Libya Political/Financial Outlook

POLITICAL STABILITY: Opposition forces entered Tripoli on August 21st, delivering the final blow to the Qadhafi regime, which has ruled Libya since 1969. At the time of writing, the rebels said that they had taken control of most of the capital, but heavy fighting was continuing in some areas, including around Colonel Muammar Qadhafi’s Bab al-Aziziya compound. The breakthrough—six months into the civil war—came when fighters from the Nafusa Mountains captured the town of Azzawiya, 50 km west of Tripoli, and home to the country’s largest oil refinery. From there, they moved to encircle the capital, as did rebels progressing westwards from Misurata.

ELECTION WATCH: The popular uprising against Colonel Qadhafi’s rule has brought his jamahiriya system of governance to an end. The opposition’s National Transitional Council (NTC) has issued a temporary constitution outlining a political transition process. Under the plan, which would be implemented immediately after the collapse of the Qadhafi regime, the NTC will continue to govern until a General National Congress is elected. Following the “announcement of liberation”, the NTC will move from Benghazi to Tripoli and set up an interim government within a month. Within three months of liberation, the NTC will issue a law governing elections to the General National Congress and call elections.

INTERNATIONAL RELATIONS: In mid-July the international contact group on Libya announced at a meeting in Istanbul, Turkey, that it had unanimously deemed the Benghazi-based NTC to be the only legitimate representative of the Libyan people. Significantly, the US was among those states to officially recognise the opposition government. Several countries, including France, Italy, Qatar, Kuwait and Turkey, have pledged financial assistance to the opposition, and others, such as the US, have said that they will make some of the Qadhafi regime’s frozen overseas assets available to the NTC.

POLICY TRENDS: Economic reform under Colonel Qadhafi has been limited, reflecting stiff resistance from vested interests, as some regime insiders have been reluctant to relax their control over large swathes of the state-dominated economy. Following the collapse of the incumbent regime, it is likely that a new government will initially focus on diverting state funds to finance reconstruction. It is also likely to introduce reforms to enable the private sector to operate more effectively than was the case under the highly restrictive Qadhafi regime. The NTC 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: The Economist Intelligence Unit expects real GDP to contract by 28.2% in 2011 owing to the effects of the civil war on oil production and exports. This is based on the assumption that oil production will pick up before the end of the year. 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 services companies, which have withdrawn from the country amid security concerns. However, Libyan engineers will be able to restart production in some fields, albeit at a much-reduced level.

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. 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 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.