The political and security environment remains uncertain in Libya. Libya faces the challenges of stabilizing the economy and responding to the aspirations of the revolution. The near-term outlook is favorable, but there are significant risks. The overarching policy objective should be to foster inclusive growth. Banks are not intermediating, and resources should be devoted to its effective implementation. Expenditure is skewed toward wages and subsidies. Libya needs to adopt a comprehensive reform strategy. The government agrees with the assessment of the economic outlook and associated risks and policy options as outlined by Executive Directors.
Libya’s macroeconomic performance in 2008 has been strong, with real GDP growth of about 4 percent, and record fiscal and external surpluses. The staff report for Libya’s 2009 Article IV Consultation underlies economic developments and policies. The outlook has been adversely affected by the global crisis mostly through a decline in oil prices and output. This outlook is subject to downside risks relating to a further worsening in global economic conditions or a wavering of the efforts to improve the quality of public expenditure and advance structural reforms.
This 2006 Article IV Consultation highlights that Libya has made efforts to liberalize its economy and foreign trade, achieving increasing economic growth while maintaining macroeconomic stability. In 2006, economic conditions continued to be satisfactory. Real GDP grew about 5½ percent, reflecting an increase of 4½ percent in the value added of the hydrocarbon sector. In 2006, structural reform continued with the implementation of a wide range of measures covering fiscal management and taxation, banking and payments systems, trade, and the business environment.
The demand for money has been perhaps the most comprehensively studied of all economic relationships over the past ten years. In addition to the natural academic interest in the determinants of demand for an important financial asset, research has been spurred by the operational importance of the relationship in circumstances where central banks have increasingly come to use rates of growth of monetary aggregates as proximate targets for policy. 1 Improving understanding of the demand for money is particularly important in the formulation of economic programs supported by assistance from the International Monetary Fund. Such programs typically involve performance criteria that set limits on the aggregate domestic lending of the banking system, either directly or through limits on the growth of the monetary base. The formulation of targets in this way is based implicitly on the assumption that there is a stable demand function for money. Given an objective or forecast for the rate of price increase, and an assumption concerning the potential of an economy for real economic growth, a certain rate of monetary expansion will then be consistent with the growth in demand for money implied by these assumptions. If a forecast or target for the likely balance of payments outturn is then added, the appropriate rate of domestic credit expansion can be determined. Credit expansion above or below this rate will cause a divergence of monetary growth from the planned rate, resulting in inflationary or deflationary pressures and tending to bring about a deterioration or improvement in the balance of payments. 2