Public Information Notice No. 09/121

Public Information Notice: IMF Executive Board Concludes 2009 Article IV Consultation with the Socialist People’s Libyan Arab Jamahiriya

September 21, 2009

On August 5, 2009, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Socialist People’s Libyan Arab Jamahiriya.¹

Background

Libya’s overall macroeconomic performance in 2008 was strong, with real GDP growing by about 3.8 percent. However, non-oil growth was broad-based and estimated at 8 percent. Oil output increased slightly at the first three quarters of the year then declined in the last quarter in line with OPEC’s decision to reduce quotas. As a result, production for the year as a whole was similar to its 2007 level. Inflation rose in 2008 to about 10 percent due to higher international commodity prices and a marked increase in public expenditure.

The fiscal surplus remained at about 25 percent of GDP in 2008. Revenue increased by about 37 percent due to higher oil prices and enhanced tax and customs administration. At the same time, overall expenditure rose by an estimated 45 percent, reflecting large increases in both current and capital outlays. Spending under the Wealth Distribution Program (WDP) was limited to LD 3.3 billion (equivalent to about 3 percent of GDP), compared to LD 4.6 billion approved in the budget

The 2009 budget envisages a small nominal decline in public expenditure, putting an end to three years of large fiscal expansion. The small decline in overall expenditure reflects a 20 percent reduction in capital spending and a 25 percent increase in current outlays, which includes a 16 percent projected increase in the wage bill. The latter is due in large part to the return to the civil service payroll of a portion of the public employees that were previously transferred to a central labor office for retrenchment to the private sector. The overall fiscal position is expected to register a surplus of about 10 percent of GDP in 2009 despite the projected decline in oil revenue by almost 40 percent.

The external current account surplus remained high at about 41 percent of GDP in 2008. The rapid increase in imports (about 30 percent) was more than offset by a sharp rise in oil receipts, resulting in a further build up of the net foreign assets of the Central Bank of Libya (CBL) and the Libyan Investment Authority (LIA) to about US$136 billion.

Broad money growth accelerated to about 48 percent in 2008, reflecting the substantial increase in net foreign assets and the rapid increase in public expenditure, including on-lending by the Specialized Credit Institutions(SCIs). The latter accounted for almost 50 percent of outstanding credit. Bank credit to the economy increased by about 12.5 percent. Bank deposits rose by about 70 percent. They mostly constitute of demand deposits of public entities.

Bank restructuring and privatization are making progress. An asset management company to deal with bad loans has been established, capital requirements are being raised, and smaller banks are being encouraged to seek well-established foreign strategic partners. The CBL licensed two new banks with foreign participation. In addition, the authorities privatized 15 percent of one of the remaining two large public banks by issuing an IPO.

Progress has been made in customs and tax administration. Large taxpayers offices have been established and customs inspection is being automated. However, the “service fee” on imports has recently been increased from 4 to 10 percent, and other ear-marked fees remain in place.

Executive Board Assessment

Executive Directors welcomed Libya’s solid macroeconomic performance and the important progress in implementing structural reforms, particularly in the financial sector. The impact of the global crisis on Libya has been limited to declines in oil revenue, and non-oil growth has remained buoyant. Libya’s medium-term outlook continues to be favorable. Directors underscored the importance of further efforts to address excess liquidity, improve public financial management, and advance structural reforms that would support the authorities’ aim to diversify the economy away from oil and promote the role of the private sector.

Directors noted that the authorities’ overall fiscal stance strikes an appropriate balance between short- and long-term considerations, and that the small decline in public expenditure planned for 2009 is a clear break with the large increases in recent years. They encouraged stronger efforts to improve the quality and composition of expenditure, and limit the growth of current expenditure. Directors welcomed the authorities’ decision to postpone the implementation of the Wealth Distribution Program.

Directors considered it crucial to advance the efforts to strengthen public financial management. The recent merging of the ministries of finance and planning is an important step in this direction. Directors endorsed the government’s intention to establish a Treasury Single Account to enhance cash management and expenditure control and to improve coordination of fiscal and monetary policies. Going forward, modernizing the budget’s legal and administrative framework to reduce extra-budgetary funds would enhance budget transparency and effectiveness. Directors encouraged the authorities to continue to enhance the legal and operational framework of the Libyan Investment Authority. To best serve its core objectives, the focus should be on conservative investments abroad.

Directors welcomed the intention of the Central Bank of Libya (CBL) to extend the maturities range of its certificates of deposit and develop an auction mechanism for them. The ongoing efforts to modernize the CBL and enhance the payments system will establish the infrastructure to support the design and implementation of monetary policy. To address large excess liquidity in the banking system, priority should be accorded to establishing quickly the Treasury Single Account and reducing on-lending by specialized credit institutions.

Directors commended the advances made in bank privatization and restructuring. In particular, they welcomed the recent establishment of an asset management company to deal with bad loans, and the partial privatization of the largest public bank. Directors welcomed the ongoing efforts to further enhance supervisory reporting, on-site supervision techniques, and regulations and standards.

Directors agreed that the dinar’s peg to the Special Drawing Right (SDR) continues to serve Libya well. They noted that, while the dinar appears to be moderately overvalued, this is likely to be partly transitory in view of the projected decline in the external current account surplus.

Directors recognized the considerable progress achieved in liberalizing and opening the economy, supported by Fund technical assistance. They encouraged continued efforts to enhance the regulatory framework in order to further improve the business climate and promote private sector activity. The welcome strengthening in customs and tax administration needs to be accompanied by low corporate tax and customs rates, with few brackets and limited exemptions.

Directors encouraged the authorities to continue to improve economic and financial statistics.