Libya’s rapid insertion into the global economy by Arthur Bayhan*

Libya’s rapid insertion into the global economy by Arthur Bayhan*


March 10, 2013, Sunday/ 13:43:00

Since the first elections in over four decades took take place in Libya in July 2012, the Libyan government has taken important steps toward promoting a peaceful political transition and developing a national economic reform agenda.

Although in the short term security remains a challenge, Libyan authorities have managed to quickly revive the production of hydrocarbons, which returned to pre-conflict levels in 2012.

Libya depends on its hydrocarbons, which have long dominated the Libyan economy. Hydrocarbons include more than 70 percent of gross domestic product (GDP), 95 percent of exports, and approximately 90 percent of government revenue, and around 80 percent of employment is generated in the public sector. However, the hydrocarbon industry is capital intensive and therefore can make only a very limited contribution to employment generation and sustained economic growth. Therefore, the diversification of the Libyan economy is crucial for long-term economic growth and employment generation. The future of the Libyan economy will be determined in significant part by whether or not Libya can commit to investing its energy income to promote sustainable growth in non-energy sectors of the economy, so that it can generate sustainable long-term employment. Apart from the service and construction sectors, which account for approximately 20 percent of the country’s GDP and are expected to expand further as a percent of GDP, Libya should focus on the tourism sector, trade and to some extent agriculture in promoting the private sector in Libya.

In the medium and long-term, the private sector will be the main driver of job creation, meaning non-energy sectors will also determine the rate of job creation and the distribution of wealth in Libya. In managing the economy, the government with the aid of international organizations should focus primarily on private sector development policies to create an environment conducive to businesses. International assistance to Libya should focus on regulatory reform, its investment climate, trade promotion, access to finance and developing small and medium-sized enterprises (SMEs) as well as entrepreneurship and capacity-building, as these things will enable Libya to have a modern economy and participate in global markets.

Although Libya’s climate and soil limit its agricultural output, leading the country to import about 75 percent of its food, there is an opportunity to take advantage of investments already made in the Great Manmade River Project (GMRP) while investing also in desalinization capabilities to meet growing water demands. However, there are also significant possibilities for diversification in the tourism industry. With an excellent climate, proximity to Europe, Mediterranean coastline, archaeological sites and other cultural assets, Libya has a competitive advantage and the potential to grow. The sector will play a key role for employment generation and growth if it opens up to strategic investors.

FDI in non-energy sectors must play crucial role in energizing Libya’s economy

Although Libya has significant revenue from oil, multilateral and bilateral aid agencies such as the EU, World Bank and United States Agency for International Development (USAID) can play a key role in providing their relevant experience and lessons from supporting the transition of economies in Europe and the former Soviet Union on private sector development (PSD) policies, including regulatory frameworks and capacity-building of the relevant agencies, which are crucial to Libya’s economic reform efforts. As the investment in hydrocarbons has its own contractual arrangements, foreign direct investment (FDI) in non-energy sectors will have to play a crucial role in energizing Libya’s economy. Its contribution must not be limited to providing much-needed capital; more important are the non-financial contributions that come along with FDI such as the transfer of state-of-the-art technology, integration of domestic production into worldwide production and marketing chains, and linking domestic businesses through upstream and downstream stages of production.

The emphasis on FDI should not provide or advocate privileges for foreign investors over domestic ones. Domestic and foreign investors must operate and compete in the same economy. International experience shows that economic growth is best furthered by creating a business-friendly legal, institutional and administrative framework that enables all investments, domestic and foreign alike. Such a framework should provide a level playing field for entrepreneurial activities where all investments, regardless of origin, are driven by market forces to their most effective use, optimizing resource allocation efficiency.

The strategic location of Libya provides a market primarily to the EU but also to African countries like Egypt, Tunisia, Chad, Mali, Niger and Sudan. Turkey will be a major trading partner (imports from Turkey reached nearly $2.1 billion in 2012) as will the Gulf states. Therefore, it is important to develop policy tools to integrate the country with regional trade networks and deepen trade and economic links with potential trading partners. Appropriate policies should be developed to improve market access to welcome foreign goods. Libya’s border and customs administration should facilitate the efficient entry and exit of goods while improving transport and communications infrastructure to facilitate the movement of goods. Another area of priority is the regulatory environment and bilateral trade agreements with potential trade partners. In the medium term Libya may wish to revive its application process from 2004 for accession to the World Trade Organization (WTO). Libya’s membership in the WTO is crucial for greater market access and for influence in global forums. Libya’s membership in the world trade body is also important for allowing its private sector to attract more investment and innovation to increase the competitiveness of the country’s non-oil sectors. However, progress on instituting market-based economic reforms for long-term growth will depend on Libya’s ability to manage its energy wealth to promote sustainable growth in non-energy sectors of the economy and spur employment in the private sector.

*Arthur Bayhan is an international competitiveness and private sector development expert with more than 20 years of project implementation experience in the areas of investment and trade facilitation, sector competitiveness and public-private partnership development.