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Policies Of Commodities Subsidy

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املنــــظمة الليبية للســــياسات وإلاســـــتراتيجيات

Libyan Organization Of Policies & Strategies

Policies of Commodities Subsidy 1

Policies of Commodities Subsidy

Prepared by: Research and Statistics

Department of the Libyan Central Bank

Introduction:

Many developed as well as developing

countries support the prices of essential

commodities in an attempt to reduce high

prices. The aim of this measure is to make

the commodities, which are usually

necessary, affordable for the poor class.

These countries allot huge amounts of

money from its resources to support the

income of individuals whether by

providing commodities with cheap prices,

social insurance or health services, or by

giving them subsidies. For example,

Germany devotes about 8% from its GDP

(Gross Domestic Product) for commodities

support, Sweden devotes around 10%

whereas in France the rate amounts to 12%.

In Egypt it has reached 18% in 20101 . In

Libya the rate of commodities support

amounted to 11.1% of the GDP and 21.6%

of the total public spending of 2010.

However, capitalist countries adopt a

dynamic policy of commodities support

which keeps pace with economy’s ups and

downs and with inflation levels in order to

maintain the normal standard of living for

1Regional Economic outlook ,IMF,ARR 2011

the low-income class. International

experiences have showed that the diversity

of means of support and the intended aims

vary according to the economic systems’

means and development. In general, this

policy, which represents a bundle of

procedures, basics and principles seeking

to achieve economic, social or political

goals, is being reflected in the budget

allocated to support commodities according

to a specific program which usually

constitutes a part of the regular budget of

the country.

There is no doubt that the policy of

commodity support in Libya faces

considerable problems and challenges

which hinder its success, especially in the

absence of a defined wage policy and the

scarcity of data. Therefore, this paper seeks

to present, in a simplified way, some

successful experiences of commodity

support policy and briefly to present the

commodity support policies in Libya. It

will also discuss some reforms and

procedures which can pull the support

policy off in Libya.




Experiences of Some Countries

Commodity policies have differed in many

countries in terms of the amount of

support, how to benefit from it and who

would be the beneficiaries. Some countries

have supported the services and prices of

some commodities in a way that allows all

the citizens and residents to benefit from

them, regardless of their social class and

income; whether this latter is low, medium

or high. Other countries support only low-

income class for the reason that it is

incapable of affording the necessary daily

needs of goods and services due to the high

prices. The practices of supporting these

goods vary between direct support of goods

and against a basket of those commodities

and monetary support (restructuring

support) in exchange of a basket of those

goods. Some of international experiences

in the commodity Support as follows:

The Indonesian experience

The Indonesian government has taken a

group of measures with the goal of

providing commodity support for the

benefit of the targeted poor classes. For

example, in 2005, it has doubled the prices

of petroleum products and later in 2008,

raised the prices of petroleum products

with a rate of 25-33%. The reason behind

this measure was to benefit from the

amounts arising from high prices by giving

it, in the form of remittances, to the poor

families (15.5 million families benefited).

Indonesia has also taken other efficient

measures such us exempting agricultural

products from the value-added tax and the

abolishment of custom duties on sugars.

Moreover, gasoline prices were subjected

to a system of dynamic adjustment

(liberalization of gasoline prices). The

success of the Indonesian support policy is

also attributed to the government’s ability

to determine and specify the targeted

classes and reach them, in addition to the

successful means of communication used

in that process.

The Iranian Experience

By the end of 2010, Iran had become the

first oil country to lift support from all the

commodities and services in order to

replace it by monetary support for all

society members. The saved amount from

these measures was estimated to be around

60 billion dollars and was distributed as

follows:

- 30 billion is to be distributed on all

society members in the first year.




- 18 billion for economic institutions in

order to restructure their production in

ways that rationalizes energy consumption.

- 12 billion for the government to pay

energy costs and develop the efficiency of

energy usage in public sector.

The initial indicators of this policy were a

growth of domestic demand2 and an

increase in the economic activities in rural

areas though the upsurge in energy cost

which had a significant and clear impact on

the consumers’ basket. However,

increasing the amount of commodities

imported and facilitating the administrative

procedures have eased the impact of high

prices. One of the main challenges the

government of Iran faced was the

restructuring of public and agriculture

sectors which heavily rely on the

consumption of energy during the

production process. Yet, the decision of

the government to financially and

technically support the two sectors, through

medium term plans, had a positive effect in

reaching all social classes.

The Policy of Commodity

Support in Libya

The policy of commodity support in Libya

started in the beginning of the 70s of the

2 Regional Economic outlook ,IMF,ARR 2011

last century when the state issued the law

number (68, 1971) establishing the national

institute of food commodities as an

affiliated body to the ministry of economy.

This institution was in charge of allocating

goods supply, products and agricultural

produce in a way that preserves its prices

and regular availability in the market with

sufficient quantities that meets the

consumers’ needs. The above-mentioned

law has allowed the institution to open

branches and offices in any place in Libya.

Hence, it also had the right to have agents

and correspondents inside and outside the

country, in accordance with the decisions

of the Board of Directors. In 2009, the

General People’s Committee released the

decision number (451) on integrating the

national institute of food commodities

within the Fund of Balancing Prices in

order to achieve the following goals:

- Balancing the prices of basic goods and

services.

- Studying and suggesting means that

help defining appropriate prices for goods

and services.

- Following up international and local

prices and providing reports on them.

- Maintaining a large stockpile of basic

goods whose prices are subject to sharp

fluctuations.




- Making suitable prices for basic goods

and services and providing it with an

appropriate cost for the citizens.

- Providing goods and services in the

local market in proportion to the

individuals’ income level.

The economic situation which

characterized the Libyan economy during

the last four decades was the dominance of

oil sector on the economic structure which

made the Libyan economy stand on one

side and relies heavily on oil sector in

funding public expenditure and suffering at

the same time from the inactivity of

income (fixed wages policy in public

sector). As well as the escalating increase

in prices rendered the commodity support

policy an urgent necessity under such

conditions. Furthermore, the country’s

ideology controls the amount and nature of

support according to its adequacy. In

general, the policy of commodity support

in Libya has been applied in two basic

forms:

1- Supporting prices of necessary food

commodities. Such support has a great

importance in the balancing of the country

and with the aims at preserving the real

income level of individuals. The

government was compelled to encounter

such measure because of the fixed wages

policy in the public sector and which also

affected the private sector. The following

table shows the types of goods and the

amount of support during 2002-2010.

Commodity Support




It is obvious, based on the above table, that

the commodity support has raised from 357

million Libyan Dinars in 2002 to 1,046

million Libyan Dinars in 2010. In other

words, the commodity support has

increased during this period with a

compound annual rate of 12, 7 % bearing

in mind that the Compound Annual Growth

Rate of population in Libya amounted to

1, 6%. The increase of commodity support

is attributed to the increase of international

prices. However, what is striking is that

the goods belonging to the food category

constitutes about 36, 6 % of the basket of

consumer prices, according to the data of

the General Information and

Documentation Authority. However, the

approximate weight of the subsidized food

constitutes only 1, 6% of the basket of

goods. This shows that the subsidized food

is not very imperative for consumers and

commodity support of the food category is

nothing but an illusion. In other words,

providing these supported goods does not

affect the individual’s level of living,

especially if there are alternative goods of

better quality in the local market. Besides,

the total commodity weight of the

subsidized goods in the consumers’ basket

does not constitute more than 15, 9 % as

demonstrated in the above table.

The weight of the subsidized goods in the consumers’ basket

The approximate weight in the consumer’s basket

Goods/ Commodities

1,6 Food

1,0 Grains

0,4 Sugars

0,2 Tea and Coffee

0,6 Fuel and lightening

1,0 health care

1,0 Medicaments

9,5 transportation

3,2 Education

15,9 Total




2- Supporting the price of local products,

whether industrial or agricultural, in order

to encourage and improve its production.

This support is realized through a group of

measures implemented by the government

with the aim of increasing production and

enabling producers or farmers to make

profits that will assist in developing and

expanding these activities. One of the most

important types of support is energy

subsidies such as the support of petroleum

products which are sold below cost of

international prices. Energy subsidies also

include supporting units of electric powers.

For example the agricultural bank provides

farmers with agricultural loans with

subsidized interest rate. Prices of

agricultural incomes are also supported. To

demonstrate those facts, it is clear that the

total of subsidized petroleum products has

amplified from 972 million Libyan Dinar

in 2002 to 10,153 million Libyan Dinar in

2010; this represents a compound annual

growth rate of approximately 30% and the

following table shows the estimations of

the subsidy amount to the petroleum

products.




The Hydrocarbon Sector Subsidies

From the previous tables, it can be said

that the Libyan government’ support and

healthcare support have increased from

1,329 Libyan Dinar in 2002 to 11,199

Libyan Dinar in 2010 resulting in a

compound Annual Growth Rate of

approximately 27%. However, it should be

noted that the indirect subsidy of electricity

prices is part of energy subsidies used to

generate electricity.

2002 2003 2004 2005 2006 2007 2008 2009 2010 Local sales’ value

of Petroleum products in local

prices

899 985 1,068 1,222 1,261 1,270 1,562 1,710 1,933

Local sales’ value of petroleum

products in global prices

1,743 2,392 3,449 4,651 5,346 4,682 6,266 5,337 8,328

The total subsidy of petroleum

products 844 1,407 2,381 3,429 4,086 3,412 4,704 3,626 6,395

Local production 605 1,069 1,674 2,501 2.838 2,357 2,861 2,584 4,743 Imports 239 338 706 928 1,248 1,056 1,844 1,043 1,652

Local sales’ value of natural gas in

local prices 134 158 208 262 346 362 1,015 1,388 1,389

Local sales’ value of natural gas in

global prices 263 406 488 973 1,787 1,799 7,835 5,539 5,147

The total subsidy of natural gas

128 249 280 711 1,441 1,437 6,819 4,151 3,758

The total subsidy 972 1,655 2,661 4,140 5,527 4,850 11,524 7,778 10,153




Direct Subsidy Given to the Sector of Electricity

Direct subsidy given to the sector of electricity

1 million LYD

2010 2009 2008 2007 2006 2005 2004 2003 2002 year

400,0 490,4 217,4 173,1 198,0 185,7 180,7 204,3 193,9 The

amount

Source:the general company of electricity

The total amount of the direct subsidy

given to the sector of electricity during the

period (0202-0220 ) reached 0 ,042 ,60

Libyan Dinar with an average annual

growth rate of 15%. The support during the

first seven years (2002-2008) was done

through reducing the losses of the

company and was not paid in cash, while

during the last two years (2009-2010); the

amount was transferred to the bank

account of the company.

It is crystal clear that the main goal of

commodity support provided by

government is centred on how to raise the

standard of living for individuals within a

society through preserving the general

level of the necessary commodity prices

(the price of the subsidized goods). Thus,

protecting these prices from the effects of

the continuous international prices

volatility and preserving a specific

appropriate standard for living. However,

the main challenge is not about the

provided commodity support but rather

results from the method in which this

subsidy is delivered. For example, the

number of Libyan citizens listed above the

item of participants in the consumer

associations is around 7,230 million

individuals; this goes against the

population census statistics and its rate of

growth in 2006. Furthermore, an important

part of the food commodities is sold in the

parallel market by individuals who want to

take advantage of the differences in prices.

In addition to that, large quantities are

smuggled into the neighbouring countries

in order to make personal benefits.

In addition to what has already been

mentioned, lots of questions are raised

regarding who is the biggest beneficiary

from the actual support in the hydrocarbon

sector. For example, is there any

support/subsidy given to the industrial

sector (productive units) in order to reduce

its costs and increase its productive and




competitive capacity in local and

international markets? Who benefits from

the petroleum products: is it the poor

people who do not own luxury cars, or is it

the rich class? Also to be noted is that a

part of the petroleum products is also

smuggled into the neighbouring countries.

Accordingly, the main disadvantages of

commodity support could be:

- Most of those who benefit from the

commodity support are the inhabitants

inside the country while a part of this

support is smuggled to foreigners outside

the country.

- Creation of a parallel market of goods

inside the country which raises the size of

the gray economy in the country.

- Opening one of the smuggling doors

across the borders.

- High costs regarding operating and

importing in comparison with monetary

support. One of the factors causing this

expensive cost is the existence of four

main branches and 25 office units for sales

all over Libya for Fund of Balancing Fund.

Moreover, there are 1561 employees

working for the fund, not to mention the

number of buildings, trucks and trailers.

The total amount of the cost of wages and

employment reached around 12, 5 Libyan

Dinar in 2010.

Changing the policy of monetary support

with a direct subsidy policy for commodity

prices can be seen as a solution to address

the problems resulting from adopting

direct support policies for the commodity

prices. The key advantages of this policy

are:

- Assuring an equal distribution of the

subsidy covering all the targeted classes.

- Decreasing poverty rate and then

decreasing the rate of unemployment

which will result in the generation of

additional incomes for most of society

individuals. Accordingly, the local demand

will rise and will lead to an increase in the

productivity thus creating additional

opportunities for private sector.

- Elimination of the parallel markets in

commodities which will lead to the

diminution of the Grey Economy’s

contribution in the Gross Domestic

Product.

It is worth mentioning that a large number

of countries have already started replacing

commodity support policy with monetary

policy. Yet, it is practically difficult to

apply this policy in many countries,

especially in developing ones for the

following reasons:

- The absence of a sophisticated

statistical body which results in the




scarcity as well as the inaccuracy of

statistical data.

- The Luck of managerial competencies

which results in weak administrative

structures of government institutions.

- The difficulty to guarantee the receipt

of monetary support by the targeted

categories in due time. In addition to

previously mentioned reasons, there are

other reasons, not mentioned here, which

hinder the success of this policy.

Based on what have been said and

according to the actual situation of the

Libyan economy, it has become crucial to

take a set of measures able to ensure that

the commodity support will be given to the

targeted society classes in accordance with

the goals set by the government. This

requires the availability of exact data and

competent management so that the

government achieve its aim. Still, under

the current circumstances of the Libyan

economy, we have to continue operating

with the commodity support in the short

term for many reasons including:

- The instability of prices and sometimes

the increase of international prices to

unprecedented levels, which necessitates

subsidizing prices in order to maintain a

suitable standard for living , particularly

because the majority of Libyan citizens

have low and fixed wages.

- The lack of an efficient administrative

system.

- The absence of a clear policy of wages.

(The absence of a policy that determines

wages, upon which the minimum wage is

being specified, can also be considered as

one of the reasons which necessitate the

temporary continuity of commodity

support until the poverty line is determined

and thus poor families or in other words

the targeted categories to be subsidized).

- The rarity of data (the unavailability of

detailed data defining the targeted

categories and as already mentioned, there

are clear variations in the data presented

by the Fund of Balancing Prices and the

data submitted by the General Information

and Documentation Authority about the

population number and the beneficiaries

from the subsidy (the number of citizens)).

- Political instability. This period is very

critical and any measure aiming at

reducing the commodity support may have

a negative impact on the present situation

of the country.

Steps to Reform the Subsidy/

Support

This paper suggests three scenarios of the

reform process which are:




1. The First Scenario:

Maintain Support

This scenario calls for the inevitability of

keeping on both the direct as well as the

indirect commodity support policy in the

present because of the political, economic

and social circumstances which the

country is going through in addition to the

absence of a good database and the

absence of an efficient administrative

capacity that helps the government replace

the commodity support with the

cash/monetary support. However, this does

not prevent working on the reformation of

commodity support policy in Libya where

this scenario focuses on a set of goals for

the reformation of the commodity support

in Libya:

- Initiating the preparation of a

comprehensive database which classifies

individuals or families of the Libyan

society according to their incomes in order

to determine the targeted category and

specify the necessary commodities that

should be subsidized according to the

family surveys of 2008 which are

classified according to the geographical

areas. Besides, all the data should be

available for everyone in order to assist the

efforts of restructuring support.

- Establishing a good system with which

all the consumers’ associations in Libya

should be connected in order to avoid

duplication and forgery. It is also crucial

that the data of these associations be

compatible with the system of the

comprehensive database. To prove the acts

of forgery, the initial data demonstrated

that the total number of Libyans who

benefit from commodity support according

to the Fund of Balancing Prices’ data that

is based on the former General People’s

Committee, has reached 7, 2 million

people. This number contradicts with the

data provided by the General Information

Authority which states that the total

population of Libya in the same year

(2010) was 6, 1 million. This contradiction

proves that there are about 1, 1 million

imaginary individuals who benefit from

the given commodity support. Thus, huge

amounts of the state money are wasted and

smuggled through the borders.

2. The second Scenario:

Increasing the Subsidies in a

Gradual Manner

This scenario is based on the hypothesis

which states the necessity to start

removing a part of commodity support and

replacing it with monetary support. The

reason behind this replacement is that the




current commodity support policy suffers

from many deficiencies such as:

- The subsidy does not go to those who

deserve it. The current system is centered

on supporting commodity rather than

supporting individuals. Therefore, it

cannot guarantee the access to commodity

by those who deserve it. Instead, it is

believed that in most cases all Individuals

benefit from that support regardless if they

are entitled to it or not.

- The insufficiency of ration in covering

the need of families and individuals.

- Inappropriate selection of beneficiaries

because there is no well-defined

classification that can be used as a

criterion in determining the targeted

classes or categories to receive subsidy

based on the level of individuals’ incomes

whether in private or public sector. Hence,

it is impossible to have detailed

information on the level of incomes upon

which eligibility can be decided.

Since the main objective of the commodity

support policy is to reach the targeted class

(low-income class), it is vital to work on a

good system operating according to an

effective mechanism that seeks the

delivery of subsidy to the intended social

class. Henceforward, this scenario contains

several goals aiming to achieve a policy of

commodity support which focuses on:

- Developing the public sector. It is

obvious that the act of removing

commodity support and substituting it with

monetary support could receive wide

acceptance from the different parts of

society if they have confidence in public

sector institutions and in their ability to

restructure the distributed money in

addition to the way in which this money

will be efficiently employed. To realize

this, the efficiency of the state budget

should be improved and trust of

community should be gained. The net of

savings arising from the restructuring of

support should be distributed on programs

and projects serving society to enhance its

productivity and reduce its costs.

- The necessity to establish coordination

between the Ministry of Economy and the

Ministry of Social Affairs to afford a good

database which encompasses all the

families in Libya. There is also a need to

classify these families according to three

categories such as: the low-income

category, the middle class category, and

the high-income category. This

classification should be carried out on the

basis of scientific studies conducted by

specialized parties in order to determine

the poverty line upon which society will




be divided into three categories according

to the income. After that priority should be

given to the category targeted by subsidy.

Experiences of some countries have

showed that the existence of a social

security institution has a major role in the

process of reform because it has data and

information about the poor classes (low-

income ones).

- Working on publishing coupons which

determines each family’s needs for basic

subsidized commodities. Then, these

coupons should be disbursed to these

families so that a (the citizen will give the

coupon to the trader who will put it in his

account to later obtain the monetary value

registered in the coupon). This policy will

create a significant competitiveness among

traders and will decrease the costs of

importation, shipping, and stocking, not to

mention other administrative costs.

Eventually, much of the state’s money will

be saved. Implementing this policy will

also diminish acts of smuggling subsidized

commodities across the borders and thus

protecting the state funds.

3. The Third Scenario: Removing

the commodity support directly.

This scenario takes the instant Liberal trend

where the removal of subsidy from all

commodities will be actual and immediate.

This scenario requires support of the

majority of the people if not all. This policy

demands:

- Spreading awareness among people

concerning the numbers spent on

commodity support by the government and

clarifying the alternatives in the case of

adopting monetary support.

- Recruitment of international Statistical

centers to help in sorting the targeted

categories of the subsidy reformation, or

recourse to a mechanism to be followed to

submit the 2000 Libyan Dinar to every

family in case it is proved to be successful.

- Respond to the rise of prices (inflation)

by addressing the structural defect in

commodity distribution channels3.

The predicted procedures and consequences

of this scenario are as the following:

- Directly transferring the amounts of

money that are expected to be saved from

the immediate process of subsidy reform to

all members of society and which will be,

on average, 1500 Libyan Dinar per capita4.

3 Libya's economy suffers from a deformity in

commodity distribution channels. This was evident in 2009 in relation with foodstuffs: While international food prices decreased that year with a rate of 19.9%, lunch prices in Libya increased with a rate of 3.1%. This is clear evidence that the Libyan market is a monopolistic market as already noted by many previous studies. 4 This value was calculated based on the average

total value of subsidy for the last five years divided




The cash grant transferred to individuals

will be a necessary element to succeed the

policy of restructuring subsidy. The more

the earned incomes (arising from the

process of elevating the subsidy of goods)

increase the more valuable cash grants will

be and eventually more popular support to

this process.

- A decrease in the local demand for

combustibles (the most supported goods in

Libya). In other words, to rationalize the

consumption of energy will increase

demand for public means of transportation.

As a result, private and public investments

in these developing areas will be

encouraged in Libya.

- The removing of subsidies on the fuel

locally sold will attract all kinds of capitals

to invest in this vital sector.

- The previous two ideas obviously point

out to a secondary clear goal which is

increasing labor demand in Libya which in

return will boost the rates of growth and

transform the Libyan economy to a market-

based economy.

by the number of Libyans residing in Libya according to the statistics of the General Information Authority.

- According to this scenario, reform in the

sector of electricity will divide the general

company of electricity into several

companies (according to the specialty and

production phase) to be supervised by the

ministry of energy. This mechanism will

improve the performance of electricity

production process( through specializing in

the production process) and provide the

amounts of support that are annually given

to the general company of electricity which

has strongly struggled since its foundation.

Moreover, the public finance will earn

additional funds arising from taxes imposed

on these companies or from fees of

Operating Rights.




- Reform in health sector will consist of

privatization of hospitals and health centers

in addition to providing health insurance

for all society members. Despite the large

amounts of money spent on health sector in

Libya, it is believed that the majority of the

Libyan people did not benefit from this

money but rather had to spend most of their

money to receive treatments abroad.

Consequently, privatizing health sector and

creating a specific mechanism to provide

health insurance to Libyans will be more

efficient. It will also affect the economic

and social levels positively.




About the Libyan Organization of Public Policies and Strategies

The Libyan Organization of Public Policies and Strategies (LOOPS) is an independent,

nonprofit and nongovernmental institution founded on December 2014 in Tripoli, Libya. A

representative branch was founded in Istanbul on January 2015.

The organization curries research and studies related to the current emerging policy and

strategy issues with the aim of coming up with effective as well as successful policies, and

also to provide support to the decision-makers. The organization devotes its efforts to

improve the performance of Libyan institutions and advance the economic and social

welfare of the Libyan people.

It seeks to spread the notions and concepts of quality, government, strategic planning and

culture of excellence so as to improve the performance of the Libyan institutions. The

organization aspires to promote and spread knowledge about public policies and strategies to

the state through the dissemination of statistics, studies and periodic reports. It also

organizes conferences, workshops and forums as platforms for discussion, exchanging

opinions and spreading knowledge.

Tripoli Office

Zawiyat Al Dahmani, Tripoli, Libya

Mailbox: 2044

Telephone: 00218 21 340 75 86

Fax: 00218 21 340 75 87

Istanbul Office

Yenibosna Merkez MAH.29

Istanbul vizyon park

Ofis Plaz.A3 BLK

K:3/D28

Bahçelievler - Istanbul – Turkey

Telephone: 0090 212 603 25 92

Fax: 0090 212 603 27 48

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