Libya’s post-conflict transition is extremely fragile, as the recent postponement of the elections scheduled for 24 December 2021 shows.
Positive developments over the past couple of years have, however, hinted at the possibility of ending the conflict that has raged for several years, and the prospect of future reunification and stability has already triggered thinking about and plans for reconstruction and development in the post-conflict period (“Foreign powers jockey for share in Libya’s reconstruction projects”, 2021).
Economic reconstruction, in particular, is one of the fundamental tasks awaiting Libya once it has turned the page of the conflict. The country will face the monumental task of rebuilding its economy and infrastructure, both shattered by years of conflict and violence.
Post-conflict economic reconstruction is a very complex and lengthy process. However, it presents Libya with the opportunity to lay the foundations for a new and more sustainable economic model that does not reproduce the weaknesses and risks of the previous hydrocarbon dependent model.
Libya has the opportunity to build a new economy that is more diversified and geared towards achieving sustainable economic development and growth, and, simultaneously, one that is aligned with the global green and digital transitions.
This policy brief explores how Libya can focus its post-conflict economic reconstruction on building a greener, more diversified, and more digitalised economy. It begins by providing a brief overview of Libya’s political economy and highlights the ways in which its oil dependence has exacerbated the conflict.
It then discusses the challenges of post-conflict economic reconstruction and the opportunities that policies centred on renewables and digitalisation can offer. The brief provides recommendations to Libyan policy-makers on how to manage this process and to the international community on how to support Libya’s reconstruction efforts.
Libya’s political economy: oil dependence and conflict
The civil war has devastated Libya’s economy. The near total collapse of the state and the fragmentation of authority that followed the 2011 revolution have allowed the emergence of a war economy based on violence and predation.
Various groups, and their international backers, have vied for control over smuggling routes, but also over oil and gas production and export facilities. Libya has the largest known oil reserves in Africa, and hydrocarbons have long constituted its main source of revenue.
In the post-revolution years, however, what had once been Libya’s source of wealth has become the source of its vulnerability and one of the key drivers of conflict. Different actors have sought to capture, control and weaponise the oil sector, with blockades on oil production and export causing immense losses in revenue.
In January 2020, Khalifa Haftar’s forces shut down oil production facilities and export terminals in Libya’s “oil crescent” – the coastal region in eastern Libya extending from Zuwaytina to Sidr from which a substantial share of Libyan oil is exported – to exert pressure on the Tripoli-based Government of National Accord (GNA).
Although the facilities are located in an area largely controlled by Haftar, proceeds from exports have mainly benefited the GNA as they are channelled through Libya’s National Oil Corporation (NOC). In addition to effectively paralysing the country, the nine-month blockade cost Libya more than 9 billion dollars in revenue (“Haftar announces conditional lifting of Libya oil blockade”, 2020).
This is a considerable loss in an economy heavily reliant on hydrocarbon revenues, which accounted for 60% of Libya’s GDP in 2019. The fallout from the 2020 blockade was a sharp reduction in government revenue, which declined from LYD 57.4 billion in 2019 to LYD 23 billion in 2020.
As a result, public spending and the government’s ability to pay out salaries and pensions have been severely undercut. The conflict between the rival authorities in the East and the West has also created a split within key economic and financial institutions, including the Central Bank of Libya (CBL), with parallel branches serving the different parties to the conflict.
The lack of a unified budget and monetary policy led to the accumulation of debt on both sides, and, with a foundering banking system, Libya was repeatedly hit by severe liquidity crises between 2015 and 2020.
The economic contraction put stress on the Libyan currency and the gap between official and unofficial exchange rates increased, leading to the devaluation of the currency in 2021. The dire economic situation has in turn affected social conditions and public service provision.
Post-conflict economic reconstruction: a role for the green and digital transitions?
In the post-conflict period, Libya needs to rebuild its economy and infrastructure. However, as a country emerging from conflict, it faces a multitude of challenges ranging from dismantling war economies and discouraging the spoilers who benefit from them to restoring basic services and building new economic structures, all while attempting to maintain peace and achieve growth and equitable socioeconomic development.
This is a crucial, albeit arduous, process as failure to properly and effectively manage post-conflict economic reconstruction increases the probability of backsliding into conflict.
If Libya is to do more than just rebuild the previous economic model, the strategic choice of integrating the green and digital agendas in its post-conflict economic reconstruction policy presents an opportunity to build a more diversified and sustainable economy. However, the green and digital transitions bring challenges of their own, adding to those posed by post-conflict economic reconstruction. Like any systemic transformation, the green and digital agendas are likely to produce winners and losers.
The risk of widening existing inequalities or creating new ones is therefore high (e.g. job loss and other impacts on labour markets, digital divides, etc.). Furthermore, while the two transitions are often considered “twin” transitions, tensions between the two agendas can also arise.
While digitalisation is often seen as a potential catalyst for the green transition, digital solutions can also themselves be detrimental to the environment by being energy intensive. If Libya is to build a more sustainable economic model by harnessing the potential of the green and digital transitions, it is important to take these challenges into account.
The green and digital transitions already constitute a highly ambitious project for stable countries. The task is more complex – even counter-intuitive – for conflict-affected countries where war economies and weak institutions prevail, and where the focus is more on immediate needs than on long-term strategies.
This does not, however, preclude viewing the green and digital agendas as a framework of action and as the horizon towards which post-conflict economic reconstruction in Libya should look. The difficulties and challenges notwithstanding, the post-conflict reconstruction in Libya is a unique opportunity to lay the foundations of a new and more sustainable economic model that is greener, more diversified, and more digitalised.
Towards a sustainable post-conflict economic reconstruction in Libya
There are many signs that Libya’s economic reconstruction is going down the road of economic liberalisation. Privatisation and market liberalisation, however, carry many risks when implemented in war-torn countries where rule of law and institutions are yet to be consolidated.
The weakness of formal state institutions constrains their capacity to oversee reconstruction processes, creating opportunities for corruption and profiteering in the attribution of reconstruction contracts.
In Libya, a notable legacy of the previous regime’s “stateless society” is that informal networks and social structures (including tribal structures) tend to prevail over formal state institutions.
Unless the process of institution-building is taken seriously, economic reconstruction will occur in a context of state weakness with limited safeguards against corruption. Multiple reconstruction contracts have already been awarded to foreign companies, with Turkish companies taking the lead. In addition to infrastructure and real estate, foreign companies are particularly eyeing Libya’s oil and energy sector.
In November 2021 the Libya Energy and Economic Summit was held to attract foreign investments to rehabilitate the oil and gas industry. As positive developments in Libya’s peace process have enabled the resumption of oil production and announced recovery in the oil sector, there is thus the risk that the previous model of a highly undiversified political economy will be restored.
It is of course unrealistic to expect a swift shift away from hydrocarbons in the short term, owing on the one hand to the difficulty of breaking oil dependency, and on the other to the realities particular to conflict and the urgency in war-torn societies of rebuilding the infrastructure, creating jobs, and investing in development.
Moreover, the intensification of international competition over Libya’s energy sector and the scramble of a number of countries to ensure their energy security and protect their strategic interests is a reality that a shift in economic policy would have to reckon with.
For example, Italy’s Eni is the leading energy company in Libya and a major shareholder in the West Libya Gas Project, which includes the Greenstream pipeline, and in oil production assets in the East, but it has increasingly faced strong Turkish competition.
While using hydrocarbon revenues to support the transition in the short-term is important, a simultaneous effort to build an alternative economic model is, however, necessary to avoid reproducing previous dynamics of oil dependence and rentier economy, as well as to ensure long-term sustainability and respond to climate-related challenges.
In the medium- and long-term, therefore, Libya should use its hydrocarbon revenues to reduce its fossil fuel dependence and invest in renewable energy, particularly solar. As hydrocarbon resources are finite and will plausibly become less and less in demand in the future – not least as Libya’s main import partners are themselves gradually shifting to renewables and clean energy – Libya’s post-conflict economic reconstruction needs to align with global calls for a green transition both for environmental and economic reasons.
Amal Bourhrous Researcher at the Stockholm International Peace Research Institute (SIPRI).