Libya’s economic outlook positive despite devastating floods, IMF says

North African country urged to diversify from hydrocarbons and foster stronger private sector-led growth

Destruction in Derna after flooding caused by Storm Daniel. Getty Images

Libya’s medium-term economic outlook remains positive despite the devastating floods that hit the country in September, mainly on the back of projected high oil prices, the International Monetary Fund has said.

While estimates of the damage due to the floods are not yet available, the impact of the disaster on measured gross domestic product "is likely to be relatively small given that Libya’s economy is largely dependent on oil and gas production", the IMF said following a staff visit led by Dmitry Gershenson.

The floods in Libya inundated about a quarter of the city of Derna after torrential rain from Storm Daniel caused two dams to collapse near the eastern port city.

Government officials and aid agencies have given death tolls from about 4,000 to more than 11,000 and the floods have directly affected more than 880,000 people, according to the UN.

The economic impact of the flood will be immense, mainly due to the rebuilding of infrastructure required as well as the hit to the city's population, analysts previously told The National.

There is an urgent need for a clear economic vision for the country, the IMF said.

"In the short term, Libya requires a budget to support policy credibility, because untargeted fiscal spending complicates the implementation of the macroeconomic policy," the fund said.

In the medium term, the country needs an economic strategy to "diversify away from hydrocarbons and to foster stronger and more inclusive private sector-led growth".

Hydrocarbons make up about 95 per cent of exports and account for nearly 95 per cent of government revenue.

Government spending is dominated by public-sector salaries, while subsidies and grants amount to about one quarter of fiscal spending.

Reducing untargeted subsidies will enable those resources to be used for targeted social spending and productive investment, the IMF said.

"In the longer term, structural reform efforts should focus on strengthening institutions, upgrading the anti-money laundering combating the financing of terrorism framework, and addressing corruption and governance concerns," it added.

The country's real GDP is projected to rise by 12.5 per cent this year, after contracting by 9.6 per cent in 2022, according to the latest IMF data.

That is down from its September forecast of 17.5 per cent growth in 2023.

The fund acknowledged the reforms undertaken by the Libyan authorities this year, particularly in improving data collection, enhancing the AML/CFT framework, FinTech innovation and aligning banking supervision with international standards.

"The recently announced reunification of the central bank is a step in the right direction," the IMF said. "The immediate benefit stemming from the August announcement is improved co-ordination in the areas of monetary policy, banking system liquidity and supervision.

"The next steps should include integrating the payment system and unifying the central bank’s organisational structure, and accounting procedures before full reunification can be achieved."

The IMF said it is providing technical assistance support to Libya by providing capacity development in public financial management, monetary and financial statistics, national accounts, tax, customs and price statistics.

Future capacity development activities include tax systems, financial sector supervision and regulation, balance of payments statistics and AML/CFT.

However, Libya has had little peace since the 2011 Nato-backed uprising against Muammar Qaddafi and it split in 2014 between warring eastern and western factions. Major fighting stopped after a ceasefire in 2020.

The country, the seventh-largest crude oil producer in Opec, has been trying to boost production after years of conflict and political instability.

"Progress in addressing Libya’s short and medium-term challenges – including by modernising fiscal and monetary policy frameworks – will, to a large extent, depend on the pace of political reconciliation," the IMF said.