Libya’s new struggle: overcoming Gheddafi’s economic system

Following the defeat of Muammar Gheddafi, the Libyan people find themselves at an important crossroads in the history of their country. Much of the current debate in Libya is centered around contentious political issues: the upcoming elections, the disarmament of rebels, regional political disparities and the legitimacy of the National Transitional Council (NTC) in leading the country through this period of change. As important as these issues are in defining the future of the country, too little attention is being given to the state of the economy and the existing challenges that impede economic development and job creation: these include high unemployment rates, declining levels of productivity, a virtually non-existent private sector and a very weak business environment.

The Libyan economy is fully dependent on the hydrocarbon sector – specifically oil. According to data from the International Monetary Fund and the Arab Monetary Fund statistical bulletins, the proceeds from oil make up more than 88% of total government revenue, 98% of total exports and around half of the country’s GDP. In 2009, the services sector made up around 31% of nominal GDP with 7% for the manufacturing sector and 3.2% for agriculture.

Two factors are of paramount importance. First Libya’s GDP exhibits a very high level of volatility, with growth rates ranging from -36% to 60% in the last 20 years. Second, the performance of the country’s GDP clearly trails that of world oil prices, which leaves the country open to a great deal of external risk and uncertainty.  

Source: US EIA Database and World Bank Indicators 2011

In light of these trends it is evident that Libya not only needs to (re)build its government institutions after the fall of Gheddafi but also requires a total overhaul of its economic system.

From a policy perspective, post-oil diversification should be made a national priority and should be coupled with a government strategy geared towards job creation for the youth. To this end, the transitional authorities face several complex issues.

The private sector in Libya is weak, fragmented and underdeveloped. In 2006 around 98% of registered private businesses were formed by a very loose network of small businesses and micro-enterprises with low levels of productivity[1]. The main reason for the private sector’s weak performance in Libya is due to the Gheddafi’s economic policies that promoted low levels of private investment in non-oil industries, as well as to high levels of government bureaucracy and outright corruption. In order to generate sustainable growth and job creation in the medium term, the transitional government should ease the restrictions on the private sector in addition to creating a favorable environment for it to flourish.

Libya’s banking system is dominated by four banks which are owned by the government and constitute almost 90% of Libya’s banking sector assets[2]. These banks are mainly charged with financing public sector activity. The financial market is weak and fragmented with very low levels of FDI in the non-oil sectors.  Domestic credit markets will be essential to develop new productive sectors outside the oil economy.

Libya’s foreign trade regime mirrors the foreign policy agenda of the Gheddafi era. Foreign trade is limited to the export of hydrocarbons and the import of food and manufactured products. Its largest trading partner is the European Union, which purchases 75% of total Libyan exports and provides 35% of total imports. Beyond Europe, Libya’s trade relations are highly fragmented and not aligned with any form of trade strategy aimed at boosting competitiveness or benefiting from domestic comparative advantage. This clearly exhibits the legacy of the old regime and its protectionist economic agenda, which isolated Libya from international economic cooperation.

Given this reality, free trade agreement negotiations – however time consuming and often frustrating – must be a priority for the transitional authorities, at both the regional and international level.

Libyan assets abroad are estimated at around $168 billion and are gradually being made available to the transitional government after the lifting of UN Security Council freeze . There in urgent need for funding to finance public sector wages, basic infrastructure provisions and security. With Libyan oil production moving closer to pre-war levels, a large amount of money is expected to start flowing back into the country. In order to ensure enhanced financial management of this large amount of resources, the transitional government should consider establishing a national fund for development similar to the Ajyal Fund established by the Tunisian transitional government as a part of the Jasmine Plan. This fund would be responsible for large scale investments in infrastructure projects in order to create jobs, in addition to promoting economic diversification.

In short, Gheddafi has been defeated politically but the legacy of his economic policies is yet to be overcome. The urgency of short-run political fixes in Libya, has led to a serious delay in tackling the country’s economic priorities. While the vision of the NTC includes building a vibrant economy to serve the Libyan people, too little is being done at the moment.

Recently, the NTC has repaid $400 million out of a total of $1.4 billion to Turkish contractors for projects completed before the revolution. This is a good signal to private investors. Moreover, Mustafa Abdel Jalil (President of the NTC) has made it clear in a recent press conference that Libya is working on a general review of its investments abroad so that they are more in line with the interest of the Libyan people[3]. However, besides sporadic press statements the main economic focus of the council has been on restoring oil production to its pre-war levels. According to Mahmoud Jibril (former Chairman of the NTC) in a statement made at the World Economic Forum on the Middle East, the short run priorities in Libya include restoring stability, collecting vast amount of arms and engaging in dialogue that can lead to national reconciliation[4]. Replacing oil revenues with other income sources and building an alternative economy is mentioned by Jibril but only as a longer term consideration. Dealing with the political difficulties of Libya is obviously an important priority. But given the state of political deadlock in the country this might take longer than expected and the economy is in no position to wait. Good governance is also about tackling multiple challenges simultaneously, including structural economic reforms.

[1]World Bank Report 2006 http://info.worldbank.org/etools/wti/docs/wti2008/brief109.pdf