Country Report - Zawya

6 Libya
Fiscal policy
Monetary policy
grow. The partial privatisation of two telecommunications companies and an
iron and steel firm has been proposed. An initial public offering for shares in
the latter was reported in August to be going ahead. The government is also
committed to streamlining the bureaucracy, but little action has been taken. Ten
new laws have been introduced in 2010 to improve the business and
investment environment, but are still awaiting executive regulations to clarify
how they will be implemented.
The whims of Colonel Qadhafi will continue to create uncertainty in
policymaking. This will deter investors, who are unlikely to be assuaged by a
proposed new hydrocarbons law. During 2009-10 the government suspended
visas for EU citizens living within the Schengen visa area and hinted that it
might nationalise the hydrocarbons sector. Despite the award of dozens of
exploration permits, drilling success has been limited, and when exploration
has been successful development of the discoveries has been impeded. This has
dented the positive perceptions of investing in Libya's hydrocarbons sector and
its entire economy more generally. Foreign investment, which is vital for
development, is therefore likely to become harder and more expensive for Libya
to obtain, and more major foreign oil companies may leave—particularly as a
number of exploration permits lapse this year. BP has confirmed its intention to
proceed with its own major exploration programme, although its deepwater
exploration programme has been delayed, possibly as a consequence of safety
concerns related to the oil spill in the Gulf of Mexico.
The government has had a healthy budget surplus in recent years owing to high
oil revenue and a tendency to fall short of spending commitments. The fiscal
surplus shrunk in 2009 to 4.6% of GDP owing to lower average oil prices and
revenue. The government expects to increase expenditure by 32% in 2010.
Although current expenditure will increase, as efforts to cut the size of the civil
service have been postponed, a public-sector pay rise is planned and subsidies
will be kept in place to control consumer prices, capital expenditure is likely to
fall short of targets. Combined with higher oil prices this will lead to an increase
in the budget surplus in 2010 to 5.9% of GDP. In 2011 cutbacks in capital
expenditure to meet existing government plans and spending restraint owing to
lower international oil prices will lead to a further increase in the budget
surplus to 10.2% of GDP. Lower than expected government expenditure in 2009
has led us to revise up our estimates and forecasts for the fiscal balance.
The currency is pegged to the IMF's special drawing rights (SDR), which
restricts monetary policy flexibility. Nonetheless, the Central Bank of Libya
cut benchmark interest rates by 2 percentage points in early 2009 and
increased them back to 5% in early 2010. Pressure on the Central Bank to
overhaul its approach to monetary policy and regulation of financial services is
likely to increase as the banking sector is liberalised. Liquidity is excessive,
and state-subsidised credit institutions are currently crowding out commercial
bank lending. Efforts will be made to address these issues.
Country Report August 2010 www.eiu.com © The Economist Intelligence Unit Limited 2010