Determinants of Fiscal Sustainability in the Libyan Economy An Econometric Investigation of Budget Balance Sensitivity to Oil Sector Shocks (1990–2018)

Abstract

 This empirical paper investigates the determinants of fiscal sustainability in the Libyan rentier economy by evaluating the structural impact of crude oil revenue fluctuations, domestic production disruptions, and global oil price dynamics on the general budget balance between 1990 and 2018. Employing a multiple linear econometric framework via Ordinary Least Squares (OLS) executed in E-Views 10, the fiscal balance (DFC) was modeled as the dependent variable against international crude prices (OILP), extraction volume (OILD), aggregate oil receipts (OILR), current account balance (CAB), and the exchange rate (EXCH). The statistical diagnostics confirmed high model robustness and explanatory capacity (R² = 0.863, Adjusted R² = 0.833, F-statistic = 29.03, p < 0.0001), indicating that hydrocarbon variables explain approximately 83.3% of the temporal variance in Libya's fiscal balance. The estimated elasticity coefficients demonstrate that a 1% expansion in oil revenues improves the fiscal balance by 0.32%, while a 1% enhancement in production capacity yields a 0.28% fiscal surplus gain. Diagnostic testing affirmed the absence of serial correlation (Breusch-Godfrey LM) and homoscedastic error distribution (ARCH test). The study concludes that Libyan fiscal policy remains acutely pro-cyclical, hostage to global oil cycles and domestic security blockades due to rigid recurrent expenditures (salaries and subsidies). Key recommendations emphasize establishing a legally protected Sovereign Oil Stabilization Fund, reforming consumption subsidies, and enforcing comprehensive structural revenue diversification away from hydrocarbon hegemony.