Libya today is a shadow of its former self

Libya is rapidly joining the ranks of Africa's better-known failed states: the Central African Republic, Somalia and South Sudan. The North African country, once boasting one of the continent's highest per-capita GDPs, is a shadow of its former self: torn apart by armed conflict and now felled by falling oil prices and declining production.

More than three years since the NATO-backed toppling of Colonel Muammar Gaddafi, Libya "may exist as an entity of international law but, in reality, it doesn't exist anymore," said Slimane Zeghidour, political analyst with France's TV5 Monde. "There is no authority recognized by even half of the country."

Islamist militia groups control the capital, Tripoli, and Benghazi, the second largest city. The internationally recognized government of Prime Minister Abdullah al-Thinni has fled to Tobruk, a port city in the east.

Heavy toll

The conflict has taken a heavy toll on the economy of North Africa's biggest oil producer. "GDP growth is estimated to have fallen by almost 30 percent last year, mostly driven by a sharp decline in oil production [down 51 percent in 2014 from 2013] and oil exports [down 75 percent in 2014 from 2013]," said Marouane El Abassi, the World Bank's Resident Representative in Libya.

Libya's Parliament - still in Tripoli at the time - approved the latest budget, worth 56.5 billion Libyan dinars ($41.6 billion), in June 2014. It was based on projections of 26 billion Libyan dinars ($19.1 billion) in oil revenue and an annual oil production of 600,000 barrels per day (bpd) at $100 a barrel, Mohamed Abdullah, head of the budget committee, told Reuters at the time. But two months after the budget was approved, Libya Dawn (an alliance of Islamist militias close to the Muslim Brotherhood) chased Thinni's government from Tripoli and the country lurched toward civil war.

By the end of 2014, amid fighting between government troops and Libya Dawn militias for the control of key oil fields, terminals and ports, oil production was down to less than 300,000 bpd, according to the International Monetary Fund (IMF). This is less than a fifth of the 1.6 million bpd Libya was pumping before Gaddafi was toppled in 2011.

Plunging oil prices since mid-2014 have dealt a second blow to Libya's economy. "The budget was made on the assumption that the oil price would stay at $100 per barrel," said Mohammed El-Qorchi, IMF mission chief for Libya. "But the situation is different now that the price has dropped."

Hydrocarbon lifeline

The hydrocarbon sector in Libya contributes, on average, almost 80 percent to GDP while it generates about 95 percent of total fiscal revenues and 98 percent of export receipts, according to the World Bank. Total collected revenues, mostly from oil, deposited at the Libyan Central Bank's consolidated revenue account as of November 30, 2014, were about 19.2 billion Libyan dinars ($14.1 billion). This represented a staggering 67-percent decline from the previous fiscal year's 59.1 billion Libyan dinars ($43.5 billion).

The double blow - falling production and prices - has led to a worsening of Libya's budget deficit (estimated at 27 percent of GDP). Government spending on civil servants' wages and food and energy subsidies represents almost 70 percent of the total budget, while the development budget is "minimal," the bank notes.

"In an oil country, all you need to do is to redistribute oil revenues in a smart way," said Jean-Yves Moisseron, an analyst with the Institut de Recherche pour le Développement, a French think tank. "So a portion of oil revenues goes to pay what's left of the public service, civil servants in schools, hospitals and so on. And another part is used to pay political parties, tribes, militias and local councils, whom you need to pay to keep the power."

Food and energy subsidies stood at 20.7 percent of the country's GDP in 2014, up from 10.4 percent of GDP in 2011, according to the World Bank. Fuel subsidies lead to excessive consumption, waste and cross-border smuggling.
Libya needs to reorient public expenditure from wages and subsidies to delivering services, according to an October 2014 IMF report. It also needs to invest in infrastructure and create "conditions for diversified, private-sector led growth," the report said.

No international loans

So far Libya has not asked for international loans to help it through its crisis: it is using its substantial foreign reserves to stay afloat and plug the deficits. But these international assets have collapsed from $120 billion at the end of 2013 to less than $100 billion at the end of last year, according to the World Bank. "If the country continues to tap into its international reserves at this rate, they will finish [them] … in four years," said El-Qorchi.

The Tobruk-based government is still ostensibly in control of the Libyan Investment Authority, the country's sovereign wealth fund worth $66 billion, according to the United States-based Sovereign Wealth Fund Institute. Yet confusion surrounds the management of this scandal-plagued fund, once the chief investment vehicle of the Gaddafi regime. "There is a lot of opacity around who deals with … where the money goes and which is the legitimate authority to access these funds," said Moisseron.

The Libyan currency is under severe pressure. Its value has already depreciated by more than 20 percent, said the World Bank in its latest report. The country may soon be forced to devalue the dinar to pay civil servants, support exports and improve the trade balance. Devaluation, however, risks hyperinflation and encourages black-market dealing in dollars and other stable currencies.

So far the 2015 budget has not been submitted to the legislative body. "There is no state left, no nation, no budget. When it comes to Libya, all these have become abstract concepts," said Moisseron.
To allow their country to function again, all Libyan parties need to cease hostilities and withdraw armed groups from major cities. They must form a national unity government and commit to the rule of law, secure airports, ports and oil terminals, and allow the economy to get back on course.

In March 2014, UN-sponsored peace talks in Geneva failed to bring together the two rival governments, as well as all political parties and armed groups.

Libya is "the perfect mix, ready to explode," said EU foreign policy chief Federica Mogherini at the Munich Security Conference in February. Especially since local armed groups such as Ansar al-Sharia, an Islamist militia based in Benghazi, and foreign jihadi groups such as the Islamic State are taking advantage of the chaos to occupy territory and amass wealth. Do the two rival governments of Tripoli and Tobruk care enough about Libya to cease hostilities? If the fighting continues, the country faces an unprecedented economic collapse that will spell disaster and deprivation for the Libyan people.

(This article first appeared inGood Governance Africa)