Import Elasticity with Respect to Government Spending in the Libyan Economy: An Econometric Study (1990–2023)

Abstract

This study aims to estimate the elasticity of imports with respect to government expenditure in the Libyan economy over the period 1990–2023. The significance of the study stems from the rentier nature of the Libyan economy, where government expenditure serves as the primary driver of aggregate demand, a substantial portion of which leaks into imports of consumer, intermediate, and capital goods. Using annual data obtained from the Central Bank of Libya and the International Monetary Fund (IMF), the study employs the Autoregressive Distributed Lag (ARDL) approach to examine both the long-run and short-run relationships between the variables. The findings reveal the existence of a long-run equilibrium relationship between government expenditure and imports. The estimated long-run elasticity of imports with respect to government expenditure is approximately 0.78, indicating that imports constitute essential goods for the Libyan economy. In the short run, the elasticity is estimated at approximately 0.44. Furthermore, the error correction term indicates that about 53% of short-run disequilibrium is corrected annually, allowing the system to converge toward its long-run equilibrium. The study recommends adopting policies aimed at diversifying the domestic production base, rationalizing current government expenditure, and redirecting public spending toward investment in import-substituting productive sectors to enhance the sustainability of the trade balance.