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The Economic Reform Needed in Libya


By: Suliman S. Al-Shahomy*

It appears that the critical situation, the Libyan economy is going

Suliman S.Al-Shahomy
Suliman S.Al-Shahomy

through has worsened. As the government’s influence is fading, it is getting harder to control resources in the country, such as taxation and customs, not to mention oil, which is considered the key resource in Libya.

With the political division and continued the armed conflict, the World Bank stated in a recent report that the exhaustion of the monetary reserve by the Central Bank of Libya (CBL) is nearing. The report also indicated that if Libyans don’t make a decision immediately and seek to join their efforts to find a way that will maintain the unity of the state and reboot the Economy, chaos will ensue.

Before discussing the methods of economic reform, we need to analyze the current situation. The Libyan Economy is suffering from a Negative growth in Gross Domestic Product (GDP), aka Deflation; this is due to the failure of the oil exportation process; which is considered the key component of the GDP. Other sectors such as agriculture, industry, banking and insurance were equally affected. Deflation rates increased 30% over the past year.

In other words, the increase in the value of goods and local services, which indicate the capacity of economic activity to develop, create jobs and achieve prosperity failed miserably.

The situation the Libyan economy is going through can also be described as Stagflation. The reason behind it is that the unemployment rate is increasing steadily and has reached 30% of Libyans with capacity to work, in addition to the acceleration of inflation rates which are now estimated to be 30%, taking into consideration the rapid changes of US Dollar exchange rates in Grey markets, and the increasing deficiency payments that reached 40% of GDP. This increases the pressure on the cash reserve of the CBL because of drafting without having enough sustainable resources, due to the difficulties facing oil exportation, which alone can improve the balance of payments.

The situation of the Libyan budget is no secret to no one. The deficiency it is facing is ongoing due to a lack of local and oil revenues in a confrontation with the expenses that are mostly spent on payrolls (almost 50%); the other half is devoted to goods and oil subsidies. These are now subjects of organized smuggling, because of the corruption that is overlaying the country.

Furthermore, the liquidity crisis, which all attempts at solving have failed, including those taken by the CBL of Al-Baida, and the CBL of Tripoli, owing that to the impossibility of managing the monetary policy in one country by two fronts, in addition to the loss of confidence in the financial system by both tradesmen and citizens.

In my point of view, for any reform system to work there needs to be one, and only one, the government in the country that mainly targets the recovery of the country by unifying the central economic institutions. Followed by two reformation programs;

The first one is urgent and a key factor in the process, it aims to address the collapse of the exchange rates in the gray market. The problem is easily solved by the CBL and exportation of oil, in addition to wholly neglecting fuel subsidies as soon as possible, furthermore, transferring the goods subsidies into monetary ones for all Libyan citizens.

As for the second program, considered to be long term; is the endorsement of a bundle of transparent economic policies by the legislature in Libya, submitted by the government as a potential blueprint, mainly aims to reform the structure of the general budget, regulating its expenses, steering a section of the oil’s revenue (which should not be less than 25%) directly to the reconstruction program and to enhance the production capacity of oil, as well as increasing reliance on local profits such as taxes and customs, in addition to regional and local resources.

This bundle should focus on organizing the domestic market in ways that guarantee transparency, fairness and consumer protection. It also must contain the fundamentals and principles the Libyan economy should rely on, which most certainly will be different from how it was before. This transformation, though, will not occur anytime soon; arrangements for a complete and forthcoming strategy are needed.

Surely the adoption of such economic arrangements which aim to tackle hyperinflation and pull the economy out of recession, in addition to improving the balance of payments as well as addressing the public budget deficit, would have a severe impact on the public’s standard of living. It is the approach required to resolve structural distortions in the Libyan economy, and certainly, the social programs associated with the application of renovation program as unemployment benefit and support the poor and low income will be helpful in alleviating the side effects. Perhaps it is important at this stage to consider applying these economic policies and to focus on restructuring the banking system starting from the CBL to commercial and specialized banks, and also transform them into tools able to create development engines through financing economic projects.

What worries me is the continuation of the current condition of the Libyan economy that threatens to be further fragile, and the diminishing of the economic institutions’ ability to fulfil their role in bringing back oil export operations, in addition to the continuous decline in the CBL reserves without adequate compensation, the leakage of subsidized merchandise outside the borders of the country and the continued waste of public funds. The continuity of this deteriorating situation will without a doubt eliminate any hopes of applying an economic reform program that will help get out of the dark tunnel, which serves the interests of benefits of the conflicting powers, without paying any attention to the interests of the country and citizen.

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