OECD Review of Foreign Direct Investment Statistics of Libya

A strong institutional setting is fundamental to the compilation of FDI statistics. Libya’s system has some clear advantages: the Central Bank of Libya (CBL) has the authority to produce FDI statistics based on foreign exchange and central bank regulations.1 The CBL has implemented a form of International Transactions Reporting System (ITRS) to capture cross-border transactions that will provide a good foundation for compiling balance of payments transactions. Finally, the CBL has established a relationship with the General Authority for Investment Promotion and Privatisation Affairs for them to provide information for the compilation of FDI statistics.

FDI is a particularly complicated type of statistical series to compile. There are certain aspects of FDI statistics, such as reinvested earnings and inter-company loans, that are not well-covered in an ITRS system. In addition, FDI position statistics cannot be derived from the transactions recorded in an ITRS.2 Therefore, compilers often have to rely on information relevant to the compilation of FDI statistics that is available from other government agencies. For example, in Libya, the CBL receives data from the General Authority for Investment Promotion and Privatisation Affairs that is particularly relevant for FDI statistics. In addition, many countries have found it necessary to conduct surveys to compile FDI statistics.

If this arrangement has not already been formalised, such as through a memorandum of understanding (MOU), it should be. The MOU should specify a lead agency responsible for the compilation and dissemination of FDI statistics; in this case, the lead agency should be the CBL. It should identify the other agencies that are responsible for providing data to the Central Bank. These agencies would include the General Authority for Investment Promotion and Privatisation Affairs, but they could also include other agencies that may have data relevant for the compilation of FDI statistics, such as regulatory agencies, special economic and free zone authorities, and the Ministry of Oil and Gas. The MOU should indicate the specific data items that will be provided to the Central Bank, the timeline for the provision of data so that it can support the timely compilation of FDI statistics, and the format that the data will be provided in (e.g., aggregate data in excel files).

It is always preferable that a country release official FDI statistics that are consistent with each other. Therefore, if an agency other than the CBL would like to release FDI statistics, it would be best if they co-ordinate that release with the CBL to ensure that the data are consistent with information released by the CBL. In some countries, the central bank, the national statistical office, and other agencies, such as investment promotion authorities, all release statistics relevant to FDI. In the best cases, these are joint releases between the agencies involved or, as the second best, that the statistics are consistent between the agencies. If the data are not consistent, then the differences between the releases should at least be easily explained to users. Arrangements covering joint releases could also be included in the MOU.

The memorandum could also establish an FDI Working Group that could co-ordinate other policies related to FDI and need not be limited to statistics compilation. For example, it could include agencies involved in investment policy and investment promotion to provide a forum for them to co-ordinate their activities. If this is done, the MOU should still establish a lead agency for FDI statistics compilation and include the above information on data-sharing arrangements.

The CBL does not currently report FDI position data to the IMF nor does it publish any position statistics on its website. Position statistics have grown more important in supporting analyses of an economy’s vulnerability to financial crises by shedding light on the financial structure of economies. The International Investment Position can reveal potential weaknesses, such as a high level of short-term debt liabilities, but also signs of resiliency, such as a high share of direct investment within liabilities. This demonstrates that the vulnerabilities of an economy vary across the functional categories. For example, portfolio investment debt poses a greater danger to an economy than direct investment debt. In recent years, the balance sheet approach provides a systematic analytical framework for exploring how balance sheet weaknesses contribute to macro-financial vulnerabilities.3

Inward direct investment positions can also provide valuable information for formulating investment policies and investment attraction policies. In particular, detail on the major partner countries and on the sectors attracting foreign direct investment can help understand the role that foreign investment is playing in the economy. Therefore, while measuring both inward and outward FDI positions is valuable and needed to support balance sheet analysis, there is still great value in compiling and disseminating information on the inward FDI position alone, especially if it is disaggregated by partner economy and by sector. Inward position statistics can be used to answer questions like:

• Is FDI playing a larger role in the domestic economy? By comparing the aggregate inward position to gross domestic product over time, it can be determined if inward FDI is becoming relatively more important in the economy over time.

• Which partner economies are the most important sources of FDI to the domestic economy? The most important sources of FDI can be identified by disaggregating the inward position by partner economy.

• Which industries are attracting the most FDI? The industries where FDI plays the most significant role can be identified by disaggregating the positions by sector. These statistics can also indicate if there is an opportunity to diversify the industries attracting FDI.

FDI positions are the levels of FDI assets and liabilities at a particular point in time. FDI positions are disaggregated into equity and debt instruments; the accumulation of reinvestment of earnings is not recorded separately in position data as it is included in the overall calculation of “equity” when recorded at market value. See Box ‎2.1 for References to International Guidance on the compilation of FDI statistics, including both the conceptual foundations and practical advice.

Equity positions cover all components of shareholders’ funds (proportionate to the percentage of shares held). They, therefore, include equity, contributed surplus, reinvestment of earnings, revaluations, as well as any reserve accounts. Market value is the conceptually correct basis for valuing equity positions, but this is difficult to do for much of the FDI positions because equity in direct investment enterprises is usually not publicly traded; that is, the equity in direct investment enterprises is unlisted. Therefore, BPM6 and BD4 recommend methods to estimate the market value of unlisted equity. The most common method used by compilers is Own Funds at Book Value (OFBV). For a description of how to estimate the FDI equity position using the OFBV method, see ‎Annex A that shows the derivation of the FDI equity and debt positions from a generic balance sheet of a direct investment enterprise, including the additional information required to appropriately compile FDI positions.

Debt positions include payables and receivables between enterprises in a direct investment relationship arising from loans, deposits, debt securities, suppliers’ (trade) credit, financial leases, and non-participating preference (preferred) shares. However, debt positions between FDI related financial intermediaries (such as commercial banks, savings institutions, credit unions, mutual funds or finance companies) are excluded from direct investment. The reason for this exclusion is that debt positions are taken to represent “normal banking-type business”, so that their very nature is quite different from that of other direct investment enterprises. Consequently, it is felt that the inclusion of debt instruments between such related financial intermediaries would produce misleading statistics.

There are two bases for compiling FDI positions: the asset/liability and the directional presentation. ‎ Annex B discusses these two presentations, the relationship to each other, and the best uses for each.

The General Authority for Investment Promotion and Privatisation Affairs provides data to the CBL that could be the basis for compiling inward position statistics. From the excel file shared following the January 2024 workshop, it appears that the General Authority for Investment Promotion and Privatisation Affairs produces aggregate data on assets and liabilities of foreign investment in the country that include information on net equity, long-term and short-term liabilities, and other credit balances. If so, the General Authority for Investment Promotion and Privatisation data would be appropriate for compiling inward FDI positions. In addition, it appears that they have information on partner economies (that is, on the economy of the direct investor) and on the sector of main activity of the direct investment enterprise that could be used to provide some geographic and sectoral detail.

Position statistics disaggregated by partner economy and by sector should use the directional principle. This could be the basic directional principle that nets reverse investment if the information on fellow enterprises is not available (see ‎Annex B on the asset/liability and directional presentations of FDI statistics for more information).

However, more information is needed on exactly what is covered in the General Authority for Investment Promotion and Privatisation data to determine if it is appropriate for compiling inward FDI positions. Below are some of the questions that would need to be answered:

• How is each of the items defined?

• Do they cover only transactions with direct investment related parties, or do they represent totals for the direct investment enterprise? For example, does the net equity investment represent only the direct investor’s share of the net equity or is it the total for the enterprise? Are the long-term and short-term liabilities only those with related parties (that is with the direct investor or affiliates of the direct investor)?

• Are foreign-owned enterprises required to report this information to the General Authority?

• What is the reporting rate? That is, do all companies report or not? If not, are the missing data estimated?

Other countries have used balance sheet information to compile FDI position statistics in the absence of surveys. For example, Egypt’s General Authority for Investment (GAFI) use balance sheets that enterprises with foreign investors are required to provide to GAFI to compile inward FDI position statistics that are consistent with BPM6 and BD4. Therefore, it is definitely possible to compile position statistics from such data.

Given the greater emphasis being placed on compiling the IIP for macroeconomic analysis, the CBL may start to compile the IIP in the future. To do this, the CBL will need to compile FDI asset positions.4 As a first step, FDI equity asset positions could be compiled by accumulating transactions. This would only be a temporary method until a data collection could be instituted.

While FDI position statistics represent the accumulated value of investment made over time, it is not appropriate to simply sum direct investment equity capital flows, even if the total is adjusted for changes in exchange rates and asset prices. This method does not take into account the many factors that can have substantial impacts on the market value of direct investment equity, including cumulative reinvestment of earnings, depreciation on fixed assets, and holding gains and losses at the direct investment enterprise. Rather than rely on the accumulation of flows, most countries rely instead on the collection of data from the books of direct investment enterprises. However, the accumulation of flows can be used until a better data source, e.g., data collection through an FDI survey, can be instituted. See IMF (2011[6]) for examples of how to carry forward FDI equity positions through the accumulation of flows.

For FDI debt positions, additional data sources should be explored. Possible data sources include a debt register and, for FDI liabilities, data sources used for compiling external debt statistics.

The direct collection of data, usually through a survey, is the best source of data to compile FDI positions. While the data from the General Authority for Investment Promotion and Privatisation Affairs appears to satisfy the need for direct collection for most FDI liabilities, the CBL would likely need to develop and conduct a survey to gather the data needed to compile FDI asset position statistics. This would be a significant undertaking. It would require establishing the legal basis to conduct a survey if not already in place, developing the information technology (IT) tools, training staff, and working with respondents. Therefore, even though it will be beneficial to have the FDI asset position as part of the eventual publication of the IIP, the OECD recommends that this not be a high priority for the CBL at this time as there are other more pressing improvements; rather, it should be a long-term objective. Information on initiating and conducting FDI surveys is available in the IMF Coordinated Direct Investment Survey Guide (IMF, 2015[5]).

FDI plays a very important role in natural resource exploration and extraction in many countries. Therefore, there is guidance offered in the international manuals on specific aspects of natural resource exploration and extraction, including the treatment of payments for the right to undertake investment, how to record exploration expenditures, and, finally, the recording of production sharing arrangements. This section presents the guidance for recording each of these aspects of natural resource exploration and extraction. It then discusses the need to identify data sources to implement the recording and to include them in the data sourcing arrangements discussed in Recommendation 1.

Payments associated with the acquisition of a right to undertake a direct investment for the extraction of natural resources: In many developing and transition economies, the government requires the payments of an agreed amount by direct investors for the right to undertake a direct investment in the host economy. These are legal transactions and should not be associated with poor governance. BD4 recommends that such payments be recorded as direct investment equity capital flows when there is the intention to establish a direct investment enterprise.

Exploration expenditures: When a direct investment enterprise is established for the purposes of natural resource exploration, its exploration expenditures should be capitalised (even if the exploration does not prove sufficient economic resources to be viable) as part of the equity investment in the direct investment enterprise and written off (or written down) as appropriate.

For example, assume an oil company incorporates a direct investment enterprise that drills an oil well. Assume also that the direct investor makes an equity investment in its direct investment enterprise of USD 100 in period 1 (including expenditure on bonus preliminary fee payments made by the direct investor to a resident of the host country, usually the government, for the right to undertake exploration for natural resources), USD 30 in period 2, and then closes down the operation at the end of period 2 when the well proves to be dry. There is a financial flow from the direct investor to the direct investment enterprise of USD 100 in period 1 and USD 30 in period 2 in direct investment accounts of both economies. No further entries for cross-border transactions are recorded after the shutdown of the operation in period 2. Instead, a negative stock adjustment of USD 130 is made in the direct investment asset position of the economy where the oil company parent is located, and an equal reduction is made in the direct investment liability position of the economy where the affiliate was located, to zero out the position.

Production sharing arrangements: A production sharing arrangement (PSA) is a contract between one or more investors in which rights to explore and extract a natural resource, often petroleum, from a specific place over a specific time period are stipulated. Under the PSA, the government hires the investor(s) to extract the resources, but the government still retains ownership of the resources. The investors administer the business at their own expense. PSAs are a way to share risk between the government and the investors. The recording of PSAs is further discussed in (IMF, 2011[7]) and in the BPM Compilation Guide Box 10.1 (IMF, 2014[4]).

PSA arrangements vary across countries, so it is key for compilers to know if PSAs are used in their country and the specific arrangements used. A PSA will generally involve the following elements:

• investor or operator pays royalties to the government

• investors receive production revenues to cover expenses

• “profit production” is split between the government, operator, and investors on a negotiated formula based on the characteristics of the project

• operator and/or investors pay taxes on their portion of profits on production

• foreign consortium supplies all of the equipment and expertise throughout the contract; does the exploration; and bears the risk.

The first step in recording PSAs is to identify the operating company and establish that there is a direct investment relationship between that company and the foreign investor(s). If there is a single foreign investor and the government, then the former is the direct investor. However, when there are a number of foreign investors (as part of a consortium), determining the nature of the investment relationships is likely to be a challenge in the absence of full disclosure on the terms and conditions of PSAs. PSAs may identify the rights of contacting parties with regard to participating interests that are usually linked to shares in the profits, but these participating interests do not provide the criteria for determining a direct investment relationship. Rather, the investor that has clearly assigned responsibilities for operating the production unit should be considered as the direct investor for statistical purposes. It is possible that the government agency that manages the state’s interests in the PSA may not create an operating company; in these cases, the compiler needs to create an artificial operating unit for the PSA, which would be treated as a branch. Direct investment relationships for this branch would be determined as discussed above.

The investment by the direct investor in the operating unit is recorded as an equity investment and includes all fixed assets provided by the investor. It is considered an equity investment because the investor does carry the risk if the project turns out not to be profitable and because the investor shares in the profits generated from the project. Yet, in the balance sheet of the operating unit, the value of the fixed assets is often recorded on the asset side and a long-term liability to the investor is recorded on the liability side. Therefore, it is necessary to reclassify this liability to an equity investment for statistical recording.

Once the project generates revenues, royalties may be paid to the government. The revenues remaining after the payment of royalties are split into ‘cost’ oil and ‘profit’ oil. ‘Cost’ oil provides investors a return on their investment and is usually capped at a certain percentage of revenues. ‘Cost’ oil continues to be paid until all costs are recovered or the project ends, and it is recorded as a withdrawal of equity capital from the host economy. The ‘profit’ oil is split between the foreign investor and the government based on the formula in the PSA; the direct investor may pay taxes on their portion of the profit oil. The direct investor’s share of the ‘profit’ oil is recorded as FDI income payments from the host economy.

Data collection on PSAs can be difficult as the agreements are often confidential, special accounting treatments may be used, and the foreign investor(s) often have limited reporting obligations under the PSA. The following information is needed for statistical recording:

• percentage of participation of each foreign enterprise

• payments received/paid for drilling rights

• operation costs provided and recovered

• cost of capital equipment provided and recovered

• depreciation of equipment

• profit oil

Therefore, it is important to identify data sources that can provide the needed information on PSAs and, once they are identified, they should be included in data sharing agreements.

It is important for the CBL to obtain the data needed so that they can record these payments and PSAs in FDI according to the international standards. The provision of data from these sources in the data sharing arrangements discussed under Recommendation 1. Given the important role of natural resource exploration and extraction in FDI in Libya, this recommendation is given high priority.

The BoP platform established by the CBL to capture banking transactions is an excellent data source for many FDI transactions, but there are some transactions, e.g., the reinvestment of earnings, that will not be captured because they do not go through the banking system in Libya.

Direct investment income on equity consists of “distributed earnings” and “reinvested earnings”. Distributed earnings consist of dividends and withdrawals from income of quasi-corporations, i.e., distributed branch profits. Dividends include those to shareholders, both common and participating preferred stock, whether voting or non-voting, according to the contractual relationship between the enterprise and these various types of shareholders, before deduction for withholding taxes. Dividends exclude liquidating dividends and bonus shares (which are dividends in the form of additional shares of stock). Liquidating dividends are excluded because they are a return of equity rather than a remittance of earnings (liquidating dividends are included instead as transactions in the direct investment equity). Bonus shares are excluded because they are a capitalisation of retained earnings – a substitution of one type of equity (capital stock) for another (retained earnings). In an accounting sense, they reduce the amount of retained earnings available for distribution but leave total owners’ equity unchanged. Distributed earnings would go through the banking system and would be captured by the BoP Platform.

Reinvested earnings of direct investment enterprises reflect earnings on equity accruing to direct investors less distributed earnings, proportionate to the percentage ownership of the equity owned by the direct investor(s). Reinvested earnings are included in direct investment income because the earnings of the direct investment enterprise are deemed to be the income of the direct investor (proportionate to the direct investor’s holding of equity in the direct investment enterprise), whether they are reinvested in the enterprise or remitted to the direct investor. However, because reinvested earnings are not actually distributed to the direct investor, but rather increase the direct investor’s investment in its affiliate, an entry that is equal to that made in the direct investment income account but of opposite sign is entered in the direct investment transactions account. In the direct investment income account, this transaction is referred to as “reinvested earnings” and, in the financial account, it is referred to as the “reinvestment of earnings”.

Reinvested earnings are imputed transactions, measured by subtracting distributed earnings in a period from total earnings in that period, or:

Reinvested earnings_t = earnings_t – dividends and withdrawals from income of quasi-corporations_t

For more guidance on the recording of reinvested earnings and the reinvestment of earnings, please see Chapter 4 and Annex 6 of BD4 (OECD, 2009[2]).

Because they are imputed transactions, the reinvestment of earnings will not go through the banking system and instead need to be compiled by collecting data on the earnings of direct investment enterprises. This makes it one of the most difficult components of FDI transactions to compile. At the 2016 meeting of the IMF’s Balance of Payments Committee, the IMF introduced its “Strategy to Compile External Sector Statistics in Countries with Low Statistical Capacity” (IMF, 2016[8]). One aspect of this strategy was to prioritise elements of the balance of payments and the IIP for compilation. This prioritisation would differentiate between level 1 items that are crucial for policymaking and are mandatory elements of the balance of payments and IIP and level 2 items that are less important for policymaking and are encouraged elements of the balance of payments and IIP. The strategy classified the reinvestment of earnings as level 2 after weighing the benefits of compiling for policymaking against the costs of compiling the item.

The CBL will need to develop data sources to compile reinvestment of earnings/reinvested earnings. It appears that the data from the General Authority for Investment Promotion and Privatisation Affairs might include information on the reinvestment of earnings in direct investment enterprises in Libya. This should be explored as a potential data source. However, it would only cover inward FDI. Therefore, the CBL would need to collect the items needed to compile reinvestment of earnings/reinvested earnings from a different data source, such as the FDI survey discussed under Recommendation 2c. This recommendation is given low priority given that the reinvestment of earnings/reinvested earnings are less important for policymaking and the high costs of compilation.

A large share of the Libyan economy is informal. The World Bank estimated that in 2020, 36.2% of output in Libya was generated by the informal economy.5 At the January 2024 workshop, the CBL raised the issue of informality and its implications for the compilation of FDI statistics. Informality poses difficulties for statistics compilation because the activities generally fall outside of normal data collection and are undertaken by individuals, households or very small-scale enterprises. The costs of data collection to cover the informal economy can be very high because the nature of the activity may call for face-to-face interviews of respondents. Moreover, the activity types in the informal sector are very diverse and are often of small scale, which is likely to render it costlier to cover (IMF, 2017[9]). While informality poses major difficulties for the measurement of key domestic macroeconomic indicators, such as Gross Domestic Product and employment, it poses fewer difficulties for external sector statistics, and fewer still for foreign direct investment.

The 2008 SNA follows the definition of the informal economy as developed by the International Conference of Labour Statisticians as “…consisting of units engaged in the production of goods or services with the primary objective of generating employment and incomes to the persons concerned. These units typically operate at a low level of organisation, with little or no division between labour and capital as factors of production and on a small scale. Labour relations—where they exist—are based mostly on casual employment, kinship or personal and social relations…” (2008 SNA, paragraph 25.36). The informal economy also includes underground activities and illegal activities. Underground activities are legal activities that are concealed from the authorities for a variety of reasons, including avoiding taxes, regulations, and administrative procedures. Thus, informal external transactions could arise from activities of either individuals, households, or enterprises operating in the informal economy or activities hidden within the formal economy.

The IMF formed a Task Force on the Informal Economy to take stock of country practices addressing the informal economy with a view to identifying data collection methods and compilation techniques that are feasible for addressing the coverage and consistency of informal economy in cross border statistics. This assessment would underpin the design of appropriate strategies to enhance the coverage of informal economy in cross-border statistics (IMF, 2017[10]). According to the final report of the Task Force, countries that have estimated informal external transactions have focused on the current account and, in particular, trade in goods as this is the area of external sector statistics where the informal economy is judged to be most important. This is followed by personal transfers and workers’ remittances in the secondary income account; and travel, transport, prostitution, gambling and smuggling of migrants in the services account (IMF, 2019[11]). Only a few countries have started compiling some components of the capital and financial accounts.

The Final Report of the Task Force also highlighted informal economy data issues specific to the financial account and IIP to encourage national compilers to extend initiatives beyond the current account, where applicable. A couple of areas may be particularly relevant for FDI: 1) illicit financial flows to avoid and evade taxes and 2) real estate purchases abroad by individuals and households.

The CBL is encouraged to explore whether there appears to be significant informal economy transactions in FDI in their economy and, if so, to consult the webpage created by the IMF to support compilers in addressing the informal economy (IMF, n.d.[12]) for practices that could be adopted to measure these transactions. Given the generally limited role of informal transactions in FDI and the relatively high costs of trying to cover them, this recommendation is given low priority.