international analysis and commentary

Rebuilding Libya: prospects for an economic success story

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Amid great turmoil and uncertainty in the Middle East, little is actually heard about the favorable economic prospects for the Arab Spring countries. However, Libya is an outlier in this respect. Looking at data recently published by the IMF, the Libyan economy is expected to grow by 20.2% in 2013 and 10.1% in 2014. Libya’s medium-term real GDP growth is expected to be at 5% in 2018.

Needless to say, these figures are very promising. Skeptics may attribute this favorable economic situation to Libya’s large dependence on oil production. In fact, approximately 80% of government revenue today is collected from the sale of hydrocarbons in international markets. Even before the revolution, Libya was able to post impressive growth rates benefiting from the waxing and waning of global oil prices. But the difference today is the spending behavior of the Libyan government. This will mark a watershed in Libya’s developmental process in the decades to come.

In 2013, Tripoli announced a budget of US$51.2 billion with 31% going to public sector employee salaries, 16% to subsidies and 28%to development and reconstruction. Compared to pre-revolution budgets, the nature of government spending in Libya today is larger in size, much more development-oriented and under constant public scrutiny.

Around half of Libya’s budget (valued at around half of the country’s GDP) is directed towards social welfare and reconstruction. A massive US$15 billion will be spent on development projects and reconstruction efforts in the current year. According to key Libyan officials, the top national industries to receive major projects from 2013-2015 are infrastructure, oil and gas, petrochemicals, utilities and industry with government organizations as key clients – the largest being the state electricity company GECOL, the Housing and Infrastructure Board and the National Oil Corporation. This could produce a very positive impact on the country’s efforts to create jobs and boost domestic consumption.

But equally important are three conditions laid out by the General National Congress to the disbursement of this year’s budget:

1. The government must activate the new national ID number system;
2. it must earmark approximately US$2 billion for child benefits;
3. and it must present a program that replaces subsidies on goods with cash subsidies.

The first condition is a result of post-war Libya’s bad track record with the disbursement of benefits and the issuance of grants. Problems are most frequently associated with the lack of official records and a mechanism to distribute payments. Enforcing a national ID system may help improve this situation although a lot of public scrutiny has been voiced against the specific program proposed by the current government.

The second condition on the proposed disbursements of child benefits will allow each Libyan household access to around US$80 per month for each child under the age of 18 and continues to be paid for females until they are married. Regardless of our opinion on the efficiency of child benefits, this is a great innovation in the Arab world. By institutionalizing child welfare, the Libyan government unknowingly may have set a precedent for the Arab region in terms of welfare spending.

As for the third condition, the proposed subsidy reform in Libya may have huge effects on the development potential of a large amount of funds dispersed yearly by the government to help people purchase food, fuel and electricity. Contrary to popular understanding, government subsidies are often taken advantage of by higher-income households and divert public resources away from spending for the poor. However, moving towards a cash subsidy program in Libya, as stipulated in the 2013 budget, could have serious positive transformational effects on the Libyan economy.

If the right guidelines and incentive structures are put in place, distributing around 13% of the country’s GDP to citizens and giving them the discretion to spend as they please could greatly enhance the efficiency of subsidy allocation and boost consumer demand which would favorably reflect on Libya’s medium-term growth prospects and national diversification efforts. This would be very important to households living in difficult economic situations after the recent conflict in the country.

In any case, in the long run the Libyan government’s overall spending behavior needs to be revisited. According to recent IMF estimates, the country’s surplus in its balance of payments is predicted to shrink from 25.8% in 2013 to 17.7% in 2014. In the medium term, Libya’s balance of payments is forecasted to be at minus 0.4% in 2018.This means that since Libya largely depends on oil revenue exports, the increase in domestic consumption over the next five years will lead to larger imports which will suppress the positive effects of oil revenue receipts on the country’s balance of payments.

In addition, as things stand, a 10 to 20% fall in international oil prices could seriously delay Libya’s development and reconstruction efforts. This exposes the weakness of Libya’s current economic paradigm. Government-led development spending based on oil revenue is much needed in the short term for economic revitalization, job creation, housing and reconstruction. However, in the medium to long term, serious efforts need to be made towards expanding Libya’s non-oil exporting sectors in addition to its domestic non-oil sectors.

All things considered, there is no doubt that Libya faces serious political and security challenges in its transition. Yet Libya’s economic prospects are highly favorable in comparison to other countries in the region that are undergoing difficult political transitions amidst prospects of economic meltdown.

Although the proposed government budget is largely focused on development in Libya, much more needs to be done in order to ensure more transparency in the disbursement of funds in addition to the creation of serious economic reform programs that can lead to enhanced institutionalization and economic diversification in the country. Nevertheless, depending on their success the nature of Libya’s ambitious spending plans for 2013 may serve as one of the pillars of the new economic paradigm in the post-Arab Spring Middle East.