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Libya
LIBYA is generously endowed with energy resources, but has one of the least diversified economies in the Maghreb region and among the oil producing countries. In the early 1970s, Libya opted for a command economy with essentially state-driven investment, a strictly controlled external trade, widespread price controls and subsidies, and an almost nonexistent private sector. The government’s stifling interference in the economy resulted in a continuous deterioration in the business climate, low economic growth, declining living standards, fragile macroeconomic conditions, and increased vulnerability to external shocks.
Economic conditions started to deteriorate in the mid-1980s with the fall in world oil prices, and worsened in the 1990s as a result of international sanctions. Since the freezing of the UN sanctions in 1999, Libya has been implementing measures to reform and open its economy, but progress in developing a market economy has been slow and discontinuous. Libya needs strong and sustained economic growth to meet the demands of its rapidly growing labour force, which requires high investment in physical and human capital, and an efficient use of the country’s resources. This can only be achieved through the implementation of far-reaching market-oriented structural reforms that would enhance the role of the private sector, improve the business climate, and promote economic diversification.
Overall, the non-oil sector remains largely dependant on imports, as evidenced by the high non-oil imports to non-oil GDP ratio (70 per cent) and the low coverage of non-oil imports by non-oil exports (11 per cent in 2004). On the fiscal front, coverage of government expenditure by non-oil revenue was less than 30 per cent, resulting in a non-oil deficit of about 30 per cent of the GDP.
According to the IMF, some progress in liberalizing the economy has been made in recent years. However, reform implementation continues to suffer from lack of coordination, including between the Central Bank of Libya and the Ministry of Finance.
Libya’s outlook for 2006–10 remains favourable and does not raise sustainability concerns. Under these projections, both the fiscal and external current account balances will continue to register large surpluses during the period 2006-10. However, the non-oil fiscal deficit is projected to remain substantial (31 per cent of GDP). Moreover, while the oil sector is projected to grow at an annual rate of 6-7 per cent, the non-oil sector’s real growth would be about 3½ per cent per year, and non-oil private sector investment would barely exceed 2 per cent of GDP, as the current pace of government reforms will fall short of generating a sustained increase in private investment and non-oil output.
Libya needs a comprehensive medium term strategy to reform its economy and make better use of its economic and financial potential, by diversifying the economy and reducing the country’s dependency on oil.
The significant progress has been made in recent months in reforming the trade system and in simplifying the trade regimes. In particular, all remaining state monopolies on imports should be terminated. A number of reforms are to be accorded high priority Price liberalization should continue with the lifting of the remaining controls on price and profit margins. A limited number of goods, which the authorities feel are not sufficiently exposed to competition, could remain under a temporary pricing formula; the number of these goods should, however, be gradually reduced and eventually eliminated.
Encouraging private sector development, and in particular strengthening the small and medium-sized enterprises (SMEs), is a key to promoting economic diversification, an objective that will require long and sustained efforts. To that effect, priority should be given to enhancing the government’s privatization strategy, ending all remaining monopolies and other impediments to economic competition, and attracting foreign investment. While the extent of poverty in Libya is not known, it has probably increased in the last 15 years, as a consequence of the international sanctions and the deterioration of economic conditions.
Zambia
After more than two decades of economic stagnation, the Zambian economy has, since 2000, achieved sustained robust growth. Inflation, however, has remained high and poverty, though declining, is still widespread. External position has strengthened in recent years, as the terms of trade recorded a marked improvement and non-traditional exports grew strongly. The exchange rate has appreciated strongly in real terms during the past year, but foreign exchange reserves are low. Extensive debt relief has greatly reduced Zambia’s external debt burden.
The real GDP growth averaged 4½ per cent a year during 2000–2005, a marked turnaround after more than two decades of economic stagnation and falling per capita income. Inflation, however, remains high, international reserves are low, and poverty is still widespread. A significant fiscal adjustment begun in 2004, has reduced the government’s domestic financing need, eased pressures to monetize debt, and curbed crowding out of bank credit to the private sector. In 2005, Zambia received extensive debt relief, which has greatly reduced its external debt burden.
Economic activity in 2005 has been weaker than expected, owing to a drought-related shortfall in maize production and temporary setbacks in the mining sector associated with labour disputes and mining accidents. Moreover, in the second half of the year, fuel shortages caused by shutdowns of the country’s oil refinery further curtailed mining production and disrupted economic activity more broadly. The real GDP grew 4.3 per cent, compared with 5 per cent anticipated in the PRGF-supported program.
In 2006, real GDP is projected to grow by 6 per cent, while end-year inflation is brought down to 10 per cent. The overall fiscal deficit is projected to remain roughly unchanged, but domestic financing would be reduced modestly, notwithstanding spending for elections, while spending on poverty-reducing programs is increased. The structural program builds on the 2005 program in seeking to strengthen public expenditure and debt management, financial sector development, and governance and transparency. Monetary policy aims to reduce inflation to single digits by 2007. The high external value of the currency may pose a challenge for non-traditional exports, which will have to rely on improvements in productivity to enhance international competitiveness.
The authorities remain committed to lowering inflation to single digits by 2007, supported by a reduction in government’s domestic. With growth in broad money consistent with inflation of 5 per cent a year, the attenuation in government borrowing would allow for a robust expansion of bank credit to the private sector, while simultaneously achieving a gradual build-up in international reserves (to about 3 months of imports by 2010).
Export growth is a key to a viable current account balance and productivity growth is a key to improved international competitiveness. Although the mining sector will continue to make a large contribution to exports over the medium and long run, especially with the reinvestments in the Copper belt mines and the opening of new mines in the North-western province, Zambia’s export development strategy will remain focused on diversification away from copper. The government, therefore, remains committed to an open trade regime that is supportive of export development and diversification of the economy.
The import coverage of foreign reserves is expected to rise slightly, while the current account deficit (excluding grants) is projected to narrow to 11 per cent of the GDP. The authorities remain committed to a flexible exchange rate regime, and to implementing measures that will reduce the cost of doing business in Zambia and expand and diversify the export base. External budget support is conservatively estimated to decline somewhat in 2006 relative to 2005.
The debt burden indicators are already well below the relevant thresholds in 2005. These would decline further. While this suggests that Zambia has considerable room to run larger fiscal deficits over the medium term (by over three percentage points of the GDP), if it aimed to simply stabilize debt relative to GDP, the authorities and staff agreed that the scope for using that room is very limited. Higher fiscal deficits financed by domestic borrowing would sustain inflation pressures and crowd out credit to the private sector. The medium-term fiscal framework envisages a reduction in government domestic borrowing to 1.6 per cent of GDP in 2006, 1.0 per cent in 2007, and 0.5 per cent in 2008.
The main challenge facing Zambia is to seize the opportunity provided by debt relief and the prospect of rising external assistance to build upon the recent improvement in economic performance. The authorities’ strategy seeks to promote macroeconomic stability, private sector growth, improved public sector management and development of the financial sector. To avoid a renewed build-up of unsustainable external debt, the authorities are committed to a prudent borrowing policy and to strengthening their debt management capacity.
