Key fact

Before the conflict, Libya had more than $120bn-worth of projects planned

Source: MEED Insight

In October 2010, the Washington-based International Monetary Fund (IMF) published a forecast predicting Libya’s economy to grow by 6.2 per cent in 2011.

Back then no one could have predicted the civil war that would break out just months later. The conflict severely damaged Libya’s economic prospects. Oil output was halted as production facilities came under attack, cutting off the country’s main source of income.

As the conflict ended in October 2011 with the capture and death of deposed leader Muammar Gaddafi, the IMF forecast the Libyan economy may have contracted by more than 50 per cent during the year.

Libya has enjoyed healthy budget surpluses in recent years, the result of high oil revenues and the tendency of its government not to fulfil its spending commitments.

Gross domestic product (GDP) fell by 2.3 per cent in 2009 as the oil price slipped below $100 a barrel, but it rose by 4.2 per cent in 2010 as prices picked up.

Libyan oil exports

Crude oil exports account for 97 per cent of the country’s total export revenues. With the collapse in production, the current account will record a significant deficit in 2011. But this should not pose a significant risk to the new interim leadership, the National Transitional Council (NTC), which should be able to finance the shortfall easily using existing Libyan funds.

A major source of financing for the reconstruction will come from [Gaddafi’s unfrozen] assets

A recovery in oil revenues will ensure that Libya’s fiscal and current accounts return to surplus in 2012. Production has already been restored to about 1 million barrels a day (b/d), more than half the pre-conflict level of approximately 1.6 million b/d. Libya is now exporting some 800,000 b/d.

Aided by high oil prices of more than $110 a barrel, as well as financial support from the international community, the economy is expected to rebound just as quickly as Libyan oil production. But the NTC still faces serious challenges. While Libya enjoys the highest GDP per capita in Africa, thanks to its low population and large oil and gas reserves, its economy suffers from severe structural issues that have impeded growth over the years.

The challenge today is people expect the role of the government to get bigger; paying more salaries and services

Ali Tarhouni, former NTC prime minister and finance minister

Primary among these is the dominance of state in the economy and the previous distrust of private sector activity. There is also inequity in the distribution of growth and unemployment is high, especially among the young. According to the Geneva-based International Labour Organisation, prior to the uprising, 22 per cent of young Libyans were out of work.

The NTC will need to address the same discontent among the Libyan people that has plagued much of North Africa and the Middle East for several generations.

However, the immediate priority will be rebuilding infrastructure damaged during the conflict.

A major source of financing for the reconstruction will come from Gaddafi assets unfrozen by the international community. NTC Chairman Mustafa Abdul Jalil and newly appointed Prime Minister Abdul Rahim al-Keib wrote to the UN in early December asking for the release of about $150bn of assets frozen by the Security Council at the start of their campaign against Gaddafi in February. The unfreezing of the regime’s assets held by foreign governments will provide a major boost to the NTC’s fiscal challenge of restoring services and ensuring stability. But there has been some concern over the time taken to do so. Legal complications have delayed the process and this is hampering reconstruction efforts.

The NTC must also address foreign governments’ concerns over accountability and transparency by being clear about the structures and measures in place to ensure the funds benefit the Libyan people.

Unfreezing Libyan assets

Towards the end of 2011, NTC Finance Minister Hassan Zaqlam announced the UN Security Council had lifted sanctions on the Central Bank of Libya and the Libyan Foreign Bank, allowing the release of more than $100bn in assets.

Foreign Minister Ashur bin Khayyal says the country has received $20bn in assets so far, mostly from the US and France. The UK has also pledged to release another $10bn.

Access to its overseas assets will provide the government with ample budgetary support. Speaking on Libyan state-run television, Zaqlam said the funds would support the NTC’s reconstruction and rehabilitation programme, along with the 2012 state budget, when it is finally adopted.

Private sector

Libya suffers from poor social infrastructure. Its healthcare and education provision is severely lacking and there is a shortage of affordable housing. This despite the previous government targeting these sectors for investment over the last decade.

Much work remains to disconnect the economy from the reliance on oil income. Whatever happens, the NTC and the government that succeeds it, will have their work cut out in transforming Libya into a market economy.

The NTC’s successors, with a stronger mandate will look to introduce reforms to foster the growth of the private sector and will have to think about the diversification of the Libyan economy away from hydrocarbons. The country’s oil sector is not labour intensive, employing less than 50,000 Libyans, so addressing under-employment will be essential. Gaddafi’s government attempted from the late-1990s to strengthen the economy, principally by moving it from a centrally planned economy to a market system.

Foreign investment in the oil and gas sector has been strong, but progress remained hampered elsewhere, with the private sector marginalised and corrupt.

Speaking at the Carnegie Endowment in Washington in early January, former NTC Acting Prime Minister and Finance Minister Ali Tarhouni described the challenges ahead for Libya. Tarhouni, a professor of economics who had spent his career in exile in the US while Gaddafi ruled Libya, returned during the conflict and was instrumental in the negotiations for the release of frozen Libyan assets.

According to Tarhouni, the private sector should be the key driver of economic activity in the future. But this will require the role of the government to shrink.

“The challenge today is people expect the role of the government to get bigger; paying higher salaries and providing more services. In the short term, this will be a question of how much the government will grow, rather than the private sector,” says Tarhouni.

Clarifying laws

According to MEED Insight’s Libyan Project Market Report 2012, before the conflict, Libya had more than $120bn-worth of projects planned. The country was seen as a projects market with plenty of potential, but with little to show for it. The majority of its planned schemes were in the construction sector, consisting primarily of the two energy city projects at Ras Lanuf and Marsa al-Brega.

For the private sector to become a key driver of economic growth, a policy of rational privatisation must be pursued, says Tarhouni.

“Most of the contracts of the future, expect them to include some type of partnership …that is one tool of [increasing] the private sector [involvement],” says Tarhouni.

He adds that for that to happen, the new government will need to develop and clarify rules, in particular property and commercial laws.

Libya now has a chance to pursue its goal of economic liberalisation with greater commitment than the previous regime. Restoring security and articulating clear policies will prove a critical first step.