Dr Mabruk Derbesh
Abstract:
Rentier state economies present unique challenges to managers, particularly in terms of market volatility and reliance on a single revenue source. This thesis argues that effective financial planning is critical to managing these challenges and achieving sustainable economic development.
Using Libya as a case study, this thesis will examine the role of financial planning in managing rentier state economies and assess its effectiveness in achieving macroeconomic stability, diversification, and sustainable growth.
The research will analyze financial planning tools and techniques through discussing the term “Rent economy” within the Libyan context, effective financial planning tools and their potential impact and present practical and suitable recommendations.
The findings of this research will provide policymakers with actionable insights into how financial planning can be used to strategically manage rentier state economies, mitigate economic risks, and foster sustainable development.
Introduction:
The infamous economies of rentier1 states are characterized by the reliance on the exports of natural resources, such as oil, gas, or minerals, which ultimately provide most of the states’ revenues. Although rentier economies extend in definition beyond those commodities, the term has become associated with them.
While this economic model has been successful in generating significant income for some countries, it has also been linked to monetary volatility and state structural fragilities that can hinder sustainable policy or the thought of it. Therefore, effective financial planning is important to dealing with such challenges and achieving sustainable economic development.
Financial planning involves setting various things, including objectives, developing strategies, and implementing policies to allocate resources efficiently and effectively. In the context of rentier economies, financial planning can play a critical role in managing and mitigating economic risks, fostering diversification, and ensuring macroeconomic reliability.
For the sake of this paper, Libya, an Arab state, is an optimal example of a rentier state that has been exponentially reliant on oil exports for state revenue.
The country has experienced significant economic challenges in recent years, which were the result of political instability, security concerns, and a decline in a lone source of revenue which is ever volatile and elastic oil prices.
Consequently, the Libyan economy, in recent decades, has gone through severe macroeconomic imbalances, including a widening budget deficit, increasing debt, and an alarming declining GDP, which may cause further economic challenges in the short and long run alike .
Methodology:
This paper, using the methodology of an expository format, argues that financial planning is a critical tool for managing the challenges faced by rentier state economies and that effective financial planning can help to achieve sustainable economic development.
Using Libya as a case study, within the format of expository tools, this paper examines the role of financial planning in managing rentier state economies. It assesses its effectiveness in achieving economic stability, diversification, and sustainable growth. The research will analyze financial planning tools and techniques, such as budgeting and forecasting, revenue and expenditure management, and debt management, and evaluate their application in the Libyan context.
The findings of this research, in the form of recommendations, will provide policymakers with actionable insights into how financial planning can be used to strategically manage rentier state economies, mitigate economic risks, and nurture sustainable development.
Ultimately, this paper aims to contribute to the growing literature on financial planning within the context of rentier economies or states and provide those with interest the practical guidance on how to effectively manage these unique economies. This paper aims at practicality as a key element of the research sequence.
Overview of Libyan economy as a rentier state:
The Libyan economy can be defined by looking into a few parameters starting with whether Libya resembles the characteristics of the rentier states and the challenges that face any economy.
A. Definition and characteristics of rentier states:
A rentier state is a country that derives a significant portion of its revenue from the export of natural resources, particularly, but not restricted to, oil, gas, and minerals. Such countries are usually referred to as those with a lack of economic diversification and heavy reliance on one or two commodities.
Rentier states typically have high levels of government spending and limited private sector activity, which can create economic imbalances and fiscal vulnerabilities. Moreover, the volatility of commodity prices can lead to unpredictable revenue streams and economic instability.
B. Overview of the Libyan economy as a rentier state:
Libya is a classic example of a rentier state, as it relies heavily on oil exports for government revenue. The country is estimated to have the largest oil reserves in Africa, and the oil sector accounts for over 90% of government revenue6 . This counts for more than half of its GDP.
The Libyan economy has been heavily dependent on oil exports since the discovery of oil in the 1960s, and efforts to diversify the economy have been talked about but continued to lack the political will to accomplish and are therefore limited. After its independence from the British occupation and the soldiers’ revolution in 1969, the government has played a governing function in the overall economy, with state-owned enterprises and entities controlling key sectors such as energy, telecommunications, healthcare, and transportation.
C. Key challenges and constraints:
Despite its abundant natural resources, the Libyan economy has faced significant challenges in recent years, especially since the many civil wars that erupted since the debacle of the Gaddafi government, which many saw as a stable eastern government9 . Since then, political instability and security concerns have created a challenging business environment, which has deterred investment, local and foreign, and hampered potential growth.
Moreover, the decline in oil prices since 2014 has also led to a sharp reduction in government revenue, which has put pressure on public finances and led to a significant increase in public debt. The continuing closure of many of the oil fields due to political conflicts also reduced oil output.
Also, the cultural reliance on the state as a source of income is one of the challenges10 . Overall, the lack of economic diversification and heavy reliance on the oil sector has continued to make the Libyan economy vulnerable to external shocks and economic volatility.
The Libyan economy is a classic example of a poorly run rentier state, nevertheless a typical one. It is heavily reliant on oil exports and faces significant challenges related to political instability, security concerns, management of wealth, nepotism, and socially tolerated corruption.
***
Dr Mabruk Derbesh – L’université Paris Panthéon-Sorbonne, Sorbonne University, Paris, France. Tripoli University, Faculty of Economics and Political Science.
_________________
