In the Chaos of Libya: Part 3 – The Economy

The economy
by Francesco Angelone

© Reuters. A building which witnesses say was hit by a rocket burns after clashes between rival militias in the Sarraj district in Tripoli

© Reuters. A building which witnesses say was hit by a rocket burns after clashes between rival militias in the Sarraj district in Tripoli

Libya is seeking its own political identity through elections, being these considered as an essential element in a democratic system. At the same time, it will have to decide which route to take in order to recover the economy after years of internal conflicts, which seem unlikely to end very soon. Therefore, the North African country’s transition – which, according to some observers, might be leading to a state failure or to an authoritarian revival – proceeds on a double-track.
If the Libyan political framework is very intricate and fragmented, divided between factions more or less easily to identify, the Libyan economy presents critical issues related to the energy resources management sector, which alone accounts for almost the entire State revenues. The macroeconomic framework of the post-Qaddafi’s Libya is not the most encouraging one, as it is strongly affected by the country’s lack of stability. This picture is indeed likely to worsen if elections held on 25th June 2014, which ended with the victory of the ‘liberals’, will not be followed up by the establishment of a stable central authority in order to promote both institutional and economic reforms, and to exploit effectively the treasure that is hidden in the subsoil. The task of the government, therefore, is also to establish a business environment for attracting foreign investors in order to facilitate an effective economic recovery.
The Libyan economy, as previously mentioned, is typical of a rentier state, i.e. a country which derives almost all of its income from the sale of its natural resources, of whatever nature they may be, to foreign countries. The definition, intuitively, is perfectly applicable to countries such as Libya, also a member of the OPEC, which is at its turn composed of ‘oil states’, because of the large amount of oil they own.
In recent years, particularly since 2011, the GDP growth rate has been suffering of continuous fluctuations, an unusual phenomenon for the local economy. The latest available data, of January 2014, show a decline in GDP of 12.06%, but after the political crisis Libya has also recorded sharp declines of 52.5% and sudden growths of up to 104.37%. You cannot ignore the fact that these substantial deficits and surpluses depend almost exclusively on the interruption-resumption of oil exports. It is evident, therefore, that a worsening of the Libyan economic situation turns out into a worsening of the energy situation in this country.
Anyway, we must admit that since the outbreak of the crisis in the country, governments have been very committed on the implementation of programs of support and assistance to the citizens. However, the increase in public spending has further worsened the debt of a country whose production (energy more than anything else) has stopped.
The future Libya must not forget what allowed it to impose as a continental power during the Qaddafi’s regime that is thanks to the mineral sources in the subsoil. The data on BP Statistical Review of World Energy describe Libya as the country holding the largest amount of oil reserves in all Africa and rank Libya as the fourth as regards to natural gas. The figures speak for themselves, and therefore it is likely that the country’s, at least for the moment, can only expect to flourish again thanks to the production and the commerce on hydrocarbons (in 2012, 95% of national exports consisted of oil and gas). However, the Libyan government’s challenge is to diversify the economy of the country, excessively dependent on the fortunes of the energy sector, certainly necessary but not sufficient condition for a sustainable and long-lasting growth. The efforts made in this direction by both Qaddafi and the following governments seem vain, though.

© Sean Smith /The Guardian. An oil refinery in Libya burns during the rebels' push towards Tripoli.

© Sean Smith /The Guardian. An oil refinery in Libya burns during the rebels’ push towards Tripoli.

Oil production has sought an important stop in 2011, with the outbreak of the civil war. In that case, Libya’s oil production slipped from 1.66 million barrels per day to only 0.48. The figure is even more disconcerting when you consider that in 2010 about 1.5 million barrels of crude oil were exported. The net loss for the State revenues was huge, but it was partially recovered in the following year, 2012, when, benefiting from the end of most of the hostilities, the production climbed again and returned almost to the pre-war levels. During the year 2013, however, there was yet another abrupt interruption of production, similar in magnitude to that of 2011.
The reason for these disruptions lies mainly in the geographical location of the country’s oil fields and processing plants. Most of the deposits, in fact, are in the east of the country, in Cyrenaica, or in its proximity, the region where the tension seems to reach maximum levels. In this context, in which protests led to the closure of the loading ports, of the fields themselves and of the pipelines, as it was not physically possible to ensure the safety of the oil production, Libya paid to the tune of billions of dollars the price of its own domestic political scenario. But these problems, both in 2011 and 2013, also affected the fields in the western part of the country that is those of El Sahara (closed several times between the summer and the autumn of 2013) and El Feel. The Zintan militias, very influential in the area, have hindered the smooth operation of both reservoirs and pumping and storage facilities in order to renegotiate better terms contracts for the sale of refined oil. The strong cleavages between the different areas of the country brought people to think that a division of the national oil company, the National Oil Corporation (NOC), was possible, so that it could operate through two companies, with one based in Cyrenaica and dedicated to the refining and petrochemical industry.
Such a situation, as you might guess, affects not only the country’s finances, and the ability to support, financially speaking, and the plans of social intervention. As a result, also the relationships with the big foreign companies operating in Libya and with the foreign countries themselves. In 2013, the oil minister al-Arousi foresaw the possibility of reviewing the oil contracts as those were stipulated against the national interest, thus, with an undue advantage for foreign contractors. Foreign companies, therefore, already alarmed by the political instability, began to act more cautiously.
At the moment, things do not seem to have improved as hoped. In June, the Prime Minister Al-Thani announced that the government had regained control of the terminal of Ras Lanuf and Es Seder in the Gulf of Sirte. However, after two months from that announcement, the production is still blocked. NOC has announced that the current fighting (especially in Tripoli) has not affected the oil production while foreign companies, Total, Eni and Repsol, have evacuated their staff. For countries such as Italy and Spain, heavily dependent on energy imports, the situation in Libya has a fundamental importance, especially in light of other crises in relevant areas for their energy supply (Ukraine for example, where, however, the greatest anxiety concerns the gas supplies).
It is for all these reasons that the diversification of the national economy, although important, does not seem to be a matter of importance comparable to the return of crude oil extraction and processing to pre-war levels. As the incidents of the recent years and months have showed, is even more essential to restore a quiet and stable environment for enabling the flourishing of a productive activity. As long as these internal rifts continue to affect the Libyan politics, the country could not optimize the exploitation of its energy resources.
The argument, of course, is also valid for the production and the international trade of natural gas. Although quantitatively less important for the Libyan economy, the country’s gas could be of critical importance to overcome the energy security issue of such purchasers from the northern shores of the Mediterranean, like Italy. We must keep in mind that in 2012, for example, Libya exported less gas than in the previous years, and that the only buyer of Libyan LNG was Italy.
Therefore, the battle of the Libyan government against political instability is of masterpiece importance not only for Libya’ state revenues and citizens, but also for other international players, both purchasers and investors.