By Sami Zaptia
The IMF published its annual report on Libya in the second week of November after its visit of October 17-28 2010. This is part of an ongoing cooperation program between Libya and the IMF aimed at helping Libya in its economic development efforts.
The IMF confirmed that Libya's overall economic environment is still 'strong' thanks to 'large' currency reserves, but also thanks to policy positions such as 'continued efforts to modernize and diversify the economy '. The IMF went out of its way to 'commend' Libya 'on efforts to enhance the role of the private sector in the economy'. It particularly highlighted 'a number of critical laws that build on the initiatives launched over the past few years to modernize the economy'. This was a reference to the series of new reform laws passed recently on Taxation, Customs Duties, Labour Relations, Commercial Law etc.
The importance of these achievements the IMF report felt 'contributed to the favorable sovereign ratings assigned to the country for the second year by international rating agencies'.
With regards to the world economic slowdown and its impact on Libya, it concluded that 'the impact of the global financial crisis on Libya has been thus far limited to the decline in oil revenue. This was due to the lack of exposure of domestic banks to the global financial system, limited trade ties outside of the oil sector, and large foreign reserves held in safe assets'.
When it came to external investments and the Libyan Investment Authority - Libya's Sovereign Wealth fund investment arm - the IMF reported that the 'LIA has come through the global financial crisis relatively unscathed'.
Libya's ability to attract FDI to its most important sector also received the thumbs up from the IMF. 'The oil sector has continued to benefit from commitments of foreign direct investment', it concluded. This is despite the world recession and resultant declining demand for oil.
But more importantly in view of Libya's 'diversification-away from oil and gas' drive, how did the non-hydrocarbon sector perform? 'Non-hydrocarbon growth has been solid on the backdrop of high domestic demand', the IMF concluded. 'Non-hydrocarbon real GDP grew by an estimated 6 percent in 2009, mainly driven by investments in construction and in services'.
The IMF confirmed this in its study: 'Hydrocarbon output declined significantly due to compliance with OPEC quota, resulting in a contraction of overall real GDP by an estimated 1.6 percent'.
Nevertheless despite this small contraction compared with what most of the rest of the industrialized world experienced, the IMF confirmed that this was just a very short term blip forecasting that 'Overall growth is projected to increase markedly to around 10 percent in 2010 due to a sharp increase in oil production'.
As far as diversification efforts are concerned, the IMF forecasts continued good news for policy makers: 'at the same time, non-hydrocarbon growth will also strengthen (to about 7 percent) as a result of large public expenditures'.
With regards to banking, loans and bank liquidity, the IMF has highlighted the paradox of Libya and its banking system. Libya's banks are cash rich, at a time when most banks in the world are finding it difficult to create liquidity. This excessive liquidity partially explains why foreign banks are queuing to enter the Libyan banking sector. However, very little lending is done compared to more advanced banking systems elsewhere in the world.
So, on the one hand, the IMF reports that 'the banking system is sufficiently capitalized' and 'Excess liquidity has remained high in the banking system'. But that 'commercial bank lending to the private sector and nonfinancial public enterprises has been constrained by lack of adequate borrower documentation, strengthening of regulation, and high liquidity at public enterprises'.
Equally it reported that 'financial intermediation is weak compared to neighboring countries'. This is a great loss to the development of the economy, to SMEs that need loans to really take-off, and a lost diversification opportunity.
Finally, highlighting the core strength of Libya's economy, the IMF reports that 'net foreign assets of the Central Bank of Libya (CBL) and the LIA have consequently continued to increase, and are projected to reach $150 billion by end-2010 (the equivalent of almost 160 percent of GDP)'.
It is this statistic of US$ 150 billion surplus that means Libya does not need to borrow to develop and grow. It means that Libya during one of the world's worst economic recessions does not need to raise taxes nor make huge cuts of economic and social expenditures as in the rest of the world.
Whereas some of the leading world economies are sitting on huge deficites that are weakening their currencies and making it almost impossible to borrow on international money markets, Libya sits on a US$ 150 billion surplus. It also means that Libya will not default - in the medium to short term - on debts. In fact Libya has no real debts.
The remark of the IMF: 'the equivalent of almost 160 percent of GDP', means that Libya has in surplus 160% of its annual GDP. Libya, in otherwords, can stay a year with zero income and would still have money to spend. This has been a large contributing factor in Libya being awarded a high investment grade ranking by the top international rating agencies - at a time when leading industrialized nations are being downgraded.
However, the Libyan economy is still a developing economy over dependent on one source of income: hydrocarbons. It still faces challenges as it attempts to recover from a decade of sanctions and attempts to change a formerly over centralized socialist system.
The IMF does warn of some challenges ahead. For example, Libya is a net importer of almost all other products except for hydrocarbons.
This makes it vulnerable to international prices. To this end, the IMF warns that 'inflation is expected to pick up to about 4.5 percent in 2010 (from 2.5 percent in 2009) as higher oil revenue increases domestic liquidity and international commodity prices increase'.
The IMF also points out that 'the authorities are aware of the many challenges that remain to diversify the economy and to help create viable employment opportunities for the growing labor force'.