Dynamic Macro-Economic Analysis of an Oil Price Shock, Fiscal, Monetary and Exchange Rate Policies for Libya in the MENA Region

Resource abundance should play an essential role in the economic growth of Middle East and North Africa (MENA) countries. However, whilst Libya is one the largest oil-producing and exporting countries in the MENA group, reliance on oil has had adverse impacts on non-oil sectors, resulting in a prolonged periods of slower economic growth and high inflation. Hence, reliance on plentiful oil reserves may be more of a curse than a blessing for Libya. This study focuses on the ‘Dutch disease’ component of the resource curse, whereby considerable foreign-currency-denominated revenue from oil exports has appreciated the real exchange rate, ensuring loss of competitiveness of domestic non-oil exports. Domestic inflation has also resulted from these developments. This is particularly noticeable for Libya that is the focus of this study..