Tim Eaton
Economic reliance on public sector
Libya’s state has become increasingly bloated. Of the country’s population of around 7 million, approximately 2.6 million people are employed by the state. Expenditure on salaries through the state budget has skyrocketed since fall of the Gaddafi regime.
A curious feature of conflicts in Libya since 2011 is that the opposing sides have almost always both been on the state payroll, meaning that – in a fiscal sense, at least – civil war has essentially consisted of the state fighting against itself.
A key obstacle to progress on economic reform is the strong cultural conviction throughout Libyan society that a state position is the most reliable form of income (people widely see public sector jobs as necessary to safeguard their financial futures).
Indeed, perhaps one of the most economically damaging legacies of the Gaddafi regime was the conflation of employment with welfare.
The irony is that today public sector employment in reality provides little in the way of a safety net: the broader failures of the state have meant that many Libyans are now unable to even withdraw their (public sector) salaries from their bank accounts; even where employees can still do so, the effects of inflation at ground level in the real economy (where the black-market exchange rate, rather than international statistics on Libyan inflation, is a more accurate indicator) mean those salaries pay for fewer goods.
Governance dysfunction has progressively weakened the Libyan economy to the extent that, by 2025, some experts argued that revenues received by the CBL were insufficient to cover public sector salaries.
The effects of state centralization
There is a degree of consensus among economic experts that – regardless of the contest among elites for control of the state – the hyper-centralized underlying structure of Libya’s system of governance prevents local communities from benefiting from state spending. Local governments such as municipal councils have few powers and depend on central ministries for funding, while almost all procurement decisions run through Tripoli.
Almost all state institutions are headquartered in Tripoli, which means that personal or political connections and access in the Libyan capital are key to securing jobs and contracts. Tripoli’s political and financial dominance over the rest of the country is a source of grievance for those in the east and south.
A rebalancing of state power, involving the devolution of decision-making and institutional control to regions outside Tripoli, is a core demand of many people in the east in particular. (Indeed, national institutions such as the NOC and CBL were originally formed in Benghazi, while the parliament also used to meet there periodically prior to Gaddafi’s rise to power.)
Decentralizing the state would have significant implications for the distribution of power, and could play an important role in conflict mediation.
It can be argued that a de facto rebalancing of the system is already partially under way, as the Haftar family – politically dominant in the east of the country – has tried to ensure that its own networks and associates retain a controlling interest in key state companies in the oil and development sectors.
The Haftar family and its associates also have access to financing through control of locally headquartered state-owned commercial banks. However, these various mechanisms typically rely on personal or improvised connections; what is lacking is institutionalized agreement over how state funds should be managed across the country in a way that would be beyond factional interest.
Future vulnerabilities
There is widespread recognition that the Libyan state cannot continue down its current path. Around 96 per cent of state revenue is believed to come from fossil fuels.48 This leaves the economy highly vulnerable to global oil and gas price fluctuations, and to market changes associated with the green energy transition. Moreover, little has been done to diversify Libya’s economy or prepare it for future challenges.
There is an urgent need to support climate-resilient livelihood diversification. The 2023 Derna disaster – when heavy rain caused two dams to burst, resulting in flooding that devastated the city of Derna and the surrounding areas – underlined Libya’s vulnerability to the impacts of climate change. Exposure to risks from rising temperatures, desertification and water scarcity is a major concern.
Despite signing the Paris Agreement on climate change in 2016 and ratifying it in 2021, Libya has yet to submit a nationally determined contribution (NDC) outlining its plans to reduce emissions and adapt to climate change; nor has the government published a national adaptation plan.
In addition to the direct risks, failure to address these clearly identifiable threats may exacerbate social conflict.
III – The challenges of addressing
structural economic drivers of conflict
The obstacles to improved economic governance are entrenched. They include vested interests, public suspicion of officialdom, and uncertainty about whether incremental or systemic reform is likely to work best.
The need for reform of the Libyan state has been a consensus opinion among experts for over 25 years. Yet given widespread agreement that economic drivers of conflict cannot be addressed without structural change, why have so few reforms taken place?
In reality, efforts to improve economic governance and mitigate conflict face many obstacles – including a lack of incentives, limited public support for a smaller state, and a lack of agreement over how reforms could be implemented.
Of these factors, the absence of incentives for current officials and their international partners is perhaps the most obvious impediment to reform. As noted, Libya’s highly centralized government system, in which the state has a monopoly over the distribution of oil and gas revenues, offers members of the elites and their networks access to vast resources.
Those in control of this system have a natural interest in maintaining the status quo, especially as economic governance discussions are often reduced to questions of ‘power-sharing’ – in effect, how to divide state wealth among conflicting parties.
Consequently, Libyan elites contesting power largely sideline difficult issues relating to structural reform, offering only superficial rhetoric on decentralization and development.
Their primary concern remains control over existing institutional structures and resources rather than creating a fairer or more forward-looking system. This sustains zero-sum calculations, whereby obtaining or remaining in office offers a means to control access to financial or physical resources.
It makes incumbent office-holders reluctant to support reforms that could dilute their power (thereby undermining any reform commitments they may have made in order to obtain office in the first place).
These disincentives are often replicated at the international level, as external states – rather than helping Libya to tackle its structural governance problems – often focus on protecting and developing their own political and/or commercial interests through engagement with Libyan elites.
Just as problematic for reform prospects is a lack of vocal support from the very group that should in theory stand to benefit – the public. While public opinion on these issues is difficult to gauge, and technocratic governance reforms are hardly a common topic of everyday conversation, dissatisfaction with the economy and failing public services is easy to discern.
Beyond this, there seems to be broad support for administrative decentralization, while many Libyans recognize their over-reliance on an ineffective state. Nonetheless, the cultural emphasis on the state is strong and there appears to be a lack of trust that reforms to the state system – such as the removal of costly subsidies for fuel, electricity, medicines and foodstuffs – would benefit the public.
The perspectives and concerns of ordinary citizens are insufficiently included in this debate. Economic reform discussions have remained largely confined to experts, and attempted governance changes have generally been limited to dialogue among ruling elites.
One notable exception was a socio-economic dialogue led by the UN Economic and Social Commission for Western Asia (ESCWA) between 2018 and 2021. This provided a platform for a diverse and inclusive range of Libyan stakeholders to formulate a long-term vision for Libya’s sustainable development.
The initiative’s findings were published in a 2021 report, outlining a common vision centred on prosperity, justice and strong state institutions. Other efforts, such as those by Libyan Peace Makers, a dialogue programme that brings together Libyans from across the country and with different perspectives to inform international mediation efforts, have put forward visions for an equitable distribution of resources as part of a wider political process. Libyan-led discussions on these issues have grown in recent years, but much remains to be done to foster societal pressure for the inclusion of economic reforms in the political process.
Even among those who already advocate and work to facilitate reforms, there is a lack of consensus over the pathways that should be pursued and the optimal sequencing of steps.
Some advocate incremental reforms with international support, while others argue that Libya’s governance system is fundamentally flawed and requires immediate root-and-branch restructuring.
One Libyan expert sees economic reform as part of a wider renegotiation of the social contract, a process that will necessarily entail downsizing the state and decentralizing power.53 Another group suggests that a decentralization law could provide the foundation for lasting peace.
However, the questions remain: how can sweeping reforms be delivered in a structured and effective manner, and what are the risks of such efforts making an already bad situation worse?
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Tim Eaton is a senior research fellow in the Middle East and North Africa Programme at Chatham House. His research focuses on the political economy of conflict in the Middle East and North Africa (MENA) region, and on the political economy of the Libyan conflict in particular.
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