Economic Policies in Libya: Challenges; A Personal View. Ahmed M. Jallala After two years of the Libyan revolution in 2011, the country faces several important economic policy challenges. Dealing with these challenges today is very important and its implications are critical in determining the path of the economy and the well being of Libyans. The objective of this article is to discuss some of these challenges. The discussion is not comprehensive and it does not cover all important policy issues. It only high lights some of the issues, given present conditions, that have priority. I. Present situation: Today the Libyan economy has four main characteristics: 1. After conflict economy: the conflict of 2011 left the country with a fragile government and several armed militias. Among other things, this has affected the economy by reducing the oil revenues due to oil ports and fields closures. The effect on the government budget in 2014 may be great and the ability of the government to meet increasing demand is questionable. Rising social expectations may complicate matters. In addition, the General National Congress failed to draft the constitution in due time because of political power struggle among different factions. The present government faces the great challenge of achieving security goals and establish rule of law. 2. Economy in transition: Since early 70’s and until 2011, Libya adopted various versions of socialism. As a result public sector dominated during this time period. Private sector was and still small and informal sector is estimated to be large. Economic distortions as a result of previous economic policies such as: large subsidies, government being the main employer and lower efficiency in both public and private sectors are still present. Some key institutions such as commercial banks were unable to perform efficiently especially in their important role of financial intermediation. Monetary policy has a very limited role. 3. Government inability to formulate and implement proper economic policies: proper policy formulation and implementation require availability of human resources capable of conducting public sector reform. At present not only capable human resources are lacking, but also coordination among different government units concerned with economic policy. As a result it is observable that some economic policy measures are contradictory. There is a very limited coordination among Monetary, financial and commercial policy.
4. Social economic regulation of the previous regime are still in effect: there is an urgent need for legal reform. Some important regulation need to be drafted such as fair competition laws and development of some form of fiscal rule. It is observable that some form of monopoly power is emerging and gaining power. At present the government is claiming that many economic regulation such as commercial law and tax law are under review.
By the end of November 2013 yearly oil revenues decreased to almost 71% of its normal level due to losses in oil exports as a result of armed militia closer of oil ports and fields. Daily oil production decreased to approximately 250 million b/d instead of 1.7 million b/d. It is estimated that the loss in oil revenue in 2013 reached approximately U.S. $12 billion. Real GDP in 2011 decreased to LD 20.146 billion from LD 52.0 billion (2003 prices). However, it improved to LD 39.9 billion in 2012. This has affected per capita real GDP as shown in Table (1). Table (1): GDP and per capita GDP (2003 prices) (Million Libyan Dinars)
Source: Central Bank of Libya, Annual Report, 2012. Central Bank of Libya estimates the rate of inflation around 6.1% in 2012 compared to 15.9% in 2011. Although per capita GDP improved from 2011, it did not get back to its level in 2010 prior to the revolution. It is unlikely that it will do so in 2013 because of the decrease in the oil exports. Libyan economy is the least diversified economy when compared with selected producing exporting Arab countries as shown in table (2). Volatility of world oil prices and almost total dependence on oil exports imply vulnerability of the economic development process. It is not possible in the short run to diversify the economy given the current challenges.
Table (2): GDP divided between oil and non-oil 2012. (Percentages)
II. Economic Policy Challenges: There are numerous and competing challenges the Libyan economy faces in the coming years. Some of these challenges are: 1. After the revolution social expectations are high and increasing, especially those related to standards of living and employment of Libyans. Meeting these rising expectations is a priority. 2. During the period 1969-2011 Libya had no petroleum extraction and export policy. Production was and still is set at OPEC maximum quota. There is a great need to develop petroleum production and export policy that respond to development needs at present and in the same time protect future generations rights. This may require introduction of some form of stabilization fund and adopt an appropriate fiscal rule to limit government spending. In addition, new means are needed to combat corruption. 3. Improving business environment and bridging the gap between public and private sectors. 4. Reform labor laws and improve the work environment in order to make working in the private sector more attractive than working in the public sector. 5. Improving the banking system to be able to do its job of intermediation. There is a need to find appropriate solution to the conflict of interest resulting from ownership of central bank of Libya to most commercial banks. Not only this but central bank of Libya failed until now in implementing effective monetary policy. 6. Reforming property rights regulations. 7. Improving services of the public administration. 8. Adopting a new policy to improve the efficiency of Libyan labor force in a short time period. It is understandable that many economic policy measures cannot be implemented in the short run due to several factors related to unstable government and security concerns. However, it is possible to undertake several policy measures aiming to prepare the ground for the future. One has to emphasize that it is impossible to have perfect policies and that Libya cannot wait for a long time to correct things. The world will not wait for Libyans to solve their problems and start building their state. Libyans have to learn that they can start and make corrections along the way. Accordingly, the main challenges, in my personal view, in the very short run facing Libya are: 1. Developing appropriate institutions to formulate and coordinate economic policies. Presently, economic policies are formulated on the basis or distorted ideological understanding and/or personal initiatives. Some politicians in charge believe that economics is simple and any one with little effort can understand it..!!Thus, most economic policies are based on hunches. There exist no formal organization that can formulate economic policies and assess their impact. No regulatory impact assessment is carried out in the prime minister office neither within each ministry. Although, there are research units in some government institutions, but they are ineffective and not capable to carry out policy research needed. Lack of coordination among different government organizations is a serious problem. Although, ministers of economy. Finance, planning and governor of central bank of Libya may meet, but none of them is an economist.
In addition, there are several international organization such as the World Bank, EU, some European countries and OECD offering technical assistance to Libya. However, the work of these organizations is not coordinated and one may find that more than one organization is doing the same work others are doing. More important, technical assistance can be beneficial only if Libyans know what they want from these organizations and set their priorities right. Thus, Libya may seek technical assistance to establish appropriate institutions to formulate and coordinate economic policies. Not only this, but also to develop effective mechanisms to assess the impact of different policies.
2. Legal Reform: Economic regulations in effect are those drafted and issued under the previous regime and mostly has a very strong socialist flavor. Presently, Libya is adopting a market oriented policies. Transition to market economy is neither simple nor easy. A holistic approach is needed so the transition can be achieved in reasonably short time. That is not only economic regulation has to be reformed, but all other regulations that may affect economic activities including civil law, labor laws and property rights laws. Harmonization of the different regulations that affect economic activities is essential to guarantee efficient performance of the economy. A single regulation or lack of it may extremely affect the performance of the economy e.g. lack of fair competition laws in Libya today may negatively affect development of small and medium enterprises. No matter how good small and medium enterprise policies are, monopoly power will prohibit new firms from growing and will drive them out of the market in a very short time. 3. Work Environment: Libyans prefer to work in the public sector and the size of the informal sector is estimated to be large. Improving work regulations will make private sector employment as secure as a job in the public sector. Workers in the private sector should have rights comparable to their equals in the public sector such as: pension, health insurance and job security. 4. Reforming the banking sector: A solution to the problem of ownership of some of the commercial banks by the central bank of Libya has to be found. Possibly a special fund can be created by ministry of finance to buy the shares of central bank of Libya in all commercial banks as a temporary measure. Privatization scheme should then be adopted. One possibility is to sell shares of the commercial banks to the public in the stock market in addition to allowing foreign banks to operate in Libya or by shares in the local banks.
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