On 15 May, Libya’s interim governing body, the National Transitional Council (NTC), passed a LD68.5bn ($54.8bn) budget for 2012, the state’s largest ever.

The budget is broken down into two main segments. The first LD30bn will be used to pay public sector wages and pensions, while the second tranche of LD38bn will go towards development and infrastructure rehabilitation. This includes the oil and healthcare sectors and the reintegration of Libya’s revolutionary fighters into civil society. About 200,000 young nationals were involved in the uprising in 2011.

Libya’s budget financing

About LD45bn of the budget will be paid for by oil revenues, but it remains unclear what oil production level and price assumption the NTC used as the basis of its budget plan. Tripoli also has an estimated $165bn-worth of foreign assets, which were frozen by host countries during the Gaddafi era and the civil war. Between 60 per cent and 70 per cent of this money has now been unfrozen and recovered and will form the remainder of the 2012 budget.

In mid-May, oil production was back up to 1.55 million barrels a day and could reach pre-war levels in June

Most estimates of how much the Libyan economy shrank during the civil war, on the back of reduced oil production and exports, vary from 30-50 per cent. The Washington-based IMF’s estimates are more pessimistic at 60 per cent. The non-oil sector’s performance was affected by the destruction of infrastructure and facilities, as well as the departure of expatriate workers, disruptions to banking activity and limited access to foreign exchange. The oil sector’s GDP is estimated to have contracted by 71 per cent in 2011, while non-oil output declined by 50 per cent, according to a January IMF report.

The central bank says inflation averaged almost 16 per cent last year, largely due to a shortage of food in the country, which imports the majority of its staples. This situation has now eased, but inflation will remain a risk as consumer demand revives. Government subsidies will aim to keep this in check, however.

The role of the private and public sectors in Libya’s future has become an emotive subject. While the revolutions in Egypt and Tunisia brought down nominally capitalist but highly corrupt regimes, Libya is very different. It endured Gaddafi’s own brand of corrupted socialism, and a highly decentralised state looks the most likely outcome of regime change.

Oil will be key to Tripoli’s economic growth. The NTC has already established an Oil Ministry and appointed Abdulrahman Ben Yezza, a former chairman of Italian-Libyan joint venture Eni Oil Company, as oil minister. Production has been restored to near pre-war levels and some analysts have forecast gross domestic product (GDP) growth of about 15 per cent in 2012-16 on this basis. But the underlying security environment will be a concern as long as the numerous armed militias remain frustrated with the pace of change achieved by the NTC, or the new government once it is elected.

Although Tripoli’s economy will be propped up by high oil prices, which are about $100 a barrel, spending on reconstruction and services means the country is likely to run budget deficits for a few years. The Libya working group of UK think-tank Chatham House has suggested that pre-war levels of national income will be not be reached until 2014. Government economic figures have not yet been released, but Libya is expected to have recorded a $10bn fiscal deficit in 2011.

Economic diversification for Libya

The oil sector accounts for more than 70 per cent of GDP and more than 90 per cent of exports and government revenue, but it is not labour-intensive and employed only 43,000 Libyans during Gaddafi’s reign. In the long term, the new government will have to think about diversifying the economy away from oil and gas, and any growth in the non-oil sector will be strong as it will come from a very low base.

Over the next year, however, hydrocarbons will remain the primary focus. Oil and gas will provide the revenues to pay for Libya’s reconstruction, satisfy domestic needs and finance the provision of basic services.

The economy contracted sharply in 2011 as oil production and exports dropped to as low as 400,000 barrels a day (b/d), compared with the 2010 figure of 1.6 million b/d. Despite the exodus of foreign workers and fears that infrastructure had been damaged during the conflict, the sector has bounced back quickly. In mid-May, production was back up to 1.55 million b/d and is expected to reach pre-war levels in June.

NTC officials are now even talking about plans to increase production to 2.2 million b/d by 2015 and 3 million b/d further down the road, possibly by 2020. However, as a transitional government, the council’s role will end following the elections planned in June, so longer-term decisions will be left to the newly elected leadership.