Blog | August 02, 2017

Libya: Building Consensus Around Economic Objectives

BY: DR. SASKIA VAN GENUGTEN

The Head of Libya’s Presidency Council, Fayez al-Serraj and his rival, the head of the Libyan National Army, Field Marshall Khalifa Haftar, recently agreed to call a ceasefire and hold elections as a way out of the current political and security crisis. Yet, despite the recent announcement, it remains to be seen whether unity amongst Libyans can be found on political matters. Any renewed dialogue focusing primarily on politically contentious issues and on dividing positions of power is likely to lead to failure in the short-term. 

However, what Libyans most likely can agree on is that a concerted effort needs to be made to stabilize their country’s economy. Indeed, more than a year and a half after the signing of the Libyan Political Agreement, large parts of the country suffer from suboptimal basic services and witness inflation above 15 percent, while dealing with limited liquidity and a steadily weakening currency in parallel markets. Indeed, the precarious situation has negatively impacted citizens’ trust in Libya’s struggling state authorities. Thus, Libyan and international policy-makers alike are looking for a solution to the crisis, should cling to that glimmer of unifying hope that can be found in economic revival. 

In broad terms, building consensus around economic objectives could start with problem-solving workgroups aimed at reversing the detrimental economic developments over the past six years of civil war and political strife, in order to find shared and inclusive solutions to the following issues:  

  • How to optimize and secure oil production and exports? State revenues have decreased due to severe disruptions to oil production and lower global oil prices. Lately, oil production has rapidly increased again, but equipment, pipelines and terminals have been damaged and are in need of repair. At the same time, when oil production rises, OPEC members might demand Libya to be included in current production capping agreements.  
  • How to spend the limited resources fairly and effectively? A significant share of the central (emergency) budget is being spent on public sector wages. This includes a good number of ‘ghost employees’ and in the aftermath of the 2011 civil war, a large number of revolutionary combatants were added to the state’s wage bill. Due to suboptimal bureaucratic practices, what were believed to be a few thousand beneficiaries, rose to more than 200,000 citizens claiming funds. 
  • How to curb inflation, ensure liquidity and stabilize the currency? As a result of the continuous budget deficit, international reserves have dwindled. In 2012, reserves stood at 118 billion USD, in 2017, the amount was 67 billion USD. Banks have suffered liquidity problems. While lately an upward trend is seen due to increased oil production, there remains pressure on the currency peg, with increased inflation making imports difficult to obtain. 
  • What can be done to transform the criminal economy?  Illicit trade is growing and there is a risk that illegal and harmful activities are being ‘normalized’ due to the security situation and a lack of governance and regulation. Growth is caused by flaws in border controls, an abundance of weapons, generous subsidies that allow for a thriving black market, and a lack of alternative economic activities. The smuggling industry has offered attractive employment opportunities – with fast money and limited risks. 
  • How to bolster the unity and independence of national economic institutions? Since the onset of the 2014 civil war, Libya has witnessed the establishment of several parallel and competing branches of, among others, the National Oil Company (NOC), the Libyan Central Bank (LCB) and the Libyan Investment Authority (LIA). Most of the breakaway entities have little control over oil and state funds and tendencies are currently towards cautious reunification.

All the above are issues that, after years of damaging conflict, require immediate action. At the same time, Libyan policymakers should keep in mind the fundamental medium and long-term challenges that were lingering even before the fall of Qaddafi’s regime. Several of these structural economic issues were partly responsible for putting Libya in such a precarious situation in the first place as they allowed someone like Qaddafi to use and abuse income from oil to buy loyalty and legitimacy. Supporters could receive cash, public sector jobs, subsidies and other benefits, while disobedience could be punished at will. 

Many of the fundamental, systemic economic issues Libya struggles with reflect those generally associated with oil exporting countries. These range from a large public sector wage bill, a lack of incentives for private sector activities, high spending on subsidies to a suboptimal human capital base. Oil still generates 95 percent of total government revenues, but only 2 percent of local employment as the industry relies heavily on expat technical staff. In 2012, explicit state subsidies amounted to 11.5 billion USD, which translated into 13.8 percent of GDP. Already under the Qaddafi regime, it was acknowledged that to remain sustainable, Libya’s economy needed urgent diversification, subsidy and banking reforms and private sector development. 

Tackling real-life economic problems, without getting lost in political zero-sum games, could allow for: 

  • A functioning, inclusive economic model which will raise the profile of Libya as a possible investment destination, to start with, a return of investments in the oil and gas industry. 
  • The release of significant government tenders in the field of reconstruction, development and advisory projects and the stability to attract companies for such projects.
  • The return of expat workers from neighboring countries to the resource-rich country, thereby adding to much needed regional employment opportunities. 
  • A better management and scaling back of the illicit economy, which is particularly of interest to European actors greatly concerned with human smuggling and trafficking activities.

Reconciliation and ending the feud should largely be a Libyan endeavor, but given the international stakes in Libya’s economy and the country’s stability, the international community should apply the pressure needed to bring the different Libyan sides to the negotiating table. The agreement between Serraj and Haftar is an excellent start. 

Dr. Saskia van Genugten is a Senior Research Fellow at the Emirates Diplomatic Academy and author of “Libya: Building Political Consensus around Economic Objectives.” Follow her on Twitter at @svgen.

The views expressed in this post reflect those of the author and not that of the EastWest Institute.