By Claudia Gazzini
Economic conditions and armed conflict in Libya are worsening rapidly as rival authorities in Tripoli and Tobruk compete control of a shrinking pot of national wealth.
PART (I)
This battle is taking place on the ground in oil fields, at pipelines and export terminals, as well as in the boardrooms of parallel national financial institutions. Combined with runaway spending due to corruption and dwindling revenues due to falling exports and energy prices, this paints an alarming mediumterm horizon for Libya’s finances and the welfare of its citizens.
Domestic political and military actors, and international actors supporting a political solution to the conflict, urgently need to address the shortcomings of the country’s finances and to contain the feud over who controls the Central Bank of Libya, the National Oil Corporation and the country’s sovereign wealth fund (LIA).
While the formation of an inclusive government of national accord – the aim of UN-led talks begun in January 2015 – would provide the ideal context through which to tackle these problems, this need not be a precondition.
Contingency measures to address urgent issues pertaining to the hydrocarbon sector and Libya’s finances can be taken before an agreement is reached and could even help to get there.
With Africa’s largest crude oil reserves and fifth largest natural gas reserves, Libya is among the world’s leading hydrocarbon states. Prior to 2011, it produced 1.65 million barrels per day (b/d) of crude oil and over 500 billion cubic feet (bcf) of natural gas.
These generated up to 96 per cent of total government revenue and accounted for 65 per cent of GDP, allowing Libya to amass cash reserves and run a debt-free economy for years, but also rendering it almost entirely dependent on the import of food, medicine, fuel and consumer goods.
During the 2011 conflict before Qaddafi’s downfall, production dropped and exports halted; both rebounded rapidly after his demise in October 2011, and returned to near-pre-war levels by mid-2012.
Optimistic about the quick pace of recovery, the new authorities made vast new expenditures for post-war reconstruction, healthcare subsidies for war veterans, public sector wage and subsidy hikes, and an inflated post-war security sector.
The government’s operating budget more than doubled, from approximately $20 billion in 2010 to over $40 billion throughout 2012-2014.
Optimism about this post-war recovery was short-lived. Since mid-2013 protests, closures, and attacks on oil and gas infrastructure across the country have impacted its oil production which has since dropped to an average of 400,000 barrels/day, less than one quarter of the peak export level prior to the 2011 conflict.
The forced drop in production, coupled with the fall in global oil prices, which went from over $100/barrel in 2013 to below $50/barrel in mid-2015, has triggered a constant deficit in the country’s balance of payments and has strained the country’s economy.
The drivers of these oil sector disruptions are multiple and have evolved in parallel to the country’s deteriorating security and political landscape. To a certain extent – especially when they first broke out in 2013 – protests and strikes appeared to be labour disputes against Qaddafi-era managers that remained at the helm of these companies.
Temporary closures of oil fields in remote desert areas were also expressions of local grievances against the country’s new rulers, unable to provide services to communities living in the oil producing areas in the country’s periphery.
Allegations of corruption in oil sales managed by authorities in Tripoli were another driver, and provided the initial impetus for a pro-autonomy movement in eastern Libya, where allied armed groups controlling the country’s main oil exporting terminal aided a failed attempt to sell crude oil outside of official government channels that took place in early 2014.
Oil facilities also became objects of contestation between tribes, ethnic groups, political groupings and rival armed factions that constituted the embryonic security apparatus in post-Qaddafi Libya, which used the forced closure of oil facilities to blackmail authorities or to exert local influence.
Although these disruptions impacted the country’s finances tremendously, during the first year they were rarely deadly. After the summer of 2014, the struggle for control of oil and gas infrastructure intensified and became one of the leading drivers of the Libyan conflict.
Fighting for control of oil and gas facilities broke out in the centernorth and in the south of the country. These military operations became closely intertwined with the broader military battles between security forces aligned to the two rival parliaments and governments that have split the country since August 2014.
To make things worse, since February 2015 extremists groups operating in the Sirte area have also attacked nearby oil fields, further reducing production.
Aside from the drop in oil revenues and the destruction of parts of the country’s oil and gas infrastructure, mismanagement and corruption have also contributed to draining Libya’s finances. This has taken many forms.
Contracts signed by government officials were paid out without services or goods delivered in exchange, and well-connected businesspeople and politicians secured letters of credit (guarantees of payment from local banks) to import goods that often were not delivered or delivered in much smaller quantities than contractually stipulated, with customs officials complicit in covering up the discrepancy.
This practice increased over 2014 and 2015, when the black market exchange rate for foreign currencies reached double the official rate. Allegedly fake contracts with foreign companies (at times created ad hoc) allowed Libyan businesspeople to secure letters of credit from Libyan banks, which would then transfer funds abroad at the more favourable official exchange rate.
These funds were then brought back into Libya in cash and resold at the black market rate. The practice became so widespread that in May 2015 the GNC attempted to impose a ban on imports of goods ranging from cars to carpets, an order that was subsequently revoked under pressure from the business community.
According to some estimates, this resulted in capital flight of up to $20 billion between 2012 and mid-2015. The public-sector wage bill ballooned, mostly due to payroll fraud: of the LYD25 billion ($18 billion) allocated for salaries in 2013, for example, some LYD5 billion ($3.6 billion) is estimated to have gone to persons who were fraudulently placed on the public payroll.
Perhaps the biggest drain on funds came from subsidies on a range of imported goods, which in 2013 alone cost the state more than LYD13 billion ($10 billion). A portion of these subsidies covered imports of foodstuffs (such as flour, cooking oil and tomato paste), on which domestic consumption is almost entirely dependent, and fertilizers.
Another small portion covered medicine imports. Smuggling of both these types of goods to neighbouring countries as well as kickbacks in health-sector contracts inflated the subsidies budget. However, the lion’s share of subsidies is (to this day) spent on importing refined fuel.
The government imports refined fuel products at international market prices in quantities in excess of domestic consumption; the surplus (at times reaching three times domestic use) allegedly was (and, albeit to a lesser extent, still is) smuggled to neighbouring countries to be resold with as much as a fivefold profit margin for the smugglers.
Further compounding the country’s financial problems, since the political crisis of mid-2014 there are two rival governments and parliaments, each convinced of its own claim to legitimacy.
The rival authorities are fighting for control of key economic and financial institutions. As the two most important of these – the Central Bank of Libya (CBL) and the National Oil Company (NOC) – remain physically under the control of the Tripoli authorities, the internationally recognised parliament in Tobruk and its government in al-Bayda are attempting to set up parallel institutions.
The two sides are also contesting ownership of the assets of a third crucial entity, the Libyan Investment Authority (LIA, the sovereign wealth fund), in international courts.
As a result of these interlocking factors, Libya’s financial outlook is alarming. According to recent data published by the CBL, throughout 2014 the country ran a fiscal deficit of LYD22.8 billion ($16.5 billion), equivalent to 44 per cent of GDP, and a balance of payment deficit of $22 billion.
According to IMF estimates, in 2015 Libya’s fiscal deficit could total between LYD20-30 billion ($14.7-22 billion), amounting to 42 to 68 per cent of GDP.
The CBL has taken some measures to reduce expenditure: it has cut the total public-sector wage bill, reduced subsidies and frozen most expenditure for development and infrastructural projects. But the reduction in spending has not been enough to stop the drain on foreign-currency reserves, which are also used to stabilise the Libyan dinar and to fund imports.
In the first nine months of 2015 alone the country’s reserves dropped a further $15.4 billion, albeit an important improvement over the $31.2 billion spent over the same period in 2014.
Most worrying is the question of how Libya will cope with both the deficit and diminishing foreign-currency reserves. There are no updated publicly available figures for Libya’s reserves (a worrying lack of transparency in itself), but estimates dating back to early 2015 placed them at $76-80 billion.
By the end of 2015 they will likely be around $60 billion (with, at current levels, expenditures projected at $20 billion for 2015). With global oil prices below $50 per barrel and production low, the stress on currency reserves is likely to increase commensurately.
The unsustainability of the current situation becomes clear when one considers that for Libya to break even at current production levels, oil prices would have to be as high as $220 per barrel. Even if oil production were to improve slightly, the country would continue to run a deficit for years before potentially catching up.
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Claudia Gazzini – International Crisis Group’s senior analyst for Libya. Her academic work on current-day Libya issues has been published in many media and academic publications, including the Middle East Report and the Arab Media and Society journal. Her analysis on MENA current affairs has also appeared in publications such as Limes, the Italian Review of Geopolitics and Quaderni Storici.
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Source: CRiSSMA working paper n. 23 – 2016
