INFLATION ON THE RISE IN LIBYA

UNCLAS SECTION 01 OF 02 TRIPOLI 000001

SENSITIVE
SIPDIS

STATE (NEA/MAG),ENERGY (ERICKSON),COMMERCE (MASON),CAIRO
(TREASURY LIAISON SEVERENS)

E.O. 12958: N/A
TAGS: ECON EPET EFIN PGOV LY
SUBJECT: INFLATION ON THE RISE IN LIBYA

REF: TRIPOLI 227

TRIPOLI 00000001 001.2 OF 002



1. (SBU) Summary: Prices have increased in Libya in the past
year, dramatically so for consumer goods (especially food),
housing and construction materials. Libya's National
Information Board estimates that prices in the third quarter of
2008 increased by 9.8 percent compared to the same period in

2007. Post's informal market basket survey showed significantly
greater increases in the price of foodstuffs than the GOL's
official figures, particularly for previously subsidized goods
such as sugar, rice, and flour, which have increased by 85
percent in the past two years. Overall inflation for 2007 was
6.3 percent, and 12 percent for 2008. Libya's Central Bank
believes high international commodity prices are the main reason
for inflation; however, the International Monetary Fund (IMF)
traces the rise in consumer prices to the rapid rise in the
domestic money supply spurred by the influx of petrodollars into
the economy. In addition, Libya has embarked on a multi-billion
dollar capital improvement program after years of neglecting its
aging infrastructure, which has driven up prices for
construction inputs. Accustomed to price subsidies and
stringent price controls, inflation has come as a rude shock for
Libyans. Concern that a radical program of privatization and
government restructuring proposed by Muammar al-Qadhafi earlier
this year could be at least partly implemented have prompted
fears that the quality of life for ordinary Libyans may erode
further still as the GOL wrestles to implement economic reforms.
End summary.

PRICES ARE RISING ...


2. (SBU) Whether talking with diplomats, expatriates working
in the private sector, or Libyans, there is an overwhelming
sense that prices across the board have increased in Libya in
the past year, and that the situation has gotten worse in recent
months. Most people agree that consumer goods (food),housing,
and construction materials (i.e. cement) have witnessed
particularly large increases. According to Libya's National
Information Board, third quarter prices in 2008 rose by 9.8
percent compared to the third quarter of 2007, with the largest
increases coming in foodstuffs, beverages and tobacco (which
increased by an average of 16.4 percent). Housing costs
increased by 6.1 percent and clothing and shoes by 4.9 percent
in the same period. Official Government of Libya (GOL) figures
put inflation for 2007 at 6.3 percent and 12 percent in 2008.

~ESPECIALLY FOR FOOD


3. (SBU) An informal market basket survey carried out by post
showed results similar to official government figures for
increases in the price of clothes and shoes (5 percent);
however, our survey showed that prices for unsubsidized goods
increased by about 25 percent in the past year alone.
Particular increases were seen in prices for foodstuffs - the
price of previously subsidized goods such as sugar, rice, and
flour increased by 85 percent in the two years since subsidies
were lifted. (Note: Flour sold to bakeries is still subsidized
and bread prices remain low; however, flour sold in stores to
the public is not subsidized. End note.) Construction
materials have also increased markedly: prices for cement,
aggregate, and bricks have increased by 65 percent in the past
year. Cement has gone from 5 Libyan dinars for a 50 kilogram bag
to 17 dinars in one year; the price of steel bars has increased
by a factor of ten. The price of prized black market
pharmaceuticals (produced in Tunisia and Egypt, and therefore
considered to be of higher quality) increased by 12.5 percent.
The cost of basic medical services has not increased markedly,
but prices at private clinics in Libya have increased. (Note:
Most Libyans who can afford to elect to either use private
clinics or travel to other countries to seek medical treatment.
End note.)


DIFFERING VIEWS ON THE CAUSES


4. (SBU) Libya's Central Bank has argued that high
international commodity prices are primarily to blame for recent
price inflation in Libya; however, the IMF has attributed rising
prices to the rapid increase of Libya's domestic money supply,
which spiked with rising oil prices. A massive housing and
infrastructure development plan begun in 2006 and involving tens
of billions of dollars in government contracts, has also

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injected more money into the domestic market. Many large-scale
development projects that had to be shelved in the 1980's due to
international sanctions against Libya, such as a new bypass
highway in Tripoli, have been resurrected. The IMF has formally
recommended to the GOL that it attempt to better sequence its
public expediture programs - to include delaying work on some
infrastructure projects - if inflation does not decline to avoid
compounding the problem.


5. (SBU) Comment: The GOL's decades-long policies of stringent
price controls and subsidizing staples have meant that Libya has
experienced little inflation for many years. Consequently, the
inflation seen since 2007 has come as a rude shock for Libyans,
especially the sizeable middle class and strata of poor, who
generally (and unsurprisingly) agree that the GOL is not doing
enough to curb price increases. The GOL's termination of
subsidies and price controls as part of a broader program of
economic reform and privatization has certainly contributed to
inflationary pressures and prompted some grumbling. A radical
program of privatization and government restructuring proposed
by Muammar al-Qadhafi in his March address to the General
People's Congress (reftel) has further stoked ordinary Libyans'
fears that the regime is abandoning them to market forces after
years of cradle-to-grave subsidies. Al-Qadhafi proposed that
5,000 Libyan dinar per month be distributed to each family;
however, a number of senior GOL officials have told us in recent
weeks that implementing that scheme would almost certainly
occasion greater price inflation without contributing to GDP
growth. While it appears unlikely that al-Qadhafi's plan will
be implemented in full, the combination of high inflation and
diminishing subsidies and price controls is worrying for a
Libyan public accustomed to greater government cushioning from
market forces. End comment.
GODFREY