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Libya Economic Monitor - Issue #1: July 2020 Summary

Core Content

The Libya Economic Monitor Issue #1 provides an analysis of the economic situation in Libya during the first half of 2020, highlighting the impact of multiple overlapping shocks on the country's economy. These shocks include the intensifying conflict, the closure of oil ports and terminals, declining oil prices, and the ongoing effects of the COVID-19 pandemic.

Main Points

1. Recent Developments

• The 2019 attack on Tripoli and the blockade of oil ports in January 2020 caused a significant political, economic, and humanitarian crisis.
• These events, combined with falling oil prices and the pandemic, created a quadruple shock that severely impacted economic activity and stability.
• The Libyan economy is highly dependent on oil, which has been a major source of revenue and GDP growth.
• The Central Bank of Libya (CBL) has played a central role in managing the economy, particularly through foreign exchange (forex) policies and exchange rate controls.

2. Current Economic Situation

• GDP growth has been volatile since 2011, with a sharp decline in 2019 to 2.5%, down from 20.8% in 2017–18.
• Inflation decreased in 2019 due to lower parallel market exchange rate premia and forex fees, but picked up again in 2020 due to increased conflict and shortages.
• The Libyan Dinar (LD) has continued to lose value in the parallel market, with a 54% depreciation in the first half of 2020.
• Public finances remain under stress, with high and rigid expenditures, especially the wage bill, and low revenues from oil and non-oil sources.
• The 2020 budget shows a huge deficit, the highest in recent years, at 90.6% of GDP.

3. Macroeconomic Indicators

• The budget surplus in 2019 was 1.7% of GDP, mainly due to forex fees (which generated LD 23.4 billion, or 32% of GDP).
• Gross domestic debt remains high at 144% of GDP.
• The current account surplus continued for the third year in a row, but foreign reserves declined due to increased forex demand and FDI outflows.
• Foreign direct investment (FDI) has substantially fallen since 2014, and the FDI stock has remained unchanged since 2013.
• Trade is concentrated in a few products and markets, increasing vulnerability to external shocks.
• The money supply declined in 2019, driven by falling demand deposits and reduced government borrowing.

4. Financial Sector Challenges

• The financial sector is dominated by banks, particularly state banks, which hold over 90% of deposits.
• The CBL has a dual role as both the central bank and shareholder of public banks, leading to conflicts of interest.
• The split of the central bank has created two separate systems, with Western banks using RTGS and Eastern banks using manual transactions.
• Currency circulation outside the banking system has increased due to lack of trust in the financial system.

5. Outlook and Risks

• The economic outlook remains uncertain, with a potential deep recession in 2020.
• The current account is expected to run large deficits in 2020–21, further reducing foreign reserves.
• Political instability and external interference continue to impede economic recovery.
• A revitalized national political will and institutional reforms are necessary for stabilization and economic diversification.

Key Information

• GDP in 2019: ~US$50 billion.
• Projected GDP in 2020: ~US$29 billion, a 41% decline.
• Oil production in 2019: ~1.2 million barrels per day, 75% of potential.
• Inflation in 2019: 21.6% on average, falling to 2.2% in 2019 due to exchange rate controls and forex fees.
• Foreign exchange fees in 2019: 183%, contributing to a budget surplus.
• FDI stock: US$18.5 billion since 2013.
• Foreign reserves in 2019: US$79.8 billion, down from US$124 billion in 2012.
• Libyan Dinar in parallel market: depreciated by 54% in the first half of 2020, reaching LD/US$ 6.17.
• 2020 budget deficit: LD 29.2 billion, or 90.6% of GDP.
• Wage bill in 2019: LD 30.5 billion, or 42% of GDP.
• Public sector size: 2 million employees in a population of 6.6 million.

Conclusion

Libya's economy is deeply affected by political instability, oil sector volatility, and external shocks. The current account and budget deficits are expected to worsen in 2020–21, with foreign reserves continuing to decline. The financial sector is fragmented and inefficient, with limited access to formal financial services for the private sector. The Libyan Dinar continues to lose value in the parallel market, and economic diversification remains a major challenge. A sustainable recovery depends on political reconciliation, institutional reforms, and economic restructuring.