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Libya budget crisis looms as oil strikes wipe out finances

Source: Reuters - Mon, 6 Jan 2014 05:00 AM
Author: Reuters
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* Oil strikes crippling the OPEC nation's finances

* Oil exports down to just 110,000 barrels a day

* Government forced to draw on reserves

* Local bank lending may be option as government seeks cash

* Local lending in dinars won't help pay for imports

By Ulf Laessing

TRIPOLI, Jan 4 (Reuters) - As strikes at Libyan oil ports run into a sixth month, reducing government income to a trickle, a budget crisis could be just around the corner for a country wearily accustomed to chaos since the popular revolt that ousted Muammar Gaddafi.

The government, when it is not grappling with militias who occupy ministries and take over oil facilities at will, warns that it might be unable to pay wages, while power cuts are commonplace.

Oil exports, which account for practically all the government's annual revenue of around $50 billion, have fallen from more than 1 million barrels a day in July, when the strikes began, to just 110,000 bpd.

The government says it has lost more than $10 billion in oil revenues since then, roughly a fifth of the annual target, but that could well be an understatement, given that the 1 million barrel shortfall would have fetched around $100 million a day, suggesting the monthly undershoot could be around $3 billion.

There is little room to trim expenditure, however, with more than half the annual budget of more than $50 billion earmarked for public salaries and politically sensitive subsidies for a range of products including bread and fuel and services such as hospital treatment.

"I don't think they will cut salaries or subsidies because I think that's extremely dangerous," said Alex Warren of advisory group Frontier, which runs The Libya Report website.

The wage bill is instead set to rise as workers in the oil sector, who account for about four fifths of GDP, are entitled to a 67 percent salary increase from January, a government measure intended to ease dissent.

Prime Minister Ali Zeidan's besieged government - and at times it is literally under siege by gunmen surrounding its buildings - might cut infrastructure spending, but that, too, is not without consequences in a country that has made little headway in repairing the damage that accompanied the revolution and its aftermath.

Indeed some of the crippling protests have been provoked by the parlous state of national infrastructure such as hospitals, which had already suffered years of neglect under Gaddafi.

Political infighting between Zeidan's cabinet and the Islamist opposition in the General National Congress has led to delays in some infrastructure projects, and that unspent cash will at least have bought the government a little time.

Oil output could also rise by 300,000 bpd in the coming days after the government declared the end of a protest at the large El Sharara field.

Even so, Labour Minister Mohamed Swalim took to the airwaves for an hour-long television broadcast this week to hammer home the urgency of ending the blockades.

"If the situation continues this will lead to collapse, to a dark tunnel leading into the unknown," he said.

CRUNCH QUARTER

Diplomats say the budgetary crunch could come by the end of the first quarter if the standoff between Zeidan and a pro-autonomy group holding three oil ports in eastern Libya continues.

Reliable data is hard to come by, however - a legacy of Gaddafi's secrecy - and spending details are sporadic at best. Key economic indicators are published only quarterly and after long delays by international standards.

A central bank official told Reuters last month in a taped interview that Libya had used $7 billion from its reserves since the summer and could spend another $5 or $6 billion by the end of 2013. The bank later denied the story after it made a splash on social media.

Libya still has a relatively generous reserves position - $119 billion at end-November, according to the same interviewee - and could use yet more to avoid a budget crunch, but much of it is invested overseas or in non-liquid assets.

Government borrowing is also an option, though overseas lenders are unlikely to help, since Libya has not been rated by credit rating agencies since 2011, and its financial system has few ties with the outside world after decades of sanctions due to its involvement in the 1988 bombing of a Pan Am flight over Lockerbie, Scotland.

"We are now facing a difficulty in liquidity, and we may turn to other sources like the central bank and the Libyan Investment Authority," Economy Minister Mustafa Abu Fanas told Reuters last month.

The central bank could refinance itself by selling Islamic bonds, though legislation allowing it do so has not been finalised. It would also have to offer a high yield, given the lack of trust in public institutions.

Analysts said the government could tap local banks, which have plenty of cash due to the paucity of lending activity in an economy that the International Monetary Fund (IMF) has tipped to shrink by 5.1 percent in 2013.

That would be easy, said one Libyan economist, as some of the biggest are owned by the state.

But with local banks sitting mostly on assets in dinars, that would not help to fund imports. Libya buys almost everything from abroad, even milk comes from Italy or Germany and mineral water from Turkey.

"I expect inflation will go up this year," the economist said.

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