Libya's economic growth exceeded 100% in 2012
Libya’s economic growth during 2012 exceeded 100 per cent, reflecting a strong recovery from its collapse during the revolution, according to a mission of the International Monetary Fund. The Latest indicators are pointing to a restoration of hydrocarbon output later this year and a full recovery of growth in the non-hydrocarbon sector in 2014. Inflation fell to six per cent in 2012, and a further decline is expected this year. With a considerable pickup in reconstruction expenditure and private demand, non-hydrocarbon growth is expected to average 15 per cent during 2013–18.
The International Monetary Fund mission visited Tripoli during February 20 and March 7, 2013, to conduct discussions with the Libyan authorities in the context of the annual Article IV consultations. Discussions focused on measures to improve the business environment to foster inclusive growth based on diversification of the economy underpinned by private sector–led growth, develop the financial sector, and control government spending including through subsidy reform.
“The financial situation began to normalize after most of the UN sanctions that had frozen Libya’s foreign assets were lifted on December 16, 2011, allowing the central bank to provide foreign exchange liquidity to banks and help normalize commercial banking operations. In 2012, broad money grew by 11.5 per cent with a shift from currency into deposits reflecting increased confidence in the banking system. The banking sector appears well capitalized, but it may be vulnerable to asset quality deterioration. More recently, the authorities have introduced legislation that prohibits the payment of interest, which unless handled carefully, could pose risks to the financial sector and undermine efforts to diversify the economy,” said Ralph Chami who led the IMF mission.
The short-term challenges are to manage the political transition, normalize the security situation, address severe institutional capacity constraints to ensure the timely compilation and dissemination of key statistics, and exercise budget discipline while maintaining macroeconomic stability.
Over the medium term, the authorities should address a range of issues including institutional capacity building, improving the quality of education, rebuilding infrastructure, putting in place an efficient social safety net, developing the financial market, improving the management of the country’s resource wealth and associated financial flows with an efficient and transparent system, and reducing hydrocarbon dependency through private sector–led growth.
A significant reduction in unemployment, which is largely structural, will require major changes in economic policies and institutions. Sustainable, employment-generating growth will require a business environment that is conducive to private-sector development with a focus on diversification of the economy to create employment opportunities in the private sector.
Libya’s public finances and external current account remain vulnerable to a sustained decline in oil prices. Increases in recurrent expenditures pose risks to fiscal sustainability and is causing appreciation of the real exchange rate. In the medium term, necessary reconstruction and development spending will push the budget into deficit in the absence of a curb on current spending.
With fiscal sustainability in mind, the government is seeking to contain current expenditures in the 2013 budget, but further steps are needed to limit current expenditure, in particular to contain increases in salaries and the number of public employees, as well as streamlining generalized subsidies. Plans are under elaboration for a subsidy reform strategy. The implementation of a national system for the identification of active civil servants should help to reduce the number of “ghost” workers in the civil service.
The pegged exchange rate regime will remain the policy anchor, thanks to ample foreign exchange reserves that preserve confidence in the currency, and fiscal and monetary policies need to be supportive of the peg. A credible fiscal policy anchor would delink the economy from world oil price fluctuations, improve the management of resource wealth, and safeguard macroeconomic stability. The adoption of a well-designed fiscal policy rule would help keep in check pressures on government spending and improve the management of oil price cycles.
Efforts are needed to develop a vibrant financial sector that caters to the needs of the economy. Structural reforms are required for the development of a growth-enhancing financial system, particularly reforms to the operation of state owned institutions and a winding down of non-commercial activities. The streamlining of regulation while strengthening the supervisory framework will be important to promote financial intermediation.
Libya’s Anti-Money Laundering and the Combating the Financing of Terrorism (AML/CFT) law needs to be brought in line with international standards, and resources should be devoted to its effective implementation. Financial sector development should be accompanied by strengthening AML/CFT supervision to ensure compliance. Adequate preventive measures and reporting to an independent and operational Financial Intelligence Unit will help limit destabilization from illicit financial flows.
A comprehensive reform strategy to improve the public financial management (PFM) system will be critical to improve accountability and transparency. The thrust of PFM measures in the near term should be to address key priorities with a view to building the institutional capacity for more fundamental reforms. In this connection, Libya’s sovereign wealth fund system, operating through the Libya Investment Authority, the budget reserve account at the central bank and other funds, should be fully integrated into the fiscal framework, with well-defined and transparent rules.
To help build capacity, the authorities and the IMF have agreed on a comprehensive technical assistance program. Data compilation remains weak and responsibilities are spread over several agencies. The authorities are keen to improve data compilation and transparency, but they need international assistance to formulate and implement a comprehensive strategy.
The mission met with Prime Minister Ali Zeidan, Finance Minister Haithem Jalgham, Central Bank Governor Saddek Elkabeer, General National Congress Chairman Mohammed Magariaf, and other government and central bank officials, as well as members of the General National Congress and representatives of civil society.