As an interim government prepares to take the reigns of a country in crisis there is hope for a democratic and peaceful transition of power in Libya. In the decade following the overthrow of Colonel Muammar Gaddafi’s government the political situation in Libya went from bad to worse. For years governance of the country has been at the centre of the conflict between the Tripoli-based Government of National Accord (GNA) led by Fayez al-Sarraj and the eastern Libyan National Army (LNA) headed by General Khalifa Haftar. As the civil war intensified it plunged the country’s economy into turmoil.
Home to Africa’s largest oilfields Libya’s economy is heavily dependent on oil revenues; however, continued conflict has significantly disrupted foreign trade and paralysed the Libyan economy resulting in a reduction in oil exports and derived products. Between 2000 and 2010 oil revenues made up two thirds of total government revenue in Libya. The conflict has significantly limited government revenues and spending due to a drop-in economic activity and the State’s incapacity to extract and refine oil. Imports have also decreased, mainly due to a contraction in the construction and building sectors, and a decline in consumer spending amongst expatriate workers and nationals. Many foreign workers returned to their home countries when violence erupted reducing consumption.
International observers forecast economic growth recovery after the fallout from the oil blockade eases, security improves and a more unified and effective government starts to take shape. Studies on post-conflict countries demonstrate that external peacekeeping and robust economic growth have proven to be more critical than political reforms in preventing a return to conflict . In addressing political and institutional reforms, policy makers and the donor community should consider that the economic reactivation shall go beyond oil resources management and focus on economic diversification.
We propose five key priority actions:
- Re-establish the unification of Libya’s financial institutions. This is crucial for the success of any economic reform efforts. The unification of currency exchange rates this month is a promising advance in the re-activation of Libya’s economy, so too is the engagement in talks by GNA and LNA to unify the national budget in 2021 with elections also on the horizon for 2021.
- Target investment in priority sectors. Investment in the areas of infrastructure development, construction, private health services, information technology and e-services could be developed leading to job creation and employment. With a more stable political environment, the country can attract regional, international and diaspora investors which could bring access to capital, technology, and know-how in these sectors. Foreign direct investment promotion should include the development of a linkages programme to engage local suppliers and foster spill-overs.
- Develop entrepreneurship and labour skills. To foster social inclusion post-conflict, it is crucial to ensure that socially disadvantaged groups have access to relevant education and skills development which will enable them to acquire the requisite competencies and in-demand skills to engage effectively in self-employment or participate in the labour market. In addition, providing socially disadvantaged groups with business knowledge, information and advice through mentoring and access to networks is imperative to ensure that these groups have the necessary support to effectively engage in business activities. Policymakers can ensure investments are made in education and training to provide in-demand skills and support the capacity of institutions to provide relevant skills, as well as improve the support infrastructure, particularly, access to networks and mentoring. Entrepreneurs’ financial management skills can also determine their ability to access credit and grow their firms.
- Facilitate access to finance. Banks traditionally require clients to provide collateral such as land or real estate to secure loans. However, many creditworthy SMEs in Libya do not have the type of collateral required by commercial lenders and therefore have trouble accessing finance. To remove this barrier, the government and financial institutions may relax collateral requirements and introduce different schemes for creditworthiness evaluation. Policymakers should consider providing financial incentives, ensuring access to innovative financing, and supporting the development of the necessary infrastructure such as incubators and accelerators which can help to catalyse the development of start-ups, for example, funds to support female entrepreneurship have been established in several countries. Venture capital is also playing an important role in catalysing alternative energy and environmentally friendly technologies, with venture capital funds being used to spur green entrepreneurship.
- Adopt a holistic approach. In conflict and transition, priority economic reforms often reflect stakeholders’ most immediate needs, rather than long-term development goals. In Libya’s case due to the political divisions and the demands of the sub-national institutions for increased empowerment, any assessments at the national level will complement local consultations including interactions with a broad range of stakeholders in the provinces, municipalities, and communities. Virtuous sequencing would build confidence and capacity among reform champions while dealing with local communities’ pragmatic concerns.
The new administration provides promise for positive political and economic development for Libya. Alongside international donor support these five priority actions can re-establish Libya’s financial footing and reactivate its economy.