IMF Executive Board Concludes 2009 Article IV Consultation with the Socialist Peoples Libyan Arab Jamahiriya

Public Information Notice (PIN) No. 09/121 September 21, 2009

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2009 Article IV Consultation with the Socialist Peoples Libyan Arab Jamahiriya is also available.

On August 5, 2009, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Socialist Peoples Libyan Arab Jamahiriya.1 Background Libyas 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 OPECs 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 Libyas 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. Libyas 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 governments 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 budgets legal and administrative framework to reduce extrabudgetary 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 dinars 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.

Libya: Basic Economic and Financial Indicators, 2005-08 (Quota = SDR 1,123.7 million) Population (million): 6.04 million (2007) Per capita GDP: US$14,479 (2008)

2007

2006

2005

2008 Prel.

(Annual percent changes) National income and prices Real GDP 6.0 Nonhydrocarbons 9.9 Hydrocarbon 2.8 CPI inflation 6.2 1.4 2.9 (In percent of GDP) Central government finance Revenue 60.8 62.4 62.9 64.0 4.3 7.2 10.4 7.9 13.6 0.0 5.9 9.9 8.0 3.8

of which : Hydrocarbons 54.5 Nonhydrocarbon 6.3 Expenditure and net lending 35.3 Current 14.1 Capital 21.1 Overall fiscal balance 25.5 Nonhydrocarbon balance (deficit -) -29.0 -26.2 -29.1 31.4 29.4 17.6 19.7 13.4 13.9 31.0 33.5 4.9 4.5 57.5 58.5

57.4

6.6

39.3

15.4

23.9

24.6

-32.7

(Annual percent changes, unless otherwise specified) Monetary indicators Broad money 40.1 16.0 10.6 4.5 4.5 12.5 14.5 11.6 7.7 (In billions of dollars, unless otherwise specified) External sector Exports of goods 47.0 of which: Hydrocarbons 45.8 Imports of goods 17.7 Current accounts balance 29.1 In percent of GDP 40.7 44.6 38.9 136.1 54.3 49.4 52.7 38.4 22.0 31.0 28.9 6.0 -1.8 25.2 17.1 40.7 13.1 11.2 36.6 38.2 30.5 21.7 39.2 31.4 60.7 62.0 47.8

Deposit rates (1 year deposits, in percent) 4.5 Claims on the economy 4.5

Total foreign assets (NFA + LIA investments) 98.3 of which: Net international reserves 48.5 (In months of next years imports) 22.9 74.8

Real effective exchange rate (percent change) -0.3 -0.6

Sources: Libyan authorities; and Fund staff estimates.

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. This PIN summarizes the views of the Executive Board as expressed during the August 5, 2009 Executive Board discussion based on the staff report.

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