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IMF Selected Issues PaperMiddle East and Central Asia DepartmentEnergy Subsidy Reform in LibyaPrepared by Mona ElShazly*Authorized for distribution by Dmitry GershensonJuly2025IMF Selected Issues Papersare prepared by IMF staff as background documentation for periodicconsultations with member countries.It is based on the information available at the time it wascompleted on May 30, 2025. This paper is also published separately as IMF Country Report No 25/149.ABSTRACT:Energy subsidies have become a significant burden on government finances in Libya. Thepervasive nature of subsidies has led to rampant corruption, smuggling, and a diversion of resources fromessential public services. The paper identifies key barriers to reform, including opposition from vested interestgroups and public apprehension regarding inflation and welfare loss. To address these challenges, a strategicreform plan is proposed, emphasizing a phased approach, a comprehensive communication plan and socialprotection measures to mitigate the adverse effects of subsidy removal. By taking these steps, Libya cantransition towards a more sustainable framework that supports macroeconomic stability.RECOMMENDED CITATION:ElShazly, M. (2025) “Energy Subsidy Reform in Libya.” IMF Selected IssuesPaper, Middle East and Central Asia Department, SIP/2025/094. Washington, D.C.: International MonetaryQ31,Q38,Q41,Q43, Q48,E62, H23, O13Libya, Smuggling, Energy Subsidies, Fuel Prices, Gasoline, Diesel,Oil, Electricity, Subsidy Reform, Collection System, Communication,Gradual Phasing, Mitigation Plan.melshazly@imf.org Fund.JEL Classification Numbers:Keywords:Author’s E-Mail Address: SELECTED ISSUES PAPERSEnergy Subsidy Reformin LibyaLibyaPrepared by Mona ElShazly11The author would like to thank Dmitry Gershenson and Subir Lall for their support and valuable comments as well as the Libyanauthorities for the constructive discussions and useful feedback. ENERGY SUBSIDY REFORM IN LIBYAA.Introduction1.Energy subsidies in Libya are extremely generous and poorly targeted.substantial oil wealth, the government has historically provided fuel subsidies as a form ofredistribution, effectively allowing citizens to benefit from the country's rich natural resources.However, fuel prices have not changed since the 1970s, making the price of gasoline in Libyacurrently the lowest in the world. Although designed to protect citizens, subsidies are typicallyregressive and primarily benefit the wealthier segments of the populations.Libya's fuel subsidy hasbeen costly and gave rise to corruption and wide-scale smuggling, effectively transferring thebenefit of the subsidy to specific interest groups and adjacent countries.Figure 1. Gasoline Prices(US$ per liter)1.6 .-------------------------�1.41.20.80.60.40.20i,,,,,,......,!!!!!!!!J..Sources: Global Petrol Prices Database; IMF Staff Calculations.2.This comes at the cost of availabilityand quality of public goods.Subsidies draingovernment resources thereby diverting fundsfrom infrastructure and public services, hinderingeconomic development in the longer run. This isespecially relevant in Libya, given thatdevelopment spending on education and healthtogether account for less than 1 percent of totalspending, whereas subsidies alone take up morethan one third of the total budget. Furthermore,by lowering the cost of fossil fuel, subsidies makeenergy-intensive industries more attractive,discouraging diversification and potential non-oilprivate sector investment and suppressing longterm sustainable growth (International MonetaryFund, 2013).2INTERNATIONAL MONETARY FUNDFigure 2. Health and Education as a shareof Total Spending - 2024■ Health.,_ Education■Subsidies•• Salaries•OtherdevelopmentSources: Central Bank of Libya; IMF Staff Calculations.1/Expenditures and subsidies are adjusted by crudeoil swa©International Monetary Fund. Not for Redistribution Given Libya's1(Percent)6%0%16%�.Ill........................................ ......... .42%36% B.Size and Burden of Energy Subsidies3.Direct energy subsidies accounted for one third of revenues and 20 percent of GDP in2024 (adjusted to include the crude oil swap).Although Libya is an oil-rich country, it importsmost of its fuel since the capacity of its domestic refineries is limited and cannot meet local demand.Fuel imports jumped from an average of US$3 billion in 2016-2019 to US$9 billion in 2024,according to the Libyan Audit Bureau. Power generation in Libya utilizes heavily subsidized naturalgas, diesel and crude oil. The government subsidizes the electricity sector in two ways; directfinancial assistance to cover the sector's losses (due to the high cost of electricity production relativeto the electricity tariff) and subsidized fuel supplied for electricity generation. Adding the cost ofcrude oil refined locally and natural gas used for electricity generation, estimated at an additionalUS$3.9 billion and US$4 billion, respectively, the total energy subsidy bill reaches US$17 billion in