Country Report Libya November 2009

Economic performance: Domestic credit indicates poor performance of banking sector

In the second quarter of 2009, the year-on-year growth in government deposits within the banking system fell to 2.5%-measured by the increase in net claims on the central government-their lowest levels for eight years, most probably owing to the slump in oil prices at the beginning of the year and the resultant fall in government oil revenue. The slight lag indicates that government deposits should pick up again in coming months, as the oil price has climbed consistently throughout the year from its nadir in January. Government deposits remain significantly larger than all types of borrowing, leaving the country in the anomalous situation of having a negative figure for overall domestic credit. However, the slowdown in government deposit growth, combined with a rise in lending, has led to monthly contractions in negative domestic credit since March-with the exception of May-the first time it contracted in almost a decade. However, at LD49bn (US$40bn) in July, it is clear that there remains a large sum of cash sitting idle in the country's bank vaults.

This money would be better utilised if banks were able to lend it on domestically. There have been significant improvements in the banking sector in recent years; the government has eased regulations and imported foreign technical expertise. Most recently, in early October, the Central Bank of Libya announced that it was set to privatise its fourth local bank and offer two or three licences for the establishment of new banks (October 2009, Economic policy). The IMF, in its recent Article IV report, also praised the government for its progress in banking sector reform, highlighting moves to raise capital requirements and to set up an asset management company to deal with bad loans. However, despite being well capitalised and profitable, Libya's commercial banks have one of the highest ratios of non-performing loans in the Middle East and North Africa at around 20%, although this should improve as reforms and efforts to improve the efficiency of the banks are implemented.

The ability of Libya's commercial banks to lend is currently being impaired by the specialised credit institutions (SCIs). These are effectively development banks, which inject subsidised credit into key sectors, such as agriculture and real estate. However, since the easing of sanctions, their role has expanded considerably and they currently account for around 50% of total credit, up from 13% in 2001. Their share of new credit rose from 17% in 2001 to 65% in 2007. However, the poor lending standards of the SCIs have led to them have a particularly high percentage of non-performing loans. As cheaper credit is available through these institutions, they have also been crowding out lending from commercial banks, which has delayed the development of an efficient banking sector.

According to the IMF, the government needs to push through reforms of the SCIs, in order to allow for greater financial intermediation by the mainstream commercial banks. It suggests reducing their size, ensuring more effective oversight and strengthening corporate governance. But given their current size, reform will be complicated. As a start, the government has reduced their allocations in the 2009 budget to less than LD1bn, from LD1.5bn in 2008. Building a developed, sophisticated local credit market is essential to Libya's overall economic development. As can be seen from the data for domestic credit, the level of lending in Libya is still very limited; claims on non-financial public enterprises and the private sector combined amounts to less than 20% of GDP. In neighbouring Tunisia and Morocco, lending to the private sector alone totals more than 75% of GDP.

Domestic credit
(LD bn unless otherwise indicated)
 20072008   2009 
 Year1 Qtr2 Qtr3 Qtr4 Qtr1 Qtr2 Qtr
Claims on central government (net)-63.3-70.5-67.0-73.7-70.6-76.0-68.7
 % change, year on year17.920.610.616.
Claims on non-financial public enterprises6.
 % change, year on year14.618.524.4-16.7-14.6-3.510.4
Claims on private sector5.
 % change, year on year7.812.119.144.851.440.629.3
Domestic credit-51.3-57.5-53.2-60.7-57.0-61.1-52.3
 % change, year on year19.521.7817.711.26.1-1.7
Source: IMF, International Financial Statistics.

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