After the anti-government protests of 17 February, the so called “Day of Rage”, Libya has experienced an escalation of violence which has led the country into an armed conflict which persists at present and which has seen the country effectively split between government-controlled areas in the west and areas controlled by anti-government forces in the east. The latter is backed by an international coalition which is enforcing a no-fly zone to protect frompro-Gaddafi forces.

The country is likely to pay a high price for the conflict, which has effectively paralysed the economy and led to a near halt of Libya’s oil production.With considerable oil revenues, a relatively small population and redistributive policies including an extensive social welfare system and subsidies for basic goods, Libya was enjoying the third highest Gross National Income (GNI) per capita and the highest human development index (HDI) in Africa. In 2010 the country was also enjoying a robust growth of around 7.4% and exhibited a high growth trajectory until the conflict erupted. The government had announced plans to increase oil production capacity to 2.5 million barrels per day (bpd) by 2015, but oil production and sales have been almost brought to a halt by the political unrest. At the time of writing this report, and despite the persistence of uncertainty, GDP is expected to decline by a double digit figure in 2011, but to recover again sharply in 2012, assuming the political situation stabilises.

The Libyan crisis has also already spilled over its borders and severely affected some African countries, in particular through humanitarian crises on neighbouring countries’ frontiers, the loss of remittances from millions of African migrants working in Libya and through the freezing of Libyan assets worldwide. While the global market loss of Libyan oil production has been offset by the increase in supply by other oil producers, risk premiums and associated high prices are likely to persist.

On the security and political front, there is no clear indication of either the duration or the outcome of the crisis. At the time of writing, the Libyan National Council, the self-proclaimed authority in the rebel-area in the eastern part of the country was increasingly recognised as the legitimate authority for the country, while defections in government ranks and diplomatic representations have significantly weakened Gaddafi’s hold on power. The crisis came at a time when Libya was pursuing economic liberalisation which was often accompanied by a gradual opening up of the political system. However, progress in this direction was mixed and many sections of society grew increasingly dissatisfied. Events unfolding in Tunisia and Egypt in the wake of their respective revolutions gave people confidence that a regime change was possible, unleashing a wave of protests and political upheaval.

On the human development front, the population is likely to suffer significantly from the impact of the conflict. Before the unrest, Libya was expected to achieve all the Millennium Development Goals (MDGs) within the 2015 timeframe. Although the state provided free universal health care and education to its citizens, the main challenge was to improve the quality of both. The pressing social challenges included the need to tackle high youth unemployment, to strengthen efforts to conserve Libya’s delicate environment and limited natural resources, to encourage women’s economic and social participation, and to manage irregular migration. Such challenges are likely to be even further exacerbated by the conflict.

The European Union (EU) remains Libya’s largest trading partner. But economic relations between Libya and emerging economies, notably China and Turkey, were expanding rapidly. These economic partners were particularly prominent in the fast-growing expanding construction sector as foreign construction firms have been contracted to carry-out the country’s large public infrastructure projects. Foreign Direct Investment (FDI) is still limited, with a few exceptions in the oil sector. Libya was increasingly positioning itself as a “gateway to Africa”, an image that appeals to the wishes of Turkey and China to strengthen their economic foothold on the continent. It was also keen on using its partnerships with emerging economies to strengthen its negotiating power vis-à-vis its traditional partners. Future relationships may be further adjusted depending on the outcome of the conflict and the respective role countries would play in support of either party, with the highest dividend possibly being assigned to (or taken away from) France and the UK which have been the front-runners in supporting the no-fly zone and the rebels. By contrast China and Russia have played a much more cautious role and often criticised the military intervention.

Table 2: GDP by sector (in percentage)

Source:AfDB Statistics Department, based on data from Statistics Libya.

Figures for 2010 are estimates; for 2011 and later are projections.

Table 3: Demand composition

Source: Data from the Central Bank of Libya; estimates (e) and projections (p) based on authors’ calculations.

Figures for 2010 are estimates; for 2011 and later are projections.

Fiscal Policy

The Libyan government has traditionally run a large fiscal surplus; it benefits from high oil revenues and has tended to underestimate average oil prices when drawing up its budget. The budget surplus remained below historical averages at 13.5% in 2010 as the government announced a USD 46 billion budget. The 2010 budget showed a 32% increase over the 2009 figure and was Libya’s largest ever. As a result of the conflict, Libya is likely to continue to generate its first fiscal deficit in recent times.

Thanks to its earlier fiscal surpluses Libya has accumulated a large stock of foreign reserves. Out of 139 countries surveyed by the World Economic Forum in 2009, Libya had the second lowest government gross debt, amounting to only 3.9% of GDP. According to the Central Bank of Libya (CBL), Libya has no external debt. The IMF estimated that by the end of 2010 net foreign assets held by the CBL and the Libyan Investment Authority (LIA), Libya’s largest sovereign wealth fund, were to reach USD 150 billion, around 160% of GDP.

The LIA was established in 2007 with a starting capital of USD 65 billion, as a vehicle for investing a substantial proportion of the country’s oil wealth. Its conservative investment strategy allowed it to emerge from the global economic crisis virtually unscathed. Recently the LIA has adopted a more aggressive strategy, through investing in Europe, Africa and Latin America with an aim of benefiting from post-crisis opportunities. A new law passed in 2010 clarified the LIA’s regulatory framework, stating that its investments should be made abroad, on a commercial basis and should be low-risk to protect future generations’ share of the national wealth. The law also permits the LIA to retain all profits, with no more transfer of funds to the national budget. While Libya’s foreign assets are largely frozen, they offer an important source of funds to finance the country’s post-conflict development.

The year 2011 will probably see a significant slowdown in non-defence public spending from the record increases the country experienced in 2010, when rising oil prices renewed the government’s resolve to invest in the country’s ageing infrastructure. Prior to the unrest, the government saw investment in the country’s transport links, telecommunications, and commercial and residential property as crucial to its larger aim of diversifying the economy and had announced a three-year infrastructural investment programme.

According to UN data, spending on education and health averaged around 2.7% and 1.9% of GDP over the period 2000-07. In the past a considerable proportion of government spending has been used to fund subsidies for basic foodstuffs, fuel, electricity and housing. In 2010 around a seventh of the total budget was allocated to the price-balancing fund. Social spending is likely to rebound further as a consequence of the unrest.

The public sector wage bill has also traditionally absorbed a large proportion of the national budget. In spite of continuing efforts to cut back the public sector, the wage bill increased by around 15% in 2010, according to the IMF. In 2010 public sector workers were exempted from income tax, a move which effectively raised incomes and narrowed the gap between public and private sector employees but only cost the government around USD 160 million in lost revenues. A new civil service law was under consideration in early 2011 and was aimed at doubling public sector salaries in 2011 to reduce the gap with private sector wages. Post-conflict Libya is likely to relaunch such proposals and experience a spike in public sector salaries in the long term.

A 2010 law simplifying tax bands aimed to increase tax compliance and boost government non-oil revenues in the long term. Additionally, several pro-business laws introduced in 2010 will reduce non-oil receipts by offering temporary freezes on taxes and customs duties for private companies. Further efforts would be needed to attract investors.

Off-budget spending has substantially decreased in recent years. However, lack of transparency in the budgetary process still exists and accounting methods can be cumbersome and confusing. Nevertheless, considerable advances have been made this year, including the unification of the current and investment budgets, improvement in budget classification and streamlining of government bank accounts. Before the unrest, the country was preparing the investment budget in a three-year framework to insulate these investments from changes in the oil price.

Concerns have also been raised over the need to improve co-ordination between the General People’s Council (GPC) for Planning and Finance, which implements fiscal policy, and the Central Bank of Libya, which implements monetary policy.

Table 4: Public finances (percentage of GDP)

Table 5: Current account (percentage of GDP)

Source:Data from the Central Bank of Libya; estimates (e) and projections (p) based on authors’ calculations.

Figures for 2010 are estimates; for 2011 and later are projections.

Figure 2: Stock of total external debt (percentage of GDP) and debt service (percentage of exports of goods and services)

The EU dominates the Libyan market in terms of both trade and FDI, but trade between Libya and emerging economies has mushroomed in recent years, with Turkey and China establishing themselves as leading players.

According to 2009 EU data, China was Libya’s second largest trading partner, after the EU. Trade volumes between the two countries were reported to have reached USD 4.9 billion in the third quarter of 2010, up 46.5% from the previous year. This was largely due to a hike in oil imports from Libya, but Chinese exports to Libya also grew by 3.8%, with industrial machinery making up the bulk of this increase. The first direct air service between Beijing and Tripoli was launched in November 2010, providing further evidence of increased business ties between the two countries.

The 2009 EU report showed Turkey as Libya’s fourth largest trade partner, behind the EU, China and the US. Turkey reported that trade volume between the two countries reached USD 2.2 billion in 2009, a 60% increase since 2008. This increase occurred even though Turkey no longer imports Libyan oil. From December 2009, Libya and Turkey mutually lifted visa requirements for businessmen, a move that Turkish officials say has greatly facilitated increased trade between the two countries. Turkey was the first non-Arab country to reach such an agreement with Libya.

Other noteworthy emerging economic partners include Brazil, Korea, India and Russia, which were ranked as the 7th, 8th, 9th and 19th largest trade partners respectively, according to 2009 EU data.

In terms of FDI, current engagement between Libya and these emerging economies remains low, as opportunities for investment in Libya are limited by the small size of the private sector and government policy. In 2010 Turkey reported that it has USD 60 million of FDI in Libya, with over half of this invested in the energy sector. The Chinese embassy reported that by the third quarter of 2010 China had invested USD 43.5 million in Libya, with most investment concentrated in the construction sector.

FDI from both countries may increase substantially in the next few years. In December 2009, Turkey signed eight bilateral investment treaties with Libya, including investment protection agreements. In September 2010 it was reported that Turkey had allocated USD 45 billion for investment in Libya in the next ten years. In July 2010, Libya and China also signed an investment protection agreement.

The construction sector has seen a large number of new economic partnerships forms between Libyan public companies and construction firms from Turkey and China, as well as Brazil, India, Russia and Korea. According to World Bulletin, construction projects undertaken by Turkish contractors in Libya exceeded USD 15 billion in 2010, accounting for 70% of the construction industry in the country. China has around 20 firms in the country across a number of sectors. Chinese construction companies have been awarded a number of high profile, large contracts. Two contracts worth USD 2.49 billion were awarded to the China Civil Engineering and Construction Corporation (CCECC) to build part of Libya’s railway network. Discussions are under way on the creation of a special industrial zone for Chinese industry.

Libya continued to contract European or US firms for project management or planning roles but favours Asian, Eastern European and South American construction firms when it comes to implementing projects. The Libyan government was reported generally to believe that Asian, Eastern European and South American construction firms tend to offer good value for money, particularly for rather unsophisticated work, but for highly technical jobs a distinct preference for European or US firms has been reported. The stance is echoed among consumers who tend to see the increased trade from emerging economies as an opportunity for cheaper finished products and consumer items, albeit of lower quality, namely from China, Turkey and Korea. This has allowed for greater consumer choice, and has increased the purchasing power of many Libyans. In a few areas, such as processed foods, imported goods from emerging partners offer stiff competition to fledgling Libyan industry.

Libyan policy makers were well aware that partnership with emerging economies increases its leverage with other countries, especially its traditional partners. In response to US support for Switzerland during a diplomatic row between Libya and Switzerland, Shukri Ghanem, head of the National Oil Corporation (NOC), indicated that Libya might favour Russian or Chinese oil firms over US ones. Similarly, a key message in Colonel Gaddafi’s speech at the Africa-EU Summit of December 2010 was that if negotiations with the EU failed to make progress, Libya has a host of other partners to turn to, including China, India, Russia and Brazil.

In the case of Turkey, close diplomatic ties between the two nations have helped facilitate greater economic partnership. Having been part of the Ottoman Empire for over 300 years, Libya considers itself to have a natural cultural affinity with Turkey. Turkey’s diplomatic stance, particularly with regard to Palestine, has also drawn it closer to Libya. In November 2010 Turkish Prime Minister Recep Tayyip Erdogan was awarded the Gaddafi Human Rights Prize. This close political relationship may also explain Turkey’s successful economic negotiations with Libya.

Diplomatic relations between China and Libya are more sensitive. In the past few years there has been an increase in the number of high profile visits between the two countries, including the attendance by Colonel Gaddafi’s son, Saif al-Islam, at the Shanghai Expo. Nevertheless, top Libyan officials have publicly spoken of their misgivings concerning Chinese economic interests in the rest of Africa. China has reported that it has been approached over plans for a joint Libyan-Chinese venture to build a road from Libya to Niger and a number of railways on the African continent. This would suggest a potential for Chinese-Libyan co-operation in Africa. The more confrontational statements of Libyan officials, however, imply that Libya also considers China as a prime competitor in the African market, with both countries investing heavily and vying for influence across the continent.

Some of China’s more aggressive attempts to enter the Libyan market have been resisted. In March 2009 the NOC blocked a move by the Chinese National Petroleum Corporation (CNPC) to purchase Verenex, a Canadian company that had recently discovered about 1.2 billion barrels of oil in Libya. The NOC asserted that Libya had first right of refusal on purchase and bought Verenex’s assets itself. Some observers interpreted this as a deliberate manoeuvre against China but NOC Chairman Shukri Ghanem insisted that the purchase was for “commercial reasons.”

For emerging partners Libya offers potential growth in conventional areas such as oil and gas, but also in the petrochemical, construction, retail and tourism sectors. Investors are also interested in using Libya as a “gateway to Africa”, a term favoured by Libyan officials. Although this is the source of potential friction in Libya-China relations Turkish officials are keen to emphasise their interest in Africa, their desire for co-operation with Libya on the continent and the similarity in the two countries’ approaches to investment in Africa.

Until 17 February, the “day of anger” in Libya, the country enjoyed relatively high political stability. In 2011 Libya was to celebrate the 42nd anniversary of the “Al Fatah revolution” that brought Muammar al Gaddafi, the world longest serving leader, to power and the establishment of its unique system of government known as the Jamahiriya. As “leader of the revolution”, Colonel Gaddafi retained considerable power over the political system, while simultaneously seeming to remain above the fray of everyday politics.

The scenario was completely turned around by the protests and the change in regime inneighbouring Tunisia and Egypt provided a source of inspiration to Libyans. Further to the fall of the regime of presidents Ben Ali and Mubarak, the government had tried to mitigate the domestic impact of popular uprisings by increasing subsidies and access to loans and opening negotiations between government envoys and potentially disaffected groups in the east of the country. A major protest was organised on 17 February, marking the fifth anniversary of a similar anti-government uprising in which 18 protesters lost their lives and hundreds were wounded.

The protest was severely repressed by security forces, provoking a spiral of violence which escalated into armed conflict and led to the country being effectively split between a rebel-held territory in the east, ruled by the Benghazi- based Transitional National Council, and government- controlled territory including Tripoli and most of the western part of the country. As Gaddafi’s forces were regaining several coastal cities on the eastern side, on 18 March a United Nations resolution authorised member states to establish and enforce a no-fly zone over Libyaand take “all necessary measures” to protect civilians short of an invasion, after a lengthy discussion and a previously failed attempt to reach such decision at the level of G8 countries. A joint operation to enforce the no-fly zone over Libya began after the UN resolution. The command of the operation was then given to NATO. The operation was also supported by non-NATO members such as Jordan, Saudi Arabia and Qatar, which offered military and other logistical support. In the meantime, the government has been weakened by several spontaneous resignations by diplomats and senior officials.

The February events came at a time when Libya was continuing its efforts to reintegrate itself into the international community and enhance its diplomatic standing. Following a two-year seat on the UN Security Council, in May 2010 Libya was elected to the UN Human Rights Council. That same year, Libya hosted two Arab league summits, the Arab-Africa and the EU-Africa summits.

EU-Libya relations soured in early 2010 after Libya temporarily refused to issue visas to Schengen country nationals. Libya had retaliated against Switzerland’s visa blacklist containing the names of a number of Libyan officials. Nevertheless EU-Libya relations were back on track later that year, with the signing of a EUR 60 million deal on migration control and continued negotiation on a broader Libya-EU framework agreement. The framework agreement is intended to formalise Libya-EU co-operation, and will include provisions for a free trade agreement.

Until the February unrest, Libya continued to place importance on African integration, positioning itself as a lead player in the African Union and the Community of Sahel-Saharan States (CEN-SAD). The country channels billions of dollars of investment and development aid to the rest of the continent through a network of sovereign wealth funds and national development organisations.

The 2010 Africa-EU summit attended by leaders and representatives of over 80 countries indicated the extent of Libya’s ambition to be the gateway between the southern shore of the Mediterranean and the African continent.

Although Libya’s international rehabilitation has been accompanied by significant domestic reforms, progress towards opening up the country politically was not linear. The release of over 200 radical Islamist prisoners was welcomed by human rights activists and indicated that the perceived Islamist threat has declined in the country. As a precondition for their release, leaders of the notorious Libyan Islamic Fighting Group issued a 600-page retraction renouncing the use of violent jihad.

In 2009 and 2010 the Gaddafi Foundation, a development organisation founded by Colonel Gaddafi’s son, Saif al-Islam, published its own human rights report. Both years the reports have openly criticised the government’s record in a variety of areas, including the detention and treatment of political prisoners. The Gaddafi Foundation has also criticised government interference in workers’ unions. Although workers and professional associations are banned from protests, groups such as the Benghazi Lawyers Association and the Union of Journalists remain active.

At the same time, government control of the press tightened in 2010, with Al Ghad, the media company owned by Saif al-Islam, coming under considerable political pressure. Oea andQuryna, the two semi-independent newspapers owned by Al Ghad, were shut down in January 2010. Oea was reopened in July but suspended again in November. That same month, 22 journalists from Al Ghad were arrested, only to be released a few days later. All the journalists worked for Libya Press, a news agency owned by Al Ghad, which was closed down a few weeks later, officially due to “security fears”. The episode has been interpreted as a power struggle between conservative and reformist elites. The tightening of the press in 2010 can be seen as a prelude to the attempted crackdown occurring one year later, which did not however manage to prevent the protests from occurring.

The human cost of the Libyan conflict has not yet properly estimated. Estimates point to deaths in the thousands. Shortage of food and medicines has also been reported. At the time of writing, a growing humanitarian crisis was being reported in the besieged rebel city of Misrata and in many parts of the West. The Libyan conflict has also spilled over to the neighbouring countries where over 530 000 people had fled by mid-April, out of which over 250 000 of those had fled through the Tunisian border of Ras Jadir alone.

Before the conflict, Libya enjoyed the highest Human Development Index (HDI) on the continent, and ranks 53rd globally. The ranking takes a number of dimensions of human development into account, including literacy, life expectancy and GDP per capita. The 2009 economic slowdown had little impact upon national poverty levels or unemployment. Libyan citizens are protected by an extensive social welfare system. Libyan decision makers do not consequently consider absolute poverty a priority. The National Millennium Development Goals (MDG) Report for Libya, published in 2009, concludes that Libya is well positioned to achieve all eight MDGs.

The state provided free education and health care to all citizens. UN data placed adult literacy at 88.4% in 2007 and reported gross primary, secondary and tertiary enrolment rates for the years 2001-09 at 110.3%, 93.5% and 55.7% respectively. Nevertheless, government policy is focusing on improving the quality of the education provided and linking national curricula to labour market needs. A prime concern for policy-makers is unemployment, particularly among young people. Official government figures put the unemployment rate at 13.5%, but other estimates place it between 25% and 30%. Libya has a very young population: according to the 2006 census almost a third of the population is under the age of 15. The problem of youth unemployment was therefore major and erupted in the most recent crisis.

According to World Health Organisation (WHO) data, Libya use to spend USD 270 per capita on health care in 2006, or 2.9% of GDP, a figure that is above average for the region but is low when compared to countries with incomes similar to Libya. Many Libyans travel abroad for healthcare, often at great personal expense. Nonetheless life expectancy has increased to 74.5 years according to 2010 UN data. The prevalence of HIV/AIDS is largely considered to be low compared to regional averages but evidence points to the presence of a concentrated epidemic among high-risk groups. For example, a 2004 study by the National Centre for Infectious Diseases found the incidence rate in Tripoli prisons to be 18%.

Illegal migration used to present a considerable development challenge to Libya, as the country is a major transit point as well as an increased destination for migrants. The government estimates that there are around 3 million illegal migrants in Libya, a country with a population of 6.4 million. The International Organization for Migration (IOM) places the figure at around 1.5 million. Illegal migrants constitute one of the poorest, most marginalised and vulnerable sectors of Libyan society, particularly as many are unable to access public services. The problem has attracted the attention of both domestic and international actors. Since 2009 joint Libyan-Italian coastal patrols have helped reduce the number of migrants attempting the risky sea crossing to Europe. In October 2010 the European Commission pledged USD 80.3 million over the period 2011-13 to help combat illegal migration. As the conflict has unfolded, new waves of displaced people fleeing the war have added to the flows of migrant, sparking a heated debate particularly in Europe.

In recent years Libya had come under increasing pressure to reform its use of detention centres for irregular migrants and to sign the 1951 Geneva Convention concerning the rights and status of refugees. In 2010 Libya’s decision to close temporarily the offices of the UNHCR, the UN refugee agency, provoked further controversy. Law No.19 was passed in 2010 to ensure that all cases concerning irregular migration are processed through the courts. It also strengthened the penalties for trafficking and employing illegal migrants while simultaneously making it easier to regularise employees. IOM reported that several prosecutions of migrant smugglers have since taken place. Migrant detention centres were emptied and closed in July 2010, but in late 2010 the International Organisation for Migration (IMF) reported that they were gradually filling up once more as the state struggles to process migrant cases.

Although women in Libya face few legal obstacles to economic and social participation, strict social customs continue to discourage women from participating fully in the economic life of the country. Women’s enrolment in higher education has now surpassed that of men, but this is not yet reflected in the labour market. According to 2007 UN data, around 32% of women are in paid employment, but their average salaries are substantially lower than those of men. In July 2010, successful lobbying by a number of Libyan civil society organisations led to a revision of the country’s nationality laws. In what was billed as a triumph for women’s rights campaigners, the new laws enabled Libyan women married to non-Libyan men to pass on their nationality to their children. This made it easier for these children to gain access to Libya’s extensive social welfare system as well as favouring mixed marriages with foreigners.

Libya faces a number of significant environmental challenges. A growing population, increasing prosperity and expanding industry place a strain on the country’s natural resources. According to the Arab Human Development Report 2009, almost 90% of Libya is affected by desertification. Libya is signatory to a number of important international environmental conventions, but still needs to strengthen its national response. Continuing subsidies on water, fuel and electricity contribute to over-consumption of the country’s finite resources.