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Country Report Libya January 2011
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HTMLEconomic performance: Money supply contracts
According to the latest data released by the IMF in its International Financial Statistics report, Libya's supply of broad money, or M2, contracted in the third quarter of 2010 on a year-on-year basis, the first time it has done so for nearly eight years. Since the end of 2009 broad money supply growth has slowed sharply, falling from 22.3% year on year in the first quarter of 2010, to 0.7% in the second quarter, to contraction of 5.5% in the third quarter. The deceleration in M2 growth was driven primarily by a contraction in narrow money supply, or M1, although the supply of quasi-money, or time and savings deposits, also narrowed in the third quarter.
| Money supply | |||||||
| (LD m unless otherwise indicated) | |||||||
| 2009 | 2010 | ||||||
| 1 Qtr | 2 Qtr | 3 Qtr | 4 Qtr | 1 Qtr | 2 Qtr | 3 Qtr | |
| M1 | 31,099 | 34,939 | 40,013 | 37,381 | 37,260 | 34,068 | 36,549 |
| % change, year on year | 37.9 | 17.2 | 17.9 | 12.2 | 19.8 | -2.5 | -8.7 |
| Quasi-money | 6,083 | 5,689 | 5,256 | 7,992 | 8,103 | 6,868 | 4,943 |
| % change, year on year | 47.8 | 27.0 | 10.9 | 49.9 | 33.2 | 20.7 | -6.0 |
| M2 | 37,092 | 40,662 | 43,910 | 45,372 | 45,363 | 40,936 | 41,492 |
| % change, year on year | 39.4 | 18.4 | 17.0 | 17.4 | 22.3 | 0.7 | -5.5 |
| Source: IMF, International Financial Statistics. | |||||||
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The sudden contraction in money supply is perplexing. Given the unsophisticated nature of Libya's economy, which is driven chiefly by public consumption supported by oil revenue, money supply trends generally follow, with a slight lag, government expenditure patterns and oil revenue inflows. But oil output in 2010 remained steady, averaging 1.56m barrels/day (b/d) over the eleven months to end-November, slightly higher than the annual average of 1.55m b/d recorded in 2009. Furthermore, average oil prices were higher in 2010 than in 2009, so the government will have received more cash from the sale of oil. The bottleneck must therefore be in government expenditure. Oil revenue may be arriving in the government exchequer, but may not be being spent in the wider economy. The lack of up-to-date fiscal figures and recent fiscal policy announcements makes this assumption difficult to confirm.
In addition, the latest data show that inflation remains steady. In the absence of any robust monetary tools, changes in the money supply can have a knock-on effect on consumer prices-higher money supply can lead to higher inflation, and vice versa. The stagnation of the money supply may therefore be contributing to containing inflation, which has been picking up elsewhere in the region. Annual consumer price inflation has averaged 2.4% in the first 11 months of the year.
