Country Report - Zawya

8 Libya
Inflation
Exchange rates
External sector
private-sector participation. Moves to raise the proportion of locals in the
workforce could stimulate greater private consumption, and strong growth in
bank lending to the private sector could help to kick-start private-sector
economic activity. However, these factors are not yet having a major impact on
overall economic growth.
After years of negative or low inflation, consumer prices picked up sharply in
2007-08 but fell again in 2009, mainly because of lower international food
prices—food is the dominant component of consumer price inflation. Inflation
is forecast to pick up to an annual average of 3.9% in 2010-11, as consumer
confidence returns and higher oil revenue increases domestic liquidity, but it
will not reach the highs of 2008, as the government maintains subsidies and
increases in international food prices are less dramatic. We have revised up our
forecast for inflation as poor grain harvests around the world, particularly in
Russia, are likely to lead to higher international food prices than previously
expected. A stronger euro against the Libyan dinar could also add to
inflationary pressure in 2010-11.
The dinar is pegged to the SDR and is managed through tight official controls.
The country's huge stocks of foreign reserves—US$97bn in March 2010—mean
that the authorities will be able to defend the exchange-rate regime should any
pressure on the currency arise over the forecast period. We expect the SDR to
depreciate against the US dollar in 2010-11, mainly owing to a depreciation of
the euro, which is a component of the SDR. The dinar is therefore forecast to
depreciate to an average of LD1.28:US$1 in 2010 and LD1.33:US$1 in 2011.
The current account is dominated by hydrocarbons exports. Earnings from
goods exports are expected to grow to an average of US$47bn in 2010-11, from
US$37bn in 2009, owing to higher oil prices and production increases. Goods
imports will rise to an annual average of US$25bn in 2010-11, lifted by demand
for inputs for government development projects. Consequently, we forecast that
the trade surplus will average US$22bn in 2010-11.
The most important element of the services account is oil-sector payments
abroad, which are expected to stagnate in line with development of the sector.
We therefore expect the services deficit to remain steady at an average of
US$4.4bn in 2010-11. The income surplus is forecast to increase owing to growth
in dividends from Libya's rapidly expanding investments abroad and low
growth in profit repatriation by foreign oil companies. The current-account
surplus is therefore expected to widen to an average of US$17bn (22% of GDP)
in 2010-11.
Country Report August 2010 www.eiu.com © The Economist Intelligence Unit Limited 2010