Libya-Concluding Statement of the 2012 Staff Visit
IMF News, January 30, 2012
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- Published: January 30, 2012
I. Overview
- Mission dates: January 26, 2012; Concluding statement dated January 30, 2012.
- Main preliminary findings:
- Restoration of hydrocarbon production is well-advanced at over half of pre-revolution levels and remains critical to economic recovery.
- Reconstruction will boost non-hydrocarbon economic activity.
- Short-term key challenges: exercise budget discipline, resuscitate the banking system, and maintain macroeconomic stability.
- Most UN sanctions that froze Libya’s foreign assets (a total of 200 percent of 2010 GDP) were lifted on December 16, 2011, allowing the Central Bank of Libya (CBL) to support the exchange rate.
- Medium-term issues: rebuilding infrastructure, reorienting the economy away from hydrocarbon dependence, and establishing a governance framework that promotes private sector development, job creation and inclusive growth.
II. Recent Economic Developments
- Output and prices:
- GDP estimated to have contracted by 60 percent in 2011.
- Consumer prices increased by 14 percent in 2011 (with end-2011 inflation estimated at 19.2 percent due to data limitations).
- Crude oil production fell from an average of 1.77 million barrels per day in 2010 (2 percent of global output) to 22,000 barrels per day in July 2011.
- Hydrocarbon GDP estimated to have contracted by 71 percent in 2011; non-hydrocarbon output declined by 50 percent.
- External sector:
- Exports declined from $48.9 billion in 2010 to $19.2 billion in 2011.
- Imports declined from $24.6 billion in 2010 to $14.2 billion in 2011.
- Current account balance decreased from a surplus of 21 percent of GDP in 2010 to 4½ percent of GDP in 2011.
- Exchange rate and foreign assets:
- As of end-2011, the Libyan dinar (LYD) was trading at a 20 percent discount on the parallel market.
- As of January 15, 2012, the spread between the official and parallel market exchange rates had narrowed to below 10 percent.
- Bulk of foreign assets unfrozen on December 16, 2011; as of end-November 2011 around $3 billion made available and further amounts toward end-2011.
- Fiscal and monetary developments:
- Revenue estimated to decline by 69 percent from 57 percent of GDP in 2010 to 39 percent of GDP in 2011.
- Wages, subsidies, and transfers were equivalent to 21 percent of GDP in 2010.
- Spending on wages rose by approximately 60 percent in 2011 due to a March 2011 public sector wage increase.
- 2011 budget financed by domestic borrowing of LYD 13.5 billion, revenues from hydrocarbon exports LYD 15.8 billion, and estimated arrears of LYD 6 billion.
- Public sector financed itself by borrowing from the CBL and drawing down deposits; counterpart on CBL balance sheet is money creation.
- Currency in circulation doubled from LYD 7.5 billion at end-2010 to LYD 15.4 billion at end-2011.
- Demand deposits increased by 13 percent in 2011.
- Banking sector health:
- Credit to the private sector declined by about 6 percent in 2011 (compared to an increase of 14.3 percent in 2010).
- Ratio of credit to GDP in 2010 was less than 20 percent.
- Non-performing loans (NPLs) were 17.2 percent of total loans at end-2010.
- Risk-weighted capital adequacy was 17.3 percent at end-2010 and provisioning was 85 percent.
- Expected sharp increase in NPLs due to conflict; magnitude of losses not estimated.
III. Economic Outlook
- Activity and prices:
- Economic activity projected to recover in 2012 concurrent with an improved security situation.
- Crude oil production increased from 22,000 barrels per day in July to an average of 980,000 barrels in December 2011.
- Hydrocarbon output including natural gas expected to increase by over 100 percent in 2012 and reach pre-conflict level during 2014.
- Non-hydrocarbon GDP expected to recover by 2014, driven mainly by reconstruction.
- Consumer price inflation expected to ease significantly once imports resume and the CBL withdraws money by selling foreign exchange.
- External current account surplus in 2012 expected to increase with restoration of hydrocarbon and non-hydrocarbon exports.
- Key risks:
- Delays in normalizing the security situation.
- Lower international prices for oil and gas.
- Uncertainties in the euro area and global financial fragilities that could lower petroleum prices.
- Preliminary macroeconomic projections (selected from Table 1):
- Real GDP (annual percentage change): 2008: 5.6; 2009: 0.5; 2010: 2.9; 2011: -60.0; 2012 (est.): 69.7; 2013 (projection): 20.5; 2014 (projection): 6.6.
- Nonhydrocarbon growth (annual percentage change): 2008: 7.9; 2009: 6.0; 2010: 7.0; 2011: -50.0; 2012: 20.0; 2013: 15.0; 2014: 10.0.
- Hydrocarbon growth (annual percentage change): 2008: 3.6; 2009: -4.6; 2010: -1.2; 2011: -70.9; 2012: 163.3; 2013: 25.2; 2014: 4.0.
- Nominal GDP in billions of Libyan dinars: 2008: 119.8; 2009: 79.3; 2010: 102.4; 2011: 45.7; 2012: 96.5; 2013: 116.3; 2014: 120.1.
- Nominal GDP in billions of U.S. dollars: 2008: 98.0; 2009: 63.3; 2010: 80.9; 2011: 37.4; 2012: 77.7; 2013: 93.4; 2014: 96.2.
- CPI inflation, period average: 2008: 10.4; 2009: 2.0; 2010: 2.5; 2011: 14.1; 2012: 1.9; 2013: -2.3; 2014: 5.0.
- Crude oil production (mbd): 2008: 1.88; 2009: 1.79; 2010: 1.77; 2011: 0.51; 2012: 1.35; 2013: 1.69; 2014: 1.76.
- Crude oil price (US$/bbl): 2008: 97.0; 2009: 61.8; 2010: 79.0; 2011: 104.2; 2012: 99.1; 2013: 95.5; 2014: 92.1.
IV. Policy Issues and Recommendations
- General policy framework:
- Establish a policy framework setting fiscal and monetary objectives including macroeconomic stability and private sector-led inclusive growth.
- Integrate activities of the Libyan Investment Authority (LIA) so it receives and transfers revenues to the budget and does not undertake public spending on behalf of the government.
- Coordinate fiscal and monetary policy; Ministry of Finance should prepare in-year cash-flow projections through its accounts at the CBL and discuss updates with CBL liquidity management.
- Exchange rate and monetary policy:
- Maintain the exchange rate peg to the SDR to maintain confidence in the currency; ensure adequate foreign exchange availability.
- Peg has been associated with generally low consumer price inflation and provided a policy anchor.
- Maintain peg alongside fiscal restraint to avoid fuelling inflation and a damaging appreciation of the real exchange rate.
- Banking system:
- Unfreezing of CBL foreign assets should allow provision of foreign exchange liquidity to banks, normalizing demand for dinar banknotes and commercial banking operations.
- Restore non-cash payment system to reduce demand for cash.
- Consider introducing an explicit guarantee of deposits with safeguards to avoid moral hazard from an indefinite blanket guarantee.
- Development of Islamic banking should be institutionally and regulatorily appropriate; short-term limitation to Islamic facilities at licensed commercial banks; draft amendment to banking law expected by end-January on Islamic banking; mission offered drafting assistance.
- Develop a framework for addressing NPLs; for 2012 net credit to the private sector expected to be broadly unchanged, with write offs of NPLs offset by a pickup in new credit.
- CBL to verify banks’ balance-sheet impacts from the conflict and ensure sufficient capital to cover losses and support credit during reconstruction.
- Fiscal policy and public spending:
- Balance short-term spending pressures against fiscal sustainability and private sector development.
- Wage bill expected to rise from 9 percent of GDP in 2010 to 18.7 percent of GDP in 2012 due to wage increases.
- Subsidies projected to rise from 11.7 percent of GDP in 2010 to 15.9 percent of GDP in 2012.
- 2012 budget discussed by mission: revenues expected to be LYD 55.9 billion (57.9 percent of GDP), expenditures LYD 62.4 billion (64.7 percent of GDP), deficit LYD 6.6 billion (6.8 percent of GDP) financed through issuance of government bonds and a drawdown in government deposits at the CBL.
- Mission cautioned elevated recurrent spending may be inconsistent with budgetary prioritization and fiscal sustainability and may put upward pressure on the real exchange rate.
- Develop a medium-term budget framework linked to sustainable fiscal policies; medium-term consolidation needed to provide space for capital and reconstruction spending.
- Fiscal reform recommendations to contain the wage bill and increase public sector efficiency:
- Retrenchment of government employees.
- Decompress wage structure and align civil service remuneration with market.
- Monetize allowances to increase compensation transparency.
- Introduce performance-based incentives.
- Computerize payroll and personnel systems.
- Strengthen recruitment to depoliticize hiring and professionalize the civil service.
- Subsidy reform guidance:
- Aim to reduce economic inefficiencies while better protecting low-income households.
- If a sophisticated social safety net is not feasible, consider: (i) limiting the speed of price increases for goods primarily consumed by low-income households; (ii) short-term mitigation measures for low-income households; (iii) using some savings from subsidy reform to increase public spending benefiting low-income households; (iv) using categorical or geographical targeting or linking benefits to self-targeting work programs or schooling requirements.
- Growth strategy:
- Institutional reforms necessary to reorient economy away from hydrocarbon dependence and promote job creation and inclusive growth.
- Pre-conflict average non-hydrocarbon growth was 8 percent in the decade prior to the conflict.
- Unemployment rate estimated at 26 percent (Ministry of Labor); conflict likely worsened labor market.
- Priority reforms: improve business environment, deepen domestic financial system, and clear path for competitive private sector development to raise employment elasticity and create jobs.
V. Other Issues and Technical Assistance
- Technical assistance:
- Mission discussed technical assistance strategy for the CBL and options to implement PFM technical assistance recommendations.
- CBL technical assistance could focus on rebuilding and modernization.
- Fund offered assistance with resident advisors and experts funded through a dedicated subaccount at the Fund.
- Statistics and capacity building:
- Urged unification of national statistics compilation under an independent agency.
- Emphasized improving coverage, quality and timeliness of statistics and offered technical assistance.
- Selected operational and contingency notes:
- Significant private capital outflows expected once access to foreign assets is restored.
- Temporary controls on conversion of large amounts of LYD cash into foreign exchange may be necessary to mitigate illicit capital flight, while allowing bona fide current international transactions.
- Mission highlighted importance of clarifying current banking arrangements for government cash flows and balances, including roles of Ministry of Finance, the CBL, and the LIA.
- Mission could provide additional advice on: (i) supervision issues related to write offs and forbearance on NPLs; (ii) AML/CFT issues including verifying ownership of accounts and sources of deposits; and (iii) possible exchange of banknotes in due course.
Source: Libya—Concluding Statement of the 2012 Staff Visit (January 26–30, 2012), International Monetary Fund.