Libya’s short- and medium-term financial outlook is dominated by the dynamics of hydrocarbon manufacturing. Libya urgently wants a transparent financial imaginative and prescient for the longer term and the IMF will proceed to assist the authorities by offering capability improvement assist in a number of areas; The introduced central financial institution reunification has led to welcome enhancements in banking supervision and financial coverage coordination and helps transfer the reform agenda ahead; The authorities ought to tackle the underlying pressures on the trade price and keep away from the procyclical spending bias. Strengthening Libya’s fiscal framework would improve macroeconomic resilience.
A employees crew from the Worldwide Financial Fund (IMF) led by Mr. Dmitry Gershenson visited Tunis, Tunisia, throughout Could 1-10, 2024, to debate Libya’s financial and monetary developments, the macroeconomic outlook, and the nation’s coverage and reform priorities. On the conclusion of the go to, Mr. Gershenson issued the next assertion:
A number of shocks have hit Libya, however their affect on GDP development has been muted. Tropical storm Daniel struck Jap Libya in September 2023, resulting in devastating floods, catastrophic harm, and a tragic lack of life. The catastrophe, nonetheless, had solely a small affect on financial development, since Libya’s GDP is especially based mostly on power exports. Equally, the economic system remained shielded from the affect of the battle in Gaza and the Pink Sea delivery disruptions. In 2023, actual GDP is estimated to have expanded by 10 p.c, largely owing to a rebound from the oil manufacturing stoppages of 2022.
The yr 2023 noticed a fiscal growth. Owing to a fall in hydrocarbon costs, authorities revenues declined, regardless of the concurrent increase to grease manufacturing. Fiscal expenditures nonetheless surged, pushed by a rise within the wage invoice and higher-than-expected power subsidies (the latter regardless of the decrease oil costs). Reflecting this growth, cash provide has grown at its quickest tempo for the reason that fall of the Ghaddafi regime.
The authorities have been attempting to cut back using international trade . In January 2024, responding to strain on international reserves, the Central Financial institution of Libya (CBL) tightened the restrictions on the issuance of letters of credit score and lowered the bounds on people’ international trade purchases, ensuing within the widening hole between the parallel and the official trade charges. In early 2024, a short lived 27 p.c tax on all international trade purchases was introduced, along with the relief of a few of the beforehand enacted restrictions. The tax is to be utilized till end-2024, though the speed could possibly be adjusted earlier if deemed needed.
Reported inflation stayed low regardless of the depreciation of the parallel trade price. With costs of most items and companies both sponsored or administered, reported inflation tends to not observe trade price actions, despite the fact that imports are estimated to represent round one half of the consumption basket. Furthermore, the reported CPI has restricted product and geographic protection. The authorities are already engaged on increasing protection and updating the CPI basket, with the brand new index anticipated to be accessible in 2025.
In 2023, the present account surplus is estimated to have declined consistent with the autumn in oil costs. Libya’s exterior place was broadly consistent with fundamentals and fascinating coverage settings, and the CBL has maintained the reserves at a comfortably excessive stage.
The outlook is dominated by the dynamics of hydrocarbon manufacturing, which is projected to achieve 1.5 million barrels per day by 2026. GDP is estimated to develop by shut to eight p.c in 2024 and proceed to develop at decrease charges within the outer years. The baseline projection is for declining fiscal and exterior balances over the approaching years consistent with a projected decline in world oil costs.
Avoiding the procyclical spending bias and strengthening Libya’s fiscal framework would improve macroeconomic resilience and cut back volatility in exercise and output. Correct budgeting—based mostly on macroeconomic forecasts, fiscal coverage aims and spending priorities—would help in delinking spending from income volatility and enhance the administration of Libya’s useful resource wealth. On this regard, bettering costing instruments and growing a fiscal framework for useful resource administration could be a essential first step. This could possibly be adopted by payroll evaluation, harmonization of public funding and recurrent price range processes, and manufacturing of extra full budget-related experiences. Decreasing distortions resulting from excessive public sector wages and subsidies is important to enhance incentives and useful resource allocation, fostering capital formation and employment alternatives outdoors the general public sector. Spending must be reprioritized to boost development and effectivity and assist intergenerational fairness, whereas tax coverage ought to intention to diversify sources of income away from oil.
Full reunification of the central financial institution stays a key goal, and it requires integration of the cost system and unification of the accounting procedures. Limiting financial financing by the CBL’s Jap department would alleviate strain on the trade price and on banking sector liquidity and facilitate coverage coordination. Implementing the CBL’s regulatory and governance reforms within the banking sector would strengthen the banks and assist to keep up monetary stability.
The authorities ought to tackle the underlying pressures on the trade price. The central financial institution ought to protect the environment friendly functioning of the international trade market, for the reason that trade price is the important thing macroeconomic anchor, given the shortage of different coverage devices. Measures to affect the demand for international trade must be fastidiously assessed and weighed towards the potential affect on the parallel market, inflation, and reserves. Within the absence of standard financial coverage instruments, controlling fiscal expenditure could be the popular response in step with Libya’s macroeconomic coverage framework. Moreover, the central financial institution ought to keep the integrity of the technique of cost, and the current steps to withdraw the compromised banknotes from circulation are welcome.
Selling monetary stability and strengthening financial coverage requires a complete reform of the banking sector. Employees outlined a roadmap for such a reform within the 2023 Article IV Session, with ideas in varied areas: structural (central financial institution reunification, banks’ disclosure necessities); banking regulation (institution of a monetary stability committee; improvement of Islamic finance); governance (match and correct necessities; separation between CBL’s possession and supervisory features); the anti-money laundering and combating financing terrorism (AML/CFT) supervision (tackle AML/CFT management failures and poor reporting of suspicious actions); and others. The CBL has been proactive in strengthening the prudential framework, together with issuing steerage for banks to extend capital, reinforcing the Monetary Data Unit, and selling monetary inclusion by way of enhancements in digital funds. Additional work is required to make sure compliance and to strengthen the banking sector.
Governance reforms all through the general public sector are needed. Regardless of current progress on some governance indicators, corruption is perceived to be an vital concern in Libya, and additional reforms for bettering governance, the rule of regulation, anticorruption establishments and the authorized framework could be important. The enhancement of anticorruption methods and their efficient implementation can be wanted. In compliance with the 2018 Coverage for Enhanced Engagement on Governance, the 2025 Article IV session is anticipated to undertake a complete evaluation of governance, anticorruption, and the rule of regulation.
The IMF will proceed to supply capability improvement help however higher coordination on the authorities’ half is required . Vital information gaps proceed to have an effect on IMF employees’s means to conduct evaluation and supply coverage recommendation. Capability improvement is required for compiling nationwide accounts and an expanded listing of economic soundness indicators. Public monetary administration (PFM) framework reforms, together with strengthening macro-fiscal and price range preparation features, are wanted to enhance money administration controls and oversight. On condition that capability improvement is being delivered by a number of suppliers (the Worldwide Finance Establishments, together with the Worldwide Financial Fund, and different organizations), there’s a want for the authorities to arrange a coordinating physique to facilitate CD provision and implementation, and to keep away from duplication.
Libya’s longer-term financial technique ought to intention to diversify away from hydrocarbons and to foster stronger and extra inclusive personal sector-led development. Structural reform efforts ought to concentrate on strengthening establishments and the rule of regulation and growing a transparent financial imaginative and prescient for the nation. A plan is required to scale up improvement spending to alleviate development bottlenecks and cut back fiscal prices related to excessive spending on public sector wages and subsidies. The authorities ought to capitalize on Libya’s comparative benefits (location, landmass, pure assets, and entry to power and labor) to advertise improvement of labor-intensive non-oil financial exercise.
The subsequent Article IV mission is anticipated within the Spring of 2025.
The mission thanks the Libyan authorities and different counterparts for his or her hospitality, constructive coverage dialogue, and productive collaboration, and acknowledges the continued enhancements in information assortment, sharing and transparency.
Distributed by APO Group on behalf of Worldwide Financial Fund (IMF).
