Libya's decline and fall

It is scarcely four years since the Arab Spring and fall of Colonel Muammar Gaddafi marked the start of a new chapter for Libya.

After suffering from decades of tyranny under Gaddafi’s regime, the Libyan people looked forward to an age of democracy, prosperity and, above all, stability.

For the first time in years, Libya was attracting international attention for the right reasons — foreign investors flocked to its oil-rich soils and began showing interest in underdeveloped sectors, such as real estate, tourism and consultancy.

By 2012, many of the world’s commercial airlines had launched services to and from Tripoli. The vast country that holds Africa’s biggest oil reserves was, it appeared, open for business.



Yet today, Libya is at war with itself again. Four years after Gaddafi was overthrown and killed by NATO-backed rebels in Sirte, the country has failed to form a legitimate majority government and draw up a constitution.

Instead, rival factions wreak violence across a nation plunging ever deeper into full-blown civil war.

The economic impact of the turmoil is painfully apparent: the once-busy airports are shut, oil production is at a fifth of its pre-liberation levels and the country is a no-go zone for foreign nationals. One analyst who asks not to be named says, simply: “You’d be crazy to do business in Libya now.”

As United Nations-sponsored peace talks resume this month, Arabian Business analyses a complex and deteriorating situation with seemingly no end in sight.


Despite the initial green shoots of commercial optimism, politically Libya has been in a state of mounting chaos since Gaddafi was overthrown. The first clashes erupted soon after the National Transitional Council (NTC) declared the country “liberated”, as rebel forces reacted to the proposed change.

In July 2012, the internationally recognised NTC handed power to an elected parliament in Tripoli, the General National Congress (GNC), but tensions gave way to violence as the new government struggled to control local militia fighting for their own interests. National security worsened, with frequent assassinations, bombings and kidnappings.

The GNC, which had been controlled by Libyan Islamists since 2013, provoked fresh discontent when it failed to stand down at the end of its electoral mandate in January 2014. General Khalifa Haftar, then commander of the Libyan Army, launched a campaign against the GNC and its Islamic allies, dissolving the GNC in Tripoli and forcing new elections to appoint the Council of Deputies, commonly known as the House of Representatives, as an internationally recognised caretaker government. But the electoral defeat of Islamist politicians sparked uproar among their supporters and, last July, a group called Libya Dawn seized Tripoli, set up its own administration and reinstated the old GNC.

Prime Minister Abdullah Al Thinni’s House of Representatives is now based in Tobruk, in the east of the country, after it was forced to flee Tripoli. To complicate matters further, the supreme court in Tripoli, controlled by the former GNC, ruled in November that the election process that had instated Al Thinni’s government was illegal — although the house has rejected this and remains in post.

The conflict has intensified as forces allied to Al Thinni seek to defend the eastern port of Benghazi from Islamist armed groups; shortly before this article went to press the death toll there had exceeded 700 in four months. Meanwhile, the two rival governments continue to fight a vicious war for legitimacy despite the fact that neither has a budget or strategy for how it would rebuild the country once in power.

Foreign analysts, unable to work in Libya at present, complain of a dearth of statistics but warn the outlook is bleak.

“Deep-rooted tribal, political and social tensions between hardline groups are making this an intractable situation, and that is really bad news for the economy,” says Jake Jolly, senior economist at IHS.

The World Bank’s latest quarterly economic briefing on Middle East and North Africa (MENA), published at the end of last month, says the price of the two sides not reaching an agreement is high. Immediately after the revolution, the report says, oil production in Libya was almost back to pre-war levels (1.6 million barrels per day), helping to double real GDP in 2012 and finance wage increases that boosted household income and consumption.

Now, oil production has dropped to around 450,000 bpd, just one fifth of the country’s pre-crisis output of 1.6 million bpd and a worrying collapse for a country for which hydrocarbon revenue makes up 60 percent of its GDP and the bulk of state spending in the form of energy subsidies. GDP is estimated to have contracted by almost 27 percent in 2014 as a result.

Civil servant salaries, which have been increased by almost 250 percent since the uprising, are placing Libya’s finances under further pressure. The country was running a budget deficit of 37 percent of GDP in 2014 — the highest ever recorded — and the recent drop in oil prices and reduced export capacity is expected to widen the gap further in 2015.

All of this has had a knock-on effect on the currency. The Libyan dinar (LYD) has depreciated by more than 20 percent in the international market in the past year. The government has been forced to dip into its reserves, which, though substantial, have dropped from $120bn in 2013 to $100bn last August and by another 20 percent since the start of the year. The World Bank estimates that it will be depleted in four years.

Mohamed Abdelmeguid, MENA editor and economist at the Economist Intelligence Unit, says that by drawing on its reserves the country “could carry on as it is for another two years, and that is one reason the conflict has gone on for as long as it has. Lack of cash could force the warring parties to negotiate but that is unlikely to happen any time soon.” What’s more, he says, most of the assets in Libya’s sovereign wealth fund are illiquid and would have to be sold off first to raise emergency cash in the future.

In the meantime, business prospects are practically non-existent and the country is becoming more and more isolated from the international community.

Khalid El Massnaoui, senior economist at the World Bank, says: “Private sector growth potential is adversely impacted by political strife and security concerns, as well as by the lack of policy actions and reforms. In the current situation, doing business in Libya entails high and unwarranted risks.”

Riad Kahwaji, chief executive of the Dubai-based Institute for Near East and Gulf Military Analysis, says: “If you want to export anything you have to know which port you’re using, who’s controlling it and where and by whom your papers will be recognised. That is impossible to determine at present as things are changing the whole time.”

Geoffrey Howard, an analyst at intelligence firm Control Risks, describes how foreign companies have been hit by crippling ten-month-or-more payment delays and other breaches of contract about which they can do very little because of the lack of governance.

One company that suffered losses from its Libya operations is energy provider APR. Last month it announced it would move its power-producing assets out of Libya to other countries after a crucial contract remained unsigned for almost a year and shares fell by up to 16.6 percent to a record low of 156 pence, according to Reuters. “The delay has obviously had an impact on our financial performance,” APR said in a statement last year.

Alex Warren, Middle East researcher and director of Frontier Media, which publishes intelligence briefing The Libya Monitor, says: “Before liberation, Libya’s economy was dominated by the state. The power void after Gaddafi’s death led to a post-revolution boom in which foreign companies that had previously regarded Libya as closed rushed to explore opportunities.”

For such companies, Libya’s appeal has disintegrated along with the rubble and dust of its battle-ravaged ports and towns. UAE-based aviation companies Etihad Airways and Emirates both launched new flights to Tripoli in 2012 but have since suspended them as the conflict intensified. An Etihad spokesman says: “Like most of the carriers the decision to suspend the service was because of security concerns.” An Emirates spokeswoman says the company “would continue to monitor the situation closely”.

Dubai-based developer Emaar, which in 2006 was close to signing a deal to develop the 380 million sq m Zowara Abou Kamash Development Zone near the border with Tunisia, declined to provide Arabian Business with an update on the project. And UAE-based contractor Habtoor Leighton Group, which had also announced an intention to expand in Libya before liberation, said only: “We do not have any projects in Libya.”

Tripoli International Airport closed last July and tourism — a growing industry pre-liberation — has slowed since 2011. The World Travel and Tourism Council’s 2014 economic impact report on Libya showed that the sector’s contribution to GDP in 2013 remained roughly flat from 2012, at 3.3 percent, totalling $1.24bn (LYD1.69bn). High-profile development schemes intended to boost tourism, including Energy City Libya, have failed to break ground. And opportunities in telecommunications have also dried up — network providers are still awaiting the tender for a third mobile phone licence for Libya promised in 2013.

For now, the hydrocarbon sector will continue to dominate the Libyan economy. Still, the country has the potential for economic diversification with key opportunities including seawater desalination, tourism, investment in Libyan stocks and construction, says the World Bank’s El Massnaoui. But opening up these opportunities in a country suffering from decades of underinvestment would require complete regulatory reform, including revision of property, investment and infrastructure law and a governance structure that promotes private sector development and job creation — impossible while current levels of instability persist, says Philip Stack from Verisk Maplecroft.

Howard from Control Risks warns: “Companies can mitigate against not getting paid, but unfortunately not against getting shot.”

Of course, addressing human rights issues raised by the conflict will form part of the latest round of UN talks. However, it is expected that the talks — which this time include parties that did not participate in the two failed rounds last year — will also attempt to negotiate power-sharing arrangements that reconcile the two governments’ opposing demands.

Samir Ghattas, acting chief of public information at the UN Support Mission in Libya, says: “The Libyan people are tired of war and want peace. The priorities are to reach a political agreement to manage the remainder of the transitional phase of government and end the fighting. This includes agreeing on a nationally unified, consensual government with a strong mandate to work towards ending the conflict.”

However, some observers are sceptical. “There aren’t any immediate solutions for Libya,” says Richard Cochrane, senior analyst, MENA, at IHS Country Risk. “Pre-existing social, tribal, and political divisions have been allowed to deepen and fester since the end of the 2011 conflict, to the extent that the country is now more akin to a feudal system than a unitary state. It’s difficult to see how a unity government can emerge as a result of these negotiations.”

For now, the stalemate continues and investors watch warily from the sidelines for some indication of calmer times ahead. Sadly, that could be some time. As Stack says, “Sorting out Libya is like rearranging the deckchairs on the Titanic.”