Irene Costantini

The paper analyses the prospects for a transformation of the current war economy in Libya to occur in relation to international and local contexts and conditions.

Entering its sixth year of transition, Libya is still struggling to find a way out from the quagmire that the fall of Muammar Gaddafi had degenerated into. The window of opportunity that the end of the regime opened up was short lived.

The situation in Libya took a turn for the worse in 2014 when, behind a growing armed polarization, multiple groups gained enough power to spoil a peaceful transition. Despite calls for the opposite, Libya is not exceptional in its conflict dynamics.

Indeed, the “conflict trap”––the likelihood of a country to experience the recurrence of episodes of violence in the immediate aftermath of the conflict––has proved valid once again.

The relapse into conflict or its continuation is often the result of intractable political tensions that the newly forming institutional framework cannot contain. Sources and ways of conflict financing add to this intractability.

Indeed, economic opportunities (and the lack thereof) are at the centre of the security and political conundrum of conflict and post-conflict transitions. They may represent profit-driven strategies that prolong armed conflict, coping mechanisms that sustain livelihoods during conflict, and/or a condition for stabilization, reconciliation, and eventually peace.

Accordingly, the transformation of war-economy structures, dynamics and actors is key for current efforts at solving the Libyan crisis, albeit economic issues have so far escaped high-level discussions.

The paper analyses the prospects for a transformation of the current war economy in Libya to occur in relation to international and local contexts and conditions. At the international level, the paper questions which role economic development plays in the current stabilization approach to post-/in-conflict intervention.

A focus on providing very visible and tangible quick-wins for the population, and the rehabilitation of critical infrastructure destroyed by conflict tends to have conservative rather than transformative objectives.

While this may ease some of the socio-economic stresses that the Libyan population is facing, the approach is ill-equipped to address the Libyan economic crisis. The fall of oil prices since June 2014 has shown the need to initiate a deep process of reform to minimize dependency on oil revenues. The two––conflict and economic crisis––are, however, mutually reinforcing.

At the local level, the paper questions the relationship between economic development and decentralization. Local authorities are often the custodians of true reconciliatory processes and in the context of Libya well placed to serve key objectives such as service delivery and issues of legitimacy.

From a political economy perspective, however, this is a contentious issue, as other conflict-affected contexts show. Political/administrative decentralization is now mostly conceived within the “stability” framework.

To become sustainable, it needs a certain degree of fiscal decentralization, which, in contrast, cannot be achieved without a transformational approach towards the economy, and the ruling bargain in the country.

The war economy in Libya

The derailing of the political process in Libya has overlapped with the country’s economy, repositioning itself at the centre of a lucrative informal/illicit market.

Reading the worsening of the conflict in Libya as purely motivated by political factors overlooks the extent to which the control over oil fields and the illicit trafficking and smuggling of weapons, drugs and migrants have embroiled economic expectations and strategies in the political and social texture of the country.

These developments have curtailed the already weak presence of the Libyan private sector and have only been marginally compensated by international aid flows.

The abundance of oil resources in Libya, which possesses the ninth largest proven reserve of crude oil, is an important factor informing the positions, agendas and tactics of domestic and external actors.

After 2011 oil revenues allowed Libyan transitional authorities to sustain tremendous levels of spending: in the 2012 budget subsidies on fuel, food and electricity increased. The following year saw a further increase in subsidies, which reached 14 per cent of the GDP.

Similarly, wages in the public sector increased by 30 per cent in 2011 and by a further 27 per cent in 2012. In the 2014 budget, current expenditures comprised 80 per cent of the whole budget.

The situation drastically changed since summer 2013 when Oil Facilities Guards seized control over key oil production sites in eastern but also in southwestern Libya. Control and access to oil resources soon became entangled in conflict dynamics causing a drastic fall in oil production.

From the 1.8 million bpd in the pre-revolutionary period, production stalled at around 400.000 bpd in 2016 (ICG 2016). It recovered in fall 2016 when General Khalifa Haftar retook control over key fields in the east and allowed for production to resume.

The decrease in Libya’s oil production overlapped with a drastic fall of oil prices worldwide. By January 2015 oil prices reached less than US $50 per barrel, which corresponded to a 50 per cent drop since June 2014 and continued to be low throughout 2015–16.

Libya is facing a “twin-shock”, borrowing the expression used by the IMF with reference to the Iraqi case: the direct and indirect costs of continued violence and conflict, on the one hand, and falling oil prices, on the other.

This caused a fiscal deficit that was estimated to be around 56 per cent of the GDP in 2015, a collapse in the country’s GDP to less than half of its 2012 value, a severe liquidity crisis and a decline in foreign currency reserves (ICG 2016).

In addition, it put enormous pressure on existing economic institutions, such as the National Oil Company (NOC) and the Central Bank of Libya (CBL), dragged into the middle of a legitimacy competition between rival Libyan authorities.

In parallel, the fall of Gaddafi altered the economic geography of Libya by opening up a vibrant, yet illegal, economy, which was previously sanctioned by the regime.

The current situation in Libya does not allow for a precise evaluation of the informal economy and its components. However, it is assumed to represent a big portion of the overall economy.

In 2010, just prior to the uprising, it represented around 30 per cent of the economy, and if we take other conflict-affected contexts as examples, we should estimate a significant increase in its volume.

The informal economy in Libya is diversified: human trafficking, drugs, and weapons constitute the bulk of the criminal economy; smuggling and trafficking also include medicines, fuels, subsidized products and currency.

Evidence from Libya points to the role of groups’ strategies to control the flourishing informal economy, especially in borderlands, as part of the conflict. For instance, the Libyan-Tunisian crossing points of Ras Ajdir and Dehiba-Wazin are both a resource and a source of income that changed in accordance to the evolving political economy of the conflict.

In that economy, there is a clear distinction between types of illicit activities, which corresponds to the distinction between coping and criminal activities, despite the fact that they can both finance the conflict.

In this context, there is little space left for the private sector, which has traditionally represented only around 4 per cent of the Libyan economy and comprised around 25 per cent of non-oil business.

The private sector in the country is traditionally dominated by small- and medium-sized enterprises; sole proprietorship prevails; and in terms of geographical distribution, small- and medium sized enterprises are more concentrated in the northwestern part of Libya

The service sector contributes half of non-oil GDP whereas the industrial sector is limited and it “encompasses food processing, textiles, steel productions, petrochemicals, and electrical consumer goods”.

Despite the difficulties of navigating through a transition, the private sector witnessed a growth in the years 2012 and 2013, mostly driven by Libyans’ expanded spending capacity. However, the crisis of 2014 had a drastic impact on this sector causing an overall halt in the expansion.

The dire economic situation in Libya is not even mitigated by an influx of international financial assistance, which is often common immediately following a post-conflict reconstruction phase. Due to the prevailing view that Libya could sustain the cost of its reconstruction, international aid to Libya has never represented an important financial resource.

In the period between 2012-2015, Libya received less than USD 200 million a year. In comparison Iraq received USD 4.3 billion solely in 2004. The derailing of the Libyan transition posed severe limits to international assistance in terms of the capacity to operate on the ground and to channel resources inside the country.

Overall, however, this scarcity of international assistance can also be interpreted as a limited engagement of the international community in the country, which may be justified by a number of factors including the disastrous results of previous interventions, notably Iraq and Afghanistan, the tumultuous changes ignited by the Arab uprisings along with the financial crisis that hit Europe after 2007-2008.


Source: The Libyan reconstruction process – Socio-political, security and economic scenarios.

INSPIRATIONAL PAPERS, organized by Center of Research on the Southern System and the Wider Mediterranean (CRiSSMA), Catholic University of the S. Heart, Milan Promoted and supported by Italian Ministry of Foreign Affairs and International Cooperation (MAECI), Directorate General for Political Affairs and Security (DGAP) and Graduate School of Economics and International Relations (ASERI) Catholic University of the S. Heart, Milan.




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