At a historic juncture, the authorities face the challenges of stabilizing the security situation, reducing political uncertainty, and responding to the aspirations of the revolution. Unlike other Arab countries in transition, Libya has no external financing need, thanks to its vast resource wealth.
Although Libya’s first elections in 60 years for the General National Congress were a successful step toward political normalization, the situation - with a fragmented political landscape and tribal rivalries - is likely to remain precarious, especially until the ratification of a constitution and parliamentary elections by mid-2013.
The immediate challenges in promoting inclusive growth are to normalize the security situation, reduce political uncertainty during the transition stage, and exercise fiscal discipline while maintaining macroeconomic stability.
As a short-term response to the aspirations of the revolution, the interim government has raised wages and subsidies. Although Libya can afford elevated levels of current expenditures during a transitional period, the increase in wages and subsidies is eroding the country’s fiscal buffers and undermining prospects for fiscal sustainability.
Beyond the short term, however, Libya will need to address a wide spectrum of issues, including capacity-building and improving the quality of education, rebuilding infrastructure, developing its financial market, reducing hydrocarbon dependence, and putting in place an efficient social safety net. The country will also need to establish a governance framework to improve transparency and accountability to better manage its resource wealth and help promote private sector–led economic development.
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