Describes the preliminary findings of IMF staff at the conclusion of certain missions (official staff visits, in most cases to member countries). Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, and as part of other staff reviews of economic developments.


The Socialist People's Libyan Arab Jamahiriya
IMF Staff Visit, Conclusions of the Mission1

Tripoli, November 12, 2007

I. Recent Economic Developments and Outlook

1. Overall, Libya's macroeconomic performance strengthened further in 2007, notwithstanding an acceleration in inflation. Real GDP is projected to increase by 6.8 percent (up from 5.2 percent in 2006) on account of rapid growth in non-oil activity (7.5 percent) and robust growth in oil production (4.7 percent). Annual CPI inflation accelerated substantially from low levels in the first half of the year to about 11 percent in the third quarter due to the large increase in public expenditure (particularly wages), excess liquidity, and the price of imports, notably food items.

2. Despite higher oil revenues, the fiscal surplus in 2007 is expected to be smaller than in 2006. The fiscal surplus for 2007 is projected at about 35 percent of GDP, compared to 39 percent of GDP in 2006. The narrowing of the surplus reflects the rise in expenditure, although the spending increase was less than what was in the budget.

3. The external current account surplus is also projected to narrow in 2007. It is expected to fall to (a still very large) 40 percent of GDP, compared to almost 52 percent of GDP in 2006, due to a surge in imports. Gross official reserves increased by $20 billion in 2006 and are projected to increase by another $24 billion in 2007, reaching about $83 billion by the end of the year.

4. Broad money growth accelerated in 2007 (projected at 31 percent by year-end, up from 20 percent in 2006). This reflects a substantial increase in the net foreign assets of the Central Bank of Libya (CBL), public spending, and lending by specialized credit institutions. The real effective exchange rate depreciated by about 1 percent in the first half of 2007 due to the appreciation of the Euro2 against the SDR, to which the dinar is pegged. The dinar appreciated by 4 percent against the U.S. dollar during this period.

5. Libya's economy is expected to benefit in 2008 and beyond from continued high oil prices, further growth in oil output, and increased interest of foreign investors. Oil production is projected to almost double (to about 3 million barrels per day) by 2012 on account of the utilization of advanced exploration and extraction techniques by international oil companies. Large investment projects announced for the various sectors (from hydrocarbon to tourism) already exceed $35 billion in total value. Turning these positive prospects into sustainable job-creating growth while maintaining macroeconomic stability hinges on containing expenditure growth, advancing structural reforms, and solid evaluation and appropriate sequencing of the planned investment projects.

6. Libya still faces key challenges in the medium term. The current favorable global environment and Libya's strong financial position provide an opportunity to take additional decisive steps to address these challenges. Laying the basis for a sustainable noninflationary growth and creating sufficient job opportunities for a fast-growing labor force hinge on
(i) containing the increase in spending and enhancing its quality; (ii) upgrading the infrastructure; (iii) strengthening the management of the oil savings to safeguard inter-generational equity; (iv) developing the financial sector; and (v) improving the domestic business climate and diversifying the productive base in order to reduce dependence on oil.

II. Fiscal Policy

7. Containing the growth of public expenditure will be essential to ensure its quality and curb inflationary pressures. The full year implementation of the 2007 increase in public wages would contribute to a likely 25-30 percent growth in recurrent expenditure in 2008. Capital expenditure would increase by an almost 50 percent compared to 2007 (even if only 70 percent of the proposed amounts are implemented). Overall, public expenditure would grow by 40 percent. This rapid increase would likely contribute to inflationary pressures and could negatively impact the quality of expenditure. To minimize these risks, the mission urges the authorities to prioritize and sequence the proposed investment projects, especially in view of the existing bottlenecks in infrastructure, and fully implement their plan to reduce the civil service and apply the wage increase selectively. Starting with a more conservative budget, that can be augmented with supplementary allocations during the year if conditions permit, would be preferable to proposing a very ambitious budget at the outset.

8. Going forward, the mission urges the authorities to ensure that increases in public sector wages are linked to performance and to civil service reform. The private sector should also be encouraged to take the lead in upgrading the infrastructure and in implementing Libya's ambitious investment program, including in the context of private-public partnership (PPP) arrangements within adequate safeguards.

9. The authorities are encouraged to step up their efforts to strengthen revenue administration. The mission welcomes the initiation of a comprehensive reform of customs administration and the establishment of a large taxpayer's office (LTO). The LTO should serve as a pilot unit for overall tax administration reform by pioneering key initiatives such as moving to a self-assessment system and reorganizing its departments in line with functional, rather than tax type, responsibilities.

10. Progress has been made in improving public financial management, including by the consolidation of the budget presentation and the initiation of a macrofiscal unit. The intended move to a functional classification of the budget starting in 2008 will be advantageous. To improve the efficiency of budget execution, it would be important to determine individual budgetary allocations for line ministries according to specific spending programs in addition to operating within the overall spending envelope. These reforms should be extended to capital expenditure. Unifying the recurrent and capital budgets under the auspices of the ministry of finance would also be essential to modernize Libya's public financial system.

III. Monetary Policy and Financial Sector Reforms

11. The mission welcomes the plan to enhance monetary policy operations, including through the development of indirect monetary policy instruments and the reorganization of the CBL. For indirect monetary instruments to be effective there would need to be a competitive banking system and a well functioning interbank market. Relaxing the current rules limiting banks' ability to place investments abroad would also help reduce the system's excess liquidity. Furthermore, lending by specialized credit institutions should be monitored and controlled as part of the overall liquidity management.

12. The mission welcomes the ongoing strengthening of banking supervision, including by improving off-site surveillance techniques and upgrading the methodology of setting capital requirements. Supervision would benefit from enhanced coordination between the off-site and on-site units and capacity building through additional staffing and training.

13. Considerable progress has been made in bank restructuring and privatization. The decision to merge 41 regional banks into one bank and to merge the Jamahiriya and Umma banks are notable steps in this direction. The recent successful sale of a large share in Bank Sahara to BNP Paribas and the ongoing privatization of the Wehda Bank will help to enhance knowledge transfer and competition. The authorities are encouraged to maintain their approach of seeking strategic partners for the remaining public banks.

14. The recent improvement in financial soundness indicators of banks is encouraging. Adoption of international accounting standards would support efforts of banks and supervisors to monitor developments and take early corrective action as needed. To preserve the health of the banking system it will be important to ensure that credit allocation is based on commercial considerations while addressing social needs through other channels.

IV. Sovereign Asset Management

15. The mission welcomes the authorities' approach in establishing the Libyan Investment Authority (LIA), which emphasizes transparency and good governance. The intention to invest the initial $40 billion allocated to the LIA on a commercial basis and almost exclusively abroad will help protect and develop Libya's savings and diversify its sources of income.3 The plan to ensure that the LIA will be run by a qualified and independent management and that transfers to the state budget will be limited to a part of the profits will also enhance inter-generational equity. Some important details remain to be determined, including how much of the profit can be withdrawn and how much of the fiscal surplus should be transferred to LIA. Staff stands ready to provide technical assistance and to review the draft LIA law to ensure its consistency with international best practices. Should the authorities' plans for the LIA be implemented as intended, it could stand as a model for other sovereign wealth funds in the region and beyond.

V. Structural Reforms and Other Issues

16. The authorities' plan to develop the non-oil sector by promoting the private sector and supporting small and medium size enterprises would contribute to economic diversification and job creation. These efforts should focus on training, deregulation, as well as enhancing property rights and the legal system in order to facilitate access to bank credit. It would be important to avoid complex incentive schemes which tend to be costly, ineffective, and highly distorting. In addition, the process of privatizing public enterprises needs to be simplified and accelerated.

17. The authorities are encouraged to improve economic and financial statistics, in order to facilitate the monitoring of developments and policy formulation. In particular, priority should be accorded to GDP, employment, and balance of payment statistics.

18. Libya's generous support of low income countries, particularly in Africa, through financial assistance and outward foreign investment is commendable. The mission encourages the authorities to provide full debt relief to heavily indebted poor countries in line with the HIPC Initiative.


Table 1. Libya: Basic Economic and Financial Indicators, 2003-08

(Quota = SDR 1,123.7 million)
Population (million): 5.85 (2005)

 

 

 

 

Prel. Proj. Proj.
  2003 2004 2005 2006 2007 2008

  (Annual percentage change, unless otherwise specified)

National income and prices

           

Real GDP

5.9 5.0 6.3 5.2 6.8 8.8

Nonhydrocarbons

2.2 4.1 5.5 6.1 7.5 8.0

Hydrocarbons

17.7 7.4 8.3 2.8 4.8 10.9

Nominal GDP in billions of Libyan Dinars

30.8 39.8 54.5 65.2 73.7 95.7

Nominal GDP in billions of U.S. dollars

24.0 30.5 41.7 49.7 58.6 76.3

Per capita GDP in thousands of U.S. dollars

4.3 5.3 7.1 8.3 9.6 12.3

CPI inflation (average)

-2.1 -2.2 2.0 3.4 7.0 8.0

CPI inflation (e-o-p)

-1.3 -3.5 3.0 7.2 ... ...
             
  (In percent of GDP)

Central government finances

           

Revenue

53.9 58.5 68.6 72.2 74.0 76.1

Of which: Hydrocarbon

47.1 50.6 63.7 66.8 66.7 69.7

Expenditure and net lending

39.1 41.2 38.6 33.1 39.3 42.4

Of which: Capital expenditure

9.2 17.7 19.8 17.9 22.6 25.8

Overall position (deficit -)

14.8 17.4 30.0 39.1 34.7 33.7

Non-oil deficit

-32.3 -33.3 -33.7 -27.7 -32.0 -36.0
             
  (Changes as a percent of beginning of the year money stock)

Money and credit

           

Money and quasi-money

8.1 9.2 29.2 20.2 31.0 24.6

Net credit to the government

-32.8 -104.2 -85.5 -110.2 -82.4 -99.2

Credit to the economy

6.6 -0.7 4.5 6.2 4.6 5.5

Of which: Credit to the private sector

-1.1 1.1 0.8 1.6 0.7 1.4

Deposit rate (1-year deposits, in percent)

5.5 4.5 4.5 4.5 4.5 ...
             
  (In billions of U.S. dollars; unless otherwise indicated)

Balance of payments

           

Exports, f.o.b.

14.6 20.4 31.3 39.2 44.5 60.6

Of which: Hydrocarbons

14.2 19.5 30.4 38.2 43.4 59.3

Imports, f.o.b.

7.2 8.8 11.2 12.9 18.6 25.3

Current account balance

5.2 7.4 17.4 25.6 23.5 31.2

(As percent of GDP)

21.5 24.3 41.8 51.6 40.2 40.9

Overall balance (deficit -)

3.1 4.6 15.4 18.7 23.9 32.3

(As percent of GDP)

13.0 15.2 37.0 37.6 40.8 42.3
             

Reserves

           

Gross official reserves

19.5 25.6 39.3 59.2 83.1 115.4

(In months of next year's imports of GNFS)

21.9 22.7 30.1 31.5 32.5 36.1
             

Exchange rate 1/

           

Official exchange rate (LD/US$, period average)

1.28 1.30 1.31 1.31 1.26 ...

Official exchange rate (LD/US$, end of period)

1.30 1.24 1.35 1.28 1.27 ...

Real effective exchange rate (percent change)

-13.91 -8.99 -1.75 -0.33 -0.98 ...
             

Crude oil production (millions of barrels per day)

1.53 1.62 1.69 1.72 1.80 2.00

Libyan crude oil price (US$/bbl)

28.2 36.9 51.9 62.5 69.3 86.0

 

 

 

 

     

Sources: Libyan authorities; and Fund staff estimates and projections.

 

1/ The data for 2007 refer to July.

             

1 The IMF mission visited Tripoli during November 4-12, 2007 to discuss with the authorities recent economic and policy developments.

2 The Euro area is Libya's largest trading partner.

3 Internationally recognized firms are advising the LIA on setting its investment strategy, including risk parameters and profit objectives, and developing a process for managing asset allocations as well as the choice and evaluation of internationally reputable managers for the different asset classes.



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