IMF Executive Board Concludes 2023 Article IV Consultation with Libya
May 25, 2023
Washington, DC : The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Libya on Wednesday, May 24, 2023.
The Article IV consultation took place after a decade-long hiatus. The fragmentation of the country that followed the fall of the Ghaddafi regime in 2011 effectively suspended the production of key economic indicators and complicated policymaking, resulting in difficulties in conducting Article IV consultations. The authorities have recently made commendable progress towards improving data sharing and collection, and transparency. Together with the flexibility afforded by the IMF’s new Fragile and Conflict-Affected States (FCS) strategy, this has paved the way for a resumption of Article IV consultations.
Libya’s institutional framework has helped the country through a period of significant macroeconomic volatility and turmoil. There have been exceptional swings in oil production and revenues since 2011. Despite this, the Central Bank of Libya has managed to maintain a large stock of international reserves, supported by a combination of a fixed exchange rate, capital controls, and various other temporary arrangements.
The economy contracted sharply in 2020 due to an oil blockade and a decline in oil prices, resulting in ballooning external and fiscal deficits, and declining foreign exchange reserves. More recently, a rebound in oil prices and the resumption of oil production has resulted in budget and current account surpluses in both 2021 and 2022. Gross Domestic Product—which closely tracks oil production—remained volatile. Inflation has been relatively subdued despite a sizable depreciation of the dinar in 2021 and rising global commodity prices, rising from 2.9 percent in 2021 to 4.5 percent in 2022.
Libya’s economic fortunes will hinge on oil and gas production for the foreseeable future.Hydrocarbon production is projected to grow by around 15 percent in 2023 following an increase in oil production from 1 million barrels per day in 2022 to around 1.2 million barrels per day in 2023 and increase gradually thereafter. Looking ahead, assuming fiscal spending remains contained, the baseline projection is for fiscal and external surpluses to gradually decline over coming years. The key risks to the outlook are lower oil prices due to lower-than-expected global growth, and renewed conflict and/or social unrest that leads to disruptions in oil production.
Executive Board Assessment[2]
Executive Directors agreed with the thrust of the staff appraisal. They welcomed the resumption of Article IV consultations with Libya following a 10-year hiatus caused by political turmoil and commended the authorities for their efforts to reengage with the Fund despite lingering political challenges. They noted the limitations to policy implementation arising from political fragmentation and urged the authorities to intensify efforts to resolve conflicts and address the substantial economic challenges. Directors concurred that substantial capacity development would be needed to modernize fiscal frameworks and monetary and financial sector policies, enhance data provision, and support economic diversification.
Directors observed that Libya is heavily reliant on oil and gas production, and therefore subject to considerable volatility and downside risks from the global green transition. They noted that the key medium-term challenge is to diversify away from hydrocarbons and to promote stronger and more inclusive private sector-led growth. They encouraged the authorities to enhance transparency, strengthen institutions and address corruption and governance concerns to support these efforts. Directors highlighted the importance of enhancing data provision and statistical capacity.
Directors called for an agreed and transparent budget to support policy credibility and macroeconomic stability and help preserve intergenerational prosperity. They noted the importance of improving public financial management, avoiding procyclical spending, diversifying the tax base, gradually reforming untargeted energy subsidies to make room for additional social spending and infrastructure development, strengthening management of state-owned enterprises, and building a medium-term framework.
Directors observed that reunification of the central bank is crucial for strengthening monetary policy, supporting financial stability, and fostering private sector development. They noted that frequent changes to the currency peg should be avoided to maintain confidence in the exchange rate as the nominal anchor. Maintaining the peg would also allow the central bank to better protect foreign exchange reserves amid elevated political and security risks.
Directors commended the central bank for introducing wide-ranging regulations aimed at modernizing the financial sector, while noting the challenges associated with limited capacity. They encouraged the authorities to continue to strengthen the AML/CFT framework, closely monitor the capitalization of banks, reopen the property registry to enable banks to mitigate credit risk and assess borrower creditworthiness, and divest holdings of the Central Bank of Libya in commercial banks over the longer run to allow them to operate independently. Given the current prohibition on interest, Directors agreed that further development of Islamic finance products, as well as Islamic finance-compliant instruments to help manage system liquidity and support monetary policy, would help mobilize credit to the private sector.
It is recommended that the next Article IV consultation with Libya be held on the standard 12-month cycle.
[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm .
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