Libya: Staff Concluding Statement of the 2024 Article IV Mission
IMF News, May 13, 2024
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- Published: May 13, 2024
Mission and context
- IMF staff team led by Mr. Dmitry Gershenson visited Tunis, Tunisia, during May 1-10, 2024.
- The next Article IV mission is expected in the Spring of 2025.
- Several shocks hit Libya in 2023 (including Tropical storm Daniel and regional conflicts), but their impact on GDP growth was muted because Libya’s GDP is mainly based on energy exports.
Macroeconomic developments and outlook
- Real GDP is estimated to have expanded by 10 percent in 2023, largely owing to a rebound from the oil production stoppages of 2022.
- GDP is estimated to grow by close to 8 percent in 2024 and continue to expand at lower rates in the outer years.
- Hydrocarbon production is projected to reach 1.5 million barrels per day by 2026.
- The baseline projection is for declining fiscal and external balances over the coming years in line with a projected decline in global oil prices.
- In 2023, the current account surplus is estimated to have declined in line with the fall in oil prices.
Fiscal developments and recommendations
- The year 2023 saw a fiscal expansion: government revenues fell owing to lower hydrocarbon prices despite higher oil production, while fiscal expenditures surged driven by an increase in the wage bill and higher-than-expected energy subsidies.
- Recommendations to strengthen fiscal framework and resilience:
- Avoid the procyclical spending bias.
- Implement proper budgeting based on macroeconomic forecasts, fiscal policy objectives, and spending priorities to delink spending from revenue volatility.
- Improve costing tools and develop a fiscal framework for resource management.
- Conduct payroll analysis and harmonize public investment and recurrent budget processes.
- Produce more complete budget-related reports.
- Reduce distortions from high public sector wages and subsidies to improve incentives, foster capital formation, and create employment opportunities outside the public sector.
- Reprioritize spending to enhance growth, efficiency, and intergenerational equity.
- Use tax policy to diversify sources of revenue away from oil.
Monetary policy, exchange rate, and foreign exchange measures
- The announced central bank reunification has led to welcome improvements in banking supervision and monetary policy coordination.
- The Central Bank of Libya (CBL) tightened restrictions in January 2024 on issuance of letters of credit and lowered limits on individuals’ foreign exchange purchases in response to pressure on foreign reserves, contributing to a widening gap between the parallel and the official exchange rates.
- In early 2024, a temporary 27 percent tax on all foreign exchange purchases was announced; the tax is to be applied until end-2024, although the rate could be adjusted earlier if deemed necessary.
- Staff advice and observations:
- Authorities should address underlying pressures on the exchange rate and avoid procyclical spending.
- The central bank should preserve efficient functioning of the foreign exchange market, as the exchange rate is the key macroeconomic anchor given the lack of other policy instruments.
- Measures to influence demand for foreign exchange should be carefully assessed against potential impacts on the parallel market, inflation, and reserves.
- In the absence of conventional monetary policy tools, controlling fiscal expenditure is the preferred response consistent with Libya’s macroeconomic policy framework.
- The central bank should maintain the integrity of the means of payment; recent steps to withdraw compromised banknotes from circulation are welcome.
Inflation and price statistics
- Reported inflation stayed low despite depreciation of the parallel exchange rate.
- Because prices of most goods and services are either subsidized or administered, reported inflation tends not to track exchange rate movements; imports are estimated to constitute around one half of the consumption basket.
- The reported CPI has limited product and geographic coverage; authorities are working on expanding coverage and updating the CPI basket, with the new index expected to be available in 2025.
Banking sector reform and financial stability
- Money supply has grown at its fastest pace since the fall of the Ghaddafi regime.
- Full reunification of the central bank remains a key objective and requires integration of the payment system and unification of accounting procedures.
- Limiting monetary financing by the CBL’s Eastern branch would alleviate pressure on the exchange rate and on banking sector liquidity and facilitate policy coordination.
- Staff outlined a roadmap for comprehensive banking sector reform (from the 2023 Article IV Consultation), including:
- Structural measures: central bank reunification, banks’ disclosure requirements.
- Banking law: establishment of a financial stability committee; development of Islamic finance.
- Governance: fit and proper requirements; separation between CBL’s ownership and supervisory functions.
- AML/CFT supervision: address AML/CFT control failures and poor reporting of suspicious activities.
- The CBL has issued guidance for banks to increase capital, reinforced the Financial Information Unit, and promoted financial inclusion through enhancements in electronic payments; further work is needed to ensure compliance and strengthen the banking sector.
Governance, rule of law, and anticorruption
- Despite progress on some governance indicators, corruption is perceived to be an important concern.
- Further reforms are essential to improve governance, the rule of law, anticorruption institutions, and the legal framework.
- Enhancement of anticorruption strategies and their effective implementation is needed.
- In compliance with the 2018 Policy for Enhanced Engagement on Governance, the 2025 Article IV consultation is expected to undertake a comprehensive review of governance, anticorruption, and the rule of law.
Capacity development and data needs
- Significant data gaps affect IMF staff’s ability to conduct analysis and provide policy advice.
- Capacity development priorities:
- Compiling national accounts.
- Expanding the list of financial soundness indicators.
- Public financial management (PFM) framework reforms, including strengthening macro-fiscal and budget preparation functions to improve cash management controls and oversight.
- Because capacity development is being delivered by multiple providers, the authorities should set up a coordinating body to facilitate CD provision and implementation and to avoid duplication.
Longer-term strategy and structural reform priorities
- Libya’s longer-term economic strategy should aim to diversify away from hydrocarbons and foster stronger and more inclusive private sector-led growth.
- Structural reform priorities:
- Strengthen institutions and the rule of law.
- Develop a clear economic vision for the country.
- Scale up development spending to alleviate growth bottlenecks and reduce fiscal costs associated with high spending on public sector wages and subsidies.
- Capitalize on Libya’s comparative advantages (location, landmass, natural resources, and access to energy and labor) to promote development of labor-intensive non-oil economic activity.
- The mission thanks the Libyan authorities and other counterparts for their hospitality, constructive policy dialogue, and productive collaboration, and acknowledges continued improvements in data collection, sharing and transparency.
Libya: Staff Concluding Statement of the 2024 Article IV Mission, May 13, 2024.