Libya’s Economic Outlook
Libya’s economy primarily relies on the oil and gas industry. After a long 4-year recession, started in 2014, the country bounced back in 2017 to register a record growth of 26.7 percent. Recently, Libya improved their security arrangements and this, coupled with enhanced political stability has saw the country more than double its oil production to reach around 1 million barrels per day (bdp).
However, challenges are still present; over the first half of 2018, Libya could not sustain this growth and its oil production dropped heavily, to 0.7 million bpd in June 2018. The government still believes that a 7.2 percent growth is possible in 2018.
Challenges to Libya’s Economy
In June 2018, armed militias took temporary control of the country’s eastern oil fields and terminals. Most of the infrastructures were badly damaged, including oil reservoirs. Currently, most of these damages have been fixed, and the recovery process is on the way.
Inflation remains a major concern for Libya. Market disruptions, mainly due to shortages of goods and services, have increased the consumer price index by 17.6 percent over the first 4 months of 2018. The cumulative inflation coupled with weak basic service delivery are likely to have increased population poverty.
Over-reliance on the hydrocarbon sector poses a major threat to the country’s economic stability. Though the government has shown its interest to diversify Libya’s economy, the non-hydrocarbon sectors remained sluggish; lack of liquidity and security directly impact the economic performance of the country.
Recent Development in Libya
Prime Minister Faiez Serraj recently signed off a new set of economic measures in September 2018. The main objective is to ease the life of Libyans who have suffered persistent lack of cash liquidity and falling purchasing power due to the drop in the dinar’s value.
The official goal of the new reforms is to:
- Reduce the gap between the official exchange rate to the U.S dollar (USD), fixed at 1.3 Libyan dollars.
- Ensure easier access to foreign currency through the official banking system, rather than reliance on the black market to import goods.
The economic model set forward to achieve these objectives is the creation of a second official exchange rate of 3.90 LYB/USD and the inclusion of a 184 percent fee on the official exchange rate for all foreign currency. These measures have been endorsed by top financial consultants in the region, such as the Central Bank of Libya Governor and the Representative of the UN Secretary-General.
To the government’s credit, the reforms have shown initial positive effects. Upon the announcement of these measures, the black-market exchange rate dropped by almost 20 percent. Yet, it is still early to determine the long-term success of the measures undertaken, since the current system for allowing letters of credit is still being rolled out.
Possible forecast for Libya
With the new measures in place, Libya is expected to generate 20 billion dinars from the new service fees alone. Part of this should be used to repay public debt and finance development projects. Gradually, the Libyan Government will most likely reduce fuel subsidies, as this strongly encourages fuel smuggling and costs the state up to $6 billion annually.
To complete the recovery process, Libya is expected to replace the service fee system currently in place by a proper devaluation of the dinar. This would take away any abuse of the dual exchange rate currently in place. Enforcing these measures would send a strong signal that stakeholders are serious about bridging the country’s divides and moving towards stabilization.
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