4.6. Results and discussion 102
4.6.6. Structural VAR estimation results for Libya 146
4.6.6.1. Impulse response function analysis on Libya 146
Like other big net oil exporters, Libya’s impulse response functions show a strong influence of oil prices on the system. Our analysis of the impulse response functions on the Libyan economy also starts from the oil price shocks which is the exogenous variable in the model. Figure 4.25 shows the response of all variables to the oil price shock.
The impulse response functions in Figure 4.25 shows similar patterns of responses noticed in most of the previous countries analysed. The oil price shock as usual has a negative effect on the oil output growth rate, although the effect is insignificant. Interest rates fall after a brief initial rise and money supply growth rate also follows in the same direction so that it falls initially and later rises.
However, the initial fall in the money supply does not seem to affect the inflation rate as it rises steadily showing that inflation here might not be money supply motivated. The exchange rate, which is fixed during periods under study, did not show any significant movement but maintained almost a straight line movement along the origin. The manufacturing growth rate fell steadily. This again confirms another scenario of inverse relationship between inflation rate and the manufacturing output growth rate. The GDP growth rate also fell steadily and picked up gradually. Generally the oil price shock effect, through the monetary policy mechanism on the manufacturing output growth, seems not to be positive in the Libyan economy as well. It is important to note that all impulse response functions in Figure 4.25 are insignificant.
Figure 4.25: Impulse responses to an oil price shock (Libya)
-80 -60 -40 -20 0 20 40 60 80
1 2 3 4 5 6 7 8 9 10 11 12
oil output growth rate
-.4 -.2 .0 .2 .4 .6 .8
1 2 3 4 5 6 7 8 9 10 11 12
Interest rate
-8 -6 -4 -2 0 2 4 6 8
1 2 3 4 5 6 7 8 9 10 11 12
money supply growth rate
-4 -3 -2 -1 0 1 2 3 4
1 2 3 4 5 6 7 8 9 10 11 12
inflation rate
-.4 -.3 -.2 -.1 .0 .1 .2 .3 .4
1 2 3 4 5 6 7 8 9 10 11 12
Exchange rate
-.8 -.6 -.4 -.2 .0 .2 .4 .6 .8
1 2 3 4 5 6 7 8 9 10 11 12
Manufacturing output growth
-8 -6 -4 -2 0 2 4 6 8
1 2 3 4 5 6 7 8 9 10 11 12
GDP growth rate
Impulse responses to the oil output growth shock is shown in Figure 4.26. The interest rate shows a less conspicuous falling trend while money supply also moves in the same direction but eventually starts rising.
Figure 4.26: Impulse responses to an oil output growth rate shock (Libya)
However, the inflation rate seems to be neutral in its response. On the whole, none of the variables show a significant response to oil output growth shock. The manufacturing growth rate shows a more conspicuous downward movement and until period six when it gradually picks up. The pattern of movement of manufacturing output growth is also
-.4 -.2 .0 .2 .4 .6 .8
1 2 3 4 5 6 7 8 9 10 11 12
Interest rate
-8 -6 -4 -2 0 2 4 6 8
1 2 3 4 5 6 7 8 9 10 11 12
Money supply growth rate
-.4 -.3 -.2 -.1 .0 .1 .2 .3 .4
1 2 3 4 5 6 7 8 9 10 11 12
Exchange rate
-4 -3 -2 -1 0 1 2 3 4
1 2 3 4 5 6 7 8 9 10 11 12
Inflation rate
-.8 -.6 -.4 -.2 .0 .2 .4 .6 .8
1 2 3 4 5 6 7 8 9 10 11 12
Manufacturing output
-8 -6 -4 -2 0 2 4 6 8
1 2 3 4 5 6 7 8 9 10 11 12
GDP growth rate
replicated by the GDP growth rate. Again the oil output growth shock seems not to have any significant positive impact on the growth of the manufacturing sector.
Figure 4.27: impulse responses to an interest rate shock (Libya)
As observed in the case studies of other oil exporting countries previously analysed, most variables in the model respond significantly to an interest rate shock. The same is observed in Figure 4.27. The responses from all variables are sharp, thus confirming the importance of interest rates in the system. The shock causes an initial rise of money supply and a consequent fall beginning in period five. The shock causes the inflation
-8 -6 -4 -2 0 2 4 6 8
1 2 3 4 5 6 7 8 9 10 11 12
money supply growth rate
-4 -3 -2 -1 0 1 2 3 4
1 2 3 4 5 6 7 8 9 10 11 12
Inflation rate
-.4 -.3 -.2 -.1 .0 .1 .2 .3 .4
1 2 3 4 5 6 7 8 9 10 11 12
Exchange rate
-.8 -.6 -.4 -.2 .0 .2 .4 .6 .8
1 2 3 4 5 6 7 8 9 10 11 12
Manufacturing output growth
-8 -6 -4 -2 0 2 4 6 8
1 2 3 4 5 6 7 8 9 10 11 12
GDP growth rate
rate to fall sharply. The real exchange rate rises notably in response, partly because of Libya’s fixed exchange rate. However, the manufacturing output growth shows a very brief initial rise in response to the depreciation in the real value of the Libyan Dinar before declining sharply. This might not be unconnected with the fact that the monetary authority intervenes to maintain a fixed exchange rate causing the currency to appreciate again and consequently lead to a fall in manufacturing output. This also confirms that a currency appreciation will have a negative effect on the growth of the manufacturing sector in Libya. Before falling steadily, the GDP growth rate has a more sustained upward movement than the manufacturing growth rate.
Figure 4.28 shows impulse responses of all variables to a money supply growth rate shock. As observed in the analysis of some countries earlier, it appears that generally the influence of money supply growth rate on most variables in the model is not significant. The implication of this is that the results fail to demonstrate any notable pattern of movement of the variables in response to a money supply growth rate shock.
Despite this, manufacturing growth rate shows some slight upward movement, which shows a very marginal rise in the manufacturing output growth in response to the money supply growth rate shock. However, the response from the GDP growth rate is not conspicuous. The results obtained in the previous impulse response analyses seem to be repeating themselves here. This is particularly on the relative influence of money supply and interest rates on the variables in the system. Comparatively, evidence from the situation seen in Figure 4.27 also confirms that interest rates are most likely to influence the variables in the system more than money supply.
The response of the manufacturing growth rate to money supply growth rate shock has been positive for most of the impulse response functions for all the previous countries, especially Nigeria and Algeria, even though often sluggish.
Figure 4.28: Impulse responses to a money supply growth rate shock (Libya)
However, it cannot be ruled out that the shock from money supply appears to be having an initial positive influence on the manufacturing output growth, before falling steadily later.
-.4 -.2 .0 .2 .4 .6 .8
1 2 3 4 5 6 7 8 9 10 11 12
Interest rate
-4 -3 -2 -1 0 1 2 3 4
1 2 3 4 5 6 7 8 9 10 11 12
Inflation rate
-.4 -.3 -.2 -.1 .0 .1 .2 .3 .4
1 2 3 4 5 6 7 8 9 10 11 12
Exchange rate
-.8 -.6 -.4 -.2 .0 .2 .4 .6 .8
1 2 3 4 5 6 7 8 9 10 11 12
Manufacturing output growth
-8 -6 -4 -2 0 2 4 6 8
1 2 3 4 5 6 7 8 9 10 11 12
GDP growth rate
Figure 4.29: Impulse responses to inflation rate shock (Libya)
Most of the oil producing countries appear to be concerned with controlling inflation in their economies. Libya is another country that has a very strict inflation rate policy. The monetary authorities in Libya attempt to control inflation, which partly explains why increases in private and government expenditure do not always influence the inflation rate (Ali and Harvie, 2013). This situation is observed in Figure 4.29 where the responses to inflation rate shock fail to show any conspicuous direction.
-.4 -.2 .0 .2 .4 .6 .8
1 2 3 4 5 6 7 8 9 10 11 12
Interest rate
-8 -6 -4 -2 0 2 4 6 8
1 2 3 4 5 6 7 8 9 10 11 12
Money supply growth rate
-.4 -.3 -.2 -.1 .0 .1 .2 .3 .4
1 2 3 4 5 6 7 8 9 10 11 12
Exchange rate
-.8 -.6 -.4 -.2 .0 .2 .4 .6 .8
1 2 3 4 5 6 7 8 9 10 11 12
Manufacturing growth rate
-8 -6 -4 -2 0 2 4 6 8
1 2 3 4 5 6 7 8 9 10 11 12
GDP growth rate
However the effect of the inflation shock still shows a slight negative influence on manufacturing output growth. The falling movement becomes more conspicuous in period six. This confirms the negative influence of inflation shock on the growth of the manufacturing sector in Libya.
Figure 4.30: Impulse responses to exchange rate shock (Libya)
The conspicuous responses of all variables in the model to an exchange rate shock as seen in Figure 4.30 is a result of the unrealistic pegging of Libya’s exchange rate.
-.4 -.2 .0 .2 .4 .6 .8
1 2 3 4 5 6 7 8 9 10 11 12
Interest rate
-8 -6 -4 -2 0 2 4 6 8
1 2 3 4 5 6 7 8 9 10 11 12
Money supply growth rate
-4 -3 -2 -1 0 1 2 3 4
1 2 3 4 5 6 7 8 9 10 11 12
Inflation rate
-.8 -.6 -.4 -.2 .0 .2 .4 .6 .8
1 2 3 4 5 6 7 8 9 10 11 12
Manufacturing output growth
-8 -6 -4 -2 0 2 4 6 8
1 2 3 4 5 6 7 8 9 10 11 12
GDP growth rate
According to Ali and Harvie (2013) the unrealistic pegging of the exchange rate in Libya has led to changes in the exchange rate five times within the last three decades. It was changed in 1980, 1985, 1990, 1999 and 2001. The changes became imperative as a result of a lack of competitiveness with other currencies in the foreign exchange market.
This resulted in adverse effects on economic activity and created disturbances, causing economic instability whenever the exchange rate was adjusted (ADB 2012).
Manufacturing output responds by an initial rise as a result of the depreciation in the real value of the Libyan dinar. As the monetary authorities take action to maintain the fixed exchange rate, the depreciation is curtailed with the result that manufacturing output falls. That is, manufacturing output falls later as soon as the exchange rate is pegged again after adjustment. The same pattern of relationship is shown by the GDP growth rate.
4.6.6.2 Variance decomposition analysis result on Libya