Public finances are expected to improve slightly but the inflexibility of current expenditures, coupled with the volatility of oil revenues, keep the country’s overall fiscal stance under severe stress. Although oil revenues were expected to improve this year (to 47 percent of GDP), they will barely cover the high—and increasing—wage bill, which will hit 48 percent of GDP.

The rising wage bill reflects salary increases and additional hiring linked to pressure placed on the use of the public payroll as a tool for stabilization during a period of multi-factional conflict. Concerns over using the payroll for militias has prompted calls for an audit of the two Central Banks. At the UN’s request, the World Bank has commented on the Terms of Reference for the audit and has also submitted comments on the new economic reforms proposed below.

Given the complex political economy, public subsidies are likely to remain high (10.6 percent of GDP) and, while slightly improving, the budget deficit has remained high—at about 26 percent of GDP in 2018, down from 34.5 percent of GDP in 2017. The deficit is expected to be financed through cash advances from the Tripoli Central Bank and the issuance of government bonds in the east of Libya.

The deficit in balance of payments reflects both the large public sector deficit and the economy’s heavy reliance on imported consumer and intermediate goods, including refined fuel. These transformed the small current account surplus of 2.5 percent of GDP registered in 2017 into a deficit of about 3 percent of GDP in 2018.

Foreign reserves will stabilize if selected foreign investment in the oil sector and oil prices cover most of the current account deficit, allowing the Central Bank to stave off a further drain on reserves. With respect to fiscal planning, immediate challenges include how to manage pressures on fiscal spending while restoring and improving basic public services.

A longer-term goal is to help develop institutions to sustain a more diversified market-based economy. The World Bank’s engagement strategy included encouraging the growth of a more vibrant and competitive economy in which the private sector could create jobs and sustainable wealth. The strategy also includes transforming the way oil revenues are managed to ensure they are used to everyone’s equal benefit. This could help give Libyans more of voice in defining their communities’ interests.