Improved political and security arrangements reached during the second half of 2017 allowed Libya to more than double its production of oil and to register record growth last year (up 26.7 percent) after four years of recession. But this dynamic has not been sustained over the first half of 2018. In fact, oil production stagnated around 1 million barrels per day (bpd) over the first 5 months before abruptly dropping to only 0.7 million bpd in June following the attack and temporary control of the oil fields and terminals in the East by militias who badly damaged oil infrastructure and oil reservoirs. Assuming the authorities can fix the damaged oil infrastructure over the second half of the year, it is expected that GDP will grow at 7.2 percent in 2018, driven on the supply side by higher oil output that could recover to around 1 million bpd by end 2018, and on the demand side by higher government expenditures and investment.
Although declining, inflation remains high reflecting market disruptions due to supply shortages of goods and services along with still very active parallel currency exchange market. The consumer price index increased by 17.6 percent over the first 4 months of 2018 (vs. 26.9 percent, the same period last year). Thanks to the relative improvement of the exchange rate in the parallel market induced by increased supply of foreign currency through the official rate, inflation is expected to slow to around 15 percent for the whole year 2018. But the cumulative inflation over the last four years has adversely affected Libyan households who lost almost 80 percent of their purchasing power. This has almost certainly pushed more Libyans into poverty and hardship and worsened inequality.
Public finances are expected to improve slightly but the inflexibility of current expenditures and volatile oil revenues keep the overall fiscal stance under severe stress. Oil revenues are expected to significantly improve this year (47 percent of GDP), yet they will barely suffice to cover the high and increasing wage bill, which will hit 48 percent of GDP. The rising wage bill reflects both salary increases and additional hiring, which in turn are linked to pressure on the public payroll as a stabilizing instrument in a context of multi-factional conflict. Subsidies will remain high (10.6 percent of GDP) given the complex political economy that delays the needed reform of the system in a context of resource competition. The budget deficit, while slightly improving, will remain high at around 26 percent of GDP in 2018 (34.5 percent of GDP in 2017). The deficit is expected to be financed through cash advances from the Tripoli Central Bank and issuing government bonds in the East.
Although there is no systematic study on poverty and very little evidence on the current well-being of Libyan households, conditions are inimical to poverty reduction. The sharp decline in oil exports starting in 2011 has severely impacted public services. Worsening conditions also contribute to the erratic power supply and the recurrent food shortages. The parallel currency premium is already reflected in the prices of many products, including essential food and medicine. In contrast, vast rents created by access to dollars at the official rate and to petroleum products at official prices are contributing to inequality and incentives for conflict, while the associated economic distortions spill over to Tunisia.
Improvement of the economic outlook depends crucially on the endorsement by the House of Representatives of the Government of National Accord (GNA) formed under the auspices of the UN. The economic and social outlook assumes that the GNA is eventually empowered to restore security and launch a comprehensive program to rebuild the economic and social infrastructures. In this context, GDP is projected to increase strongly in 2018-2019. However, the twin deficits will prevail as oil revenues will not be sufficient to cover the high budget expenditures and consumption-driven imports. Over the medium term, as oil production returns to full capacity, growth is projected to rebound at two digit growth rates in 2018 and 2019.
Libya Public Finance
Figure 1 below provides a snapshot ofLibya’s public financeswith projections through 2021. During the 2010-2013 period, the executed budget did not typically exceed the overall amount authorized by parliament, but its composition substantially differed from that of the approved budget. The overall rate of budget execution was around 80 percent in 2010 and 2012 and was about 93 percent in 2013. There has been no approved (official) budget over the past several years (2014-2018). The GNA has recently approved a unified national budget, however the HOR has failed to adopt/approve this budget legislation. Of note, over the past several years, development spending (capital investment) in Libya has virtually collapsed, comprising an estimated 1o% of total government spending in FY2018, down from a budgeted 52% of total budget spending in FY2012.
Immediate challenges with respect to fiscal planning include how to manage fiscal spending pressures while restoring and improving basic public services. A longer term goal is to help develop the framework and institutions for a more diversified market-based economy, broadening the economic base beyond the oil and gas sector. Although the Bank’s post-conflict engagement was initially expected to accompany only Libya’s short term economic recovery efforts, the transition program will lay the foundation for longer term goals. This includes creating a more vibrant and competitive economy with a level playing field for the private sector to create sustainable jobs and wealth. It also includes transforming the management of oil revenues to ensure they are used in the best interests of the country and to the benefit of all citizens equally. This will also ensure that citizens have a role in defining and voicing their communities’ best interests.
Last Updated: Oct 01, 2018