Since the beginning of the decade, when the Great Socialist People's Libyan Arab Jamahiriya was suffering from international sanctions and isolation, much has changed. At that time, price controls, multiple exchange rates and the heavy hand of government added extra burdens to the country's pariah status. But in 2003/04, the government began implementing major economic reforms along with the critical decision in 2003 to admit to 'civil responsibility' for the bombing of a Pan Am jet over Lockerbie, Scotland, in 1988.
A key turning point also came in 2005 when relations with Libya's long-time foe, the US, were normalised. This process of political reintegration has allowed for Libya's rehabilitation into the global economy and for the country's huge economic potential to begin to be realised. After decades of isolation, the government has begun a programme of institutional and structural reforms, including bank privatisation, state budget unification and encouragement of the private sector. The reforms are both domestic and foreign, aimed at increasing non-oil economic growth and creating viable employment opportunities for its relatively small population of 6 million.
Gradual change
The transformation of Libya's economy is neither easy nor an overnight change, but is a gradual process that is designed to help increase human and institutional capacity. Maintaining a stable economic environment has been a key goal and this has been helped by the country's substantial assets, built up through what Standard & Poor's describes in its July rating report as "the relatively prudent management of the surge in oil receipts in recent years".
Besides the cushion of growing oil receipts, Libya's position on reform is made more comfortable by the widespread level of support for the process which is being done in a way that is consistent with the domestic fabric of society. Across the country there are about 350 regional parliaments known as Basic People's Congresses (BPCs), which address regional issues and recommend topics to be included on the national agenda for the consideration of the General People's Congress (GPC). Issues such as the Wealth Distribution Programme and the Economic and Social Development Fund (ESDF), a unique scheme for wealth distribution to low-income families, are debated at the regional assemblies and their inputs determine whether such initiatives are passed or not. Each BPC chooses one delegate to represent it at the GPC and at the regional level.
Libya's leader, Colonel Muammar al-Gaddafi, is celebrating 40 years in power this year
In the headlines
Recent weeks have seen a lot of headlines devoted to the release of the Lockerbie bomber, Abdelbaset Ali al-Megrahi, from prison in Scotland on compassionate grounds, and more recently the 40th anniversary of the rise to power of Colonel Muammar Gaddafi.
However, the core news across the country is that new shops, restaurants and small businesses are flourishing, employment opportunities are being created in the private sector, the real estate sector is booming and the restructuring of the financial sector by the Central Bank of Libya is helping to bring the country out of isolation into a prosperous economic era.
Macroeconomic strength
Unlike many countries, Libya is operating at a different rhythm, largely undeterred by the vagaries of the global financial crisis and hopefully able to take advantage of its own resources and the opportunities it has been denied for so long. "Libya's overall macroeconomic performance in 2008 was strong," concluded the International Monetary Fund in its recent 2009 Article IV consultation. "Real GDP [gross domestic product] grew by about 3.8%. However, non-oil growth was broad-based and estimated at 8%. Oil output increased slightly at the first three quarters of the year then declined in the last quarter, in line with OPEC's [the Organization of the Petroleum Exporting Countries'] decision to reduce quotas. As a result, production for the year as a whole was similar to its 2007 level."
Oil and gas account for 65% to 70% of Libya's GDP and will continue to play a dominant role in the economy. But while the impact of the global crisis has been limited to the decline in oil revenue, the outlook for the hydrocarbon sector is promising, as is the outlook for the non-oil sector. While Libya long had the ambition to boost output to 3 million barrels per day (mbd) from the 1.8mbd achieved in 2007 and 2008 and likely to be achieved in 2009, the National Oil Corporation (NOC) decided in May that this target was out of reach. According to MEED magazine, the country expects to increase output to 2.3mbd by 2013 through the development of existing fields.
Even so, this modest growth somewhat hides Libya's true potential. While the country's current proven oil reserves amount to 44 billion barrels of crude oil and also 1400 billion cubic metres of natural gas, already a significant 3.3% and 1% of world oil and gas reserves, respectively, the energy consultant Wood Mackenzie describes Libya as "highly unexplored", with only about 25% of its area prospected. Since sanctions were lifted in 2003, all of the world's oil majors have been desperate to get involved and although negotiations with the NOC have been slow, it seems that Libya has a huge opportunity to significantly increase its production over the medium term and fulfil its enormous potential.
The non-oil sector, although small, is growing fast, but much remains to be done. Areas such as tourism are virtually untouched and have remarkable potential. Leptis Magna, east of Tripoli, is one of the most imposing ancient cities in the world, with buildings, streets, squares and coliseums from Roman, Phoenician and Arab cultures virtually intact, but it has no hotels to service tourism. Libya had 17,000 tourists in the first quarter of 2009 and is targeting up to 1.5 million a year by 2012, but with the visa system making visiting the country extremely complex and little in the way of hotel infrastructure, there is a long way to go. The tourism opportunities are huge, especially when it comes to Libya's well-preserved ancient monuments and beautiful coastline, but it will take time to develop.
Holiday in ruins: the Leptis Magna ancient city is set to become one of Libya's biggest tourist attractions
Rising assets
The core economy, although narrow and dependent on oil and gas, also has considerable financial assets. As the tables (above) show, total foreign assets rose at the end of 2008 to reach about $136.1bn, making Libya an extremely wealthy country in terms of foreign reserves. With these reserves expected to near $170bn by the end of next year, Libya has a significant financial cushion in place. And with GDP per capita reaching $14,500 in 2008, the country's small population is well placed to pursue its economic goals.
Ratings boost
Libya's rehabilitation into the global economy took a further step forward in July when rating agency Standard & Poor's acknowledged the changes taking place and gave the country an investment grade rating of A-/stable/A-2, on a par with the ratings given for Poland and Malaysia.
S&P considers Libya to be "one of the strongest fiscal balance sheets among A rated sovereigns, comprising substantial public assets and negligible debt; relatively low financial contingent liabilities; a substantial external buffer and strong external liquidity; and the solid medium-term growth prospects of the country's energy sector". While S&P acknowledges the country's strengths, it also notes the weaknesses inherent in the early stages of the liberalisation programme: "The ratings are constrained by our view of the limited transparency of official decision-making in Libya compared with that in many of its peers, as well as uncertainties surrounding the effectiveness of reforms to promote private sector development, which are at an early stage of implementation."
This initial rating highlights the country's extremely robust net external asset position and impressive external liquidity. But although S&P explains that this may change again as Libya integrates further into the global economy, some core aspects are expected to stay the same, with "the country as a whole to remain in a substantial net asset position for the foreseeable future".
Despite numerous qualifications, the S&P report nevertheless provides Libya with plenty of encouragement. Besides stressing that the country has never defaulted, has negligible debt, and no immediate plans to borrow, S&P expects non-oil growth, which has averaged 10% over the past five years, to continue into the medium term. "Future growth will be driven by expansion and upgrade of infrastructure and services, with telecommunications, banking, real estate and transport obvious candidates for substantial investment as Libya accesses foreign expertise, inputs and capital in an effort to catch up after years of economic isolation."
Libya: Illustrative Medium-Term Scenario 2005-14 (% of GDP)
Libya: Selected Economic/Financial Indicators, 2005-10 ($bn)
Economic slowdown
So what is the outlook for 2009 and beyond? Real growth is expected to decelerate to about 2.1% this year, largely reflecting a drop in oil output of about 1.5%. This downturn is expected to be ameliorated by large public expenditure and growth in non-oil activities. Meanwhile, as inflation halves from 10.4% in 2008 to about 5% this year, the overall fiscal position is still expected to register a surplus of about 10% of GDP in 2009, despite the projected decline in oil revenue by nearly 40%.
This 40% fall in exports is expected to cause the current account surplus to narrow to about 17% of GDP in 2009, but the important aspect remains that key indicators are still in surplus and the net foreign assets of the Central Bank of Libya and the Libyan Investment Authority will continue to grow, reaching about $150bn by end of the year, which is nearly 250% of GDP.
The macroeconomic outlook, in summary, is sound, and apart from unforeseen oil market development, prospects are projected to improve gradually along with global recovery. What could improve the picture further is the implementation of financial sector and other structural reforms. Bank restructuring and privatisation are making progress as two foreign bank participations and recent initial public offerings demonstrate. But foreign bankers emphasise that the reform process could be accelerated and Libya's liberalisation programme could be streamlined further.
Nevertheless, while the pace of change could be disputed, the past few years have witnessed a major transition from a long period of isolation to a state of rehabilitation back into the global economy. Libya now has a strong platform for long-term growth.
Libyan Investment Authority
- The Libyan Investment Authority (LIA) was established in 2007 to manage the country's surpluses of oil revenues. As a newly formed sovereign wealth fund, it replaced the previous Oil Reserve Fund and is also in charge of the assets of a number of portfolios and investment funds such as the Libyan Arab Foreign Investment Company. It pulls together Libya's investment vehicles into a more coherent transparent entity.
- While the objective of the LIA is to mainly invest abroad, some of its investments are being channelled to the Libyan oil sector and to the Libyan Development and Investment Fund, which was established in March 2009 in partnership with the Central Bank of Libya (CBL) and the private sector. A new law, incorporating new regulations for the LIA, is awaiting approval.
- At the end of 2008, Libya's total external assets reached $136.1bn, which is broken into core central bank reserves of $50bn, about $18bn government deposits at the CBL, and $69bn-worth of LIA investments made up of funds transferred, deposits at the CBL and investments abroad. The CBL manages the cash holdings of the LIA and when the LIA invests abroad, it takes money out of the CBL to do so. At end 2008, about 55% of LIA assets were held in cash.
- The LIA was recently reported to be in talks to buy into European utilities, drug-makers and companies with technology that would be useful for Libya: "We still feel Europe is the major partner. Our trade is 90% with Europe and that applies to investment."
- The LIA has channelled funds into investments in European countries such as Italy, which is one of its biggest trading partners. Libya is reported to have a 4.6% stake in Italy's second biggest bank, UniCredit, and a stake of nearly 2% in Italian car manufacturer Fiat.
