IMF Staff Concluding Statement of the 2026 Article IV Consultation Mission to Libya

The IMF released yesterday the ‘‘Libya: Staff Concluding Statement of the 2026 Article IV Consultation Mission’’ conducted with Libyan authorities from March 30 – April 8, 2026, in Tunis.

• Libya’s current fiscal path is unsustainable. Persistently large fiscal deficits are intensifying pressures on the exchange rate, international reserves, and inflation, underscoring the need for urgent fiscal adjustment.
• Current higher oil revenues—if spent—could further increase Libya’s vulnerabilities, as it will be more difficult to adjust spending once oil prices normalize. Instead, windfall gains should be saved to rebuild buffers, and the temporary fiscal space must be used to accelerate reforms.
• Absent fiscal discipline, measures by the Central Bank of Libya (CBL) to contain exchange rate pressures can only provide temporary relief.

1. Libya has significant economic potential supported by its large hydrocarbon resources, strategic location in the Mediterranean, and untapped private sector development. If resources are managed prudently and efficiently and steps are taken to diversify the economy, this could provide a strong foundation for sustainable and inclusive economic growth and macroeconomic stability.
2. At present, however, the macroeconomic situation reflects the opposite dynamic and points to significant balance of payments risks, with adverse consequences for the population. Public spending has expanded well beyond sustainable levels, with fiscal deficits reaching about 30 percent of GDP in 2025. Public debt has nearly doubled over the past two years to 146 percent of GDP, contributing to increasing external pressures. Despite two devaluations since April 2025, and significant foreign exchange sales, the gap between official and parallel exchange rates—while narrowing from earlier peaks—remains sizeable, reflecting persistent excess demand for foreign currency. These fiscal pressures have contributed to a rise in inflation into double-digits, reducing purchasing power and weighing on the population’s living standards. This has also shifted the burden of adjustment onto the private sector through credit compression that aims at preserving reserves and exchange-rate stability.
3. Looking ahead, in the absence of meaningful fiscal adjustment, the current policy mix would become increasingly difficult to sustain. Continued reliance on exchange rate depreciation, administrative measures, and reserve drawdowns to manage pressures would come at the cost of persistently high inflation, further depletion of external buffers, growing market distortions, and weaker private sector activity.
4. Against this backdrop, the recent surge in oil prices presents both an opportunity and–conversely if not prudently managed—an additional risk for Libya. Seizing this opportunity will require saving windfall oil revenue and advancing long-standing fiscal reforms, as discussed below. Conversely, using temporary revenue gains to finance higher non-discretionary spending would amplify existing vulnerabilities and will result in more painful macroeconomic consequences once oil prices normalize. Further, using additional foreign exchange inflows to support an exchange rate that is not aligned with fundamentals is costly, unsustainable over time, and distorts economic price signals.

Outlook and Risks: Unsustainable Despite Current Favourable Oil Prices

5. The economy is projected to expand further in the near term, supported by large fiscal spending. However, under current policies, the outlook is not sustainable. Continued high fiscal spending is expected to sustain pressures on the exchange rate and lead to a further drawdown of international reserves. Absent adjustment, the reserves would erode to critically low levels over the medium term. Exchange rate pressures would keep inflation in double digits in the medium term.
6. Risks to the outlook are significantly tilted to the downside. Risks stem from oil production disruptions, declining prices, and further increase in fiscal spending. These risks could accelerate reserve losses, increase inflationary pressures, and further erode household purchasing power. On the upside, preserving current windfall gains on oil revenue, expenditure rationalization, higher and more productive investment, could help stabilize fiscal and external balances and improve growth prospects.

Fiscal Policy: The Source of Imbalances and the Key to Restoring Stability

7. Fiscal consolidation remains the core solution to restore macroeconomic stability. A decisive adjustment is needed to reduce imbalances and restore confidence. Libya has significant scope to strengthen its fiscal position by:

• Non-oil revenue mobilization. Tax policy and administration reforms, including phasing out tax exemptions, along with increasing custom and excise duties to align them with regional standards will be essential. Staff welcomes the recent decision to abolish the foreign exchange tax and stressed that this should be promptly offset through the customs and excise duties on imports to prevent renewed pressures in the foreign exchange market.
• Expenditure rationalization. Energy subsidies—at about 20 percent of GDP—and the wage bill—at around 30 percent of GDP—are among the largest in the world. The long overdue energy subsidy reform, combined with targeted social support, should not be delayed further. For the wage bill, the Instant Salary platform is an important step toward enhancing transparency, reducing corruption, and strengthening control. Building on this progress, further government employment reforms would be needed to rationalize the wage bill.
• Productive Investments. Any investments should be guided by a transparent, prioritized multi-year investment plan, aligned with available fiscal space and the economy’s absorption capacity, and subject to robust procurement and oversight. Ensuring productive investment in the oil sector will be essential to at least maintain the current production levels.

8. Establishing a credible and well-coordinated budget—anchored in prudent medium-term oil price assumptions—is essential to support fiscal consolidation, policy coordination, and reduce fiscal vulnerability to oil price fluctuations. Ensuring budget execution is in line with approved allocations will require binding expenditure ceilings and stronger commitment controls. Furthermore, improving cash management by expanding Treasury Single Account arrangements would further enhance budget execution and accountability.
9. Moreover, insufficient transparency regarding the composition and financing of the budget of the Eastern part of the country undermines accountability and weakens oversight of the efficient use of public resources. Strengthening fiscal transparency, including through regular publication of comprehensive fiscal reports covering extra-budgetary spending, would strengthen policy credibility and support more effective macroeconomic management.

Monetary and Exchange Rate Policy: Necessary, but by itself not the solution

10. Convergence of the official exchange rate toward its value consistent with macro fundamentals can help reduce rent-seeking incentives and improve the balance between foreign exchange supply and demand. However, exchange rate adjustment cannot substitute for the required fiscal consolidation. While the CBL devalued the exchange rate and introduced administrative measures to contain foreign exchange demand, these have not been sufficient to offset the macroeconomic impact of large fiscal deficits.
11. Strengthening the monetary policy framework will be essential to have more tools for managing macroeconomic imbalances. The introduction of Shariah-compliant investment certificates is a good step. However, introducing a monetary policy framework would give the CBL an operational tool to respond to fiscal and foreign exchange pressures. Also, strengthening the central bank’s independence and capacity to carry out its core mandate will be critical to maintaining macroeconomic stability. In this regard, the ongoing Central Bank Transparency (CBT) review presents a timely opportunity to enhance its framework for transparency and accountability in line with good international practices.

Financial Sector

12. The CBL has also taken steps to strengthen financial sector oversight. The preparation of the Financial Stability Report, and efforts to adopt a new banking sector law are important milestones. The upcoming Financial Sector Stability Review (FSSR) provides an opportunity to build on this progress by assessing vulnerabilities and advancing reforms to strengthen regulation, supervision, and crisis management frameworks.
13. The CBL has made important progress in advancing financial inclusion, including through efforts to address cash shortages, reactivation of foreign exchange bureaus and digitalization. These steps have supported access to financial services, and improved payment efficiency. At the same time, further efforts are needed to strengthen infrastructure reliability, expand access to underserved populations, enhance consumer protection, and reinforce the regulatory framework.
14. Notwithstanding these positive developments, financial intermediation remains constrained. Despite system-wide excess liquidity, credit to the private sector is effectively restricted to reduce foreign exchange pressures, limiting banks’ ability to support business activity and investment.

Structural Reforms and Governance

15. Reducing Libya’s heavy dependence on oil, and strengthening the fiscal position will require improved governance, stronger institutions, and a more dynamic private sector. This entails:

• Stronger anti-corruption frameworks and governance reforms, including in the oil sector.
• Improving the business environment, including strengthening the rule of law, streamlining licensing and customs procedures, enhancing access to financing, and improving contract enforcement.
• Tackling labor market distortions through public sector employment reform, education and skills development, and active policies to support private sector job creation, while establishing a legal framework for foreign workers.
• Addressing state-owned enterprise weaknesses—through strengthened governance frameworks, enhanced financial reporting and disclosure, clearer ownership arrangements, and the gradual restructuring or commercialization of non-viable entities.

16. Efforts to enhance the anti-money laundering and combating the financing of terrorism (AML/CFT) framework are welcome, particularly ahead of the upcoming FATF evaluation. Adoption of the AML/CFT law in line with international standards is an urgent priority to safeguard the integrity of the financial system. Channeling imports through the banking system would help improve transparency and reduce illicit financial flows.

Capacity Development

17. Capacity development will play a critical role in supporting Libya’s reform agenda. Continued technical assistance in public financial management, macro-fiscal analysis, revenue administration, and monetary operations will be essential to strengthen institutional capacity. It will be important to improve data quality and coverage for real sector and price statistics as well as external, fiscal and monetary sector statistics for sound policy making. The IMF stands ready to support the authorities in these efforts.

The next Article IV mission is expected in the Spring of 2027.