The Day after Tomorrow: Designing an Optimal Fiscal Strategy for Libya

Abstract

Libya is highly dependent on exhaustible and volatile hydrocarbon resources, which constitute the bulk of government revenues. Although resource wealth provides the means to promote socio-economic development, procyclical fiscal policies threaten macroeconomic stability as well as fiscal sustainability and intergenerational equity. In three parts, this paper provides an assessment of the cyclically adjusted fiscal stance, analyzes fiscal sustainability according the permanent income framework, and simulates various fiscal policy rules with the objective of developing a rule-based fiscal strategy that would delink the economy from oil price fluctuations, improve the management of resource wealth, and safeguard macroeconomic stability.

Keywords: Fiscal policy, Libya, Hydrocarbons, Revenues, Fiscal sustainability, cyclical adjustment, permanent income hypothesis, fiscal rules, natural resources, public financial management, fiscal stance, primary deficit, fiscal position, fiscal balance, government spending, budget balance, primary budget balance, fiscal framework, primary budget deficit, fiscal impulse, budget deficit, fiscal policies, government budget, long-term fiscal sustainability, fiscal performance, fiscal policy rules, aggregate demand, fiscal strategy, government expenditure, budget constraint, government budget constraint, fiscal policy rule, public expenditure, fiscal policy management, fiscal responsibility, fiscal accou

JEL Classification: E32, E62, H11, H62, O13