Thanks to a rapid resumption of hydrocarbon production and exports, Libya’s economy recovered in 2012 from a severe contraction experienced in 2011, with real GDP growth 95.5% in 2012 against a contraction of 59.7% in 2011; inflation decelerated to 6.9% in 2012 from 15.9% 2011, and GDP growth is projected to normalise to 15% and 8.1% by 2013 and 2014, respectively, while inflation is expected to decline further to 4.7% in 2013 and 3.4% in 2014.
The peaceful conduct of elections in July 2012 was a promising indication of Libya’s successful political transition, but the subsequent difficulties in forming a new government have highlighted the challenges of achieving stability.
Libya’s successful transition and sustainable development hinges on the evolving security situation, the new government’s economic strategy, the resolution of regional tensions over hydrocarbon resources, and the international price of oil.
Libya’s economic activity began to recover in 2012 thanks to the nearly full resumption of oil production by September 2012, an increase in construction and infrastructure activity, and the prospects of reduced political instability. The political volatilities surrounding the transfer of power from the transitional government to a more permanent governance structure, together with an increase in domestic security incidents affecting the army and civilians, however, have acted as obstacles to a smooth recovery and delayed long-term economic planning.
By September 2012, Libya’s oil production had nearly reached its pre-revolution levels of 1.6 million barrels per day (BPD). The 344% increase in the hydrocarbon component of gross domestic product (GDP) in 2012 was the main driver behind the high GDP growth (95.5%) in 2012. Although non-hydrocarbon economic activity was growing fast before the conflict, it still accounts for no more than 22% of GDP and a negligible part of total exports. Non-hydrocarbon economic activities were affected adversely by the war due to the destruction of infrastructure and production facilities, disruptions to banking activity, limited access to foreign exchange and the departure of expatriate workers. However, this component is expected to recover by 2014, driven mainly by reconstruction.
The major long-term challenge facing the economy is to contain the dependence on oil revenues, particularly in light of the slowdown in international demand, and the urgent need for economic diversification in order to address the long-term financial and economic stability and Libya’s unemployment challenge. Despite its large contribution to the GDP, the oil and gas sector contributes to less than 2% of total employment (according to the latest data from 2007). Despite the increase in hydrocarbon revenues, the increase in domestic demand and high expenditure on subsidies and public-sector wages pose fiscal pressures on the government.
Sustainable management of Libya’s petroleum resources is a major challenge facing the new Libyan leadership. The management of domestic oil operations, co-ordination of the fast-growing inflow of foreign direct investment (FDI) in the petroleum sector, and containing the political and regional tensions over distribution of oil revenues are major variables determining the sustainable management of the petroleum sector.
Figure 1: Real GDP Growth 2013 (North)
Table 1: Macroeconomic indicators 2013
|Real GDP growth||-59.7||95.5||15||8.1|
|Real GDP per capita growth||-62.7||92.5||12||5.1|
|Budget balance % GDP||-15.6||13.1||6.1||5.9|
|Current account % GDP||8.4||27.2||23.4||24.9|
Recent Developments & Prospects
Table 2: GDP by Sector 2013 (percentage of GDP)
|Agriculture, forestry & fishing||-||-|
|Agriculture, hunting, forestry, fishing||2||1.9|
|Electricity, gas and water||1.1||1.3|
|Electricity, water and sanitation||-||-|
|Finance, insurance and social solidarity||-||-|
|Finance, real estate and business services||6.6||5.1|
|General government services||-||-|
|Gross domestic product at basic prices / factor cost||100||100|
|Public Administration & Personal Services||-||-|
|Public Administration, Education, Health & Social Work, Community, Social & Personal Services||7||28.4|
|Public administration, education, health & social work, community, social & personal services||-||-|
|Transport, storage and communication||3.5||7.6|
|Transportation, communication & information||-||-|
|Wholesale and retail trade, hotels and restaurants||3.6||6.6|
|Wholesale, retail trade and real estate ownership||-||-|
With an estimated 95.5% real GDP growth, Libya’s economy experienced a major rebound in 2012. This is not due, however, to an overall rise in productive economic activity but is mainly a result of the resumption of oil production as well as of the low base from which the economy started off in 2012. By the last quarter of 2012, Libya’s oil production had already recovered to nearly 1.5 million BPD, nearly reaching its pre-conflict levels of 1.6 million. The increase in demand for construction and infrastructural activity also played an important role in the massive increase in the levels of real GDP. This is however likely to be a short-term contributing factor associated with post-war reconstruction. In 2012, the oil sector constituted the largest sector of the economy, contributing to nearly 78% of the GDP.
Libya’s growth in 2012 was not employment-intensive, as it was mainly concentrated in the capital-intensive energy sector, hence failing to address the high levels of unemployment and the further expansion of the informal sector. The negative impact on the country’s poverty levels was mitigated by the government’s generous social-safety-net programmes, which require efficiency reforms.
In February 2012, Libya's interim government approved a budget of LYD 68 billion (Libya dinars) for 2012 (equivalent to 63% of the 2012 GDP), which included funds for reconstruction and development. The oil price at which the budget was balanced increased from USD 58 per barrel in 2010 to USD 91 per barrel in 2012. Continued dependence on volatile international oil prices could threaten the stability of public expenditure and the government budget in the coming years, but regardless of short-term supply and demand imbalances, hydrocarbon revenues continue to provide the Libyan authorities with the funds required for reconstruction and resumption of economic activity. Given the country’s estimated current-account surplus, which stands at 27.2% of GDP in 2012, there is limited risk of Libya’s encountering an external-account deficit in the short term should hydrocarbon prices plummet.
Wartime damages to key ports have lowered Libya's import-offloading capacity, creating supply bottlenecks, which could contribute to generating inflationary pressures given the country’s heavy reliance on food imports. Following from a temporary decline in domestic demand caused by the flight of Libyan nationals and foreign workers in the wake of the civil war, the gradual move towards political stability and the resumption of reconstruction efforts in the non-oil sector is attracting the return of these groups. The subsequent rise in demand combined with an increase in consumer confidence may also lead to higher risks of demand-driven inflation. Nonetheless, inflation is estimated to have declined to 6.9% in 2012 (based on the latest data from November 2012), and is expected to stabilise in 2014 and ease back towards its long-term trend of just below 4%.
As part of the reconstruction efforts, attempts to diversify the economy have focused on agriculture, tourism, fisheries, mining and natural gas. The agricultural sector accounts for less than 2% of GDP but is becoming a top government priority. The completion of the USD 30 billion Great Man-Made (GMM) River project reduced the country's water shortage by drawing water from aquifers beneath the Sahara and conveying it along a network of huge underground pipes to the Mediterranean coast. However, the NATO attack on the GMM pipe factory in the city of Brega in July 2011, based on claims that it was used as a military storage facility, caused major damages to the plant and led to dramatic reductions in regional water supplies for consumption and irrigation. In addition, climate conditions and poor soil still severely limit agricultural output and mean that domestic food production meets only 25% of the demand. Given Libya’s almost total dependence on wheat imports and its large consumption per capita of nearly 190 kilogrammes, and in an effort to lessen the inflationary impact of rising world food prices, the government increased food subsidies and removed all customs duties and taxes on imported foodstuffs in early 2011.
In tourism, the government is now extending many incentives designed to boost the sector, with state-owned hotels being offered to private and foreign operators. In 2012, Tameer Holding (a United Arab Emirates property developer) announced it had signed a deal with the Libyan authorities to develop a USD 20 billion residential and tourist project near Tripoli, which is the largest investment to date in North Africa by a Gulf investor.
Finally, the future trajectory of the Libyan economy will be determined to a large extent by: i) the economic strategy set out by the new government; ii) the security situation on the ground; iii) the intensity and management of regional tensions over the control and distribution of hydrocarbon resources; and iv) the international oil demand.
Following the onset of conflict in Libya in 2011, the government budget suffered massive deterioration, moving from a surplus of LYD 9.7 billion in 2010 to a deficit of LYD 6.8 billion in 2011. This was mainly due to the massive disruption to hydrocarbon and non-hydrocarbon (tax and non-tax) revenues that year. Following the rapid resumption of hydrocarbon production and revenues in 2012, a budget surplus of LYD 16.2 billion has been estimated for 2012, or nearly 13.1% of GDP. Hydrocarbon revenues are estimated to have constituted 95.4% of government revenues, or 48.9% of GDP in 2012, while non-hydrocarbon tax and non-tax revenues constituted the remaining 4.6% of total revenues. Resumption of oil revenues after the crisis, together with the government’s desire to avoid any financial pressure on the public to prevent potential political tension, left the tax system underutilised.
According to the latest data from September 2012, public-sector wages and salaries are the largest component of public expenditure, accounting for 36% of overall expenditure, followed by subsidies and transfers (29%) and goods and services (25%). With an estimated 1.3 million public-sector workers constituting around 80% of the labour force, the current spending on wages and subsidies constitutes a potential fiscal threat, according to the International Monetary Fund (IMF). High expenditure on subsidies and transfers also raises calls for replacement of price subsidies with targeted forms of protection in order to improve fiscal stability and protect the poorer households better. The vast majority of the budget for 2012, however, remained unspent due to inefficient institutions and governance issues. It is also feared that the large influx of unfrozen overseas assets could pose a further challenge to the transparency of the financial flows in Libya.
Libya's hydrocarbon resources provide the country with a vast sum of foreign reserves and a low need for external borrowing. To ensure sustainable use of its hydrocarbon revenues and establish a robust, efficient and transparent public financial-management system, a clear macro-fiscal policy framework is needed with a consistent fiscal rule reflecting the country’s economic objectives and the volatile nature of hydrocarbon-based revenues. The Sovereign Wealth Fund (SWF) managed by the Libyan Investment Authority (LIA) and the Budget Reserve Account at the Central Bank of Libya (CBL) could play major roles in improving the country’s public financial management.
Table 3: Public Finances 2013 (percentage of GDP)
|Total revenue and grants||52.4||66||37.9||50.2||49.1||50.2|
|Total expenditure and net lending (a)||46.9||55.6||53.5||37.2||43.1||44.2|
|Wages and salaries||7.6||9||19.5||11.9||11.4||10.8|
During and immediately after the revolution, the government financed its expenditures by borrowing from and by drawing down deposits at the CBL. The money supply has increased due to monetisation of the budget deficit, with broad money supply increasing by 25% between 2010 and 2011 from LYD 46.3 billion to LYD 57.8 billion. As a result, the currency in circulation doubled from LYD 7.6 billion in 2010 to LYD 14.8 billion in 2011. Despite this, demand for cash has continued to increase, resulting in a shortage of liquidity in the banking system, which the CBL addressed by imposing a limit on cash withdrawals from the banking system by individuals. This limit was lifted in June 2012 in order to boost confidence in the local banking system.
Monetary policy will remain uncertain until the new government announces clear policy objectives. The discount rate will more than likely hold at 3% until sometime in 2013, when monetary authorities regroup under the new government.
The 2012 estimated inflation rate of 6.9% is above the historical average of less than 4% but more manageable compared to the 2011 inflation of 15.9%. The decline in consumer-price inflation is due to the resumption of imports as well as the CBL’s withdrawal of domestic currency from the system by selling foreign exchange. Inflation has been both supply- and demand-driven. Post-conflict communication blackouts, infrastructure damage and military checkpoints continue to strangle supply lines of basic household commodities like food and fuel as the country seeks to restore order after a tumultuous 2011. The return of Libyan nationals and foreign workers who fled Libya during the war has also pushed up the levels of consumer confidence and demand, correspondingly expanding the possibility of demand-driven inflation. Inflation is expected to begin to stabilise in 2014 and ease back towards its long-term trend of under 4%.
Economic Cooperation, Regional Integration & Trade
Merchandise export receipts are estimated to have increased by a substantial 251% in 2012 after plunging by 59% in 2011. This massive improvement is mainly due to the rapid recovery of the revenues from oil and gas production and exports. Growth in imports is also projected to rebound as capital goods begin to flow into the country. There remains the risk that government bureaucracy and delays to political reforms will hinder post-war reconstruction efforts, and hence lead to a sharper increase of imports.
Export revenues are expected to slow down in 2013 as global oil prices are expected to tumble from their current level. Although trade and current-account surpluses will be squeezed by short-term supply and demand imbalances, they will continue to provide Libyan authorities with the resources necessary to finance reconstruction efforts. The surplus in the current account should average around 30% of GDP over 2012–13.
In an attempt to re-emerge on the international trade scene, Libya has initiated a number of trade agreements with its regional and European economic partners. The Cairo Declaration signed between Libya, Tunisia and Egypt in July 2012 aims to promote closer economic, judicial, political and security collaboration amongst the partners and promote further regional integration in North Africa. Libya is also expanding its bilateral trade and business relations with regional and non-regional economies, including Tunisia, Turkey, Uganda, Austria and the United Kingdom.
Libya’s non-tariff trade barriers remain high. They include high minimum-capital investments for establishing business ventures, poor infrastructure, an opaque, discretionary and ad hoc regulatory environment, and a lack of publicly available information. Although import licences are not required in Libya, some restrictions still apply, including the limitation on traders to import only the types of products that relate to their business specialty. All customs duties and taxes on imported foodstuffs were removed in early 2011 to protect the consumers against the rising world food prices.
Table 4: Current Account 2013 (percentage of GDP)
|Exports of goods (f.o.b.)||64.1||58.3||63.6||53.4||64.1||62.2||62.4|
|Imports of goods (f.o.b.)||30||34.6||33.4||31.4||23.4||24.9||25.2|
|Current account balance||21.1||14.8||19.8||8.4||27.2||23.4||24.9|
When set against the country’s large foreign assets (mainly foreign reserves and the LIA portfolio), Libya’s estimated external debt appears minimal. Libya's external solvency ratios are very light by international standards, with the country's debt stock measuring around 3.06% of GDP. High levels of foreign-exchange earnings from hydrocarbon exports together with an inflow of unfrozen assets provide the government with ample resources for meeting its financial commitments in the coming years, leaving behind very low levels of debt-to-GDP ratio.
Figure 2: Stock of total external debt and debt service 2013
Economic & Political Governance
Following decades of state meddling in business decisions in Libya, regulatory efficiency is very poor, with inconsistent and non-transparent application of existing regulations, resulting in limited private entrepreneurial activity. According to the latest CBL estimates, the level of private investment as a proportion of total investment in Libya has declined from 71% in 2002 to 26% in 2010.
The business climate for private businesses in Libya continued to suffer in 2012 as a result of the volatile security situation as well as the uncertain political environment stemming from the transfer of power from the transitional government to a new government in November 2012. This has left the country void of a clear policy direction, a regulatory environment and basic security – all of which are fundamental to private-sector economic activity.
Initiatives were undertaken by the government in 2012 to facilitate private-sector economic activity. These include the launch of the Libya Enterprise’s network of incubators and enterprise centres in order to reduce start-up bankruptcies and to increase the chances of success. In relation to the start-up of foreign businesses in Libya, the May 2012 Resolution 103, maintaining the current 65% foreign–35% national structure for joint stock companies, allowed for joint venture partnerships to be formed as limited-liability companies with a capital of LYD 50 000 and lifted restrictions on the range of services that can be provided by joint ventures in the oil and gas sector. Accusing the resolution of weak legal groundings and lack of a public mandate, however, the government, which took over from the National Transitional Council (NTC) in July 2012, increased the capital required for a representative office from LYD 50 000 to LYD 150 000 and the capital required for a branch office from LYD 150 000 to LYD 250 000. It also raised the minimum engagement for the Libyan partner in a joint stock company from 35% to 51%.
Improvements can also be noted in the sector of information and communication technology (ICT), which was previously entirely controlled by the Gaddafi government. This predominantly state-owned monopoly position meant that despite a relatively high income level, Libya’s ICT networks, projects and adoption remained substandard. Libya has now initiated co-operation with regional countries (e.g. the Egyptian Ministry of ICT) to improve its ICT sector and modernise its governance systems and applications in the public and private sector in order to help with the practices of open government and with establishing a more reliable and transparent regulatory system.
The banking sector in Libya remains extremely weak and opaque. In terms of the soundness of its banks, Libya ranks 139 out of 144 countries according to the 2012-13 Global Competitiveness Index (GCI). With regard to financial-market development, Libya stands between the 93rd place for venture-capital availability and the 143rd place for affordability of financial services. In 2012, in response to the liquidity crisis which occurred during the revolution, Libya lifted restrictions on withdrawing money from banks in a bid to boost confidence in the local banking system during unstable political times.
Access to private financial services still suffers from fundamental structural issues and is very limited. Payment and clearance systems and credit reporting are weak. Collateral requirements and other legal and regulatory frameworks are burdensome and constrain access to credit for small borrowers, mainly due to the difficulty of proving ownership of privately owned land. Nonetheless, Libya has a credit guarantee fund, but in 2012 it was not fully functioning and was in the process of reactivation. Additionally, the culture of “connected lending”, whereby loans are often provided based on personal connections, greatly affects the availability of financing.
To diversify financial products and services the NTC approved in 2012 an Islamic banking law that introduces sharia-compliant banking in Libya. The authorities envisage several options for Islamic banking services: to allow conventional banks to open branches or windows for Islamic finance, or to allow conventional banks to become Islamic. Core reforms of the financial system, however, have been pushed to the background until the economy returns to a more stable setting and a strong government and leadership emerge.
The government is taking a new array of measures to support the financing of small- and medium-sized enterprises (SMEs). In addition to an SME fund financed by the Islamic Development Bank, high-level talks with key local financial institutions are currently taking place to enable further financial vehicles for start-ups. Some local banks have also established SME finance units within their branches in an effort to offer targeted support. These mostly apply, however, to short-term or project financing rather than to start-up financing.
Public Sector Management, Institutions & Reform
Strengthening public financial management remains a priority in order to enhance the efficiency of spending, accountability and transparency. Budget formulation remains fragmented, mostly steered by a bottom-up approach that is disconnected from an explicit policy rule or a medium-term development strategy. In January 2012, the donor community started work with the authorities to strengthen public financial management, including technical assistance activities at the CBL, assessing the financial management of all Libyan funds run by the CBL and the SWF, and reforming the system of untargeted subsidies.
According to the latest available Worldwide Governance Indicators (WGIs), Libya demonstrated very weak governance indicators for 2011 (on the scale of 0-100), including 6.1 for voice and accountability, 4.7 for government effectiveness, 5.2 for regulatory quality, 4.7 for control of corruption, and a slightly higher 12.2 for rule of law and 17 for political stability. In the 2012 Corruption Perceptions Index Libya ranked 160 out of 174 countries. However, more recent indicators show some signs of improvement. For example, according to the 2012-13 Global Competitiveness Index (out of 144 countries) compared to 2010-11 (out of 139 countries), Libya’s ranking in terms of favouritism in decisions of government officials has improved from 122 to 50 and transparency of government policy making from 135 to 92, while wastefulness of government spending has worsened from 65 to 72.
The large size of public-sector employment and the correspondingly large wage bill need to be managed effectively in order to increase fiscal and productivity efficiency and transparency. According to Libyan officials, however, these trends are inflated particularly due to the government’s recent inclusion of two major public companies (the electricity and water companies) in its wage bill due to financial complications. Low public-sector salaries can contribute to increased corruption amongst government employees attempting to bolster their incomes.
Natural Resource Management & Environment
As of January 2012, Libya has the largest proven oil reserves in Africa with 47.1 billion barrels of oil and 1.49 trillion cubic metres of natural gas. Only 25% of Libya’s territory had been explored by 2012 for hydrocarbons. In 2012, the oil revenues are estimated to have contributed on average to about 95% of export earnings, 48.9% of GDP, and 75% of government revenues. Libyan oil and natural-gas production and exports suffered a nearly total disruption in the wake of the 2011 revolution. Following the gradual consolidation of control over most parts of the country by the NTC and later the newly formed government, and the resumption of activity by national and international oil companies, oil production began a rapid recovery, reaching its pre-conflict levels by October 2012. Gas production also witnessed a rapid recovery. Libya has, however, refused to participate in the Extractive Industries Transparency Initiative (EITI). Under the NTC, there was no auditing trail to verify how much of the oil revenues from exports reached the central bank. Sustained increase in transparency in this regard is critical to the successful management of these natural resources.
Libya faces deforestation, decreasing water reserves, extensive waste dumping and the use of mainly non-renewable energy sources. The new Libyan authorities are keen to show commitment to environmental protection and sustainable development through active involvement in national and international environmental forums. Sustainable management of the country’s water resources is essential to the country’s political stability as it affects the interests of conflicting factions and the country’s need for national reconciliation.
Libya's first post-revolution national elections were held on 7 July 2012, having been postponed from 19 June due to political unrest in eastern Libya. Nearly 80% of eligible voters took part in the elections, with the National Forces Alliance taking 39 out of the 80 seats in the 200-seat National Congress. The smooth voting process and peaceful transition of power from the NTC to the General National Congress (GNC) were widely heralded by international observers. Women’s involvement in the electoral process was also praised by the UN Support Mission in Libya. The constitution is to be drawn up by an elected 60-member Constitutional Commission and the help of the international community, notably the UN and the EU.
Elected on 12 September 2012, Mustafa A.G. Abushagur became the first elected Prime Minister of the new Libya. He was however dismissed on 7 October 2012 following the disapproval of his proposed cabinet by the GNC. Ali Zeidan was subsequently elected as the Prime Minister on 14 October 2012 and took office on 14 November after congress approved his cabinet nominees. The difficulties in forming a new government have highlighted the challenges of achieving political unity in a country emerging from a lengthy political vacuum. The 11 September 2012 attack on the US consulate in Benghazi, together with a spate of explosions and assassinations of security personnel in Benghazi and Tripoli, and attacks on Sufi shrines highlight the continuing security challenges facing the authorities in Libya.
Thematic analysis: Structural transformation and natural resources
Member of the Organization of Petroleum Exporting Countries (OPEC), the country has the largest proven oil reserves in Africa with 47.1 billion barrels of oil and 1.49 trillion cubic metres of natural gas, amongst the ten largest globally. Only 25% of the territory has been explored to date for hydrocarbons. Libya is already Europe’s single largest oil supplier, the second largest oil producer in Africa and the continent’s fourth largest natural-gas supplier, and it already dominates the Southern Mediterranean’s petroleum sector. According to the Libyan National Oil Corporation, more than 50 international oil companies operate in the Libyan market.
The economy depends primarily upon revenues from the oil sector, which contributes on average to about 95% of export earnings, 48.9% of GDP, and 75% of government revenues. Oil revenues made up almost the entire funding source for the 2012 budget of USD 55.3 billion. The Oil and Gas Ministry is of extreme importance, with revenues from hydrocarbons being used to fund the budgets of nearly every other department. Prior to the outbreak of the recent conflict, Libya was exporting about 1.3-1.4 million BPD out of its estimated 1.79 million BPD of production. Libyan oil and natural-gas production and exports suffered nearly total disruption in the months of intense fighting leading to and following the removal of Gaddafi from power. The minimal and sporadic oil production that did occur during this period was mostly consumed domestically. Libyan oil production began to recover in September 2011, faster than predicted by analysts, and by the last quarter of 2012, Libya’s oil production nearly reached its pre-conflict levels of 1.6 million BPD.
Libya’s rank as a producer and reserve holder is less significant for natural gas than it is for oil. Most of its natural-gas production is exported, almost entirely to Italy via pipeline. According to the Oil & Gas Journal estimate, the proven natural-gas reserves were 1.49 trillion cubic metres as of 1 January 2012, a decline of almost 56 million cubic metres compared to the previous year. Prior to the transformative events of 2011, new discoveries and investments in natural-gas exploration had been expected to raise the proven reserves in the short term. Natural-gas production has grown significantly in the last few years. According to the Energy Information Administration, Libya produced 30.27 billion cubic metres of gross natural gas in 2010, 23.36 billion cubic metres of which were marketed, and 16.82 billion cubic metres of that was dry natural gas (the fourth largest output of any African state). Approximately half of the remainder (3.40 billion cubic metres) was re-injected to enhance oil recovery and a roughly equal amount was vented or flared. As with oil, natural-gas production was almost entirely shut down for sustained periods in 2011, but has since recovered quickly.
Given the significance of petroleum production and exports to the economy, careful management of the financial resources generated from it will be of pivotal significance when addressing the country’s structural challenges. The new post-revolutionary environment creates the opportunity for the country to embark on a path of structural transformation and inclusive development through an approach that includes: economic diversification in order to lessen dependence on the volatility of the mining sector; de-linking expenditure from revenues; and investing the surplus revenues for use by future generations.
A successful diversification strategy requires the identification of constraints to diversification, formulation of a key strategy to overcome those constraints, and identification of projects to reinforce that strategy. A complementary strategy of de-linking government expenditure from natural-resource revenues and adoption of a non-oil deficit target will further reinforce the pressure to diversify the economy. Creation of a sustainable fiscal policy that channels mineral revenues for saving and productive investment rather than consumption and sets formal and informal fiscal rules to prevent excessive spending are important policies in this regard. Related to the latter is channelling the revenues towards investment and funds for future generations who could benefit from the oil wealth even after its depletion. SWFs can be used as a stabilisation fund that takes previous years’ fiscal surpluses and deposits them in a special government account to be used for designated economic and social development.
Strong institutions and good governance are a prerequisite for an effective fund-management and economic-diversification strategy. Improvements in the WGI “voice and accountability” indicator are required to ensure transparency via a system of checks and balances to avoid the previous rent-seeking culture, while improvements of the state institutions can enhance the regulation and use of oil revenues. Furthermore, it is vital to ensure that the management of Libya’s existing SWFs are in line with the new government’s broader development objectives. Given the previous claims of misappropriation and misuse of Libya’s SWFs, the country could also benefit greatly from funding, withdrawal and spending rules. By applying such measures, Libya will be better able to guarantee the sustainable management of its natural-resource wealth.
Despite its rapid recovery, the outlook for the country’s oil production remains unpredictable due to the continued uncertainty surrounding security conditions, state cohesion, the management of domestic oil operations, co-ordination of the fast-growing inflow of FDI to the petroleum sector, and the political and regional tensions over distribution of oil revenues. Furthermore, the on-going conflict in Mali, its potential spillovers to the affiliated armed groups within Libya, and the Libyan authorities’ involvement in re-establishing security in the region will also have important implications for the country’s security and territorial integrity, as well as its pace of economic recovery.