Public Financial Management in Libya: A Gradual Approach to Reform and Relationship-building

Michael Schaeffer, Senior Public Sector Specialist and Wesal Ashur, Public Sector Specialist, Governance Global Practice / MENA, The World Bank

Libya recently submitted its national budget for 2014, with a total envelope of LYD 56 billion (US$47 billion) to the Central Bank of Libya (CBL).  There are 30 articles that currently frame the budget law (Law No 13, 2014).  The CBL submitted the law to its legal department for opinion.  With the FY2014 deficit approaching approximately 80 percent of gross domestic product (GDP), the CBL would like to assess how a deficit of such significant levels could legally be financed before giving its approval for the budget to be implemented. This could mean a delay by an additional two weeks (until July 31, 2014).  Quite simply, this means that the government of Libya has been effectively operating for the majority of FY2014 without a legally appropriated budget and policy document.

Fragile, conflict-affected countries such as Libya are a true test in the exercise of patience.  The World Bank public financial and governance programs, with the assistance of the Department for International Development (DFID) (UK), worked rapidly over the past year to introduce a revised budget coding structure and a modest double-entry financial management information system at the Ministry of Finance (MoF).  However, the uncertainty brought on by a frail national government structure, weak administrative authority, and an under-skilled and unmotivated civil service has limited the potential of achieving viable public sector accountability reforms in Libya in the near-term.

The notion that Libya is a fragile, conflict-affected state in chaos is far too simplistic. The United States, itself, was more a fragile hope than a reality in 1790.  During the decade that followed the U.S. revolution, the ideals of the Declaration of Independence were combined with the content of the Constitution to create the practical workings of a government structure.  However, even the workings of a practical administrative structure took many years to evolve.  This appears to be the case in Libya today.

At present, the reform of the public financial management legal framework cannot be an essential starting point for public financial management (PFM) rebuilding.  International experience with fragile, conflict-affected states indicates that legal reforms— specifically the adoption of new organic budget legislation— generally occur three-to-four years after the initial political changes have taken place. Further, they take a minimum of two years to introduce.  Existing Libyan laws and interim decrees often suffice as a temporary basis for current PFM rebuilding.  In the case of fairly fluid fragile, conflict-affected states such as Libya, the existing legal infrastructure combined with interim decrees creates a sense of public financial paralysis.

Basic public financial management reforms can be very challenging in the current Libyan context.  Weaknesses in procurement and auditing are often at the heart of why it is so difficult to overcome fiduciary concerns.  Strengthening public procurement is a basic reform in the sense that it is focused on compliance rather than performance.  However, because of rent-seeking behavior vis-a-vis public investments, current Libyan procurement reform efforts remain largely ineffective. 

The impact of current public financial management reform efforts to promote state building has also been limited.  Contextual factors such as limited domestic revenue and a difficult security environment mean that PFM reforms alone cannot be expected to be the cornerstone of a fully functioning, accountable public administration. With the basic introduction of a modest financial management system and budget accountancy structure, PFM reforms have made important initial contributions toward improving the fiduciary environment through a strong focus on budget execution. However, substantial challenges remain.

This article was written on July 8, 2014