With the discovery of oil, Libya entered a new and important phase in its history. The comfortable revenues that Libya made thanks to oil brought significant change.
Indeed, in 1958, around 29 million barrels of oil were discovered in an oil field; Libya proved then to have considerable oil reserves. Therefore, the government of Prime Minister Mustafa Abdelhalim decided to launch several initiatives and programs that were meant to help Libya developing. The Libyan government wanted to turn the poor state that depended on foreign aids to a wealthy oil state with strong prospects for the future… but that was in 1959.
Some years later, the “tricky games” that Libyan Moammar Gaddafi started playing had negative outcomes on the oil sector and prospects for enhancing its capacities. With the improvement of oil capacities depending on imported material, the “Lockerbie affair” and the years of embargo that will follow the implementation of UN resolutions 731 and 748 will have serious consequences on the Libyan oil sector. Libya’s would hardly be able to improve its oil capacities.
In 2003, Libya accepted responsibility for Lockerbie bombing. But sanctions had already harmed the oil-rich country.
The Post-Gaddafi Era
With the “Arab Spring” (2011), the Libyan oil sector kept developing. But with the fall of Gaddafi, the risk of wars that would come out of energy prospects increased. Tensions were rendered evident by the slogans that many people repeated saying for example: “Oil is extracted beneath our feet and it ends up in Tripoli while we keep poor”.
Many partisans of the “Federalist movement” (the movement that claims reinforced autonomy for the eastern region of Cyrenaica) repeated these claims over and over. Popular pressure led to the closing of several oil ports; but the forces responsible for these measures claimed that they needed to protect oil infrastructures from armed groups. Besides, several threatening situations prevailed; one of them was the war that opposed Khalifa Haftar’s Libyan National Army (LNA) to the “Petroleum Facilities Guards” (PFG) of Ibrahim Jadhran. Jadhran, a member of the “Federalist Movement”, had also been proclaimed “Governor of Cyrenaica” by some of his followers.
What followed was the launching, on the 13th of December 2014, of the “Sunrise War” (Harb al-Shuruk). It was initiated by armed movements that were based in the mountains of the West as well as in some Western Libyan towns (Misrata, Zleten, Tajoura, Tripoli, Janzour, Gharyan, al-Zawya and Khums). They claimed that their reaction was a consequence to Ibrahim Jadhran’s decision to block circulation in the ports that were under his control. Jadhran justified his stance by saying that the National Oil Company (NOC) had been biased to the people of Western Libya by giving them all the oil revenues.
Jadhran also impeded local employees from working. Western towns decided therefore to gather in Wadi al-Ahmar, a region located East of Syrte and West of Bani Jawad. Two days of violent battles followed, with each protagonist suffering important human losses. Notables and tribal elders intervened to try and defuse tensions between the warring factions; the “Sunrise troops” agreed then to withdraw from the region, but many of these fighters ending up joining the “Libya Dawn” camp.
The failure to achieve social justice
Mohammed al-Agouri, a journalist and member of the Federalist Movement, sees that Ibrahim Jadhran had succeeded initially in controlling the “Oil Crescent”. But while many people believed that he would achieve social justice by favoring a fair distribution of oil revenues to all Libyans, they got to understand quickly that those promises were false. Priority was given to the defense of personal and specific interests.
Regarding political struggles and their consequences on oil and development in Libya, Dr Hassan al-Ashlam (university of Misrata) says that it will be difficult for Libya to achieve political and social stability as long as it remains a rentier state. Al-Ashlam mentions the existence of conflicting points of view between the partisans of a central state, and the defenders of social justice. From his point of view, many Libyans believe that centralism favors exclusion and oppression, and that it takes away the right of regions to decide for their political and developmental prospects.” This situation could lead to either military conflicts and clashes, or stagnation; but none of the two scenarios can help achieving stability”, al-Ashlam adds.
Al-Ashlam also thinks that the importance of oil-related prospects in Libya explains the existence of foreign interference, and that the combination of the two put an end to the dreams of the Federalist Movement. He sees that the end of federalism in Libya in 1963 was the consequence for the pressures and the demands of foreign oil companies that were important for the Libyan oil sector. Al-Ashlam says that these companies “asked for the abolition of federalism because they found it easier to deal with one central government instead of having to speak to three different governments (Cyrenaica, Tripolitania and Fezzan) that shared equally important fields and reserves of oil.”
Finally, al-Ashlam considers that the origins of corruption in Libya go back to that era, and that what followed was the emergence of “a corrupt government” that ended up favoring social exclusion and injustice.
Ashraf al-Gatani, an Ajdabya-based political activist, sees that because of oil, Libya is sitting on a powder keg. He points out the negative role of international actors and sees that their defense of their interests is turning Libya in a battle field for its own people. “Many Libyans have been fooled by foreign powers who made them believe that their oil benefits were at the risk of ending up in the hands of “other actors””, says al-Gatani.
Al-Gatani adds that foreign powers tend to discretely promote the idea that whoever loses the control of oil prospects will end up being totally excluded. From his point of view, there were clear indications of this situation early 2014 already, when Ibrahim Jadhran took control of the oil ports and infrastructures: “this is where Libya has been formally divided into an eastern and a western State, both separated by a “river of oil” around which most of the fights concentrated, leaving no clear winner or loser” says al-Gatani.
Negative Consequences on Development
Benghazi-based analyst Ahmed al-Twati sees things differently; from his point of view, the struggle over oil and development prospects has not started yet in Libya. Al-Twati considers that “the leading force” in Libya – i.e. the Libyan National Army – wants Western countries to acknowledge its pivotal contribution to the protection of oil infrastructures and reserves. Al-Twati believes that as long as we don’t achieve consensus, Libya’s developmental problems will keep going; they could even lead to military confrontation.
Professor Atiya al-Fituri considers on his side that institutional divisions have limited funding prospects; this is especially the case for regions that did not make it clear that their allegiance was to the Government of National Accord (GNA). Al-Fituri argues that this situation fueled social discontent in a general context characterized by liquidity crisis and high inflation. He also sees that this dangerous situation could ignite a new conflict.
Dubai-based economist Sleiman al-Shahumi has a different point of view; he considers that even when oil fields are placed under the control of Libyan actors, problems will remain as long as external powers will have strong interest in the Libyan oil sector. Al-Shahumi also praises the UNSC for having acknowledged a central role for the National Oil Company (NOC).
Tripoli-based researcher Walid Afhima sees on his side that it is only by putting an end to conflicts and by promoting consensus that Libya will develop, institutions will unify, and people will abide by them. Afhima also adds that, since Libya relies so much on oil revenues, this also means that the solving of oil issues conditions the success of developmental plans.
The ambitions of private companies
Khums-based political analyst Mohammed Ismail lnks Libya’s oil problems to the rivalries between big oil companies. Ismail says of Italian ENI and French Total that they are in a quest for influence that are indirectly fighting each other over Libya’s oil prospects.
Hence, Ismail also considers that if rival countries agreed on a more consensual approach towards Libyan prospects, this would help Libyans solving their problems and reaching consensus. From Ismail’s point of view, external actors could even end up being direct brokers for warring factions in Libya; their good relations with each of these actors would even bring them more benefits in return.
As we can understand from the various points of view expressed here, the Libyan crisis depends a lot on conflicts of power and influence. This is why many Libyans agree that the way ahead to solving Libya’s problems needs first agreeing on a national reconciliation plan that would be made for all Libyans, with no winner and no loser. It is also important that this plan favors social justice and inter-Libyan consensus, and that it recognizes the right of citizens to have access to the oil-generated financial, economic and developmental outcomes.
Mohammed Sreit, journalist and Libya researcher at Stractegia
Despite limited improvements, the Libyan economy still lingers well below its potential, obstructed by continuing violent conflict and political uncertainty. Libya’s poor economic performance is evident in the numbers, and it is rendered even more obvious by the population’s claims. Many efforts – including specific policies and economic orientations – have been developed by Libya’s political authorities, in the East and in the West, to try and limit the effects of economic problems on the society. However, results remain limited so far.
To contribute to a deepened understanding of the Libyan economy in its current state, the KAS Regional Program South Mediterranean in cooperation with the Madrid-based think tank Stractegia organized a roundtable within the framework of a two-year series of dialogue rounds dedicated to assess the state of play and identify a possible way forward in order to overcome Libya’s key socioeconomic dilemmas and difficulties. The roundtable on 8 March 2018 in Tunis provided a platform for Libyan-Libyan dialogue by bringing together a variety of experts and stakeholders from within the Libyan economy, who exchanged their analyses and testimonials during panels on the country’s oil and banking sectors, the role of the private and shadow economies in absence of effective state governance and the function of municipalities in filling the gap of public service provision.
Libya, the country with the largest oil reserves on the African continent, stopped being a stable supplier to the regional economy. Oil revenues have decreased by a quarter and despite reports of increasing production, the country lags far behind its potentials. The economic crises – seen by some of the experts present as the main motivation behind many faces of the conflict – undermines both social peace and public confidence in the state while it requires the country to stay on the drip of foreign humanitarian and development aid. Inflation accelerated, the black market is thriving, and the future challenges for the Libyan economy range from the reconstruction of the country’s infrastructure and a diversification of the sources of revenue to nurturing the private sector and fighting organized crime and corruption. Thus, finding sustainable solutions for the key economic issues in Libya can be the start for a resolution of the crisis, and an emphasis on a united political economy and ‘good governance’ could be a catalyst for Libyan development. The expert roundtable concluded with five main recommendations:
- Rebuild the oil and gas infrastructure
Oil is central to Libya and its economy; it is its first source of revenue. Although diversification is important for creating a vital Libyan economy, as will be argued below, the oil industry should remain a priority considering that it still constitutes the most important source of wealth for Libya. 97 percent of state revenues rely on oil and gas production, which creates a weakness of dependency within state structures. Furthermore, disruptions in Libya’s oil activity and the long-term closing of important fields – such as Mabrouk and Ghani – had a negative impact on the country’s economy. Irregular production further hinders the country to rely exclusively on oil income. Despite the oil benefits that Libya expects in 2018, 22,5 billion dollars, the country’s current production of 978,000 bpd (as of January 1st 2018) is low and deceptive.
The National Oil Company (NOC) is expected to have a strong role in this regard. In reality, its influence and its impact on the country’s oil prospects are rather limited. For instance, the NOC has repeatedly asked national authorities to repair the production fields that have been damaged, but its query was not met with any success. The Libyan NOC is perceived as an institution that should be able to pressure authorities into taking the necessary decisions; but the reality of the NOC is one of a divided institution, unable to appear as a strong body. Moreover, political divisions at the national level make it in any case quite difficult for Libyan ‘official’ institutions to have their say and impose their will on actors throughout the whole country.
As a result, oil production in Libya depends on many factors that include the political context; the security situation; the question of who is in control of oil fields as well as who among the involved external actors has more influence in cooperating with Libyan oil companies. The oil production output dropped after 2011 and productivity levels broke down completely in 2015 due to the security-related closure of oil fields and general instability. The haphazard shutdowns of key fields and ports during a long blockade of oil terminals in the Eastern Oil Crescent have reduced the pressure at the oil wells. Repsol, OMV, Total, and Waha are some of the companies that make a significant contribution to both Libya’s oil production and its level of exportation. Sharara, al-Fil, Wajala, and Abou Tefla, on the other hand, are important oil fields that notably participate in the country’s economy. The aforementioned disruptions in oil production make it hard for Libya to project itself on the long run and to proceed with a better organization of its economic prospects. Data and statistics insist on this reality; while Libya’s oil production was limited to 550,000 bpd in February 2017 given the developments in the Oil Crescent at that time, production went up to 1,01 Mbpd in July, before going down again to 917,000 bpd in December. In a country where 80 percent of the working population is said to earn a salary directly from the public sector, this creates a situation that is all too uncertain and problematic for a major part of the population.
Today, albeit producing again, oil facilities are used as “bargaining chips” for militias’ financial and political demands. A lot of the production is smuggled outside of the country. Reportedly, 40 percent of Libya’s neighboring countries’ markets are covered by smuggled Libyan oil. Experts called upon the authorities to find other forms of social support for citizens in need than oil subsidies. Libya is currently facing a budget deficit of around 12 billion Libyan dinars between state expenditure and revenues, which barely pays the income of its beneficiaries. Thus, efforts to reconstruct oil and gas infrastructure, revive the oil sector, and unlock the exploitation potential of existing resources require funds between $46-81 billion. Experts further noted that contracts with foreign oil companies need to be reviewed “for the sake of the Libyan people” and a prerequisite for this is an environment of united institutions.
Besides the oil, Libya has one other underexplored asset: it has comfortable volumes of gas and making a better use of it would considerably back the country’s sources of revenue. And this despite the fact that, like for oil, both infrastructures and the political context would need to be reassessed and to improve before Libya reaches a satisfactory level of oil and gas production. Some countries, such as Russia and Italy, have understood well the benefits that Libya’s oil and gas resources could provide; but their strategy is still at the very beginning, and it needs to be completed with an official and clear grand strategy that would also suit Libya’s interests.
- Diversify economic activities and sources of revenue
The limited performance of Libya’s economy stands in the way of a prosperous future. Indeed, most of the Libyan economy is linked to the action of the public sector, while the private sector deals with few and very modest projects. This situation adds to the lack of dynamism that prevails at the economic level, though it also generates some contradictions: systems of production are generally obsolete, the Libyan market is not competitive compared to the outside, the Libyan working force lacks training, and the constant quest for projects that would guarantee immediate benefits is simply not realistic.
Moreover, there are many factors that limit the prospects of the Libyan private sector. These include the obvious security challenges; lacks and deficits in terms of human resources; the weak performance of the banking sector; the difficulties that private companies face in the real estate sector given the lack of capacities and financial resources, as well as the lack of anticipation of existing opportunities in general.
The private sector in Libya holds the potential to diminish poverty and to play an important role in securing investment in infrastructure, electricity, water, and health care. It has been impacted strongly by the economic, political, and social factors driving further division in the country, such as the continuous fluctuation of prices. Nevertheless, in the fields of finance, health, transport, trade, and general services, the private sector seems to perform better when compared to previous years. This might give the impetus to municipalities and actors in the private sector to set up Private-Public Partnerships based on a common strategy to boost economic prospects.
During the roundtable, experts referred to “a certain chaos in the activities of the private sector in Libya” and laid emphasis on the need to create a legal framework for an involvement of the private sector in the economy. Attempts should also be made to start relying on new and alternative sources of revenue by diversifying the market and expanding industrial activity. Similarly, empowering the private sector entails an efficient strategy against the black market economy and transboundary smuggling as well as providing a more stable security environment for companies and investors.
- Stabilize the banking sector, overcome divisions of the internal market, and rebuild trust in institutions
In economic terms, the true decision maker in Libya is the Libyan Central Bank (LCB). However, even the LCB hardly provides official and reliable data and statistics on the country’s economy. The most recent information available dates back to 2016, and even then, not all the data available was necessarily reliable. Nevertheless, there are some indications that can help understand where the country stands economically.
From a financial point of view, the Libyan economy is divided into three main sectors: banking (83 percent), insurance (16 percent), and investment (1 percent). While inflation is said to have stood officially at 26,3 percent for the month of February 2018, in reality, inflation goes as much as five times higher. This situation comes mostly as a consequence of the activity of the black market, but also because the entire country tends to align virtually to the rates practiced in Tripoli. Businessmen and their activities also contribute to the increasing inflation, since many of them – while they keep working in their original businesses – also find interest in currency trading. Besides, Libya has a low industrial and manufacturing activity, which explains why the market is flooded by Turkish (in the West) and Egyptian (in the East) products.
With its heavy dependency on oil revenues, the economic situation in Libya was better placed before 2011. In the 2000-2010 period, agreements signed between Libya, the International Monetary Fund (IMF) and the World Bank (WB) had allowed Libya to benefit from a positive conjuncture. But since 2011, the worsening of the political and security situation had a deep impact on the country’s economy. After the revolution in 2011, public funds were spent unwisely in numerous state institutions due to major expectations by the population and the budget deficit widened into the revenues from taxes and customs. In 2015, 36 percent of the central bank’s reserves were used to pay for the national budget. A year later, 70 percent of the budget was drawn from the reserves. The country’s currency reserves of $120-130 billion were burned at a rate of $20 billion a year, to the effect that now, only an estimated $20-30 billion are left. Bank runs and large cash outs lead to the liquidity crisis at hand today.
Experts confirmed that more than $40 billion, the “real money,” are outside the banking system and about 60 percent of state expenditures go to ‘officials’ on its payroll. The mistrust that citizens feel towards their institutions adds to this uncertainty and results in the population squirrelling away their foreign or local printed money reserves rather than handing it over to the banks. Representatives of the banking sector present at the roundtable accentuated the need to rebuild this trust in financial structures and the Libyan dinar.
All of this led to a catastrophic economic situation fixable only though a coherent economic strategy and a set of measures coordinated amongst central and local government officials as well as stakeholders in the banking sector. Remedies to this situation exist, but they require serious political reforms and a revolution in habits. Solutions can only be straightforward, and some consider that they can only come through dispositions that would include the backing of families with giving them an additional financial aid, restricting the importation of selected products in order to increase prospects for national production, issuing a new currency so that the crisis of liquidities is limited, reducing the state control over the economy, having better state management and good governance, more effectively controlling the currency rates, unifying financial and economic institutions, starting with the LCB, and putting an end to subventions on oil products. A stable Libyan currency adequately managed by a united LCB is crucial for the future of the country.
- Include local governance structures in economic negotiation and implementation processes
Notwithstanding, there are some existing institutions that are able to define common priorities for the Libyan economy: local governance structures. One example with regards to infrastructure is the Committee for the Transfer of Competences of the Local Administration which has started several initiatives that nevertheless need backing by a stronger and a more determined political actor. Given that the Tripoli-based Ministry of Local Governance is, according to its own employees, not concerned about the tensions between Libya’s East and West, this might be a window of opportunity that should be exploited.
As effectively governing municipalities can stabilize the country not only in terms of providing and maintaining sustainable infrastructure, local structures need to be supported, state institutions need to be rebuild, and the economic and governance systems within Libya need to be decentralized. In light of municipalities being at the heart of Libyan society and economic aspects composing the core of instability in the country, local governance should not only be on the priority list for the central government, but be enabled to bear the main responsibility in service provision.
Decentralization requires a gradual delegation of powers on the basis of municipality performance. The establishment of a Ministry of Local Governance by the GNA is thus a crucial step in supporting local sources of revenue as an alternative to the resources of the central government. Not only due to the large geographical distances between the municipalities, the local coordination of administrations is not an easy endeavor.
In fact, some of the main issues prevailing in Libya are those related to the lack of proximity, both at the level of the relation between the central authorities and the municipalities, and between political/executive structures and the society at large. Neglecting this side will only make it more difficult for Libyans to benefit from improvements in the health sector, sanitation, Foreign Direct Investments, and issues such as the future of IDPs and the impact of migration movements on the country.
This is where “changing habits” and promoting a deep, revolutionary reform of local management and governance is crucial. Thus, Libya is clearly in need of clear regulatory frameworks and policies for local governance as well as a long-term vision of how municipalities can foster local investments in infrastructure to ensure service provision, guarantee state accountability, and bring an end to corruption.
- Dismantle criminal networks fueling a ‘shadow economy’ and cut economic links to militias
The black market has evolved into the controlling element behind the prices in the whole Libyan economy. Lifting this headlock necessitates a clear strategy on how to deal with the parallel markets and an action plan in order to narrow the gaping difference between the official and unofficial currency exchange rates. Many experts agree that the only unified and most active economy in Libya today is the parallel market, which is less impacted by political disputes and conflict than the divided formal economy. Any attempt for a solution must account for the fact that there is a network of interests intertwined with all kinds of criminal activities, ranging from the smuggling of oil and other subsidized goods to weaponry and human beings, and ingrained into the socioeconomic fabric of numerous local communities.
The Libyan regime under Gaddafi exerted a certain level of control over the smuggling business. Since then, open competition has taken over and provoked local conflict. The absence of stable statehood and dominant security actors led to a professionalization of the smuggling economy and – following the spread of armed groups – required smugglers to hire personnel for armed protection which again gave rise to an informal protection market. All throughout the country and empowered by Libya’s hybrid security sector, militias are fighting over control of smuggling routes; oil, gas, and transportation infrastructure; the control over borderland territory; state bodies; economic and trade nodes along the coast; and the predation of state revenues in what has been termed a war economy that depends on the dispensation of violence.
Given the fact that a lot of the liquidity in Libya is consumed by armed groups and local militias, these economic links must be interrupted by efforts to reintegrate members of armed groups into the economy and find alternatives to the central distribution of public wealth in order to preserve stability. The wealth of the militias exceeds billions of dinars and any solution requires the inclusion of the local governance level.
Libya lacks the presence of a long-term vision for its economy and this will not change until it becomes clear who exactly is taking decisions. Infrastructure and basic social services, such as health and education, are deficient, but reverting this situation needs time, money, and foreign investors. Oil reserves are important and exploring them accurately could help overcoming the crisis of liquidity and the budgetary problems that Libya is facing. Nevertheless, while having a regular and efficient oil production is critical for the country, positive achievements also need Libyans to clearly set the responsibilities for their core institutional bodies, such as the NOC and the LCB. An often raised question in this regard is on what basis oil benefits will have to be distributed.
Libya desperately needs to adopt extensive economic reforms before the situation totally slips out of the hands of those still executing some influence. Accurate reforms, however, need to be based on a good assessment and a correct understanding of the current situation in the country. In order to achieve that, Libya requires effective leadership under a government perceived as legitimate by the majority of its population.
While all eyes are on Libya’s – possible – upcoming elections, going to the polls might not necessarily contribute to solving the issues at hand, at least for the time being. This is where Libya will most probably need the few truly influential leaders to agree on feasible power-sharing before they develop accurate economic policies that would benefit the country. This, however, still sounds like wishful thinking for now.
About the Authors
Barah Mikaïl is Founding Director of Stractegia and Associate Professor at Saint Louis University in Madrid.
Simon Engelkes is Libya Project Coordinator at the KAS Regional Program South Mediterranean/Tunis.