IMF generally positive on Libya, with caveats

The International Monetary Fund has expressed generally positive views about the direction of the Libyan economy.

Though working from June figures, which made the Washington-based economists think that Libya would not return to its pre-revolution hydrocarbon output until next year, when in fact the country hit that 1.6 million barrels daily this September, the report is generally upbeat.

As part of its biannual regional economic outlook, the IMF predicts a record-breaking 2012 GDP growth of 120 percent for Libya, coming after last year’s radical 60 percent contraction. If the security situation improves as predicted, the IMF believes that economy will remain robust, with growth for next year of 17 percent, easing thereafter to seven percent from 2014-2017.

Given no radical change in oil prices,  it says, Libya can expect a fiscal surplus this year, equivalent to 19 percent of GDP, while the current account surplus rises to 22 percent of GDP.  Inflation, which the IMF estimates was running at 16 percent last year, will, it expects, ease back to ten percent this year and drop to just one percent next year.  This sharp decline willF come about, “ despite upward pressure on domestic prices arising from supply bottleneck in housing and transportation.”

It warns however that if the global economy continues to struggle with recovery, oil and gas prices could fall, which would present the hydrocarbon-dependent Lbyan economy with challenges.

The IMF speaks of concern over security and political stability, but majors on the government’s need  to  exercise fiscal discipline, while maintain macroeconomic stability.

“As a short-term response to the aspirations of the revolution, the interim government raised wages and subsidies. “notes the report, “Although Libya can afford elevated levels of current expenditure during a transitional period, the increase in wages and subsidies is eroding the country’s fiscal buffers and undermining prospects for fiscal sustainability”.

The IMF also warns that Libya must tackle a whole range of pressing issues from improved education, rebuilding infrastructure, developing a financial market, cutting economic dependence on oil and gas production and putting in place an efficient social security net.

To this end, it says: “The country will need to establish a governance framework to improve transparency and accountability, to better manage its resource wealth, and help promote private sector-led economic development.”

By Hadi Fornaji " Libya Herald" 

IMF sees Libya growth skyrocketing 116.6% this year

Economic activity in Libya is likely to rebound this year as the country rebuilds from civil war and oil production increases to levels last seen during Muammar Gaddafi's rule, the International Monetary Fund said on Tuesday.

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conomic activity in Libya is likely to rebound this year as the country rebuilds from civil war and oil production increases to levels last seen during Gaddafi's rule, the International Monetary Fund said on Tuesday.

In a report on Libya's economy conducted by an IMF mission in May but published only now, the Fund forecast growth will skyrocket 116.6% this year, following a contraction of 60% in 2011. Growth next year is expected to ease to 16.5% and 13.2% in 2014, the IMF added.

Such impressive rebounds in growth are not unusual in countries emerging from conflict, as the government pours money into rebuilding projects and pent-up private demand boosts spending.

While Libya's government can afford the current high rates of spending, over the longer term it is not sustainable and will push the budget into deficit from 2015, the IMF estimated.

"A more thorough analysis of sustainability based on the present value of financial assets and future oil extraction indicates that, from 2012, public spending will exceed the sustainable, long-term level by over 10% of GDP," the IMF added.

The IMF warned that continued political uncertainty, insecurity and the possibility of a drop in global oil and gas prices were risks to Libya's outlook.

The oil price at which Libya's budget is balanced has increased to USD 91 per barrel in 2012 from USD 58 a barrel in 2010, and is set to exceed USD 100 a barrel from 2013, the IMF said.

A deeper crisis in the euro zone and sharper slowdown in the world economy could push global oil prices lower, which would be pose challenges for Libya's oil dependent economy, the IMF added.

As Libya's imports return to normal, consumer price inflation should be contained at 10% despite pressure on prices from supply bottlenecks in housing and transportation, the IMF added.

The fund said, however, that a drop in the country's high level of unemployment is not likely without reforms.

Libya looks to Islamic banks to lure deposits

Foreign construction labors work at the construction site of a new tower over looking the sea at the commercial center of Tripoli, Libya Thursday, Aug. 26, 2010. (AP Photo/Abdel Magid Al Fergany)

Ahmed Saeed, a Libyan poultry farmer, says he’s waiting for his country to open Islamic banks to deposit money for the first time. “I’m sure that Islamic banks are more in tune with my culture,” he said.

“I had a religious upbringing and I hear clerics ban dealing with current banks because of usury.”

Once a law that allows the establishment of stand-alone Islamic banks gets approved later this month, Libya’s interim government may be able to attract cash from people like Saeed, Deputy Central Bank Governor Ali Mohammad Salem said.

“When the people see Islamic banks, they’ll put this money there,” Salem said in an interview in the capital Tripoli. “It’s a win-win situation. The money that’s now outside the system will be circulated in the economy and used in development.”

Islamic lenders in Libya, where some banks offer Shariah-compliant services, may attract some of the estimated 15 billion dinars ($12 billion) outside the banking industry, he said. Total commercial banking assets were about 71 billion dinars at the end of 2011. The nation, where almost all the 6.7 million people are Muslim, saw its economy shrink 61 percent last year after an uprising that toppled its ruler of 42 years Moammar Gadhafi. Oil production dropped to virtually zero from 1.6 million barrels a day.

The holder of Africa’s biggest crude reserves is now pumping more than 1.3 million barrels a day, or about the combined output of Qatar and Ecuador, data compiled by Bloomberg show. Its economy is expected to surge 76 percent this year, the most since at least 1988, the International Monetary Fund estimates.

While Libya doesn’t need financial assistance from the IMF, it needs guidance to lower unemployment and to improve the business environment, including increasing access to finance, the fund said last week.

“Islamic banks could be one of the tools of development,” Salem said. “We hope that Islamic banks will focus on real investments and not just consumer-linked products such as cars.” Transactions in Islamic finance are based on the exchange of assets rather than interest to comply with Shariah principles, as well as profit and loss-sharing agreements.

Mustafa Abdel Jalil, the chairman of the National Transitional Council in Libya, said in October the interim government plans to eradicate interest from the banking industry. Charging interest “brings about disease and creates hatred,” he said.

Interest-bearing accounts, such as savings and time deposits, fell 8 percent and 6.6 percent respectively last year compared with 2010, according to a report published on the central bank website. So-called demand deposits, which don’t pay interest, rose 9.5 percent last year.

Gumhouria-Bank, a state-owned lender, has three branches offering Islamic banking services and is unable to cope with requests from companies and civil servants, according to Jamal Ajaj, the director of the lender’s Islamic banking project. Demand for Shariah-compliant financial services helped establish “informal banks,” he said in an interview in Tripoli.

“It’s proof that Islamic banks will support the economy and bring out the money stored in the homes and the excess liquidity at corporates,” he said.

The central bank said in October that it plans to allow lenders to sell Islamic bonds to help develop banking services. Egypt and Tunisia, which saw uprisings that led to the ouster of long-serving rulers, also plan to permit the sale of debt that comply with Islamic principles. Bahrain, Dubai and Ras al-Khaimah are the only sovereigns in the Arab world to sell global dollar-denominated sukuk.

The average yield on Islamic debt in the six-nation Gulf Cooperation Council, which includes Arab sovereign sukuk, fell 45 basis points so far this year to 3.86 percent Friday, HSBC/NASDAQ Dubai GCC U.S. Dollar Sukuk Index.

The yield on Dubai’s 6.396 percent sukuk maturing in November 2014 has tumbled 148 basis points in 2012 to 4.09 percent Monday. The extra yield investors demand to hold Dubai’s bonds over Malaysia’s 3.928 percent sukuk maturing in June 2015 narrowed 69 basis points in the period to 218, data compiled by Bloomberg shows. Malaysia has the world’s biggest Islamic bond market.

Global sales of sukuk more than doubled so far this year to $12 billion from the year-earlier period, according to data compiled by Bloomberg.

While Libya’s central bank is keen to boost the nation’s economy with Islamic banking, the new government has struggled to rein in armed militias built around regional and tribal loyalties. The groups were instrumental in toppling Gadhafi and have largely refused to disarm before the central government provides more funding and services to their respective regions.

Until the political situation in Libya is restored, Noor Islamic Bank, a lender controlled by Dubai’s government, won’t consider expanding its services to the North African nation, Chief Executive Officer Hussain al-Qemzi.

“We still feel that it’s too soon for us,” he said. “It’s still unsettled.”

The central bank’s priority in the first three years is to develop domestic Islamic lenders before opening the door to international banks, Salem said. Libya will honor bank licenses issued before last year’s civil war, including one given to Qatar Islamic Bank, Central Bank Governor Saddek Omar Elkaber said in November.

Demand for Islamic financial services is likely to appeal to a wide segment of the population, many of whom withdrew their money during the revolution because of concern that their cash was safer at home than in banks, said Essam al-Zleiteeni, an employee at the Culture Ministry. He’s waiting for an Islamic bank to open before he’ll return his savings.

“I’m more convinced with Islamic banks because they don’t deal with interest,” he said.

“I’ll put my money in an Islamic bank to have a clear conscience.”

Libya on Recovery Path but Faces Long Rebuilding Effort

• Libya faces urgent, costly task of rebuilding its economy
• Improved institutions, management of resources to help unleash potential
• IMF remains committed to helping Libya through capacity building

Libyan oil production has recovered faster than expected following the overthrow of Muammar Gaddafi, but the country faces the challenges of building modern institutions, repairing infrastructure, and diversifying the economy, a senior IMF official said.

With the lifting of most United Nations sanctions, the bulk of frozen assets abroad have been released and normalization of the banking system is under way.

But, in an interview, the head of the IMF’s team on Libya, mission chief Ralph Chami, said the North African country faces many immediate and longer-term challenges that need to be addressed. He added: “Libya could realize its great potential if the right institutions and policies are put in place.”

A staff team from the IMF’s Middle-East and Central Asia Department, led by Chami, prepared a report entitled “Libya beyond the Revolution: Challenges and Opportunities”. Speaking to IMF Survey—the IMF’s online magazine—Chami discusses recent developments and looks at what it will take for the Libyan government to overcome the steep challenges ahead, rebuild the economy, and address the people’s aspirations.

IMF Survey online: How is Libya faring after the revolution? Is the economy getting back on its feet?

Chami: The conflict had a severe impact on the economy and especially on the hydrocarbon sector, which is the main source of public revenues and foreign exchange. During the uprising, oil production dropped precipitously from 1.8 million barrels a day to only 22,000 in July of 2011. Since the conflict ended, the production of oil has recuperated faster than expected.

Reconstruction efforts should boost nonhydrocarbon output in the coming years. In addition, the assets that were frozen during the revolution have been largely unfrozen as most UN sanctions were lifted. So there is no longer a shortage of foreign exchange, and normal imports have resumed.

IMF Survey online: What are the challenges facing the Libyan economy in the near term?

Chami: In the short term, the country faces complex and costly tasks. Coming out of the conflict, Libya needs to rebuild infrastructure and address the humanitarian needs of its people. There is a need to restore the functioning of the banking system and to consider medium-term implications when making decisions about public spending. Safety and security are also important because these would facilitate investment and the return of expatriate workers. Many well-educated Libyans live abroad and, as in other Arab Spring countries, the diaspora could come back to help rebuild the country.

IMF Survey online: How did the government respond to the peoples’ demands after the uprising?

Chami: Before the revolution, growth was not inclusive. Like in other Arab Spring countries, economic opportunities were not shared fairly among different segments of the population. Unemployment rates and the incidence of poverty have been surprisingly high for such a resource-rich country. Those reasons, combined with a lack of representation, contributed to the revolution. To respond to the needs and aspirations of the people, the government has started to increase subsidies and provide public-sector employment, especially, for young people.

IMF Survey online: What is your assessment of the measures that the government has introduced in responding to those demands?

Chami: Spending on wages and subsidies is truly needed to ease the social pressures in the near term. But, to ensure that these social protections can continue to be provided over time, the priority should be to design a well-targeted social safety net. Increasing wages and public sector employment have resulted in a 60 percent increase of the wage bill in 2011. The cost of subsidies has also gone up significantly.

While we understand the need to provide employment, we think it should be productive employment. We also understand the need to provide subsidies, but untargeted subsidies do not necessarily help the people they are supposed to help. In contrast to generalized subsidies that benefit everyone, well-targeted schemes provide assistance only to those most needy. So, fiscal discipline is needed in the coming years.

The government should make sure that the short term does not trump the long term. My advice is: in addressing temporary problems, policymakers should come up with measures that are not inconsistent with long-term overarching developmental needs. For example, we do not want to solve the problem of unemployment by providing employment for everybody in the public sector, because that would not be the most desirable permanent solution.

IMF Survey online: What are the medium-term challenges that Libya has to deal with?

Chami: Libya faces many structural problems including a lack of institutions, weak governance, and chronic structural unemployment. Over the medium term, Libya will need to build its institutions and respond to the demands and aspirations of its population. To achieve this, Libya needs to diversify its economy away from oil dependence. There is also a need to create an enabling business environment that will facilitate private sector–led growth and job creation. Areas where the business environment needs improvement include governance, transparency, accountability, rule of law, property rights, and access to finance. In addition, there will be a need to put in place an efficient social safety net to protect the most vulnerable groups of the population.

IMF Survey online: What are Libya’s economic prospects now?

Chami: Despite the challenges in the period ahead, the revolution could unleash Libya’s huge economic potential by promoting greater inclusiveness and transparency, and enhanced governance. Combined with sound management of resources, these positive factors can leverage the country’s inherent strengths: a dynamic and young population, an abundant wealth, a beautiful coastal line, access to key markets, and a privileged geographic position.

Libya has a great potential to diversify meaningfully by having vibrant tourism and service sectors. An undesirable path would be to continue to have an oil-dependent economy in which the government is the main employer and the private sector employs mostly expatriates.

IMF Survey online: How is the IMF helping Libya during the transition period?

Chami: Given the abundant resources Libya possesses, there will be no need for financial assistance from the IMF. What Libya needs in the coming years is technical assistance to build capacity and better manage its wealth. With a mission in late 2011, we have already provided the new government with advice on measures to improve governance at the sovereign wealth fund and, in January 2012, the IMF and World Bank started work with the authorities to strengthen public financial management. In addition, we are resuming technical assistance activities at the central bank.

When the Prime Minister met with the IMF’s Managing Director a few months ago, he explicitly asked for the Fund’s help in capacity building. To this end, the government has requested assistance in reforming the system of untargeted subsidies and an IMF Fiscal Affairs Department expert is to arrive in Tripoli in April. The view is to develop a comprehensive safety net, in an effort to make growth more inclusive.

The Fund will continue to help in the area of public financial management. This includes assessing the financial management of all Libyan funds run by the central bank and the sovereign wealth fund, with the aim of providing recommendations on how to enhance accountability and transparency. The attitude of the new government in this particular area is incredibly positive, and we commend them for that.

(Source: International Monetary Fund Survey)