Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized ECONOMIC MONITOR LIBYA Libya Economic Monitor Issue #1: July 2020 TABLE OF CONTENTS Executive Summary . v I . Recent Developments . 1 II . Current Situation . 9 Appendix – Selected Macroeconomic Indicators . 15 List of Figures Figure 1 GDP Growth and Oil Production, Libya . 2 Figure 2 Libya’s Inflation Has Been High and Driven by Macro Instability, 2016–20 . 2 Figure 3 Libya’s Budget Remains under Stress Despite Foreign Exchange Windfall, 2012–19 . .3 Figure 4 Substantial Fall of Inward and Outward Direct Investment, Libya, 2000–18 . 4 Figure 5 Libya’s Trade Suffers from Lack of Diversification in Products and Partners . .5 Figure 6 The Libyan Dinar Recovered Partially after Easing Exchange Policy, 2014–20 . 6 List of Tables Table 1 Libya’s Budget Execution, by Region (percent of GDP) . 4 Table 2 Libya’s Adopted Budget 2020 and Its Execution over January–June, by Region . .10 Table 3 Libya’s External Stance Remains under Stress, 2016–20 . .11 Table B2 1. Share of Respondents Who Face Deprivations, October 2019 (percent) . 12 List of Boxes Box 1 Libya’s Financial Institutions . 6 Box 2 Social Indicators . 12 iii EXECUTIVE SUMMARY he Libyan economy has recently been hit hard currency transactions (183 percent) while easing by four overlapping shocks: an intensifying access to foreign exchange (forex) . T conflict that suffocates economic activity, Despite higher oil revenues and forex fees, the closure of oil fields that puts the country’s public finances remained under stress in 2019, major income-generating activity largely on hold, constrained by higher and rigid expenditures . In decreasing oil prices that reduce income from oil particular, the wage bill continued to increase, production in surviving fields, and the COVID-19 reflecting a plethoric public sector and rising real pandemic (with 3,438 confirmed cases and 73 salaries . The financing gap in 2019 would have been deaths as of July 2020), which threatens to further very high without forex fees that generated a windfall suppress the economy . This monitoring note, first in to bridge the gap . Consequently, the budget ran a the biannual series, takes stock of recent economic small surplus after six years in a row of deficits . Libya’s trends emanating from these shocks . The note aims gross domestic debt declined slightly but remains to inform parties concerned with the well-being of high (144 percent of gross domestic product [GDP]) . Libyan citizens by providing a systematic overview of In 2019, the current account continued to the conditions on the ground . register surpluses for the third year in a row . This The attack on Tripoli in early 2019 and the surplus is due to the persistence of the CBL rationing blockade of the country’s major oil ports and policy to limit supply of hard currency to essential terminals in January 2020 generated the most serious imports only . The higher hydrocarbon revenues also political, economic, and humanitarian crisis faced by contribute to the surplus . Despite the current account Libya since 2011 . The economic impact was already surplus, foreign reserves of the CBL declined by felt in 2019 as real GDP growth slowed sharply to the end of 2019 . The dramatic drop in foreign direct 2 .5 percent, down from what seemed a promising investments (FDIs) since 2014 has also contributed to steady recovery during 2017–18, with a record growth the pressure on foreign reserves . performance of 20 .8 percent on average . Worse yet, The Libyan dinar (LD) continues to suffer in the Libya is expected to suffer from a deep recession parallel market because of political uncertainties and in 2020 . At the same time, after many years of high macroeconomic instability . In the first two quarters of inflation, prices started to recede in 2019 because of 2020, the LD in the parallel market lost 54 percent of falling parallel market exchange rate premia driven its value, following the forex restrictions implemented by concomitant actions by the government and the by the CBL with increasing uncertainty surrounding Central Bank of Libya (CBL), establishing a fee on the macroeconomic framework . v Looking forward, as the inability, or severely having conflicting agendas . At the time of this note’s limited capacity, to produce and export oil might well preparation, a military escalation with both sides prevail over the rest of 2020 because of the firm closure amassing military equipment and troops around of oil ports and terminals, GDP growth is expected to slow Sirte reinforced the downside risks going forward . further this year . The adopted budget for 2020 partially An alternative scenario that can surmount the current reflects this dire situation, with a large forecasted deficit, adversity and uncertainty would entail a revitalized the highest in recent years . Likewise, the current account national political will to unite the country and its is expected to run astronomic deficits in 2020–21 . institutions, and to implement the critical policies Consequently, reserves will be further declining this year . and reforms to strengthen institutions, stabilize Risks in Libya are high because the conflict the macroeconomic framework, and diversify the has become a proxy one with involved countries economy . vi LIBYA ECONOMIC MONITOR 1 RECENT DEVELOPMENTS n Libya, socioeconomic developments are are typically analyzed as a share of GDP fluctuate largely driven by political-military dynamics. significantly over years . Given extreme uncertainties I Recently, two major events have driven key going forward, the note refrains from projecting so- economic outcomes: the 2019 attack on Tripoli and the cioeconomic indicators in a forward-looking manner . closure of the country’s major oil ports and terminals Conflict dynamics and economic perfor- in January 2020 . Together, these two events constitute mance are intertwined. Libya suffered from a deep the most serious political, economic, and humanitarian recession over 2013–16, with GDP dropping by 12 .7 crisis facing Libya since 2011 . Adding the decreases percent on average over the period . The slump was in oil prices that reduce income from oil production mostly driven by the blockade of several oil facilities in surviving fields, and the increasingly prevalent leading to limited oil production—about 0 .6 million bar- COVID-19 pandemic, which threatens to further rels per day (bpd) on average versus a potential of 1 .6 suppress the economy, it is clear that Libyans are million bpd (figure 1) . Subsequently, following interna- facing a quadruple shock that threatens their well-being tional pressure in October 2016, a tacit agreement be- at a fundamental level . tween the two main parties in conflict allowed the oil The note aims to document the economic sector to substantially increase its production to 1 .2 mil- conditions on the ground. An immediate conse- lion bpd by the end of 2019 . This performance was nev- quence of conflict situations is often the absence ertheless still only three-fourths of potential, because of systematic information regarding the conditions the attack on Tripoli foiled the goal of the National Oil on the ground . The “Libya Economic and Social Corporation (NOC) to reach the country’s potential . In Monitoring Note” series aims to gather and interpret this context, real GDP growth slowed sharply to 2 .5 per- pertinent data in a systematic manner to inform par- cent in 2019, down from its best performance of 20 .8 ties concerned with the well-being of Libyan citizens . percent on average reached during 2017–18 . It should, however, be noted that, with frequent and After years of high inflation, the consumer abnormally large shocks, economic indicators can price index (CPI) declined in 2019 as parallel exhibit major volatilities . For example, GDP was about market exchange rate premia decreased. The US$50 billion in 2019 and is projected to shrink by concomitant actions by the government and the CBL about 41 percent in 2020 . Thus, many indicators that establishing a fee on hard currency transactions (183 1 FIGURE 1 • GDP Growth and Oil Production, Libya a. GDP growth has been volatile since 2011 b. Oil production mimics political dynamics 250 1.8 200 1.6 Short-lived peace 1.4 150 Oil de-politicized thru tacit agreement 100 1.2 50 1.0 Percent 0 0.8 Million barrels per day 0.6 –50 0.4 –100 0.2 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Revolution Political strife period w/oil politicized Oil politicized again 0 Real GDP Nonhydrocarbon Hydrocarbon Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Jul-19 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Oct-18 Oct-19 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Apr-19 Apr-20 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Source: Libya’s authorities, U.S. Energy Information Administration, and World Bank staff calculations and estimates. percent) in September 2019, while easing access to driven mainly by dropping prices for clothing (minus foreign exchange—especially for essential imports and 12 .8 percent), food (minus 4 .0 percent), communica- for family allowance—allowed a steady convergence tion services (minus 3 1. percent), transport services of parallel and official taxed exchange rates . The forex (minus 2 .3 percent), and house furniture (minus 2 .0 fee generated substantial revenues for the govern- percent) . Inflation picked up in the first two quarters ment, which translated into reduced cash advances of 2020, reaching 1 .3 percent by April, as the conflict from the CBL to finance the budget, and thus more and shortages intensified 1.