IMF Executive Board Concludes the 2013 Article IV Consultation with Libya
TRIPOLI, Libya, May 23, 2013/African Press Organization (APO)/ — On May 17, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Libya.1
The political situation is normalizing, but the government lacks control over parts of the country. While the new government brings together various interest groups, it continues to face a fragmented political landscape and tribal power struggles, which complicate the writing of a new constitution and efforts to reestablish security and the rule of law.
The loss of hydrocarbon revenues during the crisis and UN sanctions on Libya created considerable pressures. On March 17, 2011 the UN Security froze Libya’s foreign assets, which made the Central Bank of Libya (CBL) unable to provide adequate foreign exchange to the market. In response to foreign exchange shortages, demand for cash, and increased government spending, on March 6, 2011 the CBL imposed limits on deposit withdrawals. Nevertheless, the impact of the conflict was mitigated by confidence arising from large foreign exchange reserves.
Economic activity collapsed during the conflict with real GDP declining by 62.1 percent and average consumer prices increasing by 15.9 percent. The fall in hydrocarbon exports in 2011 led to a budget deficit of 15.4 percent of GDP and a sharply reduced current account surplus. The restoration of hydrocarbon production underpinned growth of 104.5 percent in 2012 while inflation declined to 6.1 percent. The budget had a surplus of 20.8 percent of GDP and the current account surplus widened to 35.9 percent of GDP.
The financial situation began to normalize in early 2012 after the removal of UN sanctions on the foreign assets of the central bank. In 2012, broad money grew by 11.5 percent with a modest shift from currency into deposits and credit to the private sector increased by 30.3 percent. Although the conflict will have caused asset quality to deteriorate, the systemic impact on the banking system should be modest in light of the liquidity buffer provided by banks’ substantial reserves, along with limited claims on the private sector and the implicit government guarantee of loans to state-owned enterprises. Preliminary data show that nonperforming loans increased modestly in 2011 and 2012.
On January 6, 2013, the General National Council (GNC) passed a law banning interest in financial transactions. The law was gazetted on March 21, 2013 and banks will no longer be allowed to pay interest to or receive interest from individuals. Companies and state entities will be prohibited from receiving and paying interest from the beginning of 2015.
Executive Board Assessment
Executive Directors welcomed the rebound in economic activity and the favorable growth outlook. They noted, however, that lingering political and security uncertainties and a pronounced vulnerability to oil price fluctuations add to the significant challenges faced by the transition, including the need to support the reconstruction effort while maintaining macroeconomic stability. Against this backdrop, Directors encouraged the authorities to move rapidly in the implementation of their reform program.
Directors welcomed the authorities’ intention to articulate and implement a strategic vision for economic development, including setting up a governance framework based on transparency and accountability. They noted that credible and efficient institutions and a favorable business environment will be crucial to create employment opportunities in the private sector and reduce hydrocarbon dependency.
Directors agreed that promoting financial intermediation is key to fostering macroeconomic stability and growth. In this regard, they encouraged the authorities to develop a comprehensive financial sector reform strategy to streamline regulation and strengthen the supervisory framework. In addition, they urged the authorities to adopt an Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) law in line with international standards and devote resources to its effective implementation.
Directors noted that the recently-enacted law banning interest in financial transactions in the absence of Sharia-compliant institutions and framework would preclude conventional bank lending. They recommended that the authorities consider delaying the implementation of the new law until the financial sector is able to comply with it.
Directors noted that expenditure is skewed toward wages and subsidies, which is eroding policy buffers, undermining the fiscal position, and reducing space for priority infrastructure spending. They supported the authorities’ efforts to implement an extensive subsidy reform in combination with a safety net and welcomed plans to develop a rules-based medium-term framework that would help ensure fiscal sustainability and intergenerational equity.
Directors welcomed the authorities’ intention to adopt a comprehensive reform strategy for public financial management. They urged the authorities to integrate the sovereign wealth fund system into the fiscal framework and prohibit all elements of the system from participating in domestic investment. Directors also encouraged the authorities to enhance transparency and accountability in the governance of the Libyan Investment Authority, consistent with international good practices.
Directors noted that the currency peg to the SDR has served Libya well. They cautioned that continued fiscal expansion is likely to lead to an appreciation of the real exchange rate and deterioration in the external position, which calls for prudent fiscal policy and far-reaching structural reforms to improve external competitiveness and boost non-oil growth prospects.
Libya: Selected Economic and Financial Indicators, 2008–13
2008 2009 2010 2011 2012 2013
(Annual percentage change, unless otherwise indicated)
Production and prices
2.7 -0.8 5.0 -62.1 104.5 20.2
6.5 7.1 6.1 -52.5 43.7 24.5
-0.5 -7.7 4.0 -72.0 211.4 16.7
Nominal GDP in billions of U.S. dollars
87.2 63.1 74.8 34.7 81.9 94.6
CPI inflation (average)
0.0 2.0 2.5 15.9 6.1 2.0
(In percent of GDP)
Central government finances
Revenue, of which:
68.4 52.9 64.9 50.3 72.3 72.9
61.3 44.7 58.8 47.8 69.2 69.5
Expenditure and net lending, of which:
43.1 55.9 56.1 65.7 51.5 53.7
25.4 26.1 25.6 8.2 5.3 10.8
Overall balance (deficit -)
25.2 -3.0 8.9 -15.4 20.8 19.2
-36.1 -47.8 -50.0 -63.2 -48.4 -50.3
(Changes as a percent of beginning of the year money) stock)
Money and credit
Money and quasi-money
47.8 12.5 3.6 25.0 11.5 4.5
Credit to the economy
5.6 0.5 4.1 -2.6 4.5 1.4
(In billions of U.S. dollars; unless otherwise indicated)
Exports, of which:
62.1 37.1 46.8 19.1 62.2 64.6
60.7 35.7 45.4 18.7 61.0 63.1
20.9 22.0 24.6 11.2 25.7 30.5
Current account balance
37.1 9.4 14.6 3.2 29.4 24.9
(As percent of GDP)
42.5 14.9 19.5 9.1 35.9 26.3
Overall balance (deficit -)
15.7 5.2 4.5 6.0 16.9 18.2
(As percent of GDP)
18.0 8.3 6.1 17.2 20.7 19.2
Total foreign assets (NFA + LIA investments)
126.1 138.3 171.5 176.9 190.3 208.7
Net international reserves
91.9 100.3 101.8 111.6 124.5 142.7
(In months of next year’s imports )
40.7 39.0 78.3 41.6 39.1 40.0
Exchange rate (dinar/US$)
1.2 1.3 1.3 1.2 1.3 1.3
Real effective exchange rate (eop)
108.6 104.8 107.0 122.8 147.9 …
Sources: Libyan authorities; and IMF staff estimates and projections.
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. An explanation of any qualifiers used in summing up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.