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Shadow Economy and snowball


By: Suliman S. Al-Shahomy*

There is no doubt that, Libya is going through its toughest

Suliman S. Al-Shahom
Suliman S. Al-Shahom

economical phases. It has entered dark tunnel following the armed political conflict, which negatively affected living standards, confused institutions that already suffer structural problems and forced the citizens to lose confidence in its ability to provide adequate services. Hence, what is known as the “Gray Economy” or “Shadow Economy” becomes basic player in the wake of continued troubled economic conditions. Some international reports refer that the shadow economy consists nearly 40% of developing countries’ economies.

Looking at Libya, shadow economy became an important part of Libyan private sector, and became a key driver, Given the decline in the state’s ability to control and regulate rules of economic activity.

Economically, shadow economy reflects unregistered economic activities, with no taxes or fees to pay, flourish and grow inside countries suffering fundamental problems with no control over economy, with widespread corruption, lack of censorship. Shadow economy is seen across countries with the annual budget defect, high poverty rates, and negatively affects gross domestic product, as all related economic activities are not listed in the official data of the national economy.

Some studies refer that the amount of shadow economy is 17.3% during 1990s, while contributions of shadow economy in the total GDP of oil activities reached 10.6% in 2000, in the light of decisions taken then to address exchange rates in the black market that led to the shrinkage of shadow economy.

Shadow economy worth 10% of non oil economy in Libya during the first ten years of the current century, represented in some unregistered agricultural products, imports carried out without banking transfers “bag trade”, but in light of economical conditions, Libya is going through since 2011, shadow economy returned to play basic role in economies. The current data issued by the Central Bank of Libya about customs and taxes revenues refers to unprecedented decline despite increased imports, which confirms the amount of corruption and lack of ability to collect taxes and fees, and refers to growing shadow economy. One consequence of such destructive type of economy is the leak of liquidity from official banks to unofficial banks run in the shadow by currency merchants that exceeded 24 Billion Dinars, most dealings inside shadow economy is carried out directly via money; and therefore, increased activities inside the framework of shadow economy will lead to increased demand on money, which will impact the efficacy of monetary policies due to growing dependence on monetary basis, which is basically banks reserves and liquified money supposed to be under control of monetary authority. Thus, with time, Libyan economy would completely turn to shadow economy in the light of current gab caused by constitutional split, confused policies, lack of ability to achieve stability and sustained development. With the transfer of banking monetary to circulate outside banking frame, this means that shadow economy controls and dominates how things are going inside Libya, and may exceed 70% of non oil economy.

Shadow economy deepened across Libya through the extinction of factors of sovereignty and control over local markets, imports and inability of CBL to resolve the liquidity crisis by racing to supply new prints of currency to feed local markets without attracting liquidity outside banks, a problem that threaten to destroy the national economy.

The problem in Libya is not just lost of liquidity inside banks or halt of oil exports, but the real problem is that most economic activities turned to uncontrolled activities outside legal framework or right economic mechanisms. At the same time, documentaries credits regulations issued by CBL in Tripoli, turned CBL to other role not of its specialities without resolving issues of shadow economy from the other side.

Thus, there is no way out of the current calamity but through unifying efforts to establish new rules to build Libyan economy, based on transparency and honesty, in light of regulations and rules that eliminate shadow economy, involve all public and private institutions, otherwise shadow economy would turn to an ice ball that ends everything in its way.

There is nothing we can do to improve economic situation in the wake of division the country is suffering, and with the absence of unified government, while commercial banks turn to empty boxes that can’t contribute in funding economic activity.

*A Libyan Finance Expert and The Founder of Libyan Financial Market