The Socialist People’s Libyan Arab Jamahiriya -- 2010 Article IV Consultation, Preliminary Conclusions of the Mission
IMF News, November 4, 2010
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- Published: November 4, 2010
I. Background and Recent Developments
- Mission visited Libya during October 17–28, 2010.
- Macroeconomic environment described as strong, underpinned by large fiscal and external positions and continued efforts to modernize and diversify the economy.
- Noted achievements:
- Passing a number of critical laws to enhance the role of the private sector.
- Favorable sovereign ratings assigned for the second year by international rating agencies.
- Impact of the global financial crisis:
- Limited to decline in oil revenue due to lack of bank exposure to global financial system, limited non-oil trade ties, and large foreign reserves in safe assets.
- Libyan Investment Authority (LIA) "came through the global financial crisis relatively unscathed."
- Growth and inflation developments:
- Nonhydrocarbon real GDP grew by an estimated 6 percent in 2009.
- Overall real GDP contracted by an estimated 1.6 percent in 2009 due to hydrocarbon output declines.
- Overall growth projected to increase to around 10 percent in 2010 driven by sharp increase in oil production.
- Nonhydrocarbon growth projected to strengthen to about 7 percent in 2010.
- Inflation expected to pick up to about 4.5 percent in 2010 (from 2.5 percent in 2009).
- Fiscal and monetary developments in 2009–2010:
- Fiscal surplus narrowed to about 7.0 percent of GDP in 2009.
- Oil revenue declined by 44 percent in 2009; public outlays reduced by 12 percent.
- Capital spending declined by 23 percent while current outlays increased by 5 percent in 2009.
- Current expenditure envisaged to increase by 19 percent in 2010 compared to 2009; wage bill to increase by 15 percent.
- Capital expenditure expected to increase by about 18 percent (vs. budgeted almost 60 percent).
- Broad money projected to grow by about 10 percent.
- Banking sector indicators:
- Regulatory capital ratio of 16.3 percent.
- Non-performing loans slightly increased to 15.5 percent as of end-June (2010).
- Loan provisions at over 100 percent.
- Domestic currency LCs increased by almost 200 percent so far in 2010.
- Off-balance sheet LCs and LGs totaling 84 percent of overall on-balance sheet bank assets.
- Commercial banks’ deposits with the Central Bank of Libya (CBL) amount to almost 65 percent at the end of September 2010.
- External position:
- External current account surplus projected to increase to about 20 percent of GDP in 2010 (after narrowing to 16 percent of GDP in 2009).
- Net foreign assets of the CBL and the LIA projected to reach $150 billion by end-2010 (equivalent of almost 160 percent of GDP).
II. Medium-Term Outlook and Risks
- Projections to 2015:
- Oil production projected to increase to about 2.5 million barrels per day by 2015.
- Non-hydrocarbon sector expected to boost growth to a projected 8 percent by 2015.
- Growth of public expenditure expected to remain moderate at about 7 percent a year in nominal terms.
- Nominal import growth projected at about 10 percent a year.
- Current account surpluses expected to remain about 20 percent of GDP.
- LIA and CBL portfolio projected to reach over $250 billion by 2015.
- Downside risks:
- Further worsening in global economic conditions that could trigger a large decline in oil prices.
- Wavering efforts to contain public expenditure and implement planned reforms.
- If realized, these risks would leave growth and fiscal and external balances well below projections.
III. Policy Discussions
A. Fiscal Policy — Findings and Recommendations
- Findings:
- 2010 budget provides for a large increase in expenditure after sizeable contraction in 2009.
- Progress in transparency in recording subsidies and unification of current and investment budgets.
- Public investment of about 84 billions of Libyan dinars to be implemented during 2010−12.
- Staff’s fiscal sustainability analysis suggests a sustainable benchmark for total spending of about LD 48 billion at current oil prices, compared to about LD 35 billion at 2009 prices.
- Budgeted expenditure for 2010 is about LD 62 billion.
- Mission recommendations:
- Link increase in public wages to performance within comprehensive civil service reform.
- Emphasize high quality public investments guided by the World Bank public expenditure review.
- Be ready to reverse discretionary outlays and make other adjustments to increase budget flexibility over the medium-term.
- Phase out subsidies and develop mechanisms to mitigate adverse impact on low income groups.
- Expand the medium-term framework to include current spending to insulate fiscal policy from oil price volatility.
- Strengthen tax administration to ensure effective implementation of the January 2010 income tax law that sets flat rates of 10 percent on individuals and 20 percent on corporates (replacing previous rates of 15−40 percent) and shifts to self-assessment with risk-based audits.
- Improve public financial management by:
- Finalizing plans to establish a treasury single account (TSA) at the central bank.
- Streamlining and modernizing budget procedures.
- Reducing allocations to SCIs to facilitate expenditure monitoring and control.
- Enhancing consistency of budget classification.
B. Monetary Policy and Financial Sector Reforms — Findings and Recommendations
- Findings:
- Introduction in 2008 of CBL’s CDs is important; early 2010 added 28-day CD maturity to existing 91-day maturity and an overnight facility; banks allowed to set interest rates.
- Excess liquidity remains high; financial intermediation is weak relative to neighbors.
- Banking supervision has progressed toward Basel core principles; comprehensive strategic plan for 2009–2011 in place.
- Presence of different government funds requires an overall sovereign asset management strategy.
- Joint CBL-LIA domestic investment fund may give rise to unnecessary reputational risk.
- Modernization progress: no more fully government-owned banks; foreign partners involved in six out of 16 operating banks; one foreign bank license granted at beginning of August (2010); listed companies on Libyan stock exchange increased to 10 and expected to reach 14 by end-year.
- Mission recommendations:
- Introduce an auction mechanism for the CDs and increase the CD maturity range.
- Enhance the settlement system to develop a secondary market.
- Develop a liquidity forecasting system.
- Strengthen coordination with fiscal policy to limit injection of liquidity, including by the SCIs.
- Further enhance coordination between off-site and on-site supervision units and build capacity through additional staffing and training.
- Scale back operations of SCIs and develop a plan to reform them.
- Finalize and implement reserve management policy and investment guidelines; establish systems for measuring and managing risks and returns; develop operational benchmarks; enhance reporting framework.
- Establish complementary roles, risk management, and strategic asset allocation across sovereign institutions taking into account the overall sovereign balance sheet and petroleum wealth under ground.
- Step up efforts to improve the credit culture via specialized training, targeted awareness campaigns, and cross-country learning to spur financial intermediation.
- Implement restructuring of the CBL toward functional-based operations to enhance coordination and monetary policy conduct.
- Strengthen the AML/CFT unit at the CBL (agreement between the CBL and the IMF welcomed).
C. Exchange Rate
- Findings:
- Real effective exchange rate appreciated by about 5 percent in 2009 and depreciated by about 1.7 percent in the year to August 2010.
- Empirical estimates indicate the dinar was moderately overvalued at end-2009; moderate misalignment projected to decline over the medium-term as fundamentals strengthen.
- Assessment complicated by economic distortions.
- Mission position:
- Does not recommend a change in the current dinar/SDR level.
- Does not recommend a change in the exchange regime until the CBL builds sufficient capacity to conduct a more effective monetary policy.
- Notes that the dinar’s peg to the SDR provides a monetary anchor while allowing flexibility vis-à-vis individual major currencies.
D. Other Structural Reforms
- Challenges:
- Promote growth of the non-hydrocarbon sector and spur diversification; hydrocarbon represents over 90 percent of government revenue and 95 percent of exports.
- Progress and measures:
- Passing in 2010 of a number of far-reaching laws expected to improve business environment (including Commercial Law, Customs Law, Income Tax Law, Stock Market Law, Labor Law, Libyan Investment Authority Law, Communications Law, and Land Registry Law).
- Mission recommendations:
- Establish permanent bodies with adequate resources to monitor, assess, and oversee implementation of law reforms.
- Set up an open consultation process with legal and business communities to inform implementation.
- Improve inter-agency coordination.
- Continue customs reform: tariff harmonization, streamlining clearance procedures, modernizing customs administration, simplifying tariffs, speeding trade facilitation, moving to risk-based auditing, and expanding electronic information systems to support WTO membership and Association Agreement with the EU.
- Accelerate retrenchment program: of 340,000 public employees previously transferred to a central labor office for retrenchment, about a quarter have reportedly found other income sources and are no longer receiving transfers.
- Implement a comprehensive civil service reform in consultation with the World Bank to design more effective wage and employment policies.
- Double efforts to improve economic and financial statistics using the GDDS framework due to significant data weaknesses in coverage, consistency, periodicity, and timeliness; national accounts suffer methodological problems and do not fully capture non-hydrocarbon activity.
Preliminary Concluding Statement of the IMF Mission to Libya, October 28, 2010.