## _cr06137 ## Source details **Canonical URL:** [_cr06137](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06137.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06137.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06137.pdf.json) --- ### I. Introduction and background - Libya: richly endowed with energy resources and "one of the least diversified economies in the Maghreb region and among the oil producing countries." - Historical policy features: command economy since early 1970s; state-driven investment; strictly controlled external trade; widespread price controls and subsidies; near-absent private sector. - Consequences: deterioration in the business climate, low economic growth, declining living standards, fragile macroeconomic conditions, increased vulnerability to external shocks, weak institutions, and poor governance. - Sanctions timeline: deterioration in mid-1980s with fall in world oil prices; further deterioration in 1990s due to international sanctions; freezing of UN sanctions in 1999; reforms since then slow and discontinuous. - Policy objective: accelerate transition to a market economy through far-reaching market-oriented structural reforms to enhance private sector role, improve business climate, and promote economic diversification. ### II. Recent developments and structural characteristics (2000–05) Findings - Sector shares (2000–05): - Oil sector contribution: about 56 percent of GDP in 2000–05. - Services: 28 percent of GDP. - Agriculture, industry, transportation, and construction: about 4-5 percent of GDP each. - External and fiscal concentration: - Hydrocarbon exports: about 97 percent of total export receipts in 2000–05. - Non-oil imports-to-non-oil GDP ratio: 70 percent. - Coverage of non-oil imports by non-oil exports: 11 percent in 2004. - Coverage of government expenditure by non-oil revenue: less than 30 percent; non-oil deficit about 30 percent of GDP. - Official reserves: "Official reserves increased by US$26 billion during the period." - State dominance and private sector: - Three quarters of employment in the public sector. - Private sector investment about 2 percent of GDP. - Structural liberalization measures implemented (selected): - Unification of the exchange rate. - New banking law enhancing the role of the Central Bank of Libya (CBL) and opening banking to domestic and foreign competition. - Privatization of some state enterprises; simplification of business procedures; removal of customs duty exemptions for public enterprises; liberalization of most prices; removal of trade restrictions; foreign investment allowed in some sectors. - 2005 actions: creation of an Investment Fund (IF) to manage part of government foreign exchange holdings; substantial streamlining of the customs tariff; abolition of all extrabudgetary expenditure from the Oil Reserve Fund (ORF). - CBL actions: partial liberalization of interest rates; issuance of decrees to improve commercial bank operations; launch of Sahara bank privatization. - Constraints on reform implementation: lack of coordination (including between CBL and MOF), absence of an overall reform strategy, human capacity constraints, weak institutions. Box: Reform measures implemented in 2004–05 (high-level) - 2004: - Approval of privatization of 360 state-owned enterprises. - Simplification of procedures for business application. - Submission to parliament of a plan to replace current subsidy system with a cash subsidy. - New banking law; Anti-Money Laundering law. - 2005: - Management of oil revenues: Creation of an Investment Fund (IF). - Tax and customs policy: new import tariff two rates (10 percent for tobacco products; 0 percent for all other products); all imported goods subject to a 4 percent service fee. Production and consumption tax changed to 25–50 percent for imported goods and reduced to 2 percent for domestically produced goods. - Revenue administration: beginning of a three-year modernization plan. - Interest rate liberalization: (i) Unification of the CBL’s deposit rates; (ii) liberalization of banks’ deposit rates; (iii) replacement of banks’ multiple lending rates by a ceiling 250 basis points above the CBL discount rate (currently at 4 percent). - Bank restructuring and supervision: Initiation of Sahara bank privatization; measures to strengthen banking supervision. - Trade policy: Decree changes limiting import restrictions. ### III. Medium-term prospects under current policies (2006–10) - Outlook summary: - Under WEO oil-price projections and current policy stance: favorable with no sustainability concerns; fiscal and external current account balances projected to register large surpluses during 2006–10. - Non-oil fiscal deficit projected to remain substantial at 31 percent of GDP. - Sectoral growth projections: - Oil sector projected annual growth: 6-7 percent. - Non-oil sector real growth projected: about 3 ½ percent per year. - Non-oil private sector investment projected to barely exceed 2 percent of GDP. - Labor market implication: projected non-oil growth insufficient to generate employment for a rapidly increasing labor force (~4 percent per year). - Oil revenue windfalls: - Projected increase from an average of US$16 billion per year (54 percent of GDP) in 2000–05 to an average of US$38 billion per year (76 percent of GDP) in 2006–10. ### IV. Medium-Term Strategy (MTS) — objectives, sequencing, and Phase One priorities Overall design - Purpose: maintain macroeconomic stability, rationalize use of oil wealth, accelerate transition to a market economy, establish basis for non-oil development. - Implementation horizon: 5–6 years in two phases of 2–3 years each. - Phase One objective: accelerate transition to a market economy by maintaining a sound macroeconomic framework, signaling commitment to reform, and implementing IMF TA-supported measures. Phase One priority areas - Consolidate public finances and streamline budgetary management and procedures. - Enhance CBL role and implement market-based monetary reforms. - Remove remaining external trade restrictions. - Complete price liberalization and rationalize subsidy system. - Develop a vigorous and coherent privatization program. - Improve the business climate. ### V. Public finance reform priorities (Phase One: 2006–08) Three reform categories and key actions 1) Bring fiscal control and transparency under MOF - Unify the budget: integrate administrative, development, and subsidies budgets and all extrabudgetary operations into a consolidated budget under MOF responsibility. - Modernize the treasury system. - Strengthen budgetary procedures. - Specific reform note: abolish the 70/30 rule under which 70 percent of budgetary oil revenue is allocated to capital spending and 30 percent to current expenditure (detailed measures to be based on planned FAD mission findings scheduled for Q2 2006). 2) Enhance quality of spending and broaden non-oil tax base - Revenue-side measures: - Simplify the tax system. - Implement tax cuts to reduce costs of doing business. - Eliminate widespread exemptions. - Improve revenue administration. - Expenditure-side measures: - Reinforce budgetary process. - Strengthen expenditure management and control. - Improve governance. - Develop Medium Term Expenditure Frameworks (MTEFs) to achieve long-term fiscal sustainability. 3) Improve management of oil wealth — Stabilization and Savings Fund (SSF) - Establish an oil fund in the form of a stabilization and savings fund to: - Reduce impact of volatile revenues on public finances and the economy. - Save part of oil revenue for future generations. - Use of SSF: - During oil price upswings: support better fiscal operations consistent with absorptive capacity. - During oil price downturns: draw on SSF to maintain expenditure stability. - Governance: strict rules governing SSF revenue and expenditure policies, full enforcement, and periodic performance assessment. Box 2: First Phase Reforms (2006–08) — selected timings - Budget: Develop a unified consolidated budget framework — Proposed timing: End-2006. - Tax policy actions: Proposed timing: April 2006; End-2006; 2007. - Revenue administration modernization: Proposed timing: April 2006; 2006–08. - Expenditure management, MTEF: Proposed timing: 2006–08. - Establish SSF: Enact a law and integrate SSF in consolidated budget — Proposed timing: 2006–08. - Governance improvements and preparations for second phase: Proposed timing: 2006–08; 2007. ### VI. Monetary policy, bank restructuring, and banking supervision Monetary reforms — objectives and measures - Aim: maintain price stability while allowing adequate credit expansion at competitive interest rates. - Actions: - Stop directed credit allocation and channel all credit subsidies through the budget. - Develop indirect monetary policy instruments (start with issuance of CBL bills), reactivate interbank money market as initial step toward open market operations. - Strengthen Monetary Policy Committee and monetary policy framework; improve database and monitoring. - Reorganize CBL in line with the new banking law. Box 3.A recommended actions and proposed timing - Terminate directed credit allocations; channel all credit subsidies through the budget; strengthen Monetary Policy Committee; fully liberalize interest rates; issue CBL bills and establish auction system; allow commercial banks to issue CDs and manage liquidity. - Proposed timing (Box 3.A): April 2006; April 2006; April 2005; June 2006; 2006; 2007. Bank restructuring and supervision — rationale and recommendations - Rationale: need an efficient, market-oriented banking system to support reform and private sector development. - Key reforms: - Enhance banking supervision; restructure banking system; modernize payment system; revise legal and regulatory frameworks. - Transfer ownership of banks currently owned by the CBL to an independent Bank Restructuring Agency (BRA); CBL to remain in charge of supervision but not directly involved in restructuring/privatization. - BRA: owner of public commercial banks during interim period minimum two years, not to exceed five years; clear written mandate; board mainly independent persons; financial independence (budget possibly funded through a levy on banks it manages). - Due diligence: external audits based on IFRS; operational reviews by international firms; CBL to initiate due diligence. - Resolution options: operational/financial restructuring followed by privatization (with or without foreign participation), merger, split good/bad assets, voluntary liquidation after liability repayment. - Additional measures: - Repeal provision limiting private investor share in a bank to 4 percent. - Open banking sector to foreign banks. - Consolidate the 48 regional banks into one entity. - Modernize payment system by 2007. Monetary and banking data (selected 2000–05) - Banks’ excess liquidity: equivalent to 34 percent of broad money at end-2005. - NPL ratio: about 33 percent at end-2005. - Central Bank foreign assets (LD mn): 2000: 7,296; 2001: 9,414; 2002: 18,444; 2003: 26,578; 2004: 33,073; 2005: 54,460. - Reserve money (LD mn): 2000: 5,405; 2001: 6,141; 2002: 6,240; 2003: 6,891; 2004: 9,966; 2005: 14,423. - Broad money (M2, LD mn): 2000: 10,555; 2001: 11,721; 2002: 13,004; 2003: 14,052; 2004: 15,344; 2005: 19,739. - Official exchange rate (LD/US$ eop): 2000: 0.54; 2001: 0.65; 2002: 1.21; 2003: 1.30; 2004: 1.24; 2005: 1.36. - Rediscount rate (percent): 2000–2005: 5.00; 5.00; 4.00; 4.00; 4.00; 4.00. - Commercial bank fixed-term deposit rates (one year): 2000–2002: 5.50; 2003: 4.50; 2004: 4.50; 2005: 4.50. - Lending rates (maximum, secured): 2000: 7.0; 2001: 7.0; 2002: 6.0; 2003: 6.0; 2004: 6.0; 2005: 6.5. ### VII. Exchange rate, trade, pricing, subsidies, privatization, and FDI Exchange rate policy - Assessment: absence of pressures after current account convertibility and external trade liberalization indicates Libyan dinar broadly appropriate. - By end-2008: consider switching to a more flexible exchange rate regime as reforms progress and non-oil economy develops; monitor non-oil external competitiveness closely. Trade reforms — Phase One priorities - Terminate all remaining state monopolies on imports. - Replace remaining 10 nonreligious and non-health-related import bans with import tariffs. - Simplify customs procedures in line with international standards. - WTO accession preparation: ensure equal treatment of foreign and domestic investors; incorporate internal taxes levied on imports in tariff schedule; adopt WTO customs valuation rules; limit import licensing; bring IPRs in line with best practice. Pricing and subsidy policy - Continue lifting remaining controls on price and profit margins; allow limited temporary pricing formulas with gradual elimination. - Subsidy reform: streamline explicit subsidies (mainly food) and implicit energy subsidies. - Quantitative estimates: - 2005 explicit subsidies: about 2 percent of GDP. - Implicit subsidies in the energy sector: assumed to be large, in the order of 14 percent of GDP. Privatization and foreign direct investment - Enact a privatization law to give agency legal existence and mandate. - Allow investors to acquire significant shares and corporate control; require competitive bidding. - Amend foreign investment law: use negative list and simplify approval to registration. - Regroup tax incentives in tax code; offer incentives as tax credits, allowances, or accelerated depreciation rather than tax holidays. Box 4 (First Phase recommended actions) — selected timings - Trade reform and WTO accession: Proposed timing: 2006. - Price liberalization and subsidy reform: Proposed timing: 2006; 2006-07. - Privatization and FDI measures: Proposed timing: 2006; 2006-07. - Social policy measures and statistical strengthening: Proposed timing: 2006; 2006-07. ### VIII. Second reform phase (2008–10): focus and recommended actions Overview - Second phase focus: (i) advancing economic diversification and promoting sectoral reforms (agriculture, industrial, services including tourism); (ii) reforming the civil service and social security system; (iii) further strengthening the social safety net; and (iv) improving governance. - Preparations to start early to begin implementation before end of first phase. Requirements for diversification and sectoral policies - Core policies to expand production base: - Land reform. - Improve legal and regulatory environment, including labor code reform. - Reform and consolidate judicial system to speed conflict resolution. - Sectoral emphasis: - Target SMEs in agro-processing and light industries, transportation, telecommunications, and tourism. - Agricultural policy: reform land law; improve government services; improve rural road network. - Labor market reforms: remove rigidities; give enterprises flexibility to control quality and size of labor force. Civil service and social policy - Civil service: streamline and reform statutes; adapt wage and recruitment policies to new environment. - Social security: comprehensive study required; social security covers about three-quarters of the labor force and shows financial distress with persistent operating deficits expected to grow. - Education and health: implement reform plans. Governance - Improve transparency, accountability, predictability of regulations; reinforce judiciary and government audit body. Box 5: Second Reform Phase (2008–2010) — recommended actions (selected) - Economic diversification: complete privatization program; complete banking restructuring; develop land reform plan; reform labor code; improve agricultural services and rural infrastructure. - Civil service: initiate reform consistent with decentralized economy. - Social policies: implement comprehensive reforms in education and health; restructure social security. - Governance: strengthen institutional framework—strong independent audit body and efficient judiciary. Implementation arrangements and TA - Decompose MTS into annual programs including required technical assistance (TA) and a performance monitoring system. - Two TA options: (i) placing short and long-term resident advisors; and/or (ii) frequent visits from Fund’s functional departments and METAC staff. - Libya to cover most TA costs; financing options include reimbursement basis or a TA-sub-account at the Fund. Institutional coordination and public engagement - Establish a High Inter-Ministerial Economic Team (HIT) to coordinate reform; supported by a Technical Committee (HIT/TC) for data collection, analysis, technical policy formulation, and reporting. - HIT/HIT-TC composition suggested: representatives from Prime Minister’s office, General Planning Council, Ministries of Finance, Economy, Planning, Energy, the CBL and the Statistical Agency; assisted by outside advisors. - Engage Basic People’s Congress and civil society to secure public support. Expected outcome - Successful implementation of the MTS expected to boost development of the non-oil sector and lay groundwork for transition from an oil economy to a more diversified economy. ### IX. Revenue administration and statistical system strengthening Revenue administration (Appendix I) — key points and priorities - Opening and liberalization require reshaping and strengthening tax and customs directorates. - Tax administration current weaknesses: widespread tax evasion; no taxpayer education; no TIN; outmoded assessment processes; almost no computerization; lack of skilled staff; degraded infrastructure. - Customs administration weaknesses: extensive exemptions; lack of automation; procedures not WTO-compliant; slow clearance; heavy controls; limited capacity. Reform priorities — Tax Directorate - Establish reform steering committee. - Restructure tax department to function-based organization; establish a Large Tax-Payer Office (LTO) in Tripoli. - Introduce self-assessment procedures starting with largest taxpayers. - Strengthen human resources and IT; upgrade buildings and equipment. - Develop necessary legislation for self-assessment and consider a tax procedures code. Reform priorities — Customs Directorate - Establish high-level reform steering committee. - Implement key customs policy and legislation reforms (e.g., accept electronic declarations). - Introduce risk-based controls; automation of customs import processing; post clearance audit unit. - Change procedures to meet WTO obligations; strengthen human resources and MIS. Statistical system — weaknesses and recommendations - Problems: weak system with serious deficiencies affecting policy capacity; data producing agencies isolated; core datasets weak. - Recommended institutional reforms: - Create a National Statistical Council (NSC). - Establish a National Statistical Agency (NSA). - Prepare multi-year statistical work program and HR recruitment/training program. - Nominate a GDDS coordinator; move responsibility for national accounts to NIDA initially; create 6-10 additional staff positions. - Participation in IMF’s GDDS recommended. Short-term statistical recommendations (selected) - Create a National Statistical Council. - Amend Banking law to mandate reporting of data for BOP statistics. - Move national accounts compilation to Census and Statistical Department; create 6-10 additional permanent staff positions. - Establish a government finance statistics unit with 4-6 staff at the MoF to compile fiscal data consistent with GFSM 2001. - Create a Balance of Payments division in the CBL and appoint sufficient staff. National accounts compilation (Section 10) - "The compilation of more accurate and reliable national accounts statistics should be given a high priority." - Recommendation: combine compilation and dissemination of national accounts with other real sector statistics in one organizational unit; Census and Statistical Department of NIDA appears the obvious choice for central unit for real sector statistics. - Footnote: "In staff’s view, official statistics and telecommunications should not be under the same Authority, as is currently the case." ### X. Stabilization and Savings Fund (SSF) — rationale, design, and implementation Justification and objectives - Justifications for SSF: - High budget dependence on volatile oil revenues. - Limited absorptive capacity. - Authorities’ willingness to reduce public sector share of economy. - Need to shield against Dutch disease. - Prudence and intergenerational equity. - Main objectives: - Reduce impact of volatile revenue on public finances and economy. - Save part of oil revenue for future generations. - During upswings: help resist spending pressures, dampen inflationary pressures, contain potential exchange rate appreciation. - During downturns: provide resources to maintain expenditure stability. Preconditions and relation with fiscal policy - SSF is not a substitute for sound fiscal policy. - Requires a medium-term budget framework (MTBF) that targets a non-oil fiscal deficit and derives budget oil revenue level to balance budget. Legal framework recommendations - Establish SSF by comprehensive law that: - Defines purpose, objectives, and location. - States sources of resources and rules for accumulation and use (including contingent accumulation rule and withdrawal rule). - Integrates SSF in fiscal framework preserving budget unity and MoF control; all transfers to/from fund to appear as explicit budget line items. - Stipulates operating and asset management regulations. - Addresses governance, transparency, reporting, auditing, performance evaluation, and sanctions. - Once SSF established, abolish ORF and IF and transfer balances to SSF. - Contingent accumulation rule example: transfer all revenues above level equivalent to targeted non-oil budget deficit to SSF. Operating and asset management - Invest SSF resources abroad to sterilize resources, avoid destabilizing domestic asset investment, be consistent with divestiture strategy, and preserve competitiveness of non-oil economy. - Investment policy principles: - SSF not permitted to borrow or lend. - SSF assets not used as collateral for government borrowing. - Budget and reporting: - SSF budget prepared annually and integrated with regular budget submitted to parliament. - MoF to prepare SSF budget and ensure consistency with macro objectives. - Operating regulations to allow withdrawals to bridge budgetary gaps when budget oil revenues fall below target. - Full transparency with regular disclosure and audits by independent agencies; reports to parliament and public. Implementation timeline - Implementation could require twelve to eighteen months and be completed by preparation of the 2008 budget to enable submission to Parliament of consolidated 2008 budget including SSF. ORF experience (background) - ORF established in 1995; status unclear (no legislation defining purpose, operating principles, controlling agency, or budget relations). - ORF not integrated in budget; accumulation rule based on oil revenues above reference oil price in budget law; government discretion over spending. - 2005 decision to eliminate all extrabudgetary spending from ORF, but off-budget allocations persisted (off-budget LD 3 billion allocated to specialized banks). ### XI. Fiscal, external, and macro aggregates — selected key statistics (2000–05) Real and nominal GDP (selected) - Nominal GDP at factor costs (LD mn): 2000: 17,775; 2001: 18,592; 2002: 25,246; 2003: 31,968; 2004: 41,950; 2005: 56,165. - Nominal hydrocarbon GDP (LD mn): 2000: 7,081; 2001: 7,297; 2002: 13,326; 2003: 19,565; 2004: 28,142; 2005: 40,773. - Nominal nonhydrocarbon GDP (LD mn): 2000: 10,695; 2001: 11,295; 2002: 11,920; 2003: 12,403; 2004: 13,808; 2005: 15,391. - Real GDP at factor cost (1997 prices, LD mn): 2000: 13,934; 2001: 14,563; 2002: 15,038; 2003: 16,412; 2004: 17,165; 2005: 17,773. Sectoral dynamics and shares - Oil production share of GDP (percent): 2000: 39.8; 2001: 39.2; 2002: 52.8; 2003: 61.2; 2004: 67.1; 2005: 72.6. - Nonoil sector share of GDP (percent): 2000: 60.2; 2001: 60.8; 2002: 47.2; 2003: 38.8; 2004: 32.9; 2005: 27.4. - Real hydrocarbon GDP growth (annual percent): 2000: -2.7; 2001: -0.7; 2002: -0.4; 2003: 26.9; 2004: 5.6; 2005: 1.4. - Real nonhydrocarbon GDP growth (annual percent): 2000: 3.0; 2001: 6.8; 2002: 4.7; 2003: 2.2; 2004: 4.1; 2005: 4.6. Fiscal operations (consolidated, LD mn and percent of GDP) - Total Revenue (LD mn): 2000: 8,075; 2001: 7,814; 2002: 12,572; 2003: 16,336; 2004: 23,272; 2005: 37,433. - Hydrocarbon revenue (LD mn): 2000: 5,557; 2001: 5,286; 2002: 9,872; 2003: 14,228; 2004: 20,141; 2005: 34,763. - Budgetary Revenue (LD mn): 2000: 4,729; 2001: 5,802; 2002: 9,417; 2003: 11,332; 2004: 13,755; 2005: 19,845. - Total expenditure and net lending (LD mn): 2000: 5,528; 2001: 8,038; 2002: 10,063; 2003: 13,396; 2004: 17,332; 2005: 21,107. - Current expenditure (LD mn): 2000: 3,721; 2001: 6,226; 2002: 6,724; 2003: 10,564; 2004: 10,298; 2005: 8,420. - Capital expenditure (LD mn): 2000: 1,807; 2001: 1,813; 2002: 3,339; 2003: 2,832; 2004: 6,933; 2005: 9,899. - Overall balance (LD mn): 2000: 2,547; 2001: 223; 2002: 1,280; 2003: 4,273; 2004: 6,901; 2005: 16,683. - Overall balance (percent of GDP): 2000: 14.4; 2001: 1.2; 2002: 5.2; 2003: 14.2; 2004: 17.5; 2005: 32.6. - Oil Reserve Fund (ORF) allocations (LD mn): 2000: 3,130; 2001: 1,719; 2002: 2,549; 2003: 4,583; 2004: 9,225; 2005: 17,337. - Nonhydrocarbon position (percent of GDP): 2000: -17.0; 2001: -27.9; 2002: -35.1; 2003: -33.1; 2004: -33.6; 2005: -35.3. External sector and balance of payments (selected) - Current Account (annual figures): 7,763 4,145 566 5,036 7,303 15,985. - Goods and Services (annual): 8,533 5,217 1,172 6,170 10,355 17,758. - Exports (fob) (annual): 13,380 10,892 9,717 14,525 20,600 30,110. - Hydrocarbon exports (annual): 12,929 10,472 9,534 14,037 19,723 29,210. - Imports (fob) (annual): -4,129 -4,825 -7,408 -7,200 -8,768 -10,875. - Gross official reserves (US$ bn): 13.1 14.1 15.0 19.5 25.6 39.3. - Gross official reserves (months of next year's imports): 26.7 19.0 20.5 21.9 23.9 31.5. - Current account balance (percent of GDP): 22.5 13.8 2.9 21.5 24.2 40.8. - Nominal GDP (US$ bn): 34.5 30.0 19.2 23.4 30.2 39.2. Price and inflation indicators - CPI inflation rate (annual percent change): 2000: -2.9; 2001: -8.8; 2002: -9.9; 2003: -2.1; 2004: -2.2; 2005: 2.5. - Example retail prices (Tripoli): - Gasoline (liter): 2000: 0.1200; 2001: 0.1400; 2002: 0.1500; 2003: 0.1500; 2004: 0.1200; 2005: 0.140. - Electricity (kilowatts): 2000–2005: 0.0200 each year. - Energy production and trade (selected): - Crude oil production (daily average, millions of barrels): 2000: 1.351; 2001: 1.316; 2002: 1.200; 2003: 1.534; 2004: 1.615; 2005: 1.646. - Crude oil exports (daily average, millions of barrels): 2000: 1.304; 2001: 1.224; 2002: 1.063; 2003: 1.354; 2004: 1.455; 2005: 1.465. - Gas produced (bcf): 2000: 490; 2001: 484; 2002: 464; 2003: 494; 2004: 527. Policy-relevant observations (from data) - Hydrocarbon sector dominance increased: oil production share rose from 39.8 percent of GDP in 2000 to 72.6 percent in 2005. - Significant accumulation of foreign assets and reserves at CBL: foreign assets rose from LD 7,296 million in 2000 to LD 54,460 million in 2005; net foreign assets of banking system rose from LD 7,774 million in 2000 to LD 56,423 million in 2005. - Fiscal positions strengthened in 2004–2005: overall balances LD 6,901 million in 2004 and LD 16,683 million in 2005; ORF allocation LD 17,337 million in 2005. - Persistent nonhydrocarbon fiscal deficits: nonhydrocarbon position percent of GDP remained deeply negative (-17.0 in 2000 to -35.3 in 2005). - Rapid expansion of monetary aggregates: broad money LD 10,555 million in 2000 to LD 19,739 million in 2005; reserve money LD 5,405 million in 2000 to LD 14,423 million in 2005. - Consumer prices: deflationary episodes 2000–2004 and mild inflation in 2005 (2.5). ### XII. Executive Board assessment and main recommendations (PIN, April 10, 2006) - Directors welcomed strong macroeconomic performance in 2004–05 and recent structural reforms. - Recommended priorities: - Accelerate establishment of a market economy: prepare and implement comprehensive medium-term plan with careful prioritization, sequencing, and institutional coordination (central bank and ministry of finance); establish a high inter-ministerial oversight committee. - Improve budgetary management and implement prudent fiscal policy: - Unify budgets and abolish extrabudgetary operations. - Strengthen expenditure management and control, streamline tax system, modernize revenue administration. - Replace Oil Reserve Fund and Investment Fund with a Savings and Stabilization Fund governed by strict, fully enforced rules; periodic performance assessment. - Ensure public expenditure considers absorptive capacity; strengthen institutional capacities and accountability; eliminate outstanding government arrears. - Move monetary management toward indirect tools and full interest rate liberalization; eliminate directed credit; reactivate interbank money market; strengthen banking supervision per international best practices. - Restructure and modernize banking sector; establish independent bank restructuring agency to assume ownership of public commercial banks. - Exchange rate policy: current peg to SDR well-served; keep policy under review; consider adjustments as market developments warrant while preserving competitiveness. - Trade and investment: terminate remaining state import monopolies; integrate taxes/fees on imports into tariffs; accelerate WTO accession preparations; improve privatization strategy; enact privatization law; replace positive investment list with negative list; remove US$50 million floor on investment. - Statistics and TA: welcome GDDS participation; undertake statistical system restructuring with NSC and NSA; significant TA needed, Libya to cover most TA costs. - Debt relief and multilateral engagement: encouraged to reconsider withdrawal from HIPC Initiative and integrate debt relief plan into multilateral framework. *Source: IMF staff report excerpts and Central Bank of Libya data as provided in _cr06137.* ### 1. Reform Measures Implemented in 2004–05................................................................... 6 ### Medium-Term Economic Reform Strategy for Libya ### I. Introduction and background - Libya is richly endowed with energy resources but "has one of the least diversified economies in the Maghreb region and among the oil producing countries." - Historical policy features: command economy from early 1970s with state-driven investment, strictly controlled external trade, widespread price controls and subsidies, and a near-absent private sector. - Consequences of past policies: deterioration in the business climate, low economic growth, declining living standards, fragile macroeconomic conditions, increased vulnerability to external shocks, weak institutions, and poor governance. - Sanctions context: economic conditions worsened in the mid-1980s with the fall in world oil prices and further in the 1990s as a result of international sanctions; freezing of UN sanctions occurred in 1999 and reforms since then have been slow and discontinuous. - Policy objective: accelerate transition to a market economy through far-reaching market-oriented structural reforms to enhance private sector role, improve business climate, and promote economic diversification. ### II. Main characteristics of Libya's economy — recent developments (2000–05) Findings - Oil sector contribution: about 56 percent of GDP in 2000–05. - Other activities: services 28 percent of GDP; agriculture, industry, transportation, and construction about 4-5 percent of GDP each. - External and fiscal concentration: - Hydrocarbon exports accounted for about 97 percent of total export receipts in 2000–05 and were the main source of official reserves. - Non-oil imports-to-non-oil GDP ratio: 70 percent. - Coverage of non-oil imports by non-oil exports: 11 percent in 2004. - Coverage of government expenditure by non-oil revenue: less than 30 percent, resulting in a non-oil deficit of about 30 percent of GDP. - Official reserves: "Official reserves increased by US$26 billion during the period." - Structural liberalization measures implemented (examples): - Unification of the exchange rate. - New banking law enhancing the role of the Central Bank of Libya (CBL) and opening banking to domestic and foreign competition. - Privatization of some state enterprises; simplification of business procedures; removal of customs duty exemptions for public enterprises; liberalization of most prices; removal of trade restrictions; foreign investment allowed in some sectors. - 2005: creation of an Investment Fund (IF) to manage part of government foreign exchange holdings; substantial streamlining of the customs tariff; abolition of all extrabudgetary expenditure from the Oil Reserve Fund (ORF). - CBL actions: partial liberalization of interest rates, issuance of decrees to improve commercial bank operations, launch of Sahara bank privatization. - Constraints on reform implementation: lack of coordination (including between CBL and MOF), absence of an overall reform strategy, human capacity constraints, weak institutions. - State dominance: three quarters of employment in the public sector; private sector investment about 2 percent of GDP. Box: Reform measures implemented in 2004–05 (high-level summary) - Year 2004: - Approval of privatization of 360 state-owned enterprises. - Simplification of procedures for business application. - Submission to parliament of a plan to replace current subsidy system with a cash subsidy. - Passage of a new banking law enhancing CBL role and opening banking sector to private (including foreign) banks. - Passage of an Anti-Money Laundering law. - Year 2005: A. Management of Oil Revenues - Creation of an Investment Fund (IF) to manage part of government oil revenues. B. Tax and Customs Policy - Simplification of the tariff schedule: new import tariff has two rates (10 percent for tobacco products and 0 percent for all other products), and all imported goods are subject to a 4 percent service fee. - Production and consumption tax changed to 25–50 percent for imported goods and reduced to 2 percent for domestically produced goods. C. Revenue Administration - Beginning of a three-year modernization plan for the tax and customs directorates. D. Interest Rate Liberalization - (i) Unification of the CBL’s deposit rates; (ii) liberalization of banks’ deposit rates; (iii) replacement of banks’ multiple lending rates by a ceiling 250 basis points above the CBL discount rate (currently at 4 percent). E. Bank Restructuring and Banking Supervision - Initiation of Sahara bank privatization. - Various measures to strengthen banking supervision. F. Trade Policy - Decree 12 of 2005 replaced by Decree 190, limiting import restrictions to six categories of imports requiring after-sale service. ### III. Medium-term prospects under current policies (2006–10) Projections and implications (as presented) - Outlook for 2006–10 under WEO oil-price projections and current policy stance: favorable with no sustainability concerns; fiscal and external current account balances projected to register large surpluses during 2006–10. - Non-oil fiscal deficit projected to remain substantial at 31 percent of GDP. - Sectoral growth projections: - Oil sector projected annual growth: 6-7 percent. - Non-oil sector real growth projected: about 3 ½ percent per year. - Non-oil private sector investment projected to barely exceed 2 percent of GDP. - Labor market implication: projected non-oil growth insufficient to generate employment for a rapidly increasing labor force (~4 percent per year). - Oil revenue windfalls: oil and natural gas revenue windfalls projected to increase from an average of US$16 billion per year (54 percent of GDP) in 2000–05 to an average of US$38 billion per year (76 percent of GDP) in 2006–10. - Diversification indicators: Figure 2 highlights evolution 2000–10 of oil GDP in % of GDP, oil revenue in % of revenue, oil exports in % of exports, nonoil exports/nonoil imports, nonoil revenue/govt expenditure, nonoil fiscal deficit (visual data referenced). ### IV. Medium-term strategy (MTS) — objectives and sequencing Overall design - Purpose: maintain macroeconomic stability, rationalize use of oil wealth, accelerate transition to a market economy, establish basis for non-oil development. - Implementation horizon: 5–6 years in two phases of 2–3 years each. - Phase One objective: accelerate transition to a market economy by maintaining a sound macroeconomic framework, signaling commitment to reform, and implementing IMF TA-supported measures. - Phase One priority areas: - Consolidate public finances and streamline budgetary management and procedures. - Enhance CBL role and implement market-based monetary reforms. - Remove remaining external trade restrictions. - Complete price liberalization and rationalize subsidy system. - Develop a vigorous and coherent privatization program. - Improve the business climate. ### V. Public finance reform priorities (Phase One) Three reform categories and key actions 1) Bring fiscal control and transparency under MOF - Unify the budget: integrate administrative, development, and subsidies budgets and all extrabudgetary operations into a consolidated budget under MOF responsibility. - Modernize the treasury system. - Strengthen budgetary procedures. - Specific reform note: abolish the 70/30 rule under which 70 percent of budgetary oil revenue is allocated to capital spending and 30 percent to current expenditure (detailed measures to be based on planned FAD mission findings scheduled for Q2 2006). 2) Enhance quality of spending and broaden non-oil tax base - Revenue-side measures: - Simplify the tax system. - Implement tax cuts to reduce costs of doing business. - Eliminate widespread exemptions. - Improve revenue administration (see Appendix I for details). - Expenditure-side measures: - Reinforce budgetary process. - Strengthen expenditure management and control. - Improve governance. - Develop Medium Term Expenditure Frameworks (MTEFs) to achieve long-term fiscal sustainability with stable expenditure policies and quantifiable targets reflected in annual budgets; reallocate resources toward basic infrastructure, social services, and capacity building. 3) Improve management of oil wealth — stabilization and savings fund (SSF) - Establish an oil fund in the form of a stabilization and savings fund to: - Reduce impact of volatile revenues on public finances and the economy. - Save part of oil revenue for future generations. - Use of SSF: - During oil price upswings: support better fiscal operations management consistent with absorptive capacity. - During oil price downturns: draw on SSF to maintain expenditure stability. - Governance: strict rules governing SSF revenue and expenditure policies, full enforcement, and periodic performance assessment (see Appendix II for details). *Source: Medium-Term Economic Reform Strategy for Libya (IMF staff paper, excerpts).* ### Box 2. Libya: Public Finances: First Phase Reforms (2006–08) ### Box 2. Libya: Public Finances: First Phase Reforms (2006–08) ### A. Budget - Develop a unified consolidated budget framework under the responsibility of the Ministry of Finance, including the administrative, development and subsidies budgets, and all the other extrabudgetary government operations. - Proposed timing: End-2006 ### B. Revenues - 1. Tax Policy - Integrate the service fee and consumption tax on imports in the tariff structure. - Simplify the tax rate structure, introduce new payment arrangements for corporations, repeal current provisions relating to tax incentives (tax holidays), and strictly limit tax exemptions. - Introduce appropriate rules for neutral tax corporate restructuring, in order to facilitate privatization. - Revisit excises. - Prepare for the introduction of the VAT. - Proposed timing: April 2006; End-2006; 2007 - 2. Revenue Administration - 2.1. Tax Directorate - Establish reform committees at the tax and customs directorates to oversee the reforms. - Restructure the tax department, establish a large tax-payer office, introduce self-assessment, supported by redesigned business process and IT systems. - Strengthen human resource development and training, and upgrade tax office buildings and equipment. - Proposed timing: April 2006; 2006–08 - 2.2. Customs Directorate - Introduce risk-based controls. - Change procedures to meet WTO obligations. - Introduce automation to customs-import processing. - Introduce management information systems. - Strengthen human resource development and training, and improve office buildings and equipment. - Proposed timing: April 2006; 2006–08 ### C. Expenditure - Enhance the efficiency of public expenditure by improving the preparation, content and execution of the public investment program, through stricter project selection and solid project execution review process. - Strengthen expenditure management and control and reform the procurement code. - Strengthen the budgetary system. - Develop an MTEF. - Proposed timing: 2006–08 ### D. Establish a Stabilization and Savings Fund (SSF) - Enact a law establishing the SSF. - Integrate the SSF in a unified consolidated budget under the responsibility of the Ministry of Finance. - Proposed timing: 2006–08 ### E. Governance - Develop a plan to improve governance. - Proposed timing: 2006–08 ### F. Preparations for Second Phase Reforms - Undertake a comprehensive census of the civil service. - Undertake a study of the social security system. - Proposed timing: 2006–08; 2006-08; 2007 (as listed in source) --- ### Monetary Reforms (narrative and Box 3.A) - Monetary policy objectives and measures: - Aim to maintain price stability while allowing for an adequate expansion of credit to the economy at competitive interest rates. - Stop directed credit allocation and channel all credit subsidies through the budget.7 - Develop indirect monetary policy instruments, starting with the issuance of CDs, and reactivate the interbank money market as a first step toward open market operations. - Strengthen the Monetary Policy Committee, improve the monetary policy framework with better database and economic monitoring capabilities, and reinforce daily monetary management. - Reorganize the CBL in line with the new banking law and expected transformation of the domestic economic environment. - Box 3.A recommended actions: - Terminate directed credit allocations. - Channel all credit subsidies through the budget. - Strengthen the role of the Monetary Policy Committee. - Fully liberalize interest rates. - Issue CBL bills and establish an auction system. - Allow commercial banks to issue CDs and manage their liquidity. - Proposed timing (Box 3.A): April 2006; April 2006; April 2005; June 2006; 2006; 2007 Note 7 (from source): "The scheme to administer these subsidies should be based on two rates: the rate received by the bank, which will be increasingly market determined; and the subsidized rate paid by the borrower, which is set by the government. The difference between the two rates should be financed by the government and budgeted." --- ### Bank Restructuring and Banking Supervision (narrative and Box 3.B–E) - Rationale: - A more efficient, market-oriented and sound banking system is needed to support economic reform and private sector development. - Key reforms and tasks: - Enhance banking supervision; restructure the banking system; modernize the domestic payment system; and revise legal and regulatory frameworks. - Continue implementing the strategic work plan to strengthen banking supervision agreed with METAC: upgrade onsite and offsite inspection systems, develop new prudential regulations in line with Basel requirements, and strengthen capacity building. - Transfer ownership of banks currently owned by the CBL to an independent bank restructuring agency (BRA); the CBL to remain in charge of supervision but not directly involved in restructuring/privatization. - Main tasks of the BRA: - Exercise ownership rights over banks currently owned by the CBL. - Safeguard banks’ value and stability during the interim period before restructuring/privatization. - Organize and monitor due diligence for each bank. - Implement a resolution strategy for each bank. - Modernize the payment system through acquisition and use of automated systems and introduction of noncash payment instruments; plan expected to be fully implemented by 2007. - Upgrade legal, regulatory, and institutional framework: open the banking sector to external competition; strengthen the judicial system; reform legislation on accounting and bookkeeping, and bankruptcy. - Box 3.B recommended actions: - Upgrade on-site and off-site supervision. - Improve accounting and financial reporting systems. - Strengthen credit-risk assessment, in line with Basel requirements. - Develop capacity building and staff training. - Strengthen prudential supervision and include specialized banks. - Box 3.C recommended actions: - Postpone the privatization of Wahda bank. - Repeal the decision limiting any private investor’s share in the capital of a bank to 4 percent, and open domestic market to foreign banks. - Transfer public banks’ ownership from the CBL to a bank restructuring agency. - Complete the due diligence process. - Consolidate the 48 regional banks into one entity. - Start the restructuring/privatization of the remaining state-owned banks. - Box 3.D and 3.E recommended actions: - Reform existing legislation on accounting and bookkeeping, and bankruptcy, in line with international standards. - Strengthen the judicial system. - Complete the modernization of the payment system. - Introduce an amendment in the banking law stipulating that the central bank does not take instructions from the government. - Restructure the CBL. - Proposed timing (Box 3 overall): 2006-08; 2006-08; 2007; April 2006; June 2006; 2006; 2007; 2006-07; 2006-08; 2007 --- ### Exchange Rate Policy - Assessment and guidance: - The absence of pressures on the exchange rate after current account convertibility and increased external trade liberalization indicates the Libyan dinar is broadly appropriate.9 - Implementation of the MTS should reinforce non-oil production and export prospects; monitor non-oil external competitiveness closely, including the level of the peg.10 - By end-2008 (end of first reform phase), as reforms progress and the non-oil economy develops, consider desirability and feasibility of switching to a more flexible exchange rate regime to give more room to respond to sharp changes in oil prices. - Footnotes from source: - 9: "The fact that non-oil exports are low reflects lack of structural reform and investment, rather than an overvaluation of the exchange rate." - 10: "In addition to monitoring unit costs, surveying the views of the business community, including investors, bankers, and enterprises involved in external trade, could help in assessing the appropriateness of the exchange rate level." --- ### Trade Reforms - Continue recent progress in reforming the trade system and simplifying trade regimes. - Priority measures: - Terminate all remaining state monopolies on imports.11 - Replace remaining 10 nonreligious and non-health-related import bans with import tariffs. - Simplify customs procedures in line with international standards. - WTO accession preparation high-priority reforms: - Ensure all regulations applied equally to foreign and domestic investors. - Incorporate internal taxes levied on imports but not on domestically supplied goods in the tariff schedule. - Adopt WTO rules on customs valuation. - Limit import licensing. - Bring Libya’s Intellectual Property Rights (IPRs) regime in line with international best practice. - Seek outside technical assistance, including from the World Bank, to speed review and prepare the Memorandum of the Foreign Trade Regime. - Footnote 11 (from source): "Including monopolies on imports of tobacco, veterinary medicines, and vaccines." --- ### Pricing and Subsidy Policies - Price liberalization: - Continue lifting remaining controls on price and profit margins. - Allow a limited number of goods to remain under temporary pricing formulas, with the number gradually reduced and eventually eliminated. - Subsidy reform: - Streamline explicit subsidies (mainly for food items) and implicit subsidies from low consumer prices for petroleum products, natural gas, electricity, and water. - Government plan to replace explicit food subsidies with cash payments should be better explained to the public to gain support of the Basic People’s Congress. - At a later stage, consider reversing universality of subsidies and progressively restrict them to the most vulnerable segments of the population. - Undertake a comprehensive study to assess the size of implicit subsidies and implement a plan to gradually reduce them over time and limit them to the poorest segments. - Quantitative estimates (from source): - In 2005, explicit subsidies were estimated at about 2 percent of GDP. - Implicit subsidies in the energy sector are assumed to be large, in the order of 14 percent of GDP; there are no current estimates for implicit subsidies in the water sector. --- ### Privatization and Foreign Direct Investment - Objectives: - Encourage private sector development and strengthen SMEs to promote economic diversification. - Priority actions: - Enhance government’s privatization strategy and end remaining monopolies and impediments to competition. - Attract foreign investment and technology. - Specific measures: - Enact a privatization law giving the privatization agency legal existence and explicit mandate. - Allow investors to acquire a significant share of capital and have corporate control over privatized companies; require sale process to be based on competitive bidding. - Subject public enterprises slated for privatization to hard budget constraints and strengthen their operational independence. - Amend the law on foreign investment: use a system of negative list and limit the number of restrictions, streamline the approval process, and replace screening procedure and feasibility study with a simple registration system. - Regroup all tax incentives in the tax code to harmonize incentives across all investors; offer incentives as tax credits, tax allowances, or accelerated depreciation rather than tax holidays or exemptions. - Strengthen the privatization program and clarify/strengthen independence of the privatization agency. - Complementary business climate improvements: - Simplify procedures and speed up approval and registration. - Improve access to land, strengthen bankruptcy laws, and simplify administrative procedures. - Advance financial sector reforms and improve infrastructure, transportation, and telecommunication networks.13 Footnote 13 (from source): "The latter include advancing financial sector reforms, improving underdeveloped infrastructure, and modernizing and developing the transportation and telecommunication networks." --- ### Box 4. Other Recommended Reforms (First Phase 2006–08) - A. Trade Reform and WTO Accession - Abolish remaining state import monopolies. - Replace the remaining 10 nonreligious and non-health-related import bans with import tariffs. - Simplify customs procedures in line with international standards. - Bring institutions, laws, and regulations related to international trade and investment in line with international standards. - Proposed timing: 2006 - B. Price Liberalization and Reform of Explicit and Implicit Subsidies - Remove the remaining controls on price and profit margins. - Promote the government’s plan to replace explicit subsidies by cash payments. - Prepare a study on implicit subsidies in the water and energy sectors. - Put implicit subsidies on budget, and develop a plan to gradually reduce them over time. - Proposed timing: 2006; 2006-07; 2006-07; 2006 - C. Privatization and Foreign Direct Investment - Clarify the mandate and strengthen the independence of the privatization agency. - Enact a privatization law allowing investors to acquire significant share and corporate control, and requiring competitive bidding. - Strengthen the privatization program. - Amend the law on foreign investment: use a negative list, limit restrictions, streamline approval, replace screening with registration. - Regroup all tax incentives in the tax code and offer incentives as tax credits, tax allowances, or accelerated depreciation. - Proposed timing: 2006; 2006-07 - D. Social Policies - Develop a plan to reform the education and health systems. - Undertake a study on poverty. - Develop a social safety net for segments most affected by structural reforms. - Proposed timing: June 2006; Sept. 2006; Sept. 2006; 2006 - E. Strengthening the Statistical System - E.1 Main Reforms: - Create a National Statistical Council (NSC). - Establish a National Statistical Agency (NSA). - Prepare a multi-year statistical work program. - Prepare a multi-year program of recruitment and training for NSA staff. - E.2 Other Measures: - Nominate a GDDS coordinator. - Move responsibility for national accounts to the National Information Documentation Authority (NIDA), and create 6-10 additional staff positions. - Transfer NIDA’s statistics department to the NSA. - Establish a GFS unit at the ministry of finance. - Proposed timing: 2006; 2006; 2006-07; 2006-07; June 2006; Sept. 2006; Dec. 2006; Dec. 2006; Feb. 2006; Mar. 2006; June 2006; June 2006 --- ### Social Policies and Poverty - Priority measures: - Undertake a comprehensive study on poverty, preferably in 2006, to inform the design of a social safety net to protect vulnerable groups during reforms (World Bank technical assistance could be sought). - Develop plans to reform education and health systems; World Bank assistance useful. - Proposed timing: 2006 (for poverty study) --- ### Strengthening the Statistical System (narrative) - Problems: - Libya’s statistical system is weak with serious deficiencies affecting government capacity to assess economic and financial conditions and develop policies. - Key reforms: - Establish a National Statistical Council to coordinate data-producing agencies and monitor progress. - Create a National Statistical Agency with authority to produce and disseminate official statistics and coordinate the national statistical work program. - Increase financial resources for statistical activities and strengthen human resource development and training. - Participate in the Fund’s General Data Dissemination Standards (GDDS) and use the GDDS as a framework for statistical development. - Box 4.E proposed measures and timings as listed above. *Source: IMF staff — Box 2 and related boxes detailing Libya: Public Finances and First Phase Reforms (2006–08).* ### 33. The second reform phase will need to focus on (i) advancing economic diversification ### 33. The second reform phase will need to focus on (i) advancing economic diversification ### Overview - The second reform phase should focus on: (i) advancing economic diversification and promoting sectoral reforms in the agricultural, industrial, and services (including tourism) sectors; (ii) reforming the civil service and the social security system; (iii) further strengthening the social safety net; and (iv) improving governance (Box 5). - Preparations for these reforms should start early so that implementation can begin before the end of the first phase of reforms. ### Requirements for the Diversification of the Non-oil Economy - Diversification is described as the biggest challenge for Libya, requiring sustained efforts to promote SMEs to expand non-oil production and export bases, and create jobs for a rapidly increasing labor force. - Policies to expand the production base should be centered on: - (i) land reform; - (ii) the continuation of efforts to improve the legal and regulatory environment, including the reform of the labor code; - (iii) the reform and consolidation of the judicial system to streamline and speed up conflict resolution, and improve the private sector’s confidence in the country's legal institutions. ### Sectoral Policies - Government policies in agricultural and industrial sectors should aim to enhance economic diversification and contribute to job creation, both in urban and rural areas. - Agricultural policies should focus on increasing output and productivity by: - reforming the land law; - improving government services; and - encouraging trade through improvement in the road network in rural areas. - Given Libya does not yet have comparative advantage in large-scale industrial activity, reform efforts should target development of SMEs in: - agro-processing and other light industries, - transportation, - telecommunications, and - tourism. - Labor market reforms should focus on removal of existing rigidities with flexibility given to enterprises to control the quality and size of their labor force. ### Civil Service - The move to a market economy will ease government control on the economy and shift economic decision making to the private sector, creating a need to redefine and simplify government functions and reform the civil service. - Civil service reform should aim at: - streamlining the civil service and reforming its statutes; and - adapting government wage and recruitment policies to the new domestic economic environment. ### Social Policies - The authorities need to undertake a comprehensive study of the social security system. - The social security system: - covers about three-quarters of the labor force; - has started to show signs of financial distress, with persistent operating deficits that are expected to grow overtime. - Based on the study’s findings, the government should develop a comprehensive reform package to redress the system’s weaknesses and ensure financial sustainability while improving service delivery. - Authorities should implement reform plans in the education and health sectors. ### Governance - Successful implementation of the reform agenda requires substantial improvement in governance, with measures aimed at: - enhancing transparency and accountability in government operations; - promoting predictability of regulations; and - reinforcing the institutional framework (efficient judiciary and strengthening of the government’s audit body). ### Box 5: Libya: Second Reform Phase (2008-2010): Recommended Actions A. Economic Diversification and Sectoral Policies - Continue efforts to build up a sound investment climate, with strong institutions to support open markets and a level playing field for all investors, and to strengthen the rule of law. - Complete the implementation of the privatization program. - Complete the restructuring of the banking system, and develop financial markets. - Develop a land reform plan and revamp the existing legal framework for industrial land. - Reform the labor code, in order to give more flexibility to enterprises to control the quality and size of their labor force. - Improve government services in the agricultural sector and improve rural infrastructure. B. Civil Service - Initiate a reform of the civil service consistent with the new decentralized economy. C. Social Policies - Implement comprehensive reforms in the education and health sectors. - Develop a reform package to restructure and strengthen the social security system. D. Governance - Strengthen the institutional framework: strong and independent audit body, and efficient judiciary. ### Implementation of the MTS and Technical Assistance - Implementation of the MTS will require decomposition into annual programs, including required technical assistance (TA) and a performance monitoring system. - Two options for Fund-provided TA could be considered: - (i) placing short and long-term resident advisors; and/or - (ii) frequent visits from Fund’s functional departments and METAC staff. - While some TA could be provided by the Fund free of charge, Libya would have to cover most of the cost of the required TA. - Financing options for TA: - (i) TA provided by the Fund on a reimbursement basis; or - (ii) Libya could establish at the Fund a TA-sub-account to finance TA provided and/or arranged by the Fund. ### Institutional Coordination and Public Engagement - Authorities should establish shortly a High Inter-Ministerial Economic Team (HIT) to coordinate reform efforts. - The HIT could be aided by a Technical Committee (HIT/TC) charged with data collection and analysis, technical policy formulation, and regular reporting on the economic and financial situation and reform implementation. - The HIT and HIT/TC could: - include representatives of the Prime Minister’s office, the General Planning Council, and the Ministries of Finance, Economy, Planning, Energy, the CBL and the Statistical Agency; and - be assisted by outside advisors. - Libya is encouraged to organize information missions to countries that have succeeded in transitioning to market economies for HIT and HIT/TC members. - Public support is required for sustainability of reforms; authorities should engage the Basic People’s Congress and establish a permanent dialogue with civil society, including the business community. ### Expected Outcome - Successful implementation of the proposed MTS will boost development of the non-oil sector and lay the groundwork for the transition from an oil economy to a more diversified economy. ### Revenue Administration (Appendix I) — Key points - Libya’s decision to open up and liberalize its economy will significantly impact tax and customs departments; the GPC decision to reduce budget reliance on oil will require reshaping and strengthening revenue administration. - Current tax and customs activities are characterized by a wide regional/local network with most activity in major urban centers, but revenue collections are weak and among the lowest in the Middle East. - Box 1: Tax and Customs Administration—Current Status - Tax Administration - Widespread tax evasion; no taxpayer education, no information dissemination. - No registration data base, no taxpayer identification number (TIN). - Outmoded administrative tax assessment processes; almost no computerization; no uniform internal procedures and systems; lack of information systems; lack of skilled and trained staff. - No clearly defined organizational structure; degraded physical infrastructure and equipment. - Customs Administration - Extensive exemptions; no automation and computerization of processes. - Procedures that do not comply with WTO requirements; slow clearance of imports; heavy and redundant control procedures; no management information systems. - Limited capacity to improve current performance with existing skills and procedures. - Poor accommodation and equipment. ### Reform Priorities for Tax Administration - Tax department needs an extensive modernization program with careful sequencing accounting for capacity constraints and adjustment needs. - Main steps proposed: - Establish a steering committee to oversee the reforms. - Implement key tax policy reforms to establish a strong policy foundation. - Restructure the tax department to a function-based organizational structure, phased beginning with headquarters. - Establish a large taxpayer office (LTO) in Tripoli, to be extended to other regions later. - Introduce self-assessment procedures and systems covering all key functional areas, applied first to the largest taxpayers and extended progressively. - Strengthen human resource development and training: recruit, develop, and train staff in headquarters and regions. - Upgrade tax office buildings and equipment. - Develop necessary legislation, including enacting legislation to support self-assessment procedures and consideration of a tax procedures code in the longer term. ### Reform Priorities for Customs Administration - Customs department requires deep reform of procedures and systems to comply with a market-based economy. - Main steps proposed: - Establish a high-level reform steering committee including tax and stakeholder departments. - Develop a plan to communicate the vision of a modernized customs department. - Implement key customs policy and legislation reforms: implement IMF tax policy recommendations; amend the customs law to enable new procedures (e.g., acceptance of electronic declarations and advance manifests). - Introduce risk-based controls to replace full documentary and physical examination with selective targeting of high-risk consignments. - Introduce automation to customs import processing by implementing an integrated customs-processing IT application. - Change procedures to meet WTO obligations: reform customs valuation procedures and establish a post clearance audit unit for selected transaction reviews and reassessments. - Strengthen human resource development and training. - Improve office buildings and equipment. - Develop management information systems and performance measures. ### Stabilization and Savings Fund (Appendix II) — Background and ORF Experience - Libya’s budget is highly dependent on oil, estimated to have contributed about 80 percent to government revenue in 2000–05. - There is a strong macroeconomic case for saving part of oil wealth for long-term fiscal sustainability and intergenerational equity via an SSF. - The ORF was established in 1995 to mitigate short-term oil price volatility on government expenditure and shield the budget from political pressure to spend when oil revenue is high. - The ORF’s status remains unclear: no legislation enacted stating its purpose, operating principles, controlling agency, or relations with the budget. - In practice, the ORF is not integrated in the budget and is governed by an accumulation rule—recipient of all oil revenues above a reference oil price set in the budget law—with government discretion over ORF spending decisions. - In 2005 the authorities decided to eliminate all extrabudgetary spending from the ORF, but off-budget allocations persisted. - Libya’s ORF experience did not achieve intended stabilization or long-term savings objectives; non-integration and absence of oversight complicated fiscal management, led to inefficient allocation, and reduced transparency. ### Selected Fiscal and ORF Data (as presented) - Text statements: - In 2000-05, oil revenues contributed some 80 percent of government revenue. - In 1992–94, responding to a sharp drop in oil revenues (by some 12 percentage points of GDP), the authorities reduced the non-oil fiscal deficit by more than 3 percentage points of GDP and managed to contain the overall fiscal deficit at about 3 percent of GDP. - In 1995–96, although oil revenues more than doubled in terms of GDP to about 27 percent of GDP, the non-oil deficit increased only by about 2 percentage points of GDP. - Starting in 1997–98, there was a break in fiscal discipline with increased recourse to the ORF to finance discretionary extrabudgetary spending; the latter averaged some 6 percent of GDP in 1999–02, but increased to about 10 percent of GDP in 2003–05. - In 2005 the government increased the oil reference price to US$26 (from US$22 in 2003-04) and decided to refrain from extrabudgetary spending, but allocated off-budget LD 3 billion of ORF resources to specialized banks. - Table 1 (verbatim as in source): - 1990-911992-941995-961997-981999-022003-05 - Overall fiscal balance5.1-3.18.3-2.47.021.5 - Of which: Nonoil fiscal deficit - -19.5-16.1-18.4-22.1-22.6-34.0 - ORF expenditure0.00.00.01.35.59.7 - Expenditure/NOR (in percent) 1/250.2209.1237.1273.5273.6659.8 - Oil price for Libya (in US$ per barrel)20.316.518.015.523.039.6 - Oil revenue24.613.026.719.729.655.5 - Source: Libyan authorities; and staff estimates. - 1/ NOR=Nonoil revenue. *IMF staff report excerpt* ### 6. There are many factors that would justify the establishment of an SSF in Libya. These ### 6. There are many factors that would justify the establishment of an SSF in Libya. These ### Justification for an SSF - High dependence of the budget on—and hence its vulnerability to—volatile oil revenues, which makes a stabilization fund highly desirable. - Limited absorptive capacity of the Libyan economy. - Authorities’ willingness to reduce progressively the public sector’s share in the economy. - Need to shield the economy against Dutch disease. - Prudence and intergenerational equity, indicating the need for a saving function. ### Main objectives of an SSF - Reduce the impact of volatile revenue on public finances and the economy. - Save part of the oil revenue for future generations. - During oil price upswings: help government resist spending pressures by formally limiting resources available to the budget, dampening inflationary pressures, and containing potential appreciation of the exchange rate. - During oil price downturns: allow recourse to SSF resources to help maintain expenditure stability. - Enable implementation of strong macroeconomic policies to achieve strong non-inflationary sustainable economic growth. ### Preconditions and relationship with fiscal policy - Establishment of an SSF cannot substitute for government commitment to pursuing a sound fiscal policy. - For Libya, this means a sensible medium-term budget framework (MTBF) that focuses on the non-oil fiscal deficit. - Under the MTBF scheme: - Government targets a non-oil fiscal deficit. - Derive the level of the budget oil revenue—that is the amount of oil revenues to be earmarked to the budget—that would balance the budget. ### Legal framework for establishing the SSF (recommendations for the law) - The SSF should be established by a comprehensive law covering all issues relevant to the fund’s success. - The law should: - Include a clear definition of the purpose and objectives of the SSF, and its location. - State the nature and source of the SSF’s resources, and the rules governing accumulation and use. In particular: - Reference to a contingent budget rule for accumulation in the SSF can mitigate pressure on the government to spend and facilitate political acceptance of safeguarding part of oil wealth for future generations. - Reference to a budget rule for withdrawal from the SSF to clarify relations with the budget, including instances when withdrawal for budget financing is allowed. - Address integration of the SSF in the fiscal framework, preserving unity of the budget and keeping control of fiscal policy under the Ministry of Finance (MoF). All transfers to and from the fund should appear as explicit line items in the budget. - Stipulate guidelines for operating and asset management regulations. - Address governance, transparency, and accountability: roles and responsibilities, reporting, auditing (internal and external), performance evaluation (management and financial), and sanctions for non-compliance. - Once the SSF is established, the government would need to abolish the ORF and the IF and transfer their balances to the SSF. - The contingent rule for accumulation could indicate that all revenues above a level equivalent to the targeted non-oil budget deficit would be transferred to the SSF. ### Operating and asset management regulations (recommendations) - Preserve the fund from risky investments and poor governance while ensuring full transparency. - Strong case for SSF’s resources to be invested abroad to: - Sterilize resources and avoid destabilizing effects of investing in domestic financial assets. - Be consistent with government’s divestiture strategy and enhance private sector role. - Preserve competitiveness of the non-oil economy. - Investment policy principles: - SSF should not be permitted to borrow or to lend. - SSF assets should not be used as collateral for government borrowing. - Budget and reporting: - SSF’s budget should be prepared annually and integrated with the regular budget in a consolidated budget submitted to parliament for approval. - MoF could be charged with preparing the SSF’s budget and ensuring consistency with the regular budget and overall macroeconomic objectives. - Operating regulations should provide a mechanism allowing withdrawals from the SSF to bridge budgetary gaps when budget oil revenues fall below target. - Full transparency requires regular and frequent disclosure and reporting, regular audits (preferably by independent agencies of international repute), with reports presented to parliament and the public on a timely basis. ### Implementation timeline - Implementation of the proposed reform could require twelve to eighteen months and be completed by the time of the preparation of the 2008 budget, enabling submission to Parliament of a consolidated 2008 budget including the regular budget and the SSF’s budget. ### Bank restructuring strategy (summary of related recommendations) - Background facts: - Public sector represents 90 percent of Libya’s banking business. - CBL fully owns three banks: National Commercial Bank, Umma Bank, and Jamhouria Bank. - Government majority share in Wahda Bank (87 percent) and Sahara Bank (82.7 percent, before the start of the privatization). - Private sector owns four banks and 48 small regional banks. - At end- 2005, the banks’ excess liquidity was equivalent to 34 percent of broad money, and the NPL ratio was about 33 percent. - Recommended approach: - Restructuring urgently needed; requires comprehensive, properly sequenced reforms and enhanced expertise: institution, market, and instrument development; banking supervision capability; legal and regulatory changes. - Transfer direct ownership of state-owned commercial banks to a Bank Restructuring Agency (BRA). - BRA mission: owner of public commercial banks during an interim period of a minimum of two years, but not to exceed five years. - Responsibilities: appoint boards and key managers, issue general instructions. - BRA should have a clear written mandate, board composed mainly of independent persons, chairman from private sector or academia, financial independence (budget possibly funded through a levy on banks it manages), and authority to hire required domestic and international expertise. - Safeguards: ensure substantial liquidity held by commercial banks is carefully safeguarded during interim period. - Operational restructuring during interim period: introduce modern interbank transfer techniques and risk management, merge/close unprofitable branches, consolidate redundant staff. - Due diligence requirements: - Audit of financial statements based on internationally understood valuation norms. - Operational review assessing procedures and systems, including information technology. - CBL should initiate due diligence of all public commercial banks; BRA should continue monitoring once banks are transferred. - External audits (now required by the new Banking Law) should cover each bank’s last fiscal year; be performed jointly by a local and an international accounting firm; be based on IFRS. Apply to Sahara Bank regardless of privatization status. - Operational review to be performed by relevant international firms, starting at same time as audit. - Resolution strategy selection by BRA after due diligence; options include operational/financial restructuring followed by privatization (with or without foreign participation), merger, split between good and bad assets, voluntary liquidation after liability repayment. Privatization strategy should state which banks, when, and in what order; strategy should be public. - Financial restructuring to improve banks’ solvency, profitability, and liquidity; may involve removing bad loans, splitting banks into good and bad parts. BRA to take over and manage bad assets to maximize value. - Transfer responsibility to new owners/managers as final step; BRA responsibility for each bank ends at that stage. Timetable should consider absorptive capacity of potential investors and interest of targeted buyers. ### Additional banking-sector reform measures - Reform corporate and commercial laws: - Repeal legal provision limiting private ownership to 4 percent of capital for banks (and 5 percent for companies). - Introduce law making share registry of larger private companies, including banks, publicly available, and treating local and international investors equally. - Develop plan to open banking sector to foreign banks to introduce advanced systems, increase competition, and provide strong signaling that Libya is open for business. - Accelerate capacity-building in banking supervision; require substantial technical assistance. - Supervision of specialized banks by CBL should start immediately as required by new law; consolidation of the 48 regional banks into a single entity should be completed expeditiously. - Improve environment for banking activities: - Further liberalize interest rates. - Adopt IFRS for banks and other large corporate entities. - Establish a privately-owned Tripoli Stock Exchange (TSE), separate legal entity owned and controlled by financial market participants; privatization of Sahara Bank provides opportunity to start modest trading. - Accelerate modernization of the payment system to enhance bank performance, expand/improve service delivery, and reduce costs. - Note: There are three public specialized banks under the Ministry of Finance: the Agriculture Bank, Saving and Real Estate Investment Bank, and Development Bank. ### Statistical reforms (summary) - Background: - Libya needs a professionally operated statistical system to support economic reforms, policy decisions, and monitor population well-being. - Data producing agencies work largely in isolation; core datasets are weak. - National accounts: follow 1968 System of National Accounts (1968 SNA); responsibility of Ministry of Planning (MoP); compilation hampered by ineffective legal/institutional arrangements, absence of human resources, and lack of efficient data collection program; inadequate interagency coordination and methodological weaknesses. - Government finance statistics: compiled by Ministry of Finance (MoF) but overall responsibility not clearly established; no comprehensive consolidated data for the three government budgets (the administrative, subsidies, and development budgets); other shortcomings include misclassification of expenditure items; non-coverage of social security, social solidarity, and employment funds; non-recording of Oil Reserve Fund (ORF) operations. - Monetary statistics: compiled by Central Bank of Libya (CBL) but institutional coverage incomplete; weaknesses in valuation and accrual accounting practices in source data limit reliability and generate inconsistencies with balance of payments statistics. - Balance of payments: CBL has well-established practice for collecting/compiling but has no legal authority; no discussions or cross-checks with other institutions; inconsistencies in methodological, recording, and valuation practices not addressed; formal confidentiality regulations absent. - Recommendations: - Authorities’ commitment to strengthen statistical system is basic condition; create a National Statistical Council to discuss and approve national statistical program and monitor progress within IMF General Data Dissemination System (GDDS). - Data producing agencies must work together to ensure consistency across datasets. - GDDS participation recommended; GDDS offers international best practices and allows self-paced progress through self-defined strategies. - Strengthen real sector statistics derived from censuses, household and economic surveys, and administrative sources to monitor growth, business activity, inflation, labor market, household income/wealth, and other social developments. *Source: _cr06137 - 6. There are many factors that would justify the establishment of an SSF in Libya.* ### 10. The compilation of more accurate and reliable national accounts statistics should be ### _cr06137 - 10. The compilation of more accurate and reliable national accounts statistics should be ### Compilation of national accounts statistics - "The compilation of more accurate and reliable national accounts statistics should be given a high priority, and appropriate resources must be allocated." - "Compilation and dissemination of national accounts statistics should be combined into one organizational unit with other real sector statistics." - Combining compilation and dissemination with other real sector statistics "would allow integration with other data sources and the realization of efficiency gains." - "In the present circumstances, the Census and Statistical Department of the National Information, Documentation, and Telecommunication Authority (NIDA) appears to be the obvious choice for becoming the central unit for real sector statistics." - Footnote: "In staff’s view, official statistics and telecommunications should not be under the same Authority, as is currently the case." ### Establish Government Finance Statistics - "Government finance statistics are needed to determine the fiscal stance in a transparent way, to inform fiscal policy decision, and assess fiscal sustainability and vulnerability." - "The establishment of government finance statistics should be reinforced and the overall responsibility for fiscal statistics centralized in the MoF." - The authorities should "adopt the Government Finance Statistics Manual (GFSM 2001), which harmonizes the system used to report fiscal statistics with other macroeconomic statistical systems and most notably with the 1993 System of National Accounts (1993 SNA)." ### Develop External Sector Statistics - "While the Libyan statistical legislation does not assign any responsibility to the CBL for the collection, compilation and dissemination of balance of payments statistics, the CBL has a well-established practice through the activities of the Research and Statistics Department (RSD)." - "A Balance of Payments Division within the RSD and additional staff for this division would permit a formal designation of responsibilities and a clear separation of tasks for the compilation of a comprehensive set of external sector statistics in line with the Balance of Payments Manual, fifth edition (BPM5)." - Footnote: "In February 2006, the authorities officially announced their participation in the GDDS and appointed a national GDDS coordinator." ### Strengthen Monetary Statistics - "The format of monetary statistics compiled by the CBL’s RSD is broadly consistent with the structure of the Monetary and Financial Statistics (MFSM)’s Depository Corporations Survey." - "However, there is a need to broaden the institutional coverage and improve the valuation and accounting practices in the source data, in order to ensure greater consistency between monetary and balance of payments statistics." ### Recommendations — Short Term - "Create a National Statistical Council to strengthen collaboration among agencies and to support the (future) national statistical agency." - "Amend the Banking law in order to set out provisions for mandatory reporting of data for BOP statistics." - "Move responsibility for national accounts statistics to the Census and Statistical Department. Start the process of strengthening national accounts statistics by creating 6-10 additional permanent staff positions." - "Establish a government finance statistics unit with 4-6 staff at the MoF, responsible for compiling a comprehensive set of fiscal data consistent with the GFSM 2001 framework." - "Create a balance of payments division in the Central Bank of Libya and appoint sufficient staff for this division." *Source: _cr06137 - 10. The compilation of more accurate and reliable national accounts statistics should be* ### 15. Medium Term ### 15. Medium Term ### Institutional Recommendation - Establish a National Statistical Agency with authority to produce and disseminate official statistics and to coordinate the national statistical program. ### Real Sector — Key Statistics (2000–05) - Nominal GDP at factor costs (In millions of Libyan dinars): 2000: 17,775; 2001: 18,592; 2002: 25,246; 2003: 31,968; 2004: 41,950; 2005: 56,165. - Nominal hydrocarbon GDP (In millions of Libyan dinars): 2000: 7,081; 2001: 7,297; 2002: 13,326; 2003: 19,565; 2004: 28,142; 2005: 40,773. - Nominal nonhydrocarbon GDP (In millions of Libyan dinars): 2000: 10,695; 2001: 11,295; 2002: 11,920; 2003: 12,403; 2004: 13,808; 2005: 15,391. - Real GDP at factor cost (1997 prices, In millions of Libyan dinars): 2000: 13,934; 2001: 14,563; 2002: 15,038; 2003: 16,412; 2004: 17,165; 2005: 17,773. - Real hydrocarbon GDP (In millions of Libyan dinars): 2000: 4,256; 2001: 4,228; 2002: 4,213; 2003: 5,345; 2004: 5,644; 2005: 5,724. - Real nonhydrocarbon GDP (In millions of Libyan dinars): 2000: 9,678; 2001: 10,335; 2002: 10,825; 2003: 11,066; 2004: 11,521; 2005: 12,049. - Annual percent changes (selected): - Nominal GDP at factor costs: 2000: 26.3; 2001: 4.6; 2002: 35.8; 2003: 26.6; 2004: 31.2; 2005: 33.9. - Real GDP at factor costs: 2000: 1.1; 2001: 4.5; 2002: 3.3; 2003: 9.1; 2004: 4.6; 2005: 3.5. - Real hydrocarbon GDP: 2000: -2.7; 2001: -0.7; 2002: -0.4; 2003: 26.9; 2004: 5.6; 2005: 1.4. - Real nonhydrocarbon GDP: 2000: 3.0; 2001: 6.8; 2002: 4.7; 2003: 2.2; 2004: 4.1; 2005: 4.6. - GDP deflator: 2000: 24.9; 2001: 0.1; 2002: 31.5; 2003: 16.0; 2004: 25.5; 2005: 29.3. - CPI index (1995 = 100): 2000: 111.3; 2001: 101.4; 2002: 91.4; 2003: 89.5; 2004: 87.6; 2005: 89.8. - CPI inflation rate (annual percent change): 2000: -2.9; 2001: -8.8; 2002: -9.9; 2003: -2.1; 2004: -2.2; 2005: 2.5. ### Sectoral Distribution and Dynamics (2000–05) - GDP at factor cost by sector (current prices, In millions of Libyan dinars) — selected sectors: - Nonoil sector: 2000: 10,695; 2001: 11,295; 2002: 11,920; 2003: 12,403; 2004: 13,808; 2005: 15,391. - Oil production: 2000: 7,081; 2001: 7,297; 2002: 13,326; 2003: 19,565; 2004: 28,142; 2005: 40,773. - Total public services (current prices): 2000: 2,666; 2001: 2,901; 2002: 2,859; 2003: 3,205; 2004: 3,800; 2005: 4,129. - Shares of GDP at factor cost (percent of total) — selected: - Oil production share: 2000: 39.8; 2001: 39.2; 2002: 52.8; 2003: 61.2; 2004: 67.1; 2005: 72.6. - Nonoil sector share: 2000: 60.2; 2001: 60.8; 2002: 47.2; 2003: 38.8; 2004: 32.9; 2005: 27.4. - Sectoral real growth rates (annual percent change, 1997 prices) — selected: - Total GDP at factor cost: 2000: 1.1; 2001: 4.5; 2002: 3.3; 2003: 9.1; 2004: 4.6; 2005: 3.5. - Oil production: 2000: -2.7; 2001: -0.7; 2002: -0.4; 2003: 26.9; 2004: 5.6; 2005: 1.4. - Nonoil sector: 2000: 3.0; 2001: 6.8; 2002: 4.7; 2003: 2.2; 2004: 4.1; 2005: 4.6. ### Investment and Employment Indicators - Gross Fixed Capital Formation by economic sector (current prices, In millions of Libyan dinars): Total (2000–05): 2000: 2,214; 2001: 2,158; 2002: 3,580; 2003: 3,331; 2004: 3,988; 2005: 4,807. - Labor force and employment (In thousands, selected years and totals): - Total employment (1999–2004): 1999: 1,383.8; 2000: 1,445.0; 2001: 1,458.4; 2004: 1,600.0. - Libyans employed (1999–2004): 1999: 1,203.9; 2000: 1,257.1; 2001: 1,335.4; 2004: 1,543.1. - Non-Libyans employed (1999–2004): 1999: 179.9; 2000: 187.9; 2001: 123.0; 2004: 56.9. ### Prices and Retail Prices (Tripoli) — Selected Retail Prices (LD) - Poultry (Kilogram): 2000: 4.2903; 2001: 3.1472; 2002: 2.8122; 2003: 2.6342; 2004: 2.6362; 2005: 2.308. - Gasoline (Liter): 2000: 0.1200; 2001: 0.1400; 2002: 0.1500; 2003: 0.1500; 2004: 0.1200; 2005: 0.140. - Electricity (Kilowatts): 2000–2005: 0.0200 each year. ### Energy Sector — Production, Consumption, Trade (2000–05) - Domestic production of petroleum products (thousands of metric tons, 2000–04): Total: 2000: 16,125; 2001: 14,646; 2002: 13,909; 2003: 15,216; 2004: 14,999. - Domestic consumption of petroleum products (thousands of metric tons, 2000–04): Total: 2000: 7,401; 2001: 7,077; 2002: 8,142; 2003: 8,787; 2004: 9,327. - Production of crude oil and exports (millions of barrels, 2000–05): - Production (daily average, millions of barrels): 2000: 1.351; 2001: 1.316; 2002: 1.200; 2003: 1.534; 2004: 1.615; 2005: 1.646. - Exports (daily average, millions of barrels): 2000: 1.304; 2001: 1.224; 2002: 1.063; 2003: 1.354; 2004: 1.455; 2005: 1.465. - Gas and petrochemical production and exports (2000–04): - Gas produced (billions of cubic feet): 2000: 490; 2001: 484; 2002: 464; 2003: 494; 2004: 527. - Petrochemical exports (thousands of metric tons): Total: 2000: 2,164; 2001: 1,863; 2002: 1,819; 2003: 2,022; 2004: 1,819. ### Fiscal Operations — Consolidated Data (2000–05) - Total Revenue (In millions of Libyan dinars): 2000: 8,075; 2001: 7,814; 2002: 12,572; 2003: 16,336; 2004: 23,272; 2005: 37,433. - Hydrocarbon revenue: 2000: 5,557; 2001: 5,286; 2002: 9,872; 2003: 14,228; 2004: 20,141; 2005: 34,763. - Nonhydrocarbon revenue (noted separately for extrabudgetary in table): 2000–05 entries include 2,518; 2,528; 2,700; 2,108; 3,131; 2,671 (presented in table under extrabudgetary/headings). - Budgetary Revenue (In millions of Libyan dinars): 2000: 4,729; 2001: 5,802; 2002: 9,417; 2003: 11,332; 2004: 13,755; 2005: 19,845. - Total expenditure and net lending (In millions of Libyan dinars): 2000: 5,528; 2001: 8,038; 2002: 10,063; 2003: 13,396; 2004: 17,332; 2005: 21,107. - Current expenditure (In millions of Libyan dinars): 2000: 3,721; 2001: 6,226; 2002: 6,724; 2003: 10,564; 2004: 10,298; 2005: 8,420. - Capital expenditure (In millions of Libyan dinars): 2000: 1,807; 2001: 1,813; 2002: 3,339; 2003: 2,832; 2004: 6,933; 2005: 9,899. - Overall balance (In millions of Libyan dinars and percent of GDP): - Overall balance (LD mn): 2000: 2,547; 2001: 223; 2002: 1,280; 2003: 4,273; 2004: 6,901; 2005: 16,683. - Overall balance (percent of GDP): 2000: 14.4; 2001: 1.2; 2002: 5.2; 2003: 14.2; 2004: 17.5; 2005: 32.6. - Oil Reserve Fund (ORF) allocations (In millions of Libyan dinars): 2000: 3,130; 2001: 1,719; 2002: 2,549; 2003: 4,583; 2004: 9,225; 2005: 17,337. - Nonhydrocarbon position (percent of GDP): 2000: -17.0; 2001: -27.9; 2002: -35.1; 2003: -33.1; 2004: -33.6; 2005: -35.3. - Gross domestic debt (percent of GDP): 2000: 43.3; 2001: 42.1; 2002: 31.3; 2003: 25.4; 2004: 0.1; 2005: 0.0. - Memorandum items: Nominal GDP (In millions of Libyan dinars): 2000: 17,668; 2001: 18,148; 2002: 24,449; 2003: 30,036; 2004: 39,361; 2005: 51,244. ### Fiscal Components and Administrative Spending (2000–05) - Administrative expenditures — Total administrative expenditures (In millions of Libyan dinars): 2000: 3,153; 2001: 3,779; 2002: 4,278; 2003: 4,058; 2004: 4,977; 2005: 5,017. - Allocations to the regions (In millions of Libyan dinars): 2000: 1,978; 2001: 2,198; 2002: 2,042; 2003: 2,140; 2004: 2,687; 2005: 2,665. - Central government development expenditures — Total Development Budgetary Expenditure (In millions of Libyan dinars): 2000: 1,541; 2001: 1,539; 2002: 3,702; 2003: 2,050; 2004: 3,581. ### Subsidies and Social Support (2000–05) - Food subsidies (In millions of Libyan dinars): Total (annual): 2000: 152.4; 2001: 172.0; 2002: 357.3; 2003: 625.1; 2004: 1,202.2; 2005: 838.8. - Great Man-Made River Authority — Financial operations (In millions of Libyan dinars): Revenues and expenditures (2000–04): - 2000: Revenues 375.5; Expenditures 365.9; Surplus 9.6; Accumulated Deficit -894.9. - 2001: Revenues 447.7; Expenditures 350.5; Surplus 97.2; Accumulated Deficit -797.7. - 2002: Revenues 883.9; Expenditures 853.8; Surplus 30.1; Accumulated Deficit -767.6. - 2003: Revenues 699.3; Expenditures 627.7; Surplus 71.6; Accumulated Deficit -696.0. - 2004: Revenues 637.0; Expenditures 708.0; Deficit -71.0; Accumulated Deficit -767.0. ### Monetary and Financial Sector — Central Bank and Banking System (2000–05) - Central Bank of Libya — Summary accounts (In millions of Libyan dinars, 2000–05): - Foreign assets: 2000: 7,296; 2001: 9,414; 2002: 18,444; 2003: 26,578; 2004: 33,073; 2005: 54,460. - Reserve money: 2000: 5,405; 2001: 6,141; 2002: 6,240; 2003: 6,891; 2004: 9,966; 2005: 14,423. - Government deposits: 2000: 7,566; 2001: 7,765; 2002: 8,587; 2003: 12,964; 2004: 19,519; 2005: 35,893. - Banking system monetary aggregates (In millions of Libyan dinars): - Net foreign assets (banking system): 2000: 7,774; 2001: 9,976; 2002: 19,123; 2003: 27,123; 2004: 34,237; 2005: 56,423. - Broad money (M2): 2000: 10,555; 2001: 11,721; 2002: 13,004; 2003: 14,052; 2004: 15,344; 2005: 19,739. - Money (M1): 2000: 7,433; 2001: 7,704; 2002: 8,705; 2003: 9,029; 2004: 10,537; 2005: 13,968. - Monetary Survey — annual growth rates (selected): - Broad money (annual percent change): 2000: 59.7; 2001: 64.6; 2002: 53.2; 2003: 46.8; 2004: 39.0; 2005: 38.5. - Official exchange rate (LD/US$): end of period (2000–05): 2000: 0.54; 2001: 0.65; 2002: 1.21; 2003: 1.30; 2004: 1.24; 2005: 1.36. - Official exchange rate (LD/US$, period average): 2000: 0.51; 2001: 0.61; 2002: 1.27; 2003: 1.28; 2004: 1.30; 2005: 1.31. - Net foreign assets of central bank (In millions of U.S. dollars): 2000: 13,502; 2001: 14,475; 2002: 15,242; 2003: 20,434; 2004: 26,574; 2005: 40,128. - Interest rate structure (selected rates, percent): - Rediscount rate (2000–2005): 5.00; 5.00; 4.00; 4.00; 4.00; 4.00. - Commercial bank fixed-term deposit rates (one year): 2000–2002: 5.50; 2003: 4.50; 2004: 4.50; 2005: 4.50. - Lending rates (maximum, secured): 2000: 7.0; 2001: 7.0; 2002: 6.0; 2003: 6.0; 2004: 6.0; 2005: 6.5. ### Banking Credit and Credit Distribution (2000–05) - Net domestic assets (banking system, In millions of Libyan dinars): 2000: 2,780; 2001: 1,745; 2002: -6,119; 2003: -13,071; 2004: -18,893; 2005: -36,684. - Domestic credit (In millions of Libyan dinars): 2000: 6,611; 2001: 7,092; 2002: 6,899; 2003: 3,486; 2004: -11,253; 2005: -26,998. - Claims on the economy (In millions of Libyan dinars): 2000: 5,724; 2001: 6,477; 2002: 7,453; 2003: 8,305; 2004: 8,212; 2005: 8,903. - Distribution of credit facilities by commercial banks — total domestic credit (In millions of Libyan dinars): 2000: 6,448.2; 2001: 6,896.1; 2002: 7,266.0; 2003: 7,411.0; 2004: 7,212.0; 2005: 6,995.0. - Sectoral allocations (2005, selected): Petroleum 494.3; Electricity 140.4; Transportation & communication 119.1; Housing and public utilities 498.4; Social loans 1,654.6; housing loans 1,435.9. ### Selected Financial Institutions — Lending and Balance Sheets - Libyan Arab Foreign Bank — Summary accounts (Sept., In millions of Libyan dinars): Total assets = liabilities: - 2000: 4,904; 2001: 5,721; 2002: 10,244; 2003: 11,721; 2004: 14,106; 2005: 12,886. - Current assets (2000–2005): 2000: 3,171; 2001: 3,581; 2002: 6,579; 2003: 7,169; 2004: 9,746; 2005: 8,464. - Development Bank — loans disbursed by sector (In thousands of Libyan dinars, 2000–05): Total loans disbursed across sectors: 2000: 20,722; 2001: 31,705; 2002: 69,167; 2003: 77,826; 2004: 36,024; 2005: 235,283 (table entry shows total loans disbursed and loan stock outstanding). ### Policy-Relevant Observations from the Data - Hydrocarbon sector dominance increased markedly between 2000 and 2005: oil production share of GDP rose from 39.8 percent in 2000 to 72.6 percent in 2005. - Significant accumulation of foreign assets and reserves at the Central Bank of Libya: foreign assets rose from LD 7,296 million in 2000 to LD 54,460 million in 2005; net foreign assets of the banking system rose from LD 7,774 million in 2000 to LD 56,423 million in 2005. - Fiscal positions strengthened markedly in 2004–2005 with overall balances rising to LD 6,901 million in 2004 and LD 16,683 million in 2005, supported by large hydrocarbon revenues and ORF allocations (ORF allocation LD 17,337 million in 2005). - Nonhydrocarbon fiscal balance remained deeply negative throughout 2000–05 (nonhydrocarbon position percent of GDP: -17.0 in 2000 to -35.3 in 2005), underscoring fiscal dependence on hydrocarbon revenues. - Broad money and reserve money expanded rapidly (broad money LD 10,555 million in 2000 to LD 19,739 million in 2005; reserve money LD 5,405 million in 2000 to LD 14,423 million in 2005), coincident with large increases in foreign assets and government deposits at the central bank. - Consumer prices exhibited deflationary episodes in 2000–2004 (CPI inflation: -2.9 in 2000; -8.8 in 2001; -9.9 in 2002; -2.1 in 2003; -2.2 in 2004) and mild inflation in 2005 (2.5). *Source: Libyan authorities; and Fund staff estimates.* ### 1. Current Account7,7634,1455665,0367,30315,985 ### _cr06137 - 1. Current Account7,7634,1455665,0367,30315,985 ### 1. Current Account (summary figures) - Current Account: 7,763 4,145 566 5,036 7,303 15,985 ### A. Goods and Services - Goods and Services: 8,533 5,217 1,172 6,170 10,355 17,758 - a. Goods: 9,251 6,067 2,309 7,325 11,832 19,234 - Exports (fob): 13,380 10,892 9,717 14,525 20,600 30,110 - Hydrocarbon sector 1/: 12,929 10,472 9,534 14,037 19,723 29,210 - Other exports: 450 420 184 489 877 900 - Imports (fob): -4,129 -4,825 -7,408 -7,200 -8,768 -10,875 - Of which: oil sector: -666 -752 -626 -950 -1,271 -1,378 - b. Services (net): -718 -850 -1,137 -1,155 -1,477 -1,476 - Debit: 890 1,033 1,539 1,597 1,914 1,970 - Credit: 172 183 402 442 437 494 - Freight and insurance for imports: -187 -263 -343 -540 -658 -816 - Travel: -515 -494 -628 -352 -368 -381 - Transportation: -145 -169 -83 -104 -85 -68 - Government services (other): -161 -209 -190 434 547 - Private services (other): -83 -79 -100 -202 -134 -70 - Of which: Hydrocarbon sector: -58 -49 -23 -23 -33 -48 ### B. Income - Income: -180 -240 265 540 -543 -870 - Direct investment income 2/: -850 -747 -585 -845 -1,634 -2,551 - Other investment income: 670 507 850 1,385 1,091 1,681 - Government sector: 420 414 740 1,263 966 1,549 - Private sector: 250 93 110 122 125 132 ### C. Current transfers - Current transfers: -590 -832 -872 -1,673 -2,509 -903 - General government 3/: 0 0 0 -1,174 -1,741 -115 - Private sector: -590 -832 -872 -499 -768 -788 - Oil sector: -123 -127 -105 -156 -210 -259 - Other sectors (workers transfers abroad): -467 -705 -767 -343 -558 -529 ### 2. Capital and Financial Account - Capital and Financial Account: -149 -976 89 -167 -1,023 -2,349 - Direct investment: 43 -308 281 79 -643 -1,503 - Abroad: -98 -175 136 -63 -1,000 -1,909 - In Libya: 141 -133 145 142 -312 406 - Portfolio investment: -706 -1,358 72 -607 -187 -448 - Other investment: 514 690 -264 361 -193 -399 ### 3. Errors and Omissions and Other Capital - Errors and Omissions and Other Capital: -1,115 -1,831 -341 -1,748 -134 0 ### 4. Overall Balance - Overall Balance: 6,499 1,338 314 3,122 6,146 13,636 ### 5. Reserve items - Reserve items: -6,499 -1,338 -314 -3,122 -614 613 636 ### Memorandum items - Official exchange rate, LD/US$ (pa): 0.51 0.61 1.27 1.28 1.30 1.31 - Official exchange rate, LD/US$ (eop): 0.54 0.65 1.21 1.30 1.24 1.36 - Gross official reserves (in billions of US$): 13.1 14.1 15.0 19.5 25.6 39.3 - Gross official reserves, in months of next year's imports of GS: 26.7 19.0 20.5 21.9 23.9 31.5 - Current account balance (in percent of GDP): 22.5 13.8 2.9 21.5 24.2 40.8 - Overall balance of payments (in percent of GDP): 18.8 4.5 1.6 13.3 20.4 34.8 - Nominal GDP (in billions of US$): 34.5 30.0 19.2 23.4 30.2 39.2 *Source: Central Bank of Libya; and staff estimates and projections.* ### Table 30. Libya: Composition of External Trade, 2000–04 (percent of total) - Imports (2000–04 totals shown columnwise as percentages of imports): 100.0 100.0 100.0 100.0 100.0 - Food and live animals: 20.1 17.1 15.0 13.4 14.1 - Beverages and tobacco: 0.3 0.4 0.4 0.1 0.2 - Crude materials, inedible, except fuels: 2.6 2.2 2.1 1.4 1.4 - Mineral fuels, lubricants, and related materials: 0.3 0.1 1.3 0.7 0.7 - Animal and vegetable oils and fats: 3.7 1.9 0.9 3.1 1.9 - Chemicals: 7.2 6.5 8.5 5.3 4.0 - Materials: 16.2 15.9 19.8 20.9 19.9 - Machinery and transport equipment: 41.0 42.3 43.0 48.0 48.0 - Miscellaneous manufactures: 8.6 13.6 9.0 7.1 9.8 - Exports (2000–04 totals shown columnwise as percentages of exports): 100.0 100.0 100.0 100.0 100.0 - Hydrocarbons: 96.6 96.1 98.1 96.6 95.7 - Other: 3.4 3.9 1.9 3.4 4.3 *Source: Census and Statistics Department; and staff estimates.* ### Table 31. Libya: Direction of Trade, 2000–04 (percent of total) - Imports: 100.0 100.0 100.0 100.0 100.0 - Arab countries: 11.6 10.2 9.7 10.1 6.1 - Asian countries: 18.7 14.5 18.5 13.8 22.9 - Of which: Japan: 4.6 3.5 6.5 8.7 8.3 - Other African countries: 0.6 0.9 0.4 0.4 0.2 - European countries: 61.3 67.9 63.3 71.8 63.1 - France: 5.5 4.4 4.4 4.9 4.0 - Germany: 11.8 13.1 11.2 8.9 12.0 - Greece: 0.7 0.4 0.8 1.0 0.6 - Italy: 19.1 24.3 24.4 18.4 18.3 - Netherlands: 2.3 2.6 1.8 1.3 1.1 - Spain: 3.3 1.8 1.9 1.4 1.5 - Turkey: 1.0 1.3 1.5 2.1 1.8 - United Kingdom: 5.8 5.7 7.0 5.4 4.1 - Western Hemisphere countries: 7.2 5.8 7.2 3.5 7.5 - Canada: 0.9 0.6 1.1 1.1 1.8 - United States: 2.1 2.8 2.9 1.9 2.5 - Unallocated: 0.6 0.7 0.8 0.4 0.2 - Exports: 100.0 100.0 100.0 100.0 100.0 - Arab countries: 5.4 6.6 6.2 4.6 3.9 - Asian countries: 0.5 2.8 3.3 4.9 4.1 - Other African countries: ... 0.3 0.4 0.2 0.2 - European countries: 93.9 90.0 89.9 89.9 90.5 - France: 5.6 3.6 3.7 2.6 2.1 - Germany: 15.3 14.1 13.3 14.7 18.3 - Greece: 2.6 2.3 2.4 2.2 2.1 - Italy: 42.6 41.6 41.0 39.6 39.3 - Netherlands: 0.7 1.2 1.1 0.9 0.7 - Spain: 15.2 15.5 17.1 14.7 13.3 - Turkey: 7.5 6.2 5.8 7.7 8.3 - United Kingdom: 2.3 1.8 2.8 2.4 1.7 - Western Hemisphere countries: 0.2 0.3 0.2 0.4 1.3 *Source: Census and Statistics Department.* ### Public Information Notice (PIN) — Key narrative findings (April 10, 2006) - Background: - Libya lifted international sanctions in 2003–04 and has undertaken structural reforms while the economy remains largely state controlled and undiversified. - Three quarters of employment is in the public sector; private investment is 2 percent of GDP; oil sector remains dominant. - 2004 highlights: - 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 ~24 percent of GDP. - Gross international reserves ≈ 24 months of 2005 imports. - Fiscal stance expansionary; 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. - 2005 highlights: - Real GDP growth ≈ 3½ percent; inflation 2.5 percent. - Non-oil economy growth ≈ 4½ percent; oil sector growth 1½ percent. - Main non-oil growth: trade, hotels, transportation (7 percent); construction and services (5 percent); agriculture (2.5 percent); manufacturing (1.8 percent). - Overall fiscal surplus ≈ 32½ percent of GDP; oil revenues 68 percent of GDP. - Non-oil fiscal deficit widened to 35 percent of GDP. - Broad money grew 29 percent; money 33 percent; quasi-money 20 percent. - Government net creditor position with banking system ≈ 70 percent of GDP. - Current account surplus ≈ 41 percent of GDP; hydrocarbon exports increased 48 percent to about US$29 billion; imports grew 24 percent to about US$11 billion. - Gross international reserves ≈ 32 months of 2006 imports. - Structural and policy measures in 2005: - Streamlined customs tariff; negative import list reduced from 31 to 17 items. - New tariff schedule: two rates (10 percent for tobacco products; 0 percent for all other products) plus a 4 percent service fee on all imports. - Production and consumption tax adjusted to 25–50 percent for imported goods and 2 percent for domestically produced goods. - Creation of an investment fund (IF) to manage part of oil revenues. - New banking law enhancing CBL independence; AML law passed. - Banks free to determine deposit rates; lending rates within a band of 250 basis points above the discount rate (currently 4 percent). - Privatization of Sahara Bank launched; recapitalization of three commercial banks. - Business procedures simplified (one stop-window; 30-day approval limit); privatization program expanded (216 enterprises slated; 144 to be liquidated; 66 small enterprises sold). - Steps to regularize external creditor relations; settlements with Germany, Spain, United Kingdom; ongoing discussions with others. - Libya developed its own debt relief plan after withdrawing from HIPC; rescheduling agreements with Uganda, Tanzania, Benin; negotiations with Nicaragua ongoing. ### Executive Board Assessment — Main recommendations and views - Directors welcomed strong macroeconomic performance in 2004–05 and recent structural reforms. - Recommended priorities: - Accelerate establishment of a market economy: prepare and implement a comprehensive medium-term plan with careful prioritization, sequencing, and institutional coordination (central bank and ministry of finance), including a high inter-ministerial oversight committee. - Improve budgetary management and implement prudent fiscal policy: - Bring fiscal policy under ministry of finance by unifying budgets and officially abolishing extrabudgetary operations. - Strengthen expenditure management and control, streamline tax system, modernize revenue administration. - Replace Oil Reserve Fund and Investment Fund with a Savings and Stabilization Fund governed by strict, fully enforced rules; periodic performance assessment. - Ensure public expenditure on infrastructure and social services considers absorptive capacity; strengthen institutional capacities and accountability; reinforce budget preparation, execution, monitoring; eliminate outstanding government arrears and avoid new arrears. - Move monetary management toward indirect tools and full interest rate liberalization; eliminate directed credit; reactivate interbank money market; strengthen banking supervision per international best practices. - Restructure and modernize banking sector: implement a strategy including establishment of an independent bank restructuring agency to assume ownership of public commercial banks. - Exchange rate policy: - Current peg of the Libyan dinar to the SDR is well-served; dinar rate broadly appropriate. - Consider adjustments as market developments warrant while preserving competitiveness; keep policy under review as reforms progress. - Trade and investment: - Terminate remaining state import monopolies. - Integrate all taxes and fees on imports into tariff rates and gradually reduce tariffs later. - Accelerate WTO accession preparations; seek technical assistance. - Improve privatization strategy; enact a privatization law providing legal status and mandate to the privatization agency. - Replace positive investment list with a clear negative list; remove the US$50 million floor on investment. - Gradually streamline the subsidy system. - Statistics and technical assistance: - Welcome participation in GDDS; undertake thorough restructuring of statistical system with a National Statistical Council and a National Statistical Agency. - Additional significant technical assistance needed; Libya agreed to cover most TA costs. - Debt relief and multilateral engagement: - Encouraged to reconsider withdrawal from HIPC Initiative and integrate its debt relief plan into the multilateral framework. *Source: Central Bank of Libya; and staff estimates and projections.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06137.pdf_