VZCZCXRO9310
PP RUEHBC RUEHDE RUEHKUK RUEHROV
DE RUEHTRO #0001/01 0041454
ZNR UUUUU ZZH
P 041454Z JAN 09
FM AMEMBASSY TRIPOLI
TO RUEHC/SECSTATE WASHDC PRIORITY 4287
INFO RUEHEE/ARAB LEAGUE COLLECTIVE
RUEHFR/AMEMBASSY PARIS PRIORITY 0665
RUEHLO/AMEMBASSY LONDON PRIORITY 0978
RUEHRO/AMEMBASSY ROME PRIORITY 0489
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC
RUEHTRO/AMEMBASSY TRIPOLI 4810

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 
 
TRIPOLI 00000001  002.4 OF 002 
 
 
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