Determinants of Libya's Non-Oil Trade Balance: An ARDL-Based Econometric Analysis of Long-Run and Short-Run Relationships (1970–2024)
DOI:
https://doi.org/10.65405/c2sbew20Keywords:
Non-oil Trade Balance; Real Effective Exchange Rate (REER), ARDL Model; Cointegration; Error Correction Model (ECM); Libya.Abstract
This study investigates the impact of the real effective exchange rate (REER), foreign income, and domestic income on Libya's non-oil trade balance over the period 1970–2024. The study is motivated by the Libyan economy's heavy dependence on oil exports and the limited contribution of non-oil exports to external trade. Annual data were analyzed using the Autoregressive Distributed Lag (ARDL) approach, which is suitable for variables integrated of different orders. The Bounds Testing approach was employed to examine the existence of a Long-Run equilibrium relationship, while the Error Correction Model (ECM) was used to capture short-run dynamics and the speed of adjustment toward Long-Run equilibrium.
The empirical findings reveal the existence of a Long-Run cointegrating relationship among the study variables. The results indicate that an appreciation of the real effective exchange rate has a statistically significant negative effect on Libya's non-oil trade balance, whereas higher foreign income significantly improves non-oil trade performance by stimulating external demand. In contrast, domestic income does not exert a statistically significant impact on the non-oil trade balance. The findings also show that the 2011 Libyan crisis had a substantial adverse structural effect on non-oil trade. Furthermore, the estimated error correction coefficient indicates that approximately 48.7% of short-run disequilibrium is corrected annually, suggesting a moderate speed of adjustment toward Long-Run equilibrium.
The study recommends adopting an exchange rate policy that enhances the competitiveness of non-oil exports, accelerating economic diversification, strengthening trade relations with major trading partners, and improving institutional and political stability to support sustainable growth in Libya's non-oil external sector.
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