 1½ percent.
  - oil revenues reached 68 percent of GDP (preliminary data).
  - non-oil revenue declined by about 15 percent.
  - broad money growth 29 percent; money and quasi-money grew 33 percent and 20 percent, respectively.
  - government’s net creditor position with the banking system reached 70 percent of GDP.
  - bank credit to private sector grew about 3 percent.
  - hydrocarbon exports increased by 48 percent to about US$29 billion.
  - imports grew 24 percent to some US$11 billion.
  - gross international reserves rose to about 32 months of 2006 imports.

### Staff macro outlook and risks (2006–10 projections)
- Staff macroeconomic projections (continuation of current policies):
  - Real GDP growth of about 4.5 percent per year on average during 2006–10.
  - Average annual growth rate in the oil sector of about 7 percent.
  - Modest growth in the non-oil economy of 3¼ percent per year on average.
  - Annual CPI inflation projected to stabilize at 3–4 percent, assuming no slippage in the fiscal stance.
  - Fiscal and external current account balances projected to average about 35 percent and 41 percent of GDP, respectively.
- Oil sector capacity projection: output capacity projected to rise from present 1.65 million barrels per day to about 2.25 million barrels per day by 2010.
- Sensitivity and downside scenarios:
  - On assumption of an oil price US$15 a barrel below the WEO spot price trajectory, fiscal and external current account would still record large surpluses—on average 22 percent and 27 percent of GDP, respectively.
  - A decline in the oil price of US$30 below the WEO spot price trajectory would be required for the fiscal surplus to be fully absorbed.
  - For the external current account to be fully absorbed, a drop of US$33 would be required.
- Risks and structural concerns:
  - large non-oil fiscal deficits of about 29 percent of GDP on average;
  - very modest non-oil private investment of 2 percent of GDP;
  - rapidly increasing labor force (about 4 percent per year), implying current projections insufficient to generate enough employment opportunities.
  - Studies in MENA: each 1 percent growth in the non-oil economy increases employment by about 0.7 percent.

### Fiscal policy: diagnosis and recommended reforms
- Three categories of fiscal reforms required:
  - (i) Bring total control of fiscal policy under the responsibility of the ministry of finance by unifying the government’s budgets and abolishing extrabudgetary operations.
  - (ii) Enhance the quality of government spending by strengthening the budgetary process, and broadening the non-oil tax base.
  - (iii) Improve management of the country’s oil wealth by establishing a stabilization and savings fund to replace the existing oil reserve fund and investment fund.
- Short-term fiscal observations:
  - preliminary staff assessment: non-oil tax revenue collections estimated to have declined by about 5 percent in 2005 despite increased activity and imports.
  - customs revenue declined by 14 percent despite estimated increase in imports by about 25 percent.
  - draft 2006 budgets point to an increase in expenditure of about 17 percent; staff recommended dedicating large part to education, health, physical infrastructure, targeted social outlays, and clearing government arrears.
  - staff projects for 2006: overall fiscal surplus of about 38 percent of GDP; non-oil fiscal deficit of about 29 percent of GDP.
  - staff estimated long term sustainable non-oil fiscal deficit ceiling for Libya of about 55 percent of GDP in the current circumstances.

### Stabilization and Savings Fund (SSF) — design, governance, and contention
- Staff view:
  - Establish SSF to replace ORF and IF is key to strengthening management of oil wealth and maintaining macroeconomic stability.
  - Law establishing SSF should state nature and source of resources, rules governing accumulation and use, and guidelines for operating and asset management regulations.
  - Staff argued SSF resources should be invested abroad and all public investment should be channeled through the budget.
- Authorities’ positions and process:
  - Establishing SSF by law would take up to two years because draft law must be discussed by the country’s Basic People’s Congresses (BPCs); there are 450 BPCs.
  - Authorities disagreed with staff recommendation to prohibit domestic investment by SSF.
  - Two draft decrees on SSF (MoF and CBL) required significant revisions:
    - MoF draft: no clear withdrawal rules and SSF allowed to invest domestically.
    - CBL draft: SSF assets merged with bank’s reserves and CBL can withdraw from Fund to cover government’s foreign exchange needs.

### Monetary policy, banking sector reforms, and AML
- Monetary policy recommendations:
  - increase reliance on indirect monetary instruments by fully liberalizing interest rates;
  - issue CBL bills/CDs and reactivate the interbank money market;
  - terminate directed credit and put credit subsidies on the budget.
- Banking supervision and restructuring:
  - CBL implemented METAC-supported plan to strengthen supervision and requested METAC TA for 2006.
  - Achievements include new financial statements consistent with IFRS; upgraded loan classification, provisioning, and credit filing; improved liquidity risk management.
  - Staff recommended reconsidering current restructuring approach and adopting MFD TA strategy including establishment of an independent bank restructuring agency to take ownership of public commercial banks.
  - Privatization of Sahara Bank started June 12; as of end-September 2005 only 15 percent of offered shares sold; staff recommended delaying privatization of Wahda Bank.
- Anti–money laundering:
  - AML law enacted; authorities intend to request Fund TA to amend the law along staff recommendations.
- Interest rate practice (as of August 2005):
  - banks granted autonomy to determine deposit interest rates and set lending rates within a band of 250 basis points above the discount rate (currently at 4 percent).
  - in practice, deposit rates remained generally low, in the order of 1–1½ percent, due to high bank liquidity.

### Trade, tariff, pricing, subsidies, privatization, and FDI
- Trade and tariff reforms (2005):
  - Customs tariff streamlined; negative import list downsized from 31 items to 17 items.
  - New tariff schedule: two rates — 10 percent for tobacco products and 0 percent for all other products.
  - All imported goods subject to a 4 percent service fee.
  - Production and consumption tax increased to 25–50 percent for imported goods and reduced to 2 percent for domestically produced goods.
  - Tax applies to a list of 81 products produced locally and imported.
- Staff concerns and recommendations:
  - integrate the consumption tax and fees on imported goods into tariff rates;
  - incorporate the 4 percent service fee into the tariff schedule or otherwise rationalize import taxation to improve transparency and WTO compatibility;
  - terminate remaining state import monopolies and allow competition in key sectors including telecommunications and transportation;
  - advance WTO accession preparations and seek external TA (including World Bank experts).
- Privatization and FDI:
  - privatization program and foreign investment scope broadened to include downstream oil activities, health, transportation, and insurance.
  - total of 216 enterprises slated for privatization and 144 to be liquidated; 66 small enterprises sold to date.
  - staff recommended: enact a privatization law; allow investors corporate control of privatized companies; base sales on competitive bidding.
  - FDI recommendations: remove the US$50 million floor; replace positive list with clear negative list; simplify and speed approval and registration processes; improve access to land and strengthen bankruptcy laws.

### Quasi-fiscal deficit in the energy sector (2004 data)
- Libya’s proven reserves:
  - Oil: about 39 billion barrels.
  - Natural gas: 1.5 trillion cubic meters.
- Energy sector characteristics and adjustments:
  - collection rate: 59 percent; technical losses: 11 percent.
  - government increased electricity prices in June 2004 by average 30 percent for households and 45 percent for businesses and municipalities.
- Quasi-fiscal deficit (2004, as presented):
  - Quasi-fiscal deficit: 5,581 LD million; 14.2 percent of GDP.
  - Electricity and natural gas: 2,575 LD million; 6.5 percent of GDP.
    - Mispricing: 1,194 LD million; 3.0 percent of GDP.
    - Commercial losses (lack of metering): 850 LD million; 2.2 percent of GDP.
    - Commercial losses (on billing): 208 LD million; 0.5 percent of GDP.
    - Technical losses: 323 LD million; 0.8 percent of GDP.
  - Petroleum products: 3,006 LD million; 7.6 percent of GDP.
  - Note: based on a cost of US 17 cents per kwh.

### Statistical system weaknesses and reform priorities
- Data shortcomings undermine surveillance; issues include weaknesses in conceptual and compilation procedures, coverage, periodicity, timeliness, and interagency coordination.
- STA 2005 recommendations (selected):
  - establish a National Statistical Agency to produce and disseminate official statistics and coordinate the national statistical program;
  - create a National Statistical Council as a legally empowered interagency coordination committee;
  - transfer national accounts responsibility to the Census and Statistical Department of NIDA and create 6–10 additional permanent staff positions;
  - prioritize implementation of the 1993 System of National Accounts and undertake surveys for services, agriculture, and construction;
  - expand CPI coverage and finalize new CPI based on 2003 household budget survey.
- Authorities agreed, requested a resident advisor on national income accounts, and in February 2006 announced participation in the GDDS and appointed a national GDDS coordinator.
- STA provided an expert to start shortly.

### Institutional, governance, and implementation modalities
- Staff recommended:
  - develop a comprehensive MTS and decompose it into annual programs with required TA and performance monitoring;
  - establish a High Inter-Ministerial Economic Team (HIT) to coordinate reforms;
  - establish technical committee for data collection, analysis, and policy formulation;
  - sustain reform via permanent dialogue with civil society and business community.
- Technical assistance options:
  - IMF-provided TA on reimbursement basis; or Libya establishes a TA-sub-account at the IMF to finance TA provided/arranged by the IMF.
  - Authorities agreed to cover most TA costs.

### External relations, debt relief, and multilateral matters
- Disputed claims with creditors in Germany, Spain and the United Kingdom settled in 2004–05; discussions with other foreign creditors ongoing.
- Libya withdrew from the HIPC Initiative and developed its own debt relief plan:
  - By end-2005, rescheduling agreements reached with Uganda, Tanzania, and Benin; negotiations with Nicaragua ongoing.
  - Libyan law does not allow government to cancel principal of any outstanding loan; relief plan uses debt-to-equity/real-estate swaps, rescheduling of principal, and interest cancellation.
- Staff reiterated recommendation that Libya reconsider withdrawal from HIPC Initiative and integrate its debt relief plan in the multilateral framework.
- Staff welcomed Libya’s intention to participate in financing the Exogenous Shock Facility (ESF).

### Missions, technical assistance chronology, and surveillance timetable
- Selected missions chronology includes STA, FAD, MFD, METAC, and World Bank missions from February 1985 through 2005 (see list of dated missions).
- World Bank engagement: Bank economic mission visited Libya in July 2004; draft Country Economic Report delivered November 2004; Bank mission visited November 2005 and agreed to visit in March 2006 to update and finalize report.
- Staff proposal: next Article IV consultation on the standard 12-month cycle.

*Source: IMF staff report content as provided in the supplied PDF excerpt (cr06136).*

### Executive Summary ......................................................................................................

### Executive Summary

### Developments in 2004–05
- Libya’s macroeconomic performance in 2004–05 was satisfactory with relatively strong economic growth, and large fiscal and external surpluses reflecting favorable developments in the oil market.
- Progress on structural reform included:
  - significant streamlining of the tariff schedule;
  - partial liberalization of interest rates;
  - broadening of the privatization program and the scope for foreign investments;
  - launching the privatization of a major public bank.
- Reform implementation constraints:
  - absence of a comprehensive medium-term plan;
  - lack of coordination between government institutions.

### Views of the authorities
- Authorities agreed with staff on the need to pursue more vigorous and coordinated structural reform.
- A draft Medium Term Strategy (MTS) to reform Libya’s economy, prepared by Fund staff at the authorities’ request, was well received.
- Authorities acknowledged that implementation of the MTS will require massive technical assistance, which Libya will need to finance for the most part.

### Staff appraisal — macroeconomic outlook
- Libya’s financial conditions are expected to remain favorable in the medium run, owing to positive prospects in the world oil market.
- Outlook for the non–oil economy remains mixed under current policies.
- Staff urges the authorities to use the MTS as a blueprint to reform Libya’s economy.

### Staff appraisal — fiscal policy (recommended reforms)
- Three categories of fiscal reforms required:
  - (i) Bring total control of fiscal policy under the responsibility of the ministry of finance by unifying the government’s budgets and abolishing extrabudgetary operations.
  - (ii) Enhance the quality of government spending by strengthening the budgetary process, and broadening the non-oil tax base.
  - (iii) Improve the management of the country’s oil wealth by establishing a stabilization and savings fund to replace the existing oil reserve fund and investment fund.

### Staff appraisal — monetary policy and banking sector
- Staff encouraged the Central Bank of Libya (CBL) to:
  - increase reliance on indirect monetary instruments by fully liberalizing interest rates;
  - issue CDs;
  - reactivate the interbank money market.
- Bank restructuring recommendations:
  - reconsider current restructuring approach and adopt staff-recommended strategy, including establishing a bank restructuring agency that would take over ownership of commercial banks.

### Staff appraisal — structural reform priorities
- Key structural actions identified:
  - integrate the consumption tax and fees on imported goods in the tariff rates;
  - advance preparations for WTO accession discussions;
  - enact a privatization law;
  - for foreign investment, use a clear negative list, remove the US$50 million floor, and simplify procedures and speed up the approval and registration process.

### Staff appraisal — external and multilateral matters
- Staff welcomed Libya’s intention to participate in the financing of the Exogenous Shock Facility.
- Staff reiterated recommendation that Libya reconsider its withdrawal from the HIPC Initiative and integrate its debt relief plan in the multilateral framework of the latter.

### Institutional and statistical recommendations
- Establish a high inter-ministerial oversight committee to coordinate government reform efforts.
- Thoroughly restructure the statistical system, with priority given to:
  - establishing a National Statistical Council;
  - creating a National Statistical Agency.

### Introduction and recent developments (context and challenges)
- Long legacy of centralized economic management, excessive reliance on the public sector, and heavy dependence on oil pose a formidable challenge.
- Since lifting of international sanctions, Libya decided to undertake comprehensive structural reforms and accelerate transition to a market economy.
- Structural characteristics and social indicators:
  - three quarters of employment is in the public sector;
  - private investment is 2 percent of GDP;
  - in 2000-05 the oil sector contributed about 56 percent of GDP, 97 percent of the country’s exports of goods, and 80 percent of government revenue.
- Fund engagement:
  - Executive Board decision in early 2005 to support Libya’s request for IMF technical assistance;
  - several IMF missions visited Tripoli (including missions from FAD, METAC, MFD, and STA).
- High-level engagement:
  - July 2005 meeting with Libya’s Leader Qadhafi who stressed determination to reform and modernize the economy and praised enhanced relationship with the IMF.
- Cooperation with the World Bank proceeded more slowly than expected, but prospects for resumed cooperation improved recently.

### Developments during 2004
- Oil market and output:
  - higher oil prices (31 percent) and increased oil output (5.6 percent).
- Growth and inflation:
  - overall real GDP grew an estimated 4½ percent, with a 4 percent increase in non-oil sector value added;
  - consumer prices declined by 2.2 percent (official data).
- Sector performance:
  - construction, utilities, and mining grew 5 percent;
  - trade and service sectors grew 5–6 percent due to liberalization of external trade and resumption of foreign tourism.
- Fiscal developments:
  - non-oil fiscal deficit of 33½ percent of GDP;
  - overall fiscal surplus about 17½ percent of GDP;
  - oil revenues about 51 percent of GDP;
  - non-oil revenue increased by about 1 percentage point of GDP.
  - total expenditure and net lending declined by ½ percent of GDP;
  - surge in capital expenditure (8 percent of GDP) offset by sharp drop in extrabudgetary current expenditure.
- Monetary developments:
  - broad money grew 9.2 percent;
  - government’s net creditor position with the banking system about 50 percent of GDP;
  - overall credit to the economy declined by 1 percent (excluding government buy-back, credit to the economy grew 9.4 percent);
  - credit-to-GDP ratio declined to 21 percent from 28 percent in 2003.
  - CBL refinance rate at 4 percent; lending and deposit rates largely administered.
- External sector:
  - external current account surplus about 24 percent of GDP;
  - oil export earnings increased by 41 percent to about US$20 billion;
  - imports grew 22 percent to US$8.8 billion;
  - gross international reserves reached about 24 months of 2005 imports.

### Developments during 2005
- Macroeconomic aggregates:
  - real GDP growth about 3½ percent;
  - fiscal surplus estimated at 32½ percent of GDP;
  - external current account surplus estimated at 41 percent of GDP;
  - official consumer inflation about 2.5 percent.
- Growth composition:
  - overall growth generated mainly in the non-oil economy (4½ percent);
  - oil sector growth 1½ percent due to output capacity constraints;
  - trade, hotels, and transportation grew 7 percent;
  - construction and services grew 5 percent;
  - agriculture grew 2.5 percent;
  - manufacturing grew 1.8 percent (first positive growth in five years).
- Fiscal and revenue developments:
  - oil revenues reached 68 percent of GDP (preliminary data);
  - non-oil revenue declined by about 15 percent due to nontransfer of interest on the Oil Reserve Fund (ORF) balances by the CBL and lower collections by customs and local governments;
  - new tax law (March 2004) reduced top marginal tax rate on wages and salaries and increased exemptions;
  - new tariff schedule introduced mid-2005;
  - government spending excluding Lockerbie settlement payments increased by LD 5.2 billion, including LD1.6 billion (2.9 percent of GDP) transfer to specialized banks in mid-December 2005 to be disbursed in 2006;
  - non-oil fiscal deficit widened to 35 percent of GDP (30.2 percent excluding Lockerbie settlement in 2004).
- Monetary developments:
  - broad money growth 29 percent; money and quasi-money grew 33 percent and 20 percent, respectively;
  - remonetization, increased public confidence after lifting of sanctions, and sharp increase in credit to public enterprises (23 percent);
  - commercial banks remained highly liquid and increased excess reserves with the CBL;
  - government’s net creditor position with the banking system reached 70 percent of GDP;
  - bank credit to private sector grew about 3 percent;
  - specialized banks provided substantial private-sector credit (new loans by specialized banks in first nine months of 2005 totaled LD 1 billion; stock equivalent to about 25 percent of outstanding bank credit as of end-September 2005).
- Banking system liquidity:
  - by end-2005 total banks’ deposits with the CBL about 58 percent of total bank deposits (up from about 50 percent in 2004);
  - regular banks’ reserves about 17 percent of total bank deposits (as against 12 percent in 2004).

*Source: IMF staff Executive Summary (cr06136).*

### 14. On the external side, the widening of the current account surplus reflects mainly

### _cr06136 - 14. On the external side, the widening of the current account surplus reflects mainly

### External sector developments and reserves
- Hydrocarbon exports increased by 48 percent to about US$29 billion.
- Imports grew 24 percent to some US$11 billion, boosted by increased domestic demand.
- Gross international reserves rose to about 32 months of 2006 imports.

### Exchange rate developments
- Since January 2002, the Libyan dinar has been pegged to the SDR.
- The exchange rate of the Libyan dinar depreciated by a cumulative 4 percent against the US dollar in 2004–05, reflecting movements in the U.S. dollar/Euro rate.
- The Real Effective Exchange Rate (REER) based on the official CPI rate declined by 7 percent in 2004–05.

### Trade and tax policy reforms (2005)
- Customs tariff significantly streamlined; negative import list downsized from 31 items to 17 items.
- New tariff schedule: two rates — 10 percent for tobacco products and 0 percent for all other products.
- All imported goods are subject to a 4 percent service fee.
- Production and consumption tax: increased to 25–50 percent for imported goods and reduced to 2 percent for domestically produced goods.
- A tax applies to a list of 81 products that are both produced locally and imported; previous rates were 10–50 percent for imported goods and 4 percent for locally produced goods.
- Government created an investment fund (IF) to manage part of the government’s oil revenues.

### Monetary and banking sector measures
- New banking law reinforcing CBL independence and authorizing foreign banks to operate in Libya.
- Anti Money Laundering (AML) law enacted.
- As of August 2005, banks granted autonomy to determine deposit interest rates and set lending rates within a band of 250 basis points above the discount rate (currently at 4 percent).
- In practice, deposit rates remained generally low, in the order of 1–1½ percent, due to high bank liquidity; no pressures on lending rates.
- CBL issued decrees to improve commercial bank operations, launched privatization of Sahara Bank, and recapitalized three of the five commercial banks it owns.

### Structural reforms and privatization
- Simplified business application procedures: one-stop window established and 30-day limit for application approval with obligation for administration to notify any refusal through a notary public.
- Privatization program and foreign investment scope broadened to include downstream activities in oil, health, transportation, and insurance sectors.
- Joint ventures between Libyan and foreign investors can benefit from incentives of Law 5.
- Total of 216 enterprises slated for privatization and 144 to be liquidated; 66 small enterprises sold to date.

### External debt and debt relief actions
- Disputed claims with creditors in Germany, Spain and the United Kingdom settled in 2004–05; discussions with other foreign creditors ongoing. Claims pertain to disputed payments resulting from the imposition of UN sanctions on Libya.
- After withdrawal from the HIPC Initiative, Libya developed its own debt relief plan.
  - By end-2005, rescheduling agreements reached with Uganda, Tanzania, and Benin; negotiations with Nicaragua ongoing.
  - Libyan law does not allow the government to cancel the principal of any outstanding loan; relief plan relies on modalities including debt to equity/real estate swaps, rescheduling of principal and interest cancellation.

### Medium-term outlook (2006–10) and macro projections
- Staff macroeconomic projections (continuation of current policies) indicate:
  - Real GDP growth of about 4.5 percent per year on average during 2006–10.
  - Average annual growth rate in the oil sector of about 7 percent.
  - Modest growth in the non-oil economy of 3¼ percent per year on average.
  - Annual CPI inflation projected to stabilize at 3–4 percent, assuming no slippage in the fiscal stance.
  - Fiscal and external current account balances projected to continue registering large annual surpluses, averaging about 35 percent and 41 percent of GDP, respectively.
- Build-up of surpluses reflects limited absorptive capacity, particularly projected low investment and growth levels.
- Oil sector capacity projection: output capacity projected to rise from present 1.65 million barrels per day to about 2.25 million barrels per day by 2010 (as a result of an ambitious investment program).

### Sensitivity and downside scenarios
- On assumption of an oil price US$15 a barrel below the WEO spot price trajectory, fiscal and external current account would still record large surpluses during the projection period—on average 22 percent and 27 percent of GDP, respectively.
- Other staff sensitivity notes:
  - A decline in the oil price of US$30 below the WEO spot price trajectory would be required for the fiscal surplus to be fully absorbed.
  - For the external current account to be fully absorbed, a drop of US$33 would be required.

### Risks and structural concerns
- Staff stressed increased dependency on oil with:
  - Large non-oil fiscal deficits of about 29 percent of GDP on average.
  - Very modest non-oil private investment of 2 percent of GDP.
- Projected non-oil growth and investment levels are among the lowest in neighboring countries and other oil countries, well below the country’s potential.
- Rapidly increasing labor force (about 4 percent per year) implies current projections are not sufficient to generate enough employment opportunities.
- Studies in MENA indicate that, on average, each 1 percent growth in the non-oil economy increases employment by about 0.7 percent.

### Policy recommendations and Medium-Term Strategy (MTS)
- Staff recommended development of a comprehensive reform program and submitted a draft Medium-Term Strategy (MTS) for authorities’ consideration.
- Authorities broadly agreed with assessment but did not indicate timing for implementation; prioritization, sequencing, and technical assistance emphasized as key.
- Core MTS elements and recommended reforms (Phase I: 2006–08 and Phase II: 2008–10) include:
  - Public finance: develop unified consolidated budget; establish a stabilization and savings fund; modernize treasury; develop medium-term expenditure frameworks; simplify tax system; strengthen revenue administration; undertake civil service census and social security study.
  - Monetary and banking: terminate directed credit; fully liberalize interest rates; put credit subsidies on budget; issue CBL bills; allow commercial banks to issue CDs; upgrade supervision; restructure and privatize public banks; open banking sector to external competition; modernize payment system; reform accounting and bankruptcy legislation.
  - Structural reforms: abolish remaining state import monopolies; replace nonreligious and non-health-related import bans with tariffs; simplify customs; liberalize price controls and rationalize subsidies (put subsidies on budget and plan gradual reduction); strengthen privatization agency and enact privatization law; amend foreign investment law to use negative list and streamline approval; harmonize tax incentives and replace tax holidays by tax credits/allowances/accelerated depreciation.
  - Social and statistics: develop education and health reform plans; undertake poverty study; develop social safety net for those affected by reforms; create national statistical council and agency; prepare multi-year statistical work program.
  - Phase II focus: economic diversification, sectoral reforms (agriculture, industrial, services including tourism), civil service and social security reform, strengthen social safety net, improve governance (audit agency and judiciary).
  - Implementation modalities: decompose MTS into annual programs with required TA and performance monitoring; options for IMF TA include resident advisors and frequent departmental visits; Libya to cover most TA costs; establish High Inter-Ministerial Economic Team (HIT) to coordinate reforms; establish technical committee for data collection, analysis, and policy formulation; sustain reform via permanent dialogue with civil society and business community.

### Fiscal policy discussions and short-term fiscal outlook
- Authorities noted relative spending restraint; staff welcomed elimination of extrabudgetary spending from the ORF.
- Need to strengthen budgetary process: address lack of transparency, netting-out operations, and absence of medium-term planning; authorities resolved to address netting-out in 2006.
- Import tariff reform of August 2005 well received by private sector; staff noted potential short-run revenue loss that could add to shortfalls from the new tax law.
  - Staff’s preliminary assessment: non-oil tax revenue collections estimated to have declined by about 5 percent in 2005 despite increased activity and imports.
  - Customs revenue declined by 14 percent despite an estimated increase in imports by about 25 percent.
- Staff encouraged broadening the tax base and increasing efficiency in revenue collection; authorities requested follow-up TA on revenue administration.
- Government’s LD 3 billion multi-year lending program financed with ORF resources through specialized banks reviewed by staff.
  - Staff recommended undertaking operation through commercial banks and granting any interest subsidy through the budget; MoF agreed but pointed to CBL reluctance.
  - Specialized banks’ disbursements amounted to LD 1 billion during first nine months of 2005.
  - Public commercial banks’ excess liquidity estimated at LD 6.8 billion (34 percent of broad money) at end-December 2005.
- Draft 2006 budgets point to an increase in expenditure of about 17 percent.
  - Staff recommended dedicating large part of increase to education, health, physical infrastructure, targeted social outlays, and clearing government arrears.
  - Staff identified LD 1 billion of arrears owed to the social security fund; government pays only 30 percent on average of its electricity bill.
  - Staff stressed attention to potential inflationary impact due to limited absorptive capacity, increase execution rate of investment program, and improve quality of spending.
- Staff projects for 2006:
  - Overall fiscal surplus of about 38 percent of GDP.
  - Non-oil fiscal deficit of about 29 percent of GDP.
  - Staff estimated long term sustainable non-oil fiscal deficit ceiling for Libya of about 55 percent of GDP in the current circumstances.

*Italic: Source — IMF staff report content as provided in the supplied PDF excerpt.*

### 32. The authorities agreed with staff that the establishment of a Stabilization and

### The authorities agreed with staff that the establishment of a Stabilization and Savings Fund (SSF) to replace the ORF and the IF, is key to strengthening management of the country’s oil wealth and maintaining macroeconomic stability.

### Stabilization and Savings Fund (SSF)
- Establishing the SSF to replace the ORF and the IF is judged key to strengthening management of the country’s oil wealth and maintaining macroeconomic stability.
- Authorities noted establishing the SSF by law would take up to two years because the draft law must be discussed by the country’s Basic People’s Congresses (BPCs) before submission to the General People’s Congress (GPC).
  - There are 450 BPCs in Libya.
- Authorities disagreed with staff’s recommendation to prohibit domestic investment by the SSF; staff argued:
  - All public investment should be channeled through the budget.
  - Investing SSF resources abroad would be consistent with the government’s divestiture strategy and could be justified to sterilize resources and avoid transmission of oil-revenue volatility to the economy.
- Staff noted the two draft decrees on the SSF prepared by the MoF and the CBL needed significant revisions:
  - Under the MoF draft, there are no clear withdrawal rules and the SSF is allowed to invest domestically.
  - Under the CBL’s draft, SSF assets are merged with the bank’s reserves, and the CBL can withdraw from the Fund to cover the government’s needs in foreign exchange.
- Staff reiterated that the law establishing the SSF should:
  - State the nature and source of its resources and the rules governing the accumulation and use of these resources.
  - Stipulate guidelines for the establishment of operating and asset management regulations.
- Staff emphasized the need to establish an SSF along the lines it recommended and noted that the two draft decrees required significant revisions.

### Medium-term fiscal outlook, civil service, and fiscal reforms
- Staff expressed concern that the authorities continue to use the civil service to reduce unemployment and stressed the need to rationalize the budget structure and gear fiscal policy toward macroeconomic stability.
- Three categories of reforms required:
  - (i) Bring total control of fiscal policy under the responsibility of the ministry of finance and improve transparency in government operations.
  - (ii) Enhance the quality of government spending and broaden the non-oil tax base.
  - (iii) Improve the management of the country’s oil wealth to reduce overall fiscal vulnerability to oil shocks.
- Authorities agreed with staff’s recommendations and recognized the need for a comprehensive reform of the civil service.
  - Authorities indicated working groups would be established to implement the recommended measures.
- Issues to be covered by working groups include revenue administration, customs administration, and expenditure management and control; a fourth group will take up government finance statistics.

### Monetary policy and financial sector development
- Interest rates and monetary management:
  - Staff welcomed the CBL’s recent partial liberalization of interest rates as an important first step toward indirect monetary management.
  - Staff advocated a swift shift to full interest rate liberalization and stressed banks and the MoF would need a mechanism to address interest rate subsidies.
  - Staff encouraged the CBL to:
    - Issue CDs and reactivate the interbank money market as first steps toward open market operations.
    - Reinforce daily monetary management and improve economic monitoring capabilities.
  - The CBL agreed with recommendations, requested a long-term advisor, and requested Fund TA to develop a CD market.
- Banking supervision and regulatory reform:
  - CBL implemented a plan developed with METAC to strengthen banking supervision and requested METAC TA to be maintained in 2006.
  - Plan objectives: upgrade on-site and off-site inspection systems, develop prudential regulations in line with Basel and international best practice, and strengthen capacity building.
  - Achievements: new financial statements consistent with International Financial Reporting Standards; upgraded loan classification and provisioning and credit filing; improved liquidity risk management.
- Bank restructuring and privatization:
  - CBL decision to recapitalize some commercial banks and tackle nonperforming loans aims to strengthen balance sheets and enhance attractiveness for privatization.
  - Staff argued these actions should be part of a diligent restructuring program and noted lack of private-sector interest in Sahara Bank privatization as evidence the approach is inadequate.
    - The privatization of Sahara Bank started on June 12; as of end-September 2005 only 15 percent of offered shares had been sold.
  - Staff recommended following the strategy developed by the MFD TA mission on bank restructuring of June 2005, including establishment of an independent bank restructuring agency to take ownership of public commercial banks.
  - Staff recommended delaying privatization of Wahda Bank, which was at an advanced preparation stage.

### Anti–money laundering (AML)
- Authorities appreciated IMF comments on Libya’s recently passed AML law and intend to request Fund TA to amend the law along staff recommendations.

### Exchange rate and Article VIII issues
- Exchange rate regime:
  - Staff agreed with authorities that the current exchange rate regime is serving Libya well and the current rate of the Libyan dinar is broadly appropriate.
  - Low non-oil exports reflect lack of structural reform and investment rather than exchange-rate overvaluation.
  - Chairman of the Chamber of Commerce confirmed absence of a parallel exchange rate market and absence of delay or restriction on access to foreign exchange for current account transactions.
  - Staff recommended closely monitoring the dinar’s exchange rate and being prepared to change the level of the peg to absorb shocks and avoid real appreciation.
  - Staff stressed improving data on the non-oil economy to better assess competitiveness.
- Medium-term recommendation:
  - As structural and macroeconomic reforms progress and the non-oil economy develops, staff recommended considering feasibility of switching to a more flexible exchange rate regime.
  - Staff advised developing institutions needed for a more flexible regime: foreign exchange markets, risk management, and intervention policies.
- Article VIII:
  - For Libya’s acceptance of obligations of Article VIII, Sections 2(a), 3, and 4, LEG and MFD are awaiting necessary clarifications from the authorities before the review can be completed.

### Trade reform
- Staff welcomed progress in reforming and simplifying the trade system and encouraged further liberalization using the country’s strong balance of payments to terminate remaining state import monopolies.
- Concerns and recommendations:
  - Recent increase in the consumption tax on imported commodities exacerbates discriminatory nature of the tax, raises protection, reduces transparency in import duties, and probably aggravates governance problems by limiting competition and encouraging smuggling.
  - Staff stressed this tax is not consistent with national treatment under the WTO basic principle and recommended integrating it into the tariff rate structure and gradually eliminating it at a later stage.
  - Staff also raised the issue of incorporating the 4 percent service fee into the tariff schedule; authorities expressed reluctance because the fee was placed outside the tariff schedule to apply to all imported goods, including from countries with free-trade agreements with Libya.
  - Staff recommended allowing competition in key sectors, including telecommunications and transportation.
- WTO accession:
  - Authorities formed a working group to review laws, regulations, and policies affecting international trade and investment and to prepare the Memorandum of the Foreign Trade Regime.
  - Staff encouraged seeking TA from foreign experts, including World Bank experts, to speed this process.

### Pricing and subsidy policies
- Price controls and competition:
  - State-owned companies now face competition from the private sector, which can freely import or produce goods previously under public monopoly.
  - Staff urged official abolition of price and profit margin controls that remain in some markets but are not enforced.
  - Staff agreed limited temporary pricing formulas could remain for goods not sufficiently exposed to competition but recommended establishing a timetable for gradual elimination.
- Subsidy reform:
  - Staff encouraged gradually streamlining the subsidy system and recommended:
    - First undertaking a comprehensive study to assess size and distribution of energy and water subsidies by main recipients.
    - Later implementing a plan to reduce these subsidies over time, gradually and with a social safety net.
  - Authorities raised prices of domestic petroleum products in 2005 by 22 percent on average.
  - Food subsidies:
    - Staff advised continuing public campaigning to garner support to replace current system with a cash subsidy, which was rejected by the BPC in early 2005.
    - Authorities remain confident public debate will produce more support for the proposed reform.
- Subsidy system composition:
  - Subsidies include implicit subsidies (fixed low consumer prices for petroleum products, natural gas, electricity, and water) and explicit subsidies (mainly for food items).
  - Five essential food staples are currently subsidized at a cost of about 2 percent of GDP.

### Privatization and Foreign Direct Investment (FDI)
- Private sector and SME development:
  - Encouraging private sector development and strengthening SMEs is key to economic diversification and will require long and sustained efforts.
  - Priority recommendations: enhance privatization strategy, remove remaining monopolies and impediments to competition, and attract foreign investment.
- Privatization strategy recommendations:
  - (i) Enact a privatization law to give the privatization agency legal existence and an explicit mandate.
  - (ii) Allow investors to acquire a significant share of capital and have corporate control over privatized companies.
  - (iii) Base sale processes on competitive bidding.
- FDI liberalization and complementary reforms:
  - Staff welcomed broadening scope for FDI but warned limited impact unless accompanied by reforms to improve business climate and attract foreign investment and technology:
    - (i) Remove the US$50 million floor on foreign investment.
    - (ii) Replace current system of a positive list with a clear negative list.
    - (iii) Simplify procedures and speed up approval and registration processes.
    - (iv) Promote a more competitive business environment by easier access to land and strengthening bankruptcy laws.

### Quasi-fiscal deficit in the energy sector (Box 2, 2004)
- Libya’s proven reserves:
  - Oil: about 39 billion barrels.
  - Natural gas: 1.5 trillion cubic meters.
- Energy sector characteristics:
  - Energy prices are very low; consumption remains high and is among the highest in the Maghreb countries.
  - Large quasi-fiscal deficit in the electricity sector measured as difference between cost-recovery price-value of energy delivered and actual revenue; includes commercial losses from nonbilled consumption, nonpayment, and technical losses.
  - Collection rate: 59 percent.
  - Technical losses: 11 percent.
  - Government increased electricity prices in June 2004 for the first time in seven years; increase on average was 30 percent for households and 45 percent for businesses and municipalities; prices for other sectors remained unchanged.
  - Quasi-fiscal deficit for natural gas and petroleum products measures difference between domestic prices and international prices.
- Quasi-Fiscal Deficit in the Energy Sector, 2004 (as presented)
  - Quasi-fiscal deficit: 5,581 LD million; 14.2 percent of GDP.
  - Electricity and natural gas: 2,575 LD million; 6.5 percent of GDP.
    - Mispricing: 1,194 LD million; 3.0 percent of GDP.
    - Commercial losses (lack of metering): 850 LD million; 2.2 percent of GDP.
    - Commercial losses (on billing): 208 LD million; 0.5 percent of GDP.
    - Technical losses: 323 LD million; 0.8 percent of GDP.
  - Petroleum products: 3,006 LD million; 7.6 percent of GDP.
  - Sources: The Libyan authorities; and staff estimates.
  - Note: Based on a cost of US 17 cents per kwh.

### Strengthening the statistical system
- Libya’s statistical system remains weak and requires a long-term program of reforms to strengthen institutional framework and build a reliable statistical system.
- Key staff recommendations:
  - (i) Establish a National Statistical Council to ensure coordination among data-producing agencies, approve the national statistical work program, and monitor progress.
  - (ii) Create a National Statistical Agency with authority to produce and disseminate official statistics and coordinate the national work program.
  - (iii) Increase financial resources for statistical activities and strengthen human resources and training.
  - (iv) Participate in the IMF’s General Data Dissemination Standards (GDDS) and use it as a framework for statistical development.
- Authorities agreed with recommendations, requested a resident advisor on national income accounts.
  - In February 2006, they officially announced participation in the GDDS and appointed a national GDDS coordinator.
  - An expert has been identified by the Fund’s STA department and is scheduled to start his assignment shortly.

### Other issues
- Debt relief and HIPC:
  - Authorities started implementing their own debt relief plan for Libya’s poorest debtors, including HIPC countries, and restated they could not bypass the BPC’s decision to reject Libya’s participation in the HIPC Initiative.
  - Staff reiterated recommendation that Libya reconsider withdrawal from the HIPC Initiative and integrate its debt relief plan into the multilateral framework.
- Exogenous Shocks Facility (ESF):
  - Authorities intend to participate in financing the ESF; staff provided requested additional information.
- Inter-ministerial oversight committee:
  - Staff reiterated earlier recommendation to establish a high inter-ministerial oversight committee to coordinate government reform efforts, clarify CBL and MoF reform responsibilities, and ease tensions between these institutions.
- Technical assistance (TA) needs and financing:
  - Two options presented for TA financing:
    - (i) IMF-provided TA on reimbursement basis.
    - (ii) Libya establishes a TA-sub-account at the IMF to finance TA provided/arranged by the IMF.
  - Authorities agreed to cover most TA costs and will inform staff of preferred option later.

### Staff appraisal (summary)
- Encouraging developments since freezing of UN sanctions in 1999; macroeconomic performance increasingly strong aided by favorable external environment and reform measures.
- Progress in developing a market economy has been slow and discontinuous; government has yet to clearly break from past shortcomings in policy formulation and implementation.
- Libya’s economic and financial conditions expected to remain favorable in the short to medium run owing mainly to positive world oil market prospects, but outlook for the non-oil economy remains mixed.
- Projected expansion of the oil sector expected to positively impact the rest of the economy, but the non-oil economy will continue to operate below potential unless weaknesses in the government’s reform approach are redressed.

*IMF staff report: chapter/section on SSF establishment, fiscal policy, monetary and financial sector reforms, exchange rate, trade, pricing and subsidies, privatization and FDI, statistics, other issues, and staff appraisal.*

### 55. Prospects for far-reaching economic reform in Libya have improved

### 55. Prospects for far-reaching economic reform in Libya have improved

### Reform outlook and implementation challenges
- Prospects for far-reaching economic reform in Libya have improved significantly since the 2004 Article IV consultation.
- Major implementation challenges remain due to:
  - A long legacy of centralized economic management and heavy dependence on oil.
  - Insufficient technical capacity and limited intra-governmental coordination.
- Staff recommendation: adopt the measures proposed by staff in the MTS, with strong prioritization and sequencing to avoid overstretching administrative capacity.
- Required supports: better intra-governmental coordination and a comprehensive technical assistance program.

### Fiscal management and public spending
- Key objectives: improve budgetary management and control, and implement a prudent fiscal policy to maintain macroeconomic stability.
- Institutional and policy measures recommended:
  - Bring control of fiscal policy under the ministry of finance by unifying the government’s budgets and officially abolishing all extrabudgetary operations.
  - Increase public expenditure on basic infrastructure and social services, taking into account absorptive capacity, given that very large fiscal surpluses are being generated while basic social needs remain inadequately met.
  - Promptly eliminate all outstanding government arrears, including arrears toward the social security fund and the electricity company.
  - Bolster institutional capacities and accountability to ensure increased spending efficiency.
  - Reinforce budget preparation, execution, and monitoring, and enhance budgetary discipline.

### Oil revenue management: ORF, IF, and proposed SSF
- Reform measure: replace the ORF and the IF by a Savings and Stabilization Fund (SSF) with strict rules governing revenue and expenditure policies.
- Operational requirements: enforce the SSF rules fully and undertake periodic assessment of performance.

### Monetary policy, banking, and supervision
- CBL actions to date: partial liberalization of interest rates is a welcomed first step toward gradual move to indirect monetary management.
- Staff encourages:
  - Full liberalization of interest rates.
  - Elimination of directed credit.
  - Issuance of CDs.
  - Reactivation of the interbank money market.
- Banking sector measures:
  - Continue to strengthen bank supervision.
  - Ensure adequate asset classification and provisioning in line with international best practices.
  - Reconsider the authorities’ bank restructuring approach in light of the recommendations of the June 2005 MFD TA mission.
  - Establish an independent bank restructuring agency to take over ownership of public commercial banks—a critical condition for the success of the proposed reform strategy.

### Exchange rate policy
- Assessment: the current exchange rate regime is serving Libya well and the current rate of the Libyan dinar is broadly appropriate.
- Recommendations:
  - Be prepared to revalue the peg as necessary in response to market forces while preserving competitiveness.
  - Keep exchange rate policy under review as structural and macroeconomic reforms progress.

### Trade policy and WTO accession
- Progress in reforming the trade regime is ongoing, but additional measures are needed:
  - Terminate the remaining state import monopolies.
  - Integrate all taxes and fees on imports into tariff rates and undertake a gradual reduction in tariff rates.
- To expedite WTO accession preparations, authorities are encouraged to seek technical assistance from outside experts, including World Bank experts.

### Economic diversification, privatization, and foreign investment
- Diversification is a long-term objective requiring sustained effort.
- Priority measures:
  - Enhance the government’s privatization strategy and attract foreign investment.
  - Enact a privatization law.
  - For foreign investment, implement a clear negative list and remove the US$50 million floor.

### Statistics and data governance
- Libya’s statistical system requires thorough restructuring.
- Priority institutional reforms:
  - Establish a National Statistical Council to improve coordination among data producers.
  - Create a National Statistical Agency with the authority to produce and disseminate official statistics.
- While data provision is adequate for overall surveillance purposes, shortcomings remain in some key areas.

### Coordination and governance for reform implementation
- Urgent need to establish a high inter-ministerial oversight committee to coordinate the government’s reform efforts.
- This committee will be key to successful implementation of the recommended reforms.

### International finance and debt relief
- Staff welcomes the authorities’ intention to participate in the financing of the ESF and encourages them to make their decision official.
- Staff reiterates the recommendation that Libya reconsider its withdrawal from the HIPC Initiative and integrate its debt relief plan in the multilateral framework of the latter.

### Surveillance timetable
- Proposal: the next Article IV consultation takes place on the standard 12-month cycle.

*Source: IMF staff report — "55. Prospects for far-reaching economic reform in Libya have improved" (chapter text).*

### 1. February 1985: STA mission in monetary statistics.

### 1. February 1985: STA mission in monetary statistics.

### Missions chronology (selected IMF/STA/other technical assistance missions)
- 1. February 1985: STA mission in monetary statistics.
- 2. September 1985: STA mission in price, trade, and non-oil production statistics.
- 3. March 1990: STA mission in money and banking and balance of payments statistics.
- 4. February 1998: STA multisector statistics mission.
- 5. August 2001: MAE mission in monetary operations, banking supervision and payment system.
- 6. December 2003: Two-week course on financial programming (INS and MCD).
- 7. February 2004: FAD mission on strengthening tax policy and revenue administration.
- 8. May 2004: MFD mission on monetary policy operations and introduction of financial instruments and markets.
- 9. June 2005: MFD mission on financial sector reform including bank restructuring.
- 10. June 2005: STA multisector mission on government finance statistics (GFS) and national accounts statistics (first part).
- 11. July 2005: FAD mission on reform of tax and customs directorates.
- 12. August/September 2005: STA multisector statistics on monetary and balance of payments statistics (second part).
- 13. Five missions by Middle East Technical Assistance Centre (METAC) on banking supervision (May, July, August and September 2005).

### Appendix II — Libya: relations with the World Bank Group (excerpt)
- Prepared by the World Bank staff (As of February 1, 2006)
- 1. Libya has been a member of the World Bank Group since 1958, joining the International Bank of Reconstruction and Development (IBRD) and International Finance Corporation (IFC) in September 1958, International Development Association (IDA) in August 1961, and Multilateral International Guarantee Association (MIGA) in April 1993. There have been no World Bank Group loans made to Libya to date as the development of the country’s petroleum assets from 1960 placed Libya among capital-surplus oil-producing countries, and provided resources to build extensive infrastructure and provide social services.
- 2. At the request of the Libyan authorities, a Bank economic mission visited Libya in July 2004 to prepare a Country Economic Report. The mission focused on the following areas: macroeconomic performance, investment climate, public enterprise reform, trade policy and customs administration, financial sector reform, social protection, and public finance management. A draft Country Economic Report, reflecting the mission’s findings and assessment of policy reform options, was delivered to the Libyan authorities in November 2004.

*Content unit: _cr06136 - 1. February 1985: STA mission in monetary statistics.*

### 3. A Bank mission, led by the Director of the Maghreb Department and the Chief

### 3. A Bank mission, led by the Director of the Maghreb Department and the Chief Economist of the Middle East and North Africa Region, visited Libya in November 2005

### Bank mission outcomes and proposed assistance
- Mission visited Libya in November 2005 to discuss follow-up to the Country Economic Report and explore Libyan interest in further World Bank Group assistance.
- Authorities expressed appreciation of the Country Economic Report and its main messages and recommendations.
- Agreement reached that a Bank mission would visit Libya in March 2006 to update and finalize the Report.
- At the authorities’ request, the mission made proposals for further assistance in:
  - public finance management,
  - private sector development,
  - financial sector reform,
  - social protection.
- These proposals and the possible instruments for Bank assistance are currently under review by the Libyan authorities.

### Statistical issues — overview
- Data shortcomings seriously affect staff capacity for effective surveillance. Shortcomings include:
  - weaknesses in conceptual and compilation procedures across sectors;
  - deficiencies in coverage, periodicity, and timeliness;
  - lack of consistency of data across sectors;
  - except for monetary data, lack of a reporting system to the Fund to update MCD’s operational database between missions.
- Institutional weaknesses compound issues:
  - lack of interagency cooperation;
  - proliferation of agencies with unclear and overlapping responsibilities;
  - continuous reshuffling of responsibilities among agencies.
- A 2005 multisector mission (June 4–9 and August 27–September 3) examined compilation procedures for national accounts, price indices, foreign trade, money and banking, and government finance; developed recommendations; urged Libya to expedite participation in the GDDS; and prepared a short-term action plan for authorities.

### National accounts — status and STA recommendations
- Status and constraints:
  - Some progress: GDP estimates by economic activity through 2004, based on the 1968 System of National Accounts.
  - Compilation hampered by high staff turnover and delays in receipt of basic data from various sources.
  - Many surveys are outdated.
  - Annual data up to 2002 were reported to STA in 2004 and published in the IFS, but estimates are not fully consistent with other data sets.
  - A new household survey was finalized in 2003.
- STA 2005 recommendations:
  - establish a National Statistical Agency to produce and disseminate official statistics and coordinate the national statistical program;
  - create a National Statistical Council as a legally empowered interagency coordination committee to oversee compilation of national accounts statistics;
  - transfer responsibility for the national accounts from the National Planning Council to the Census and Statistical Department of the National Information and Documentation Agency (NIDA) and create 6–10 additional permanent staff positions;
  - prioritize implementation of the 1993 System of National Accounts and outline entailed data requirements;
  - improve questionnaires for construction and manufacturing surveys and the establishments frame;
  - initiate regular surveys of major services activities, agricultural output, and public and private construction;
  - improve estimates for transport, storage, and communication companies (by including the three airline companies, shipping establishments, and telecommunication enterprises in the services sector), and for trade margin (by excluding margin of goods not channeled through wholesale or retail trade).

### Price statistics — status and STA recommendations
- Status:
  - Existing index based on weights from the 1992–93 household budget survey (as recommended by the 1998 STA mission), has a 1999 reference year, and compiled from 2000 onwards.
  - A new index based on a 2003 household budget survey is being finalized.
- STA 2005 recommendations:
  - expand coverage of the new CPI to include Benghazi and Sabah in addition to Tripoli;
  - align the classification system more closely with international standards (particularly by including services of owner-occupied dwellings and second-hand goods in the CPI basket);
  - adjust seasonal items and temporarily missing items;
  - revise all item descriptions and specify clearly the brand name and country of origin to ensure accurate data collection;
  - replace administrative data used to estimate rent by a sample of rental units;
  - develop methodology for compiling a producer price index (to use as a deflator for national accounts).

### Monetary, banking, and financial statistics — status and STA recommendations
- Status:
  - Timeliness and quality of monetary data reported to the IFS have improved, but deficiencies remain.
- STA 2005 recommendations:
  - reclassify Libyan Foreign Bank as a resident financial institution under other depository corporations and include it in the monetary survey;
  - reclassify specialized development banks if they start issuance of depository liabilities and include them in the monetary survey;
  - reclassify the Libyan Foreign Investment Company as a resident financial institution under other financial corporations;
  - exclude contingent positions (e.g., those arising from issuance of letters of credit) from the CBL’s and other banks’ monetary accounts and revise monetary data retroactively (which the CBL has already implemented);
  - treat provision of funds from the government’s Oil Reserve Fund at CBL as withdrawals from the government deposit account (or treat it as loan/advance to government in case of an overdraft) instead of sourcing them from the valuation adjustment account;
  - adopt market-based valuation of financial instruments and accrual accounting procedures for accruing interest;
  - revalue CBL’s holdings of monetary gold at end-period gold market prices;
  - identify all Fund-related accounts in the CBL’s balance sheet as per IMF Finance Department instructions;
  - revise/develop report forms for banks to contain sufficient breakdown by currency of denomination, instrument, and sector of counterparty needed for implementation of the Standardized Report Forms (SRFs) for monetary statistics.

### Fiscal data — status and STA recommendations
- Status:
  - Fiscal information system remains fragmented and inconsistent with international standards; designed for administrative reporting under government finance law rather than timely statistical information for economic planning and analysis.
- STA 2005 recommendations:
  - adopt centralized management at the ministry of finance of all budgetary central government accounts;
  - expand coverage of central government accounts to include extra budgetary and local government operations;
  - develop GFS metadata on concepts, scope, classifications, basis of recording, data sources, and statistical techniques for posting on the GDDS website;
  - adopt the Fund’s 2001 Government Finance Statistics Manual (GFSM) as a coherent methodological framework for production and dissemination of monthly, quarterly, and annual fiscal data, promoting recording of all assets and liabilities on accrual basis and at market values.

### Balance of payments — status and STA recommendations
- Status:
  - Authorities resumed reporting annual data in BPM5 format in 2000, but reported data suffer from:
    - unclear methodology;
    - outdated surveys as sources for primary data;
    - lack of component detail;
    - lack of comprehensive trade data coverage;
    - methodological flaws in compilation of the financial account.
- STA 2005 recommendations:
  - include provisions in the Bank Law for mandatory reporting by all resident sectors of data needed for BOP compilation (CBL as legally authorized compiling agency with penalties for noncompliance, misreporting, breach of confidentiality);
  - institutionalize regular coordination meetings of the CBL with NIDA, ministry of finance (customs department), ministry of planning, other ministries/agencies and private sector enterprises providing external sector source data;
  - urge high-level staff to seek training opportunities, including IMF courses on balance of payments statistics;
  - develop computer programs for compiling BOP statistics in BPM5 format and move to electronic reporting by reporting agencies;
  - bring BOP compilation in line with BPM5 on residency/nonresidency criteria, recording basis (accrual principle), valuation (market price), coverage;
  - improve source data by conducting surveys on foreign direct investment, services, transfers and a survey to establish a business registry;
  - improve coverage of FDI and portfolio investment data by surveying relevant foreign-based oil companies and companies outside the hydrocarbon sector;
  - improve coverage of the income account by including all transactions of the Libyan Foreign Bank and oil companies employing nonresidents;
  - compile foreign trade statistics using internationally accepted concepts and definitions.

### Table of common indicators required for surveillance (as of February 15, 2006) — selected entries
- Exchange Rates: Date of latest observation Jan. 2006; Date received January 2006; Frequency of Data M; Frequency of Reporting M; Frequency of publication M.
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest observation Nov. 2005; Date received January 2006; Frequency of Data M; Frequency of Reporting M; Frequency of publication M.
- Reserve/Base Money: Date of latest observation Dec. 2005; Date received February 2006; Frequency of Data M; Frequency of Reporting M; Frequency of publication M.
- Broad Money: Date of latest observation Dec. 2005; Date received February 2006; Frequency of Data M; Frequency of Reporting M; Frequency of publication M.
- Central Bank Balance Sheet: Date of latest observation Dec. 2005; Date received February 2006; Frequency of Data M; Frequency of Reporting M; Frequency of publication M.
- Consolidated Balance Sheet of the Banking System: Date of latest observation Dec. 2005; Date received February 2006; Frequency of Data M; Frequency of Reporting M; Frequency of publication M.
- Interest Rates: Date of latest observation Dec. 2005; Date received February 2006; Frequency of Data M; Frequency of Reporting M; Frequency of publication M.
- Consumer Price Index: Date of latest observation Sept. 2005; Date received December 2005; Frequency of Data M; Frequency of Reporting M; Frequency of publication M.
- Revenue, Expenditure, Balance and Composition of Financing – General Government: Date of latest observation Dec. 2005; Date received February 2006; Frequency of Data A; Frequency of Reporting A; Frequency of publication A.
- GDP/GNP: Date of latest observation 2004; Date received December 2005; Frequency of Data A; Frequency of Reporting A; Frequency of publication A.
- Gross External Debt: Date of latest observation Nov. 2000; Date received Nov. 2000; Frequency of Data NA; Frequency of Reporting NA; Frequency of publication NA.

### Public Information Notice (PIN) No. 06/38 — Article IV consultation summary (April 10, 2006)
- Background and structural context:
  - Since lifting of international sanctions in 2003–04, Libya decided to undertake comprehensive structural reforms and accelerate transition to a market economy.
  - Economy remains largely state controlled and not diversified: three quarters of employment in public sector; private investment 2 percent of GDP; oil sector dominant.
- 2004 developments:
  - Higher oil prices (31 percent) and increased oil output (5.6 percent).
  - Real GDP grew 4½ percent.
  - Consumer prices declined (-2.2 percent).
  - External current account surplus reached some 24 percent of GDP.
  - Gross international reserves rose to about 24 months of 2005 imports.
  - Fiscal stance expansionary: large non-oil fiscal deficit of 33½ percent of GDP; overall fiscal surplus 17½ percent of GDP.
  - Non-oil revenue increased by about 1 percentage point of GDP.
  - Total expenditure and net lending declined by ½ percent of GDP; capital expenditure surge 8 percent of GDP.
  - Broad money grew 9.2 percent.
  - Government’s net creditor position with the banking system about 50 percent of GDP.
  - Overall credit to the economy declined by 1 percent.
- 2005 developments (preliminary):
  - Real GDP growth about 3½ percent.
  - Inflation 2.5 percent.
  - Non-oil economy growth estimated 4½ percent; oil sector growth 1½ percent.
  - Sectors with strong growth: trade, hotels, and transportation (7 percent); construction and services (5 percent); agriculture (2.5 percent); manufacturing (1.8 percent).
  - Overall fiscal surplus reached 32½ percent of GDP; oil revenues 68 percent of GDP.
  - Non-oil revenue estimated to have declined by about 15 percent.
  - Non-oil fiscal deficit widened to 35 percent of GDP.
  - Monetary developments: broad money growth 29 percent; money grew 33 percent; quasi-money grew 20 percent.
  - Government’s net creditor position with the banking system reached 70 percent of GDP.
  - Bank credit to private sector grew about 3 percent; sharp increase in bank credit to public enterprises 23 percent.
  - External: current account surplus widened to 41 percent of GDP; hydrocarbon exports increased by 48 percent to about US$29 billion; imports grew 24 percent to some US$11 billion.
  - Gross international reserves rose to about 32 months of 2006 imports.
- Policy and structural reforms in 2005:
  - Streamlined customs tariff; downsized negative import list from 31 items to 17 items.
  - New tariff schedule with two rates: 10 percent for tobacco products and 0 percent for all other products; all imported goods subject to a 4 percent service fee.
  - Production and consumption tax increased to 25–50 percent for imported goods and reduced to 2 percent for domestically produced goods.
  - Government created an investment fund (IF) to manage part of oil revenues.
  - New banking law reinforcing CBL independence and authority to allow foreign banks; Anti Money Laundering (AML) law enacted.
  - Banks granted autonomy to determine interest rates on deposits and set lending rates within a band of 250 basis points above the discount rate (currently at 4 percent).
  - Privatization: 216 enterprises slated for privatization; 144 to be liquidated; 66 small enterprises sold so far.
  - Steps taken to regularize relations with external creditors; disputed claims with creditors in Germany, Spain and the United Kingdom settled in 2004–05.
  - Libya developed its own debt relief plan after withdrawal from HIPC Initiative; rescheduling agreements reached with Uganda, Tanzania, Benin; negotiations with Nicaragua ongoing.
- Executive Board assessment — key messages and recommendations:
  - Directors welcomed strong macroeconomic performance in 2004–05 and recent structural reforms.
  - Urged acceleration towards establishment of a market economy, sustained growth and job creation in the non-oil economy; noted absence of a comprehensive medium-term plan to date.
  - Recommended using Libya’s comfortable financial situation to pursue reform agenda vigorously, with the medium-term strategy prepared by staff as a blueprint.
  - Emphasized need for careful prioritization, sequencing, and effective coordination among institutions, including establishment of a high inter-ministerial oversight committee.
  - Fiscal recommendations:
    - bring control of fiscal policy under the ministry of finance by unifying government budgets and officially abolishing all extrabudgetary operations;
    - strengthen expenditure management and control, streamline tax system, modernize and improve revenue administration;
    - replace existing Oil Reserve Fund and Investment Fund by a Savings and Stabilization Fund governed by strict, fully enforced rules and periodic performance assessment.
    - ensure spending on infrastructure and social services takes into account absorptive capacity; strengthen institutional capacities and accountability; reinforce budget preparation, execution, and monitoring; eliminate outstanding government arrears and avoid new arrears.
  - Monetary and financial sector recommendations:
    - move to indirect monetary management, starting with full interest rate liberalization;
    - eliminate directed credit, reactivate interbank money market, strengthen banking supervision in line with international best practices;
    - implement banking sector restructuring and modernization strategy, including establishment of an independent bank restructuring agency to take over ownership of public commercial banks.
  - Exchange rate policy:
    - current regime pegging the Libyan dinar to the SDR is well served; current rate broadly appropriate;
    - consider adjustments in response to market developments while preserving competitiveness; keep exchange rate policy under review as reforms progress.
  - Trade and investment recommendations:
    - terminate remaining state import monopolies;
    - integrate all taxes and fees on imports in the tariff rates and gradually reduce them later;
    - accelerate preparations for WTO accession; seek technical assistance from outside experts;
    - enhance privatization strategy and conditions for foreign investment; enact a privatization law giving the privatization agency legal status and explicit mandate;
    - replace current positive list with streamlined negative list for foreign investment; remove the US$50 million floor on investment.
  - Statistical system recommendations:
    - welcome participation in the GDDS and encourage thorough restructuring of statistical system with priority to creation of a National Statistical Council and a National Statistical Agency.
  - Technical assistance:
    - Directors stressed need for further significant technical assistance given severe human resource constraints and weak institutions; welcomed Libya’s decision to cover most of the cost of required technical assistance.
  - Debt relief and creditors:
    - welcomed Libya’s intention to participate in financing the Exogenous Shocks Facility and progress in improving relations with external creditors;
    - encouraged authorities to reconsider withdrawal from the HIPC Initiative and integrate its debt relief plan in the multilateral HIPC framework.

### Selected macroeconomic and financial indicators (highlights)
- Population: 5.67 million (2004)
- Per capita GDP: US$5,271 (2004)
- Real GDP growth (annual percent changes):
  - Prel. 4.5 3.3 9.1 4.6 3.5
- Real nonhydrocarbon GDP (annual percent changes):
  - Prel. 6.8 4.7 2.2 4.1 4.6
- CPI inflation (annual percent changes):
  - Prel. -8.8 -9.9 -2.1 -2.2 2.5
- Central government finances (in percent of GDP):
  - Revenue: 43.1 51.4 54.4 59.1 73.0
  - Expenditure and net lending: 44.3 41.2 44.6 44.0 41.2
  - Overall fiscal balance: 1.2 5.2 14.2 17.5 32.6
  - Nonhydrocarbon balance (deficit -): -27.9 -35.1 -33.1 -33.6 -35.3
- Monetary indicators:
  - Broad Money (annual percent changes): 11.1 10.9 8.1 9.2 28.6
  - Deposit rates (1 year-deposits, in percent): 5.5 5.5 5.5 4.5 4.5
- External sector (in billions of dollars unless otherwise specified):
  - Exports of goods: 10.9 9.7 14.5 20.6 30.1
  - Imports of goods: 4.8 7.4 7.2 8.8 10.9
  - Current account balance (annual percent changes): 4.1 0.6 5.0 7.3 16.0
  - Current account balance (as percent of GDP): 13.8 2.9 21.5 24.2 40.8
  - Gross official reserves: 14.1 15.0 19.5 25.6 39.3
  - Reserves (in months of next year's imports): 19.0 20.5 21.9 23.9 31.5

*Source: _cr06136 - 3. A Bank mission, led by the Director of the Maghreb Department and the Chief Economist of the Middle East and North Africa Region, visited Libya in November 2005 (IMF staff report content supplied).*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06136.pdf_