Economic Analysis - Persistent Shortfalls To Be Covered By Domestic Borrowing, Foreign Reserves - AUG 2017

BMI View: Libya ' s budget balance will remain in deficit over the years ahead, as elevated instability prevent oil output from reaching the levels needed to cover still-large public sector wage and subsidy bills. With few other options available, authorities will continue to fund fiscal shortfalls through the issuance of domestic debt and depletion of international reserves .

Libya will continue to record fiscal deficits over the coming years. Instability and below-potential oil output - a key source of state earnings - will limit the government's revenue-raising abilities. At the same time, public spending on wages and subsidies will stay elevated due to their social and political sensitivities. The budget shortfall will nevertheless start to reduce from 2017 onwards, as oil production gradually ticks up. Authorities will fund deficits through a combination of domestic debt issuance and the use of still-large - but rapidly diminishing - reserves built up over the years prior to the H214 oil price plummet.

Persistent Instability Continues To Weigh On Fiscal Position
Libya - Fiscal Position
e/f = BMI estimate/forecast. Source: BMI, IMF

Revenue Streams Still Constrained

Frequent disruptions to oil production by various militant groups and relatively low oil prices will continue to weigh on Libyan state revenues - over 95% of which are derived from energy earnings - in the coming years. While output will increase from the historical lows recorded in 2016, overall levels are set to remain far below government targets ( see ' Sustained Economic Recovery Off The Cards, ' May 9 2017). Other revenue streams will also continue to disappoint as civil war-like conditions negatively impact consumers' and businesses' ability to pay taxes - while also restricting the government's ability to prohibit tax evasion. Illustrating this trend, recently released data from the Government of National Accord (GNA) show large shortfalls against conservatively targeted revenues from income tax (23%), custom duties (58%) and public service charges (42%) over Q117.

Revenues Hit By Decline In Energy Earnings
Libya - Oil Prices & Output
e/f = BMI estimate/forecast. Source: BMI, IEA

On the spending side, the Central Bank of Libya (CBL) continues to allocate emergency financing only to the country's authorities - primarily covering salaries and subsidies. This will likely remain the case until a final peace deal has been reached. While cuts to public wages and subsidies have been made over the past couple of years, they remain very high on a global comparison, accounting for 49.5% and 12.5% of GDP, respectively, in 2016, according to IMF estimates. The ongoing conflict leaves little room for further reductions, as authorities seek to maintain popular support by limiting price growth in categories such as food and fuel and by preventing escalations in violence by continuing to pay allied militias.

Pace Of Decline In Reserves To Gradually Decelerate
Libya - Foreign Reserves & Import Cover
e/f = BMI estimate/forecast. Source: BMI, IMF

Higher Domestic Debt Levels And Declining Reserves Ahead

The government's persistent need to finance deficits will result in higher domestic debt (estimated by the IMF at around 100% of GDP in 2016) and declining reserves in the years ahead. We forecast the latter to drop from around USD53.5bn at end-2016 to USD49.9bn and USD44.9bn in 2017 and 2018, respectively. The pace of decline, however, is likely to slow as oil revenues increase. The eventual release of Libya's frozen USD67.0bn sovereign wealth fund by the UN Security Council once a new government has reasserted centralised control would also improve Libya's fiscal position - though sanctions on the Libyan Investment Authority (LIA) are likely to be extended through 2017 amid continued internal rivalry over its chairmanship.