Libyci mcnot Mon*ttor 00 Toad a sutanal soia cotrc inu Ubga Spin 2023* Libya Economic Monitor- Spring 2023 Towards a sustainable social contract in Libya Libya Economic Monitor - Spring 2023 Towards a sustainable social contract in Libya Executive summary Recent economic developments Conflict and Institutional Developments Recent Growth performance Inflation dynamics Labor Market External sector Foreign Exchange Policy and Monetary policy Fiscal Management Recent social developments Outlook, risks, and opportunities Social Protection in Libya: Towards a new social contract Social Safety Nets Pensions and Social Insurance Labor Market and Jobs To Conclude.. Evolution of violent events in Libya since 2011 6 Libyan average GDP per capita growth rate of before and after 2011. 6 in comparison with other Arab countries. Evolution of Libyan GDP per capita with and without the conflict 6 Correlation between number of buttles and GDP growth 7 Correlation between number of explosion and remote violence and GDP growth 7 Share in the GDP by region 7 Real growth rate 8 Oil production and price 8 The sectoral impacts of one week closing of Libyan Oil fields 9 Contribution to growth between 2010 and 2019 10 CPI 11 Contribution to inflation 11 Inflation with Median Cost of the MEB in Libya and in main regions 11 Participation rates 12 Unemployment rate (% of total active population) 12 Trade balance 13 External sector position 13 Exchange rates 13 Liquidity growth (y-o-y) 14 Government Fiscal Balance 16 Government expenditure (GNU) as percentage of GDP 17 Government revenue (GNU) as share of GDP 18 Fiscal balance and public debt (% of GDP) 18 Population in need of targeted humanitarian assistance in 2021 19 (% of total population, including migrants and refugees) Distribution of income by category of income in Libya 20 Distribution of income by category of income and region in Libya 20 Breakeven oil prices 23 The impact of one week closing of Libyan Oil fields 9 Sectoral structure of the Libyan economy 10 Libya's Banking System 14 Public Financial management in Libya 15 Public wages vs social policy in Libya 17 Libya Economic Monitor - Spring 2023 Towards a sustainable social contract in Libya Economic growth in 2022 remained low and volatile due to conflict-related disruptions While armed clashes have declined, Libya in oil production. In 2022, World Bank staff continues to face fragmentation and fragility. estimates that the Libyan economy contracted Progress on establishing an agreed framework by 1.2percent due to a blockade on oil production for elections has been limited. Service delivery during the first semester. The labor market is standards have continued to decline across the characteriaed by high unemployment, with country. an official rate of 19.6 percent. More than 85 The country's fragility is having far-reaching percent of those who work are employed in the economic and social impact. GDP per capita public and informal sectors. declined by 50 percent between 2011 and Inflation is primarily imported. Libya imports 80 2020while it could have increased by 68percent percent of its food consumption and 90 percent if the economy had followed its pre-conflict trend. of cereals. In 2022, inflation has been moderate This suggests that Libya's income per capita yet remained significant, mainly driven by food, could have been 118 percent higher without housing, and electricity. Official Consumer Price the conflict. According to the REACH initiative, Index (CPI) reached 4 percent at end-2022. The 43 percent of households could not access Minimum Expenditure Basket (MEB)-the basket needed healthcare due to lack of medicines and includes 18 food items, five non-food items and hLgh cost; 22 percent of households could not cooking fuel -shows that the increase in national properly access water services, and households prices peaked at 38 percent. connected to the electricity grid experienced The Government of National Unity (GNU) did 6.3hours of power blackouts per day. not have an approved Budget in 2022and the Central Bank of Libya (CBL)continues Social conditions and public service delivery to plytral fa l fuions TheLous havebeen affcted Accrdig tothe to play critical fiscal functions. The House have been affcted Accrdig to the of Representative (H oR) initially authori3ed Coordination of Humanitarian Affairs (OCHA, th e sendurte 1/lle where 2023) 4 percent of total population are food thly spendned t its e ent inseureandneedassstace ad aoun 58 monthly spending is capped at its equivalent in nominal terms in the previous year. However, percent of health facilities are either partially this temporary measure was not applied by the functioning or not functioning. GNU as it ultimately requested Budget approval In 2022, the humanitarian situation improved, by the HoR, which did not materialiae. The but vulnerabilities still exist., OCHA reported Government of National Stability (GNS)had an that the number of people who require targeted approved Budget in 2022 but was not funded by humanitarian assistance is expected to decrease CBL. The GNU's 2023 budget, which has not been by 58 percent in 2023 but remains significant at approved by the HoR, amounts to LYD101 billion, 4 pwith LYB15 billion allocated to the development 4percent of the population. Needs are greater bugt among internally displaced persons, with health b care, education, transport, and shelter as priority The GNU registered a fiscal surplus of 2.8 percent needs. of GDP in 2022, compared to 10.6 percent of 6 GDP in 2021, despite a significant increase system that ensures adequate sharing of oil of hydrocarbon revenue. This was the result of wealth and inter-governmental fiscal transfers the increase in government current expenditure. as well as effective and transparent budget Public wages are considered as a public planning, execution and reporting policies. The allowance. Half of the active population works fourth is the establishment of a modern and in the public sector. In 2022, the GNU-financed comprehensive social policy that enables the wage bill increased by 42 percent. Fiscal reform of public administration and creates a revenues increased by 27.2 percent driven by clear distinction between social transfers and higher oil revenues which account for 97 percent public wages. of fiscal revenues. Public debt, mainly domestic, Prior to 2011, the Libyan population enjoyed ishighat 77 percent of GDP and 126 percent of a range of social protection benefits that Government revenue. It is sustainable assuming were supported by a robust legal framework. hydrocarbon production and exports are not Since 2011, however, the system efficiency has impacted by security or conflict measures. declined. The formal social security system and The increase in current spending is expected non-contributory social assistance programs to be sustained in 2023, partly because of have been suspended or lack funding. As a result, the adoption of the wage unification law in coverage for vulnerable populations has become November 2022. limited and labor market outcomes have been Similar to numerous conflict-affected countries, negatively impacted. the World Bank refruins from providing quantitative growth and macroeconomic forecasts. Relative political stability and security is expected to lead to the continued recovery and stabili3ation of oil and gas production and support improved fiscal revenues and external surpluses. Deeper political divisions, armed conflicts and more persistent inflation and social tensions remain significant downside risks. Despite the numerous challenges facing the country, the Libyan economy could be reconstructed and diversified by leveraging its substantial financial resources building on four critical pillars. The first is reaching a sustainable political agreement on the future of Libya. The second is the preparation of a shared vision on economic and social development that is based on accurate assessments of needs and aspirations. The third is the development of a modern and decentraliZed public financial management Libya Economic Monitor - Spring 2023 Towards a sustainable social contract in Libya Libya's GDP per capita in constant dollars experienced an average growth rate of 1.5 CIDpercent, surpassing the growth rates of both Libya has been undergoing a challenging Saudi Arabia and Kuwait (Figure 2: Contraction transition since 2011, with the country divided of Libyan average GDP per capita after 2011). between rival governments, factions, and During the specified time period, Libya's Gross armed groups at times. The ceasefire of October Domestic Product (GDP) per capita experienced 2020 and the formation of the Government an upsurge from USD 11,170 to USD 12,925. Had of National Unity (GNU) in 2021were seen as this positive trajectory persisted, the current steps towards an end to the crisis. However, the GDP per capita of 9,043.5 USD in 2021 would absence of national elections and the creation of have reached a projected value of USD 15,177, the competing Government of National Stability signifying a significant 68 percent increase from (GNS) in 2022 accentuated existing divisions. its present state. (Figure 3). Limited progress has been made towards Figure 2:Contraction of Libyan average GDPper capita the constitutional framework for elections. after 2011 (growth rates) Following the establishment of 5+5 Joint Military 436 Commission' and the ceasefire agreement 3.0 reached in 2020, the security situation improved 2 1 but remains fragile (Figure 1). Sporadic violence o and clashes are reported in various regions. The o- - rule of law is weak and human rights abuses -' -2 continue according to the UN Independent Fact- Finding Mission (FFM) on Libya in June 2022. - Libya Tunma SndiArabi Algeria Egypt, Arab Kuwait Moct= Figure 1: Evolution of violent events in Libya since 2011 2ZWO-2010 .2011-2021 EveNt Source: World Bank 1800 1600 Figure 3:Loss in GDP per capita due to the conflict 1400 1200 LYD 1000 16000 400 200 1000 0 -12000 2010 2012 2014 2016 2018 2020 2022 Totalvioentmiidats - Butles 6000 - ExplomRemote violmce Proate - VilecugaimstCivilians - Stritegic devulment 4000 Source ACLED data base 2000 Libya has lost nearly an entire decade of 2000 2005 2010 2015 200 2025 Libya - -Libyawithboconflka developmental gains. Between 2000 and 2010, -Liby World Bhnk Source: World Bank 'The 5+5 committee, formally named the 5+5 Libyan Joint Military Commission. It consists of 5 senior military officers chosen by the Government of National Accord and 5 senior military officers chosen by the Libyan National Anny. 8 The importance of the hydrocarbon sector in Based on innovative Night-time lights the economy could enable a prompt recovery of (NTLs) analysis, there has been a relative the GDP to its pre-conflict levels in the event convergence in terms of economic activity of sustained political stabili3ation. A robust across the country. This can see seen by correlation exists between the country's Gross the NTLs intensity, which various economic Domestic Product (GDP) performance and the studies have shown to be a robust proxy of state of its security condition. For example, a -2.5 economic activity2 (Figure 6). In 2012, more correlation index exists between the number of than 60 percent of the total economic activity battles and GDP growth (Figure 4), and growth originated in the country's western geography, performance is even more correlated to the number while the rest of the country contributed only of explosion and remote violence (correlation index 30 percent of the total GDP. However, by of -3.7; (Figure 5). Both correlations are relatively 2023, economic activities had balanced out. strong with an R2 of 0.25 and 0.27 respectively. The share of economic activity in the eastern Figure 4: Robust correlation between number of battles areas of Libya increased to 35.5 percent, while and GDP growth the share of its western parts declined to 55.4 percent. This faster paced growth of economic 600 activity in Libya's eastern geography results in a convergence of economic activity across 500 the country. It is important to acknowledge W........ that the proxy measure of nighttime lights . 2,5243x intensity used in the analysis may not capture 200*. R1 0,3N06 the full range of economic activities. The trend 100 'towards convergence is a positive development -60 40 -20 0 20 40 60 80 100 with potential favorable implications for GPgrowth th CDP owththe country's overall economic growth and ACLED data base and Bureau of Statistics count Figure 5: Robust correlation between number of explosion and remote violence and GDP growth Figure 6: Inequal repartition of the GDP by region So PrcWtofGP 80 7070 600 60 100* . = 3 10 -100 -i0 -40 -20 0 20 40 00 B0 100 Nov-10 Apr-12 Aug- 13 De-14 May-16 Sep-17 Feb-19 Jun-20 Oct-21 Mur-23 Jul-24 GDP growth East Sougl -Wel ACLED data base and Bureau of Statistics Source: World Bank estimation using Night-time light analysis 2 L Vernon Henderson, Adam Storeygard and David N. Weil "Measuring Economic Growth from Outer Space" AMERICAN ECONOMIC REVIEW VOL. 102, NO. 2APRIL 2012 Libya Economic Monitor - Spring 2023 Towards a sustainable social contract in Libya Recent Growth performance Figure 8: Missed opportunity - Libya'soil production and international oil price The economy is estimated to have contracted Tousandbblday USIYbb1 by -1.2 percent in 2022in real term due to the 10 1110 blockade of oil production facilities during the n1 11000 first semester (Figure 7). The blockade of oil production facilities reduced oil production to 00 400,000 barrels per day (bpd)by April (a time 90" 80 when global oil prices were surging following 70 70 the Russia's invasion of Ukraine). Oil production 630 60 resumed in August 2022 and returned to 1.133 R 1 - oil productimn (thousad bbhlay) - Crude oiL montly prue averWg (US Dfbbl) million bpd in November. As of January 2023, it Gilource:lElk l(PEQUWoldBank Source: ElA, OPEC, World Bank reached 1.215 million bp (Figure8).This estimation is based on the underlying hypothesis that the At the sectoral level, the Libyan economy decline in the oil sector is entirely transmitted remains relatively simple and largely dominated to the hydrocarbon sector, it can be posited that by the hydrocarbon sector (box 2). In 2022, a growth of one point in the oil sector would the production of the hydrocarbon sector is result in an equivalent growth rate for the estimated to have declined by 12.7 percent. Since hydrocarbon sector. However, if the transmission that sector accounted for 51 percent of the 2022 is only partial, whereby the hydrocarbon sector GDP, a disruption in the sector significantly is affected by only half of the decline in the oil reduces Libya's economic performance. A World sector, the growth rate could potentially reach Bank Computable General Equilibrium model 2.5 percent. The government has estimated (CGE) analysis shows that each week of closure that only 30 percent of the decline will be of oil fields reduces growth performance by 1.5 transmitted to the hydrocarbon sector. Based basis points, government revenue by 2 percent on this estimate, the growth performance is and increases public deficit by 43 percent (Box 1). expected to reach approximately 5.4 percent. The non-hydrocarbon sector grew by an Figure 7: Libya's real GDP at factor cost growth rate estimated 15 percent in 2022, while estimates driven by the hydrocarbon growth from the GNU indicate a growth of 19.5 Percent percent. The negative impact of the decline in RealGDP the hydrocarbon sector is estimated to be totally -Hydrocalton 50 -sH." noffset by the increase of final demand of good and services that resulted from the 2021 and 25 2022public salary increase. This, in turn, led to a surge in the non-hydrocarbon GDP especially .2s Government sector, trade, food and real estate's sectors. -50 -75 2019 2020 2021 2022 Souce: Central Bank of Libya (CBL), World Bank staff calculations 10 Box 1: The impact of one week closing of Libyan Oil fields Computable General Equilibrium (CGE) models consists of a mathematical framework that represents the entire economy as a system of interrelated equations, capturing the interactions between different economic, agents, markets, and sectors. These models are widely used in policy analysis to assess the economic impacts of changes in policies or external shocks, such as changes in trade, taxation, or environmental regulations. They can also be used to analy5e the distributional effects of policy changes across different income groups or regions, and to evaluate the welfare implications of different policy scenarios. The use of a CGE model tailored to the Libyan economy by World Bank staff shows that the Libyan economy is heavily dependent on the oil sector, and any disruption to oil production can have far-reaching effects on the economy. More specifically, a drop in oil production equivalent to one week of closure of oil fields is estimated to lead to: - A decrease in Libya's GDP by 1.56 percentage points. In terms of growth performance, If the initial GDP growth was supposed be at 4.75 percent a one week closing of oil fields could reduce the performance to 3.1 percent. This confirms and, more insightfully, quantifies the extent to which the Libyan economy is sensitive to changes in the oil sector. - A depreciation of Libya's real exchange rate by 0.09, which could make imports more expensive and lead to inflationary pressures. - Government revenue could decrease by -1.62 percent (e.g., Government revenue to GDP ratio could be decrease from 59.3 to 59.1 despite decrease in GDP ), which could impact the government's ability to fund its budget. If the government decides to maintain its expenditure at the same level, an additional financing need of 14 percent could arise. If the government chooses to finance this gap through domestic borrowing, this could have a crowding-out effect on private investment, leading to a decrease in job creation and a potential increase in the unemployment rate. Furthermore, the impact of the disruption in the oil sector could spill over to other sectors of the economy (Figure9). For example, construction activities could shrink by 2.47 percent, and mining could decrease by 2 percent. This suggests that the effects of the disruption in the oil sector could be felt throughout the economy, impacting job creation and overall economic growth. Figure 9: The sectoral impacts of closing Libyan oil fields for one week Figure 9: The sectoralimcts of losn iba ilfed 0 Minng of crude oil other services ligteran gas and peat extraction and their... Public administration and defense compulsory smial Mining security -2,5 Transport Food and Tobacco Hotels travel and Textile coloting aIK restaurants printin Consctans Offer rnanufaat=ng Source: EIA, OPE Socre: Staff estimation using CGE model based on 2012 supply and use tables. C, Wolid Bank Libya Economic Monitor - Spring 2023 Towards a sustainable social contract in Libya Box 2 Sectoral structure of the Libyan economy Libya's agricultural sector is weak and accounts for only 1.8 percent of real GDP at factor cost (Figure 10), with 7.5 percent of the population abandoning their farms due to conflict and insecurity. However, around 19 percent of Libyans still farm for their own consumption. The industrial sector including oil industry, which accounts for 68.4 percent of real GDP at factor cost, has been impacted by the contraction of hydrocarbon-related industries, while non-hydrocarbon manufacturing is small and mainly produces food, cement, and textiles. The service sector, which represents 38.1 percent of real GDP at factor cost, is the only sector that has recorded positive growth in 2022. However, the informal sector, which accounts for an estimated 35.3 percent of GDP (according to World Economics, and 30-40 percent of GDP according to the AfD B), is dominated by trans border trade and smuggling with Tunisia. Before the conflict, migration from Tunisia contributed to Libya's development and helped Tunisia's unemployment issue. This trend has reversed since 2011 due to the conflict situation and the drop in Human Development Indexin Libya. Many Libyans live in Tunisia and their transfers provide foreign currency inflows and much needed liquidity to Tunisian banks . During the first 7 months of 2022, about 1 million Libyans entered Tunisia. Figure 10: Sectoral contribution to real GDP growth at factor cost between 2010 and 2019 Percent 175 15.0 125 100 75 50 25 V -50 -75- Real GDP -Agriculture -Industry Services Source: BSC, CBL Inflation dynamics Inflationary pressure has continued to mount since the devaluation, as the country's consumption mainly relies on imports. Russia's invasion of Ukraine contributed to additional pressure in 2022 through the disruption of global supply chains, global scarcity of goods and increases in food price Price increases of essential goods where more pronounced in the Libya's western region, mainly due to heightened insecurity that disrupted supply chains and forced many to turn to costly alternative sources of water and electricity generation Russia's invasion of Ukraine constituted a shock for the Libyan food security as it aggravated disruption of food supply chains. In Libya, import accounts for about 80 percent of the country's food consumption, a figure that reaches 90 percent for cereals. In 2020, Libya was the tenth largest purchaser of Ukrainian "Impact of the Libya Crisis on the Tunisian Economy" World Bank 2017 4lOn 16 December 2020, the CBL's bank's board of directors met for the first time in five years and agreed to devalue the Libyan Dinar and reunify the exchange rate. The CBL announced a devaluation from the official between Libyan dinar to US dollar from 1.4 to 4.48. 12 wheat globally. Wheat and grain imports from both Russia and Ukraine together accounted for more than half the country's supply. CGE estimation shows that a 10 percent increase in international agriculture price could increase the CPI in Libya by 1.98 percent and decline household consumption by 2 percent. The two key sources of data on prices in Libya are the official CPI inflation rate and the inflation of the Minimum Expenditure Basket (MEB) measured by the REACH initiative. None of these two measures are completely accurate Official CPI inflation figures are likely a gross underestimate of the true inflation rate as they are collected primarily from Tripoli only. The M EB inflation rate suffers from the narrow scope of products in the basket, questions of national representativeness of the rate, and underestimation due to measuring the lowest available price for each product in the basket. Inflation has been moderate but remains significant and mainly driven by food, housing, and electricity. Official inflation rate CPI reached 5.7 percent (y-o-y) in March 2022 and has remained high,4.7 percent at end-2022 despite a declining trend (Figure 11). The MEB shows a different level of inflation but similar dynamics. Specifically, it shows that the national price increase peaked at 38.7 percent in April 2022 (y-o-y) (Figure 12); this development was driven by the Tripoli region where price increases reached 44.1 percent compared to 35.5 percent in the East. At end-2022, the national MEB inflation rate moderated to a still elevated 20.7 percent, with 21.4 percent in the West and 11.4 percent in the East (Figure 13). Figure 11: Acceleration of the official Figure 12: Official CPI inflation driven inflation (CPI) (capturing only Tripoli region) by food and basic items (contribution to CPI) y-o-y changeI NIrent percent 8 8 6 6 4 4......IIll ilh 2 -4 -6 -4 -8 -10 -8 F tra -, Trtmport Houing Water lkcticityo&er 1neh Source: BSC, CBL Source: BSC, CBL, World Bank staff calculation Figure 13: Inflation gaps by region (as measured by the Median Cost of the MEB) y-y change, percent 50 40 30 20 10 0 -10 -20 -30 -East -Souk -40 Soumce: REACH Initiative and World Bank staff calculations Libya Economic Monitor - Spring 2023 Towards a sustainable social contract in Libya Labor Market Despite relatively low labor force participation rate especially for women, unemployment is high and those who work are mostly in the public and informal sectors (Figure 14). Libya's unemployment rate according to the GNU is 15.3 percent while ILO modeled estimate 1s19.6 percent in 2021 (Figure 15), 26.8 percent for women5 and 30 percent for youth. The public sector employs 51 percent of formal active population although it contributes to only 9 percent of GDP6. It is estimated that about 80 percent of the population receives some form of income from public sources. Figure 14:Libya Labor Force Participation rates Figure 15: Unemployment rates (% of total active Pement population) remain high, especially for women 70 Ratio of female to male labor force Perent 60 participation sate (N/) 29 (modeledTrO 50 estimate) 27 505 -Labor foce 40 participation rate, 23 female (% of female population ages 15+) 21 30 (modeledTr0 estimate) 19 20 Labrfrce 17 participalson rate, male ("e ofmale population 15 . . . . . 10 ages 5+)(modeled Z p ELO estim ate)A Q Q A Uaemlioyment. bstal 1 of t"al labor force) maleled ILO etimate) 0 - Unemfoymemt female (% of bmale labor Ibree) (modeled L0 e4itte) 2012201320142015201620172018201920202021 Source World Bank and LO Source World Bank External sector Blockades on oil production during the first semester of 2022 is expected to limit the current account surplus despite high international hydrocarbon prices. In contrast, the rebound of oil production in 2021 had led to a surplus of current account of 12.7 percent GDP (against a deficit of 9.5 percent of GDP in 2020). Oil export accounts for 93 percent of Libya's total export and 35 percent of GDP (average 2012-2021). Current account balance and reserve position therefore fluctuate with the conflict situation and international oil prices. According to the International Monetary Fund, export revenues (in US dollars) increased by +36.6 percent during the first nine months of 2022, compared to an increase of +269 percent during the same period in 2021, while government sources estimated this increase by 19.3 percent during the nine months. the first nine months of 2022, and by 502.0 percent during the first nine months of 2021.This deceleration was due mainly to the aggravation of the conflict which resulted in blockades on oil facilities during the first semester 2022, notably April- July (Figure 16). Oil production contracted by 12.7 percent in 2022 (in real terms). FDI has continued to be negative since the conflict begun, at -1.4 percent of GDP on average 2012-2021. International reserves remain at a comfortable level, at USD84 billion as of end-20227 (figure 17). World Bank DataBank 'Labor market and employment policy in Libya, 2014, ET-EU "Competitiveness of Arab Economies" 2022, Arab Monetary Find 14 Figurel6: Libya's trade balance in the fiscal deficit, compounded by uncontrolled uM. Mho money growth by both governments, which had Tra& balane Export -Import caused significant pressure on the exchange rate. 4 Prior to the devaluation and unification of exchange rates, the informal market was the dominant player in the country's foreign 1 exchange sales, constituting 97 percent of all 0 transactions, especially in the eastern regions. -1 To boost the economy, the CBL introduced a 183 7 percent foreign exchange fee for private entities in September 2018, which was later lowered to Source: DOTS, RW 163 percent in June 2019, before being abandoned in 2021. This strategy narrowed the gap between the formal and informal sectors, reducing the USD iin dependence on informal transactions while 140 40 120 30 creating a revenue stream for the GNU. The CBL IoD 20 in Tripoli controls all foreign currency in Libya, 80 10 regulating access through the issuance of letters 60 0 of credit, which can lead to payment delays and 40 * I potentially fraudulent activities, thereby serving 20 _a I- as a potential source of capital outflows. 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Figurvt8: Convergence of exchange rates since the devaluation in Net official resves (s) - Cunnt Account h) - Trade blae (du) L IUSD Source : CBL 6 Foreign Exchange Policy and Monetary s policy 3 -Official Since the devaluation by one-third of the 2P=Hnl official rate and unification of the exchange rate in January 2021, the gap between the black market and official rates in Libya has decreased significantly. The gap narrowed from 325 percent (informal rate/official rate) prior Source: CBL, FX Black Market Facebook Page, World Bank staff calculation to the devaluation to 6.3 percent at the end of 2022, which was aided by a gradual depreciation While the liquidity crisis was attenuated by the of the official rate by 8.4 percent between the January 2021 devaluation it continues especially devaluation and the end of 2022 (Figure 18). The in the eastern parts of the country. As a step decision to devalue the currency was made in towards reunification, the A[-Bayda CBL branch response to successive oil blockades and a surge stopped printing money and issuing bonds; at the Libya Economic Monitor - Spring 2023 Towards a sustainable social contract in Libya same time, a unified exchange rate was introduced high, but financial intermediation beyond salary in 2021 and an unified electronic settlement system transfers is extremely narrow. Private sector in 2022. Prior to this, banks in the eastern region businesses are almost wholly excluded from of Libya were disconnected from the real time the formal financial sector. In addition to these gross settlement (RTGS) system. This left them structural weaknesses, the CBL split divided the to work with manual settlement and contributed banking system under two separate supervisions to a liquidity crisis in the eastern region, as the (Libya's eastern provinces accounts for about economy had to resort to cash which aggravated a third of the banking activity). All banks have depreciation of the LYD in parallel market. The branches in both sides and deposits in both CBL effectiveness of these measures remains uncertain, branches. Cash outside the formal banking system as the institutional fragmentation continues, is estimated to be about 30 percent of liquidity and 44 percent of population reports receiving financing Box 3 Libya's Banking Systern8 from informal sources.. Banking system assets amounts to LYD 117.1 Liquidity growth has remained negative in 2022 billion in 2018, which accounts for 80 percent (Figure 19). This stems from a severe contraction in of the Libyan financial sector. Loans and credit the second half of 2021, during which both M2 and represent 14 percent of these assets, while currency outside the banking system contracted 68.4percent of deposits are short-term mainly by 20 percent (y-o-y) by end-2021. In March for salary transfer. The banking system's capital 2022, M2's contraction stabili6ed (+0.4 percent) adequacy ratio was above 15 percent during 2012- but liquidity outside the system has continued to 2018. Libya's banking law is governed by Islamic decrease although at a slower pace (-2.7 percent). banking principles and interest has been prohibited since 2013, which limits both banking sector development and monetary policy. 20 Money ply (M2) 15 -Conencyooutdeth be While Libya has 19 commercial banks, the five- 10 state owned bankshold over 90 percent of the 0 system's deposits. State-owned banks benefit from major regulatory advantages, for example, -10 they (almost exclusively) channel government 21 salaries and transfers and also benefit from hidden 25 advantages given to state banks, including the broad perception of implicit deposit guarantees. The CBL is the shareholder of public banks, while Sourm: CBL Thpoli, World Bank staff calculation being the regulatory agency of the banking sector, Fiscal Management which creates a conflict of interest. The functioning of budget institutions and Consumer account penetration is technically implementation of good public financial Based on the Libya Financial Sector Review, 2020, World Bank, with CBL updated data. 16 management policies and processes are formulation, execution, and reporting are based undermined by the conflict and political on every level of administrative, economic, and fragmentation (Box 4). The 2022 budget of functional classification using International the GNU was not approved by the House of Monetary Fund Government (IMF) Finance Representatives (HoR), despite being fully Statistics Standards (GFS) Manual (GFSM funded. Initially the GNU was allowed to spend 2014). Publication of Budget Execution Reports temporary based on the rule that the budget (BER) using the BC-CoA will improve decision- disbursement of each month was limited to 1/12 making and transparency. of the previous year's (nominal) budget (based on a presidential decree). No capital expenditure orenu colleed bo the NiL oi Company is trmnsferred to the CBI. From was allowed until the approval of the budget by the CBL, it is then transferred to the GNU the House of Representatives (HoR). However, thes rues ere ot espctedas he 022 accounts for salary payments and other current budetrule was not pprvped y the oOntexpenditures. The GNU recorded a fiscal surplus of 2.8 percent of GDP in 2022, a significant drop other hand, the budget of the Government of National Stability (GNS) for 2022 was approved fr thegurp o p i r in June of that year but was not properly funded as GNS does not receive CBL transfers9. This The GNU 2023 Budget amounts to LYD101 situation has created a significant challenge for billion with LYD15 billion allocated to the the effective management of public finances, development Budget (in addition to the unspent resulting in uncertainty and inadequate sharing LYD 16 billion in the development spending from of fiscal resources. The CBL, in turn, implements the 2022 Budget). This budget was not approved several public finance duties including payment by the HoR. of salaries and reporting. Efforts are ongoing to formulate a Cash Management Policy and Box 4: Public Financial management in Libya operationali6e the Treasury Single Account Political division and irregular budget (TSA). The first step is to conduct a stock take process affect both the transparency and of all government bank accounts. the Government's basic proper functioning. There is need for a clear annual budget calendar Aggregate budget execution report is published with laid down processes to submit a unified by the CBL but the reports have significant budget proposal to the legislature at least two differences compared to those published by months before the start of the fiscal year and the Ministry of Finance (MoF). There is limited for same to be approved before the fiscal year. information on debt obligations, including state- owned enterprise (SOE) debt and on transfers The Ministry of Finance has designed a new to SOEs is available. Budget Classification (BC) and Chart of Accounts (CoA) that will improve budget Annual Financial Statements are not submitted 9 The Government of National Stability (GNS) official budget amounted to LYD 90 billion, of which 45.5 percent of wages, 8.9 percent of goods and services, 28.9 percent of subsidies and 18.9 percent of capital expenditure. Libya Economic Monitor - Spring 2023 Towards a sustainable social contract in Libya Political division and irregular budget exporting all of Libya's crude oil and importing process affect both the transparency and oil products. Some contracts seem unclear the Government's basic proper functioning. as the NOC is working with same brokers on Aggregate budget execution report is published selling and buying sides. It appears that some by the CBL but the reports have significant operations consider only the net value of two (or differences compared to those published by more) operations, which materially obfuscates the Ministry of Finance (MoF). There is limited transparency and accountability and is not in information on debt obligations, including state- line with international best practices. owned enterprise (SQE) debt and on transfers Figure 20: Government (GNU only) Fiscal Balance as to SOEs is available. percentage of GDP. Annual Financial Statements are not Percent of GDP 70 submitted by the MOF for the Libyan Audit 60 Bureau to conduct audit and submit report to 50 Parliament. The Libyan Audit Bureau which is 40 the supreme audit institution is considered as 30 not fully independent. Local Government audit methodology in compliance with International 10 Standards of Supreme Audit Institutions (ISSAI) *2021 2022 GNU 2022 GNU+NOC has been developed, staff trained, and now needs to be adopted for full implementation. Totdrevenues UTotdexpenditureandnetlending moverall Belance Limited information on public contracts, Source: Central Bank of Libya (CBL), World Bank staff including natural resource extraction awards, calculations is publicly available.10 Libya is ranked 171 out The public wage bill is the largest spending 180 countries in Transparency International's category with 25.4 percent of GDP (Box 5). corruption perception index of 2022. It has increased by 53 percent in 2022 after a 23 increase in 2021. The cumulative increase Libya's budget is divided into five chapters drn h attoyassesfo ae (Chapter 1: Salaries, Chapter 2: Good and dusnt thateccur ae Servces,Chater CaitalExpnditre, adjustments episodes that occurred after the ShaterviceS bsidi d Chapter Cnitey 2021 devaluation. This increase will continue in Chapter 4 Subsidies, and Chapter 5 Contingency (Miscellaneous). Meanwhile, in recent budgets 2023 as a result of the adoption by parliament no expenditure was reported under chapter 5, of the wage unification law in November 2022. and chapter 1 includes expenditure related to catering and clothing. From the revenue side, the role of the National Oil Company (NOC) should be better clarified. As a state-owned company, NOC is responsible of 10 "2022 Fiscal Transparency Report: Libya", US Department of State 18 Box 5: Public wages and social policy in Libya Figure 21: Government (GNU) expenditure as percentage of GDP In the absence of a modern and comprehensive Pew of GDP social policy, public wages in Libya, as in many 70 parts of the Middle East and North Africa 60 (MENA) region, are an integral part of the 50 social contract (asking to a public allowance)- 40 another staple of the region's social contract is 30 untargeted subsidies, especially on food items 10 (e.g., bread) and fuel. As a result, half of the active 0 2021 2022 GNU 2022 GNU+NOC population works in the public sector. In 2013, the government employed up to 85 percent of wages &saarim .Goods& services mSubsidiesktrnsfem Capital expenditze mongen