Libya Economic/Political Outlook

POLITICAL STABILITY: Libya has descended into civil war, as pro- and anti-regime forces battle for control of the country. Political uncertainty will remain high for the foreseeable future. The first signs of a popular uprising emerged in mid-February, when a small group of demonstrators marched through Benghazi. As the unrest spread rapidly across the country the Libyan leader, Muammar Qadhafi, responded with extreme force, prompting the UN Security Council to impose a no-fly zone as part of a mission to protect civilians. NATO took leadership of the military operation in late March but has struggled to articulate its exact goals, appearing reluctant to confirm the possibility of targeting Colonel Qadhafi himself.

ELECTION WATCH: The popular uprising against Colonel Qadhafi’s rule has brought his jamahiriya system of governance to an end. The Economist Intelligence Unit expects Libya to hold elections within the forecast period, either following an outright victory by the opposition or as part of a negotiated deal with the incumbent regime. The opposition movement has said that it will seek to establish a representative democratic system in the post-Qadhafi era.

INTERNATIONAL RELATIONS: The Qadhafi regime’s attempts to violently suppress the revolution have met with near-universal condemnation. The West, led by NATO, has imposed a no-fly zone over Libya. The military intervention, authorised under Security Council Resolution 1973, is aimed at protecting civilians. As of July 18th NATO said that it had conducted 15,669 sorties, of which 5,902 were strike sorties, since March 31st. In addition, the UN, the EU and the US (as well as other individual countries) have imposed sanctions on senior members of the Qadhafi regime and on Libyan state institutions that represent a source of funding for the government.

POLICY TRENDS: Following the departure of Colonel Qadhafi, it is likely that a new government would introduce drastic changes to economic policy, increasing the pace of liberalisation and reform and eliminating excessive bureaucracy. The TNC has not formally outlined its future policies in this area, except to say that it will endeavour to create “effective economic institutions to eradicate poverty and unemployment”.

ECONOMIC GROWTH: We have revised our economic forecast to reflect the effects of the ongoing conflict on the oil sector. We expect real GDP to contract by 28.2% (previously 26.1%). This remains a fairly optimistic forecast, which is based on the assumption that the political situation will be resolved before the end of the year, allowing oil production and exports to resume gradually. We expect GDP growth to average 2.4% in 2011-15. Renewed activity in the hydrocarbons sector will depend heavily on the return of foreign oil service companies, which have withdrawn from the country amid security concerns.

INFLATION: According to figures from the Central Bank of Libya, inflation averaged 2.5% in 2010. It is forecast to rise to an average of 6.1% in 2011, based on the assumption that Libya, which imports 75% of its food, is facing significant shortages owing to the ongoing conflict. In addition, higher international food and non-oil commodity prices will push up the cost of imports. Upward inflationary pressure may be mitigated by a shortage of local and foreign currency. However, it is possible that the Qadhafi regime could access additional funds by liquidating direct investments by Libyans in foreign assets, particularly in Sub-Saharan Africa. In the medium term inflation will be sustained by a revival in consumer confidence and higher oil revenue, leading to greater domestic liquidity. It is likely that government subsidies under any future regime will be maintained, which will ensure that prices for many staple goods, particularly housing and healthcare, are kept in check.

EXCHANGE RATES: The Libyan dinar is pegged to the IMF’s special drawing rights (SDR) and is tightly managed. As a result, we do not expect a significant change to the official dinar rate, despite severely restricted access to foreign-exchange reserves. However, a parallel market has emerged with the unofficial exchange rate weakening from the official 2010 average of LD1.27:US$1, providing further evidence that foreign exchange is already in short supply. A new government is unlikely to come under pressure to devalue the dinar. Once sanctions are lifted and oil revenue recovers, Libya will again have access to billions of dollars of foreign reserves, which will provide ample support to the currency. We therefore expect the peg to the SDR to remain in place in 2011-15.

EXTERNAL SECTOR: The current account is dominated by hydrocarbons exports. Earnings from goods exports are expected to fall sharply in 2011, to US$8.8bn from US$46.3bn in 2010. Goods exports will resume growth as the political situation becomes clearer, rising to US$47bn in 2015 and averaging US$32.3bn a year in 2011-15. We expect imports to decline in the short term owing to the effects of sanctions and the disruption caused by the political and security crisis, which will dampen private consumption. As a result, we forecast that the trade surplus will average US$13.1bn in 2011-15.

SOURCE: Country Outlook