Public Information Notice No. 07/46

Public Information Notice: IMF Executive Board Concludes 2006 Article IV Consultation with The Socialist People's Libyan Arab Jamahiriya

April 25, 2007

On April 20, 2007, 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 is a hydrocarbon rich country, but has one of the least diversified economies in the Maghreb region and among the oil producing countries. It has a long legacy of central economic management and excessive reliance on the public sector, and started its transition to a market economy in 2002, after 10 years of international economic sanctions. Since then, Libya has made efforts to liberalize its economy and foreign trade, achieving increasing economic growth while maintaining macroeconomic stability.

In 2006, economic conditions continued to be satisfactory. Real GDP grew about 5½ percent, reflecting an increase of 4½ percent in the value added of the hydrocarbon sector, and a buoyant non-oil economy (6 percent) boosted by increased government spending and the liberalization of the trade, service, and tourism sectors. However, preliminary end-year data indicate that annual Consumer Price Index (CPI) inflation accelerated in the last quarter reaching 7.2 percent (year on year) in December.

Based on preliminary data, the consolidated government operations registered a record overall cash surplus of about 39 percent of GDP, owing to a substantial increase (of 25 percent) in hydrocarbon revenues. Non-oil revenue performance grew even faster at 33 percent, partly owing to the reform of tax and customs administration currently underway. Government spending grew about 12 percent, owing to: (i) a marked increase in the wage bill, reflecting new hiring in the regions, and increases in wages for some categories of civil servants; and (ii) an improved execution of the development budget. Development spending increased to about 17 percent of GDP, concentrated on infrastructure and construction (42 percent), social sectors (32 percent), and hydrocarbons (19 percent).

Monetary developments were characterized by a strong (albeit lower than in 2005) broad money growth (about 20 percent), reflecting mainly the impact of the nominal increase in the non-oil fiscal deficit on money supply and a sustained increase in credit to public enterprises (of over 20 percent). Bank credit to the private sector grew about 7 percent, the highest growth rate since 2000.

On the external side, the current account surplus is estimated to have reached about 48½ percent of GDP, reflecting the growth of hydrocarbon exports resulting from higher export prices and volumes. Import growth was robust (18 percent) reflecting rising domestic demand, including increased government spending. Gross international reserves reached the equivalent of 29 months of 2007 imports of goods and services, and the Real Effective Exchange Rate (REER) based on the official CPI remained stable.

In 2006, structural reform continued with the implementation of a wide range of measures covering fiscal management and taxation, banking and payments systems, trade, and the business environment.

In the fiscal area, the authorities established the Libya Investment Authority to centralize hydrocarbon revenue management. Also, progress was made on strengthening revenue administration with the establishment of a large taxpayers office and the development of plans to streamline the tax and customs departments, strengthen controls, and upgrade office buildings and equipment.

In the monetary and banking area, the authorities developed a plan to restructure the public commercial banks, merged 21 regional banks, and accelerated efforts to strengthen banking supervision and modernize the payment system.

Efforts to liberalize trade and improve the business environment continued. In particular, the authorities: (i) halved the consumption tax on imported goods produced locally; (ii) abolished all remaining state import monopolies except those on petroleum products and weaponry; (iii) reduced the list of import bans for religious, health, and ecological reasons to 10 products; (iv) opened 51 offices across the country to expedite approval of business permits; (v) lowered the floor on Foreign Direct Investment (FDI) in the non-oil sector from US$50 million to US$1.5 million; and (vi) established a negative list for non-oil FDI limited to retail trade, wholesale trade, and importation. Also, the authorities issued a decree requiring that all FDI in the non-oil sector be undertaken through joint ventures with a minimum Libyan participation of 35 percent.

Following its withdrawal from the Heavily Indebted Poor Countries (HIPC) Initiative, Libya has developed its own debt relief plan. Rescheduling agreements were reached with a number of HIPC countries including Uganda, Tanzania, Benin, and negotiations with Nicaragua are ongoing.

Executive Board Assessment

Executive Directors were encouraged by Libya's economic performance in 2006, including strong real GDP growth, and surpluses realized on the fiscal and external current account balances. Directors also welcomed the elimination of most import monopolies. While taking note of these achievements, they observed that Libya needs to restore fiscal prudence, strengthen oil revenue management, develop a well-designed comprehensive strategy to restructure public commercial banks, and enhance the implementation of structural reforms.

Directors welcomed Libya's favorable medium-term financial outlook, which reflects the projected continuation of high hydrocarbon prices. However, they considered that the authorities' ability to maintain economic and financial stability could be undermined by the loosening of fiscal conditions in the 2007 budget. Directors stressed that, to avoid jeopardizing medium-term economic prospects, adjustments to the authorities' policy stance and reform approach will be needed.

Directors emphasized that a prudent fiscal policy is key to ensuring macroeconomic stability. They underscored the need to link government wage increases to productivity performance and calibrate nonwage government spending in line with the economy's absorptive capacity, in order to keep inflation in check. For 2007, they recommended that the envisaged increase in civil service wages be introduced with caution, possibly in installments over an eighteen-month period.

Directors urged the authorities to strengthen public financial management, including by unifying the budget and increasing its coverage, improving macro-fiscal coordination, and establishing clear operating and asset management regulations for the Libyan Investment Authority (LIA). They cautioned that investing LIA resources domestically could marginalize the private sector and be counterproductive in the medium to long run.

In responding to the envisaged fiscal expansion, Directors urged the Central Bank of Libya to tighten monetary policy to contain inflationary pressures. They recommended the liberalization of interest rates and development of market-based monetary instruments in order to strengthen the monetary framework.

Directors noted that the current exchange rate regime has served Libya well, but recommended that Libya's move to greater exchange rate flexibility be gradual, and supported and preceded by a switch to market-based monetary management.

Directors advised that the recourse to the Social and Economic Development Fund to restructure the public commercial banks contains significant risks. They reiterated the view that the establishment of an independent bank restructuring agency, along the lines recommended by staff, remains key for success.

Directors noted that the authorities have implemented few of the reforms recommended by Fund technical assistance. They indicated that future Fund technical assistance should concentrate on areas not covered previously and essential in preserving macroeconomic stability, or where technical assistance recommendations have been adopted.

Directors encouraged the authorities to reach debt relief agreements with heavily indebted poor countries on terms comparable with the HIPC Initiative.

Directors welcomed the authorities' participation in the General Data Dissemination System and their commitment to improve the quality and timeliness of economic data.

¹ Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.