Amidst daily media updates on the advances of Libyan rebels and abounding speculation on the erstwhile dictator’s whereabouts, those with financial interests in the country and those seeking nascent opportunities have their eyes fixed squarely on Tripoli. With the rebel movement’s National Transitional Council of Libya (NTC) now largely recognised as the legitimate interim government, the question on the minds of many, both inside and outside Libya is what the economic future will hold for the country. This paper will consider what the post-Gaddafi Libyan economy might look like, what challenges it will face and where financial opportunities will lie for investors.

The legacy of a dictator

By most accounts a bellicose climate for foreign direct investment was created during Gaddafi’s protracted reign. “The concealed presence of oil companies in the Libyan economy did not contribute to the development of the country, but it did mean that the benefits of oil exploitation, extraction and sales went straight into the pockets of the regime.”⁽²⁾

In the many decades of his corrupt and oppressive rule, Gaddafi nationalised the economy to a great extent and secured much of the oil wealth for his personal musings. In the mean while, little was redirected to necessary socio-economic advancement or infrastructure development. He aimed to “embrace Islamist socialist values”⁽³⁾ during his four decades in power, and aligned his actions accordingly.

What’s more, Libyan Central Bank Governor, Farhat Bengdara, estimates that the six months of conflict may have cost the country’s economy in the region of US$ 15 billion in damage.⁽⁴⁾ The installations and infrastructure of the oil and gas industry will also have sustained some injury as a result of the abrupt halting of business and hurried shutting down of infrastructure in the wake of the civil war. Notwithstanding post-conflict reconstruction issues, the suspension of the Libyan oil industry, on which the economy is almost wholly reliant, will pose its own set of challenges to the rebuilding and formation of a new Libya.

Challenges in going forward

The NTC will need to stablise the government and its structures rather hastily in order to allow for its economy to recover so that fiscal inflows may contribute to the funding necessary for the endeavour of post-conflict reconstruction. The government relies on oil and gas for 92% of its overall revenue ⁽⁵⁾ and for 95% of export revenue,⁽⁶⁾ and will thus make the recuperation of the oil industry a priority. There is much speculation regarding how long it will take for production to recover to pre-conflict levels, however, analysts agree on a period between one and three years. In the interlude, production levels constituting 20% of peak production are expected within the next three to four months.⁽⁷⁾

Since Libya’s economy centres around the oil industry, essential commodities are imported by and large. Up to 75% of food products are imported to the country, and in order to provide for food security across Libya, the shortfall in funds will need to be addressed.⁽⁸⁾

It is to this end that the TNC have sought access to frozen offshore Libyan assets in order to keep the country functioning and to provide for the humanitarian needs of the people. Nonetheless, the foreign governments of countries where these assets are held will surely seek to use them as leverage in ensuring the democratic transition of the interim government and are therefore likely to release these funds in modest increments. In addition, the NTC owes its current position of power to the Western intervention of NATO in particular and will need to be cognisant hereof in the conduct of its affairs with the West.

In the longer term, Tripoli will need to look toward the diversification of the economy in order to minimise its reliance on the oil and gas sector, and to therefore limit its vulnerability to external shocks. Employment will likely also be of great concern due to the economic and physical displacement impacts of the conflict as well as the high unemployment rate, particularly among young people. Gaddafi “effectively stifled entrepreneurship by nationalising most businesses… satisfaction with the new government, and therefore stability, will depend on providing sustainable employment for the nation’s youth.”⁽⁹⁾

Infrastructure development will also be crucial in restoring the country, developing economic opportunities and attracting foreign investors. The devastation left in towns and cities as a result of the conflict will need to be seen to – mines must be cleared, buildings must be rebuilt, transport and communications infrastructure must be repaired, and essential services such as schools and hospitals must be restored. It is approximated that up to US$ 100 billion will need to invested over the next five years in this regard.⁽¹⁰⁾ The well-functioning of these facilities will contribute to stabilisation and to socio-economic and political success in coming months.

Factionalism in the ranks of the rebels who take over government will be a further concern. This is a phenomenon that has plagued African politics in several post-conflict circumstances, and investors and observers will surely be cautious of the rapturous impact that the formation of rebel factions could have on the prosperity of post-Gaddafi Libya.

Financial opportunities in a new era

Despite these challenges Libya still finds itself in a rather comfortable position. It has an accumulated wealth on the back of having the world’s ninth largest oil reserves and therefore has ample financing for a national reconstruction campaign.

Libya holds huge foreign assets thought to total US$ 170 billion,⁽¹¹⁾ as well as US$ 250 billion in foreign exchange reserves as a result of oil sales ⁽¹²⁾ and 144 tonnes of gold which is held by the country’s central bank. What’s more, the Gaddafi regime acquired a string of luxury hotels in other African countries, which could generate a tidy sum in the sale thereof.⁽¹³⁾ Improving the country’s financial standing even further is the fact that it has no outstanding debts.

Another saving grace for Libya will be its modest but well-educated population. With a gross domestic product of near US$ 90 billion, the country’s annual per capita income is high for its six million citizens at US$ 15,000 ⁽¹⁴⁾ – an amount which places it on par with many Eastern European countries. The educational standards of the citizenry are also comparable to emerging economies such as Malaysia. ⁽¹⁵⁾

The oil industry is expected to continue to shine in the post-Gaddafi economy, particularly due to its classification as ‘sweet’ crude oil which requires little refinement. As such, it is a high quality crude which can be used by European refineries which are not equipped to refine the lower quality ‘sour’ crude oil. European and Asian markets are therefore far more dependent on oil of such high quality, thus placing Libya in a position of comparative advantage. Once a semblance of stability and security has been achieved, the major oil companies from Italy, Spain, France and Germany with drilling operations in Libya will be back to continue to boost their coffers and supply their countries with oil.⁽¹⁶⁾

Despite the riches to be reaped from oil, Libya will be well-advised to diversify its economy; and as luck would have it, opportunities for diversification and investment abound. The development of a tourism industry offers endless possibilities considering that the “hundreds of miles of pristine Mediterranean coastline, a short hop from Europe” have not been exploited for that purpose as yet.⁽¹⁷⁾ Tunisia and Egypt have both been able to offer themselves as desirable tourist destinations to the West, garnering substantial inflows of visitors annually; and there is no reason why Libya should not do the same. There is also potential for the development of an agriculture industry due to the thousands of square miles of arable land which is at present undeveloped.⁽¹⁸⁾ In addition, this opportunity would offer Libya the occasion to curtail its reliance on imports for foodstuffs, and improve its food security by producing more of the products which its citizenry consume.

Moreover, the banking and insurance industry which had previously attracted some attention from offshore investors following the lifting of sanctions in 2004 ⁽¹⁹⁾ can seek revival and further development presuming a more stable administration emerges as is hoped. It is anticipated that the new administration will be friendly to the West and it is in light hereof – granted sufficient stabilisation occurs – that other foreign companies not previously engaged in Libya may look to the country with renewed positivity.

In the immediate future Libya will not be short of new opportunities for economic development and securing foreign direct investment. Bengdara seems positive that Libya’s economic output can double from pre-conflict levels over the next ten years to become the “star of the region.” ⁽²⁰⁾ In order to achieve this, the NTC must continue to commit itself to an ambitious but achievable roadmap leading to peaceful transition, free and fair elections, and the implementation of the principles of good governance. In so doing Libya indeed has the potential to rise as a phoenix from the ashes.

NOTES:

(1) Contact Lisa Otto through Consultancy Africa Intelligence’s Finance and Economy Unit (finance.economy@consultancyafrica.com).
(2) Amr Omran Farkash, “Foreign investments in post-Gaddafi Libya”, 28 August 2011, http://english.libya.tv.
(3) Adam Tanner, “A Post-Gaddafi Libya would likely diversity: World Bank”, 30 March 2011, http://www.msnbc.com.
(4) Alaa Shahine and Vivian Salama, “Oil-Rich Libyans Won’t Need Foreign Financial Backing in Post-Qaddafi Era”, 24 August 2011, http://www.bloomberg.com.
(5) Olga Belogolova, “What Happens to Libyan Oil After Qaddafi?”, 25 August 2011, http://www.theatlantic.com.
(6) “Many challenges ahead for Libya post Gaddafi economy”, Albawaba, 28 August 2011, http://www.albawaba.com.
(7) Olga Belogolova, “What Happens to Libyan Oil After Qaddafi?”, 25 August 2011, http://www.theatlantic.com.
(8) “Many challenges ahead for Libya post Gaddafi economy”, Albawaba.com, 28 August 2011, http://www.albawaba.com.
(9) Ibid.
(10) “The cost of a civil war”, Fin24, 26 August 2011, http://www.fin24.com.
(11) Ibid.
(12) Vivienne Walt, “The Post-Gaddafi Boom: In Libya, Foreign Bankers See a Coming Bonanza”, 09 June 2011, http://www.time.com.
(13) Sebastian Tong, “Investors eye promise, pitfalls in post-Gaddafi Libya”, 22 August 2011, http://www.reuters.com.
(14) “The cost of a civil war”, Fin24, 26 August 2011, http://www.fin24.com.
(15) Sebastian Tong, “Investors eye promise, pitfalls in post-Gaddafi Libya”, 22 August 2011, http://www.reuters.com.
(16) Olga Belogolova, “What Happens to Libyan Oil After Qaddafi?”, 25 August 2011, http://www.theatlantic.com.
(17) Vivienne Walt, “The Post-Gaddafi Boom: In Libya, Foreign Bankers See a Coming Bonanza”, 09 June 2011, http://www.time.com.
(18) Ibid.
(19) Sebastian Tong, “Investors eye promise, pitfalls in post-Gaddafi Libya”, 22 August 2011, http://www.reuters.com.
(20) Alaa Shahine and Vivian Salama, “Oil-Rich Libyans Won’t Need Foreign Financial Backing in Post-Qaddafi Era”, 24 August 2011, http://www.bloomberg.com.

Written by Lisa Otto ⁽¹⁾