Libya’s economic freedom score

Libya’s economic freedom score 

Is 40.2, making its economy the 173rd freest in the 2010 Index. Its score has decreased by 3.3 points, reflecting declines in four of the 10 economic freedoms. Libya is ranked last out of 17 countries in the Middle East/North Africa region, and its overall score is well below the world and regional averages.

Libya’s economic institutions remain poor and prevent dynamic entrepreneurial activity. Much-needed reforms in recent years have included the complete elimination of tariffs, but overall progress toward improving regulation and diversifying the economy has been marginal. The government remains the largest source of employment and dominates the energy sector.

The business and investment environments remain heavily encumbered by the strong state presence in many economic activities. The investment climate is uncertain, weakened by the risk of nationalization. Corruption is widespread, and fair adjudication of property rights is not guaranteed. Inefficient management of resource allocations results in market distortions and shortages of basic goods. Privatization, especially in banking, has been implemented slowly, and institutional resistance remains strong.

Background Back to the top

Oil and natural gas provide about 95 percent of Libya’s export revenues and over half of GDP. Despite one of Africa’s highest per capita incomes, the economy has been hurt by more than 30 years of socialist economic policies and international sanctions imposed after the 1989 Lockerbie airplane bombing. The United Nations lifted its sanctions in 2003 after Libya consented to a trial for the officials involved in the plot and agreed to compensate victims’ families. The U.S. lifted most of its sanctions in 2004 after Muammar Qadhafi renounced weapons of mass destruction, and the Department of State removed Libya from its list of state sponsors of terrorism in 2006. Libya paid $1.5 billion to U.S. citizens in October 2008 as compensation for previous terrorist attacks.

Business Freedom20.0 Back to the top

The overall freedom to start, operate, and close a business is significantly restricted by Libya’s regulatory environment. Despite modest improvements in the business climate, Libya’s bureaucracy remains one of the region’s most burdensome.

Trade Freedom85.0 Back to the top

Libya’s weighted average tariff rate was 0 percent in 2006. In 2005, the Libyan Customs Administration cancelled duties on more than 3,500 product categories; however, a flat 4 percent “service fee” is levied on most imported products. Additional consumption and production taxes serve as a form of protection for local goods and companies. Import bans and restrictions, other import fees, non-transparent and discretionary regulation, aging infrastructure, state trade in petroleum products, subsidies, and customs corruption also add to the cost of trade. Fifteen points were deducted from Libya’s trade freedom score to account for non-tariff barriers.

Fiscal Freedom81.7 Back to the top

The top tax rate on individual income is nominally 15 percent, but for incomes over 200,000 Libyan dinars, other taxes (such as those on commercial and industrial profits) may raise the top rate to 90 percent. The top corporate tax rate is 40 percent. Libya has no value-added tax (VAT) or inheritance tax. In the most recent year, overall tax revenue as a percentage of GDP was 2.9 percent.

Government Spending62.8 Back to the top

Total government expenditures, including consumption and transfer payments, are moderate. In the most recent year, government spending equaled 35.2 percent of GDP. Privatization has been slow, and the economy remains highly centralized and dominated by the energy sector.

Monetary Freedom66.4 Back to the top

Inflation has been relatively high, averaging 8.6 percent between 2006 and 2008. Consumer prices have picked up sharply as the government has slowly relaxed some of its control of the domestic market. The government still determines most prices, either directly or through state-owned enterprises and utilities. Fifteen points were deducted from Libya’s monetary freedom score to account for policies that distort domestic prices.

Investment Freedom10.0 Back to the top

Although foreign investment is generally welcome, it does not receive national treatment and is screened by the government. Foreign investors face additional regulatory requirements before projects can be approved. At least 35 percent of a non-Libyan business must be controlled by Libyan individuals or companies. Bureaucracy is non-transparent, complex, inefficient, and subject to political influence. Residents and non-residents may hold foreign currency accounts with prior approval. Repatriation and most capital transactions, including transactions involving capital, credit operations, and direct investment, are subject to controls, including approval requirements. Foreigners may not own land in most cases.

Financial Freedom20.0 Back to the top

Libya’s highly centralized financial system remains subject to considerable state influence. The government, which nationalized all banks decades ago, recently eased banking laws to allow financial liberalization and privatization, but overall progress has been minimal. The banking sector is still dominated by four banks that are owned in full or majority-owned by the Central Bank of Libya. These four banks account for more than 90 percent of the sector’s assets. The high cost of credit and limited access to financing impede private business development. Legislation passed in 2005 permits foreign banks to open branches.

Property Rights10.0 Back to the top

The Libyan government eliminated all private property rights and most private businesses in 1978. The renting of property was declared illegal, and ownership of property was limited to a single dwelling per family, with all other properties being redistributed. The judiciary is not independent, the private practice of law is illegal, and all lawyers must be members of the Secretariat of Justice. There is little land ownership, and the government has the power to renationalize any property that has been privatized. Foreign companies are especially vulnerable, and the government has a history of expropriation. Trademark violations are widespread.

Freedom From Corruption26.0 Back to the top

Corruption is perceived as widespread. Libya ranks 126th out of 179 countries in Transparency International’s Corruption Perceptions Index for 2008. Government integrity is undermined by favoritism based on personal and family connections. The Qadhafi clan exercises near-total control of major government decisions.

Labor Freedom20.0 Back to the top

Unemployment remains high, and the growing number of job seekers makes job creation a major priority. Libya’s labor regulations are highly restrictive. The labor law specifies minimum wage rates, the number of work hours, night shift rules, and dismissal regulations.