Tim Eaton
II – Economic drivers of conflict,
past, present and future
Libya’s centralized economic model and huge public sector – both Gaddafi-era relics – create fiscal vulnerabilities, incentivize state capture and corruption by elites, and greatly complicate prospects for economic governance reform.
Libya’s economic reform challenges reflect its curious combination of centralized state power and fragmented on-the-ground governance.
In de jure terms, the economy is by design highly centralized in key respects – partly a legacy of Gaddafi-era top–down control. But in a practical, operational sense, cohesive policymaking is often impossible because of the current administrative split between competing power centres in the west and east of the country, a problem epitomized by the lack of a unified national government.
Control of the state in Libya implies control of economic resources. Many Libyan experts have argued that this dynamic is inherently unhealthy, and that competition over resources and rents is a structural driver of conflict.
Certainly, economic drivers of conflict in Libya are intertwined with conflicts over state authority, as different social constituencies and political factions vie for control of public institutions. This has implications both for the day-to-day management of the state and its resources and for the structural underpinnings of the state, making it impossible to address problems in one area without reforms in the other.
The period since the 2011 overthrow of Muammar Gaddafi has featured a complex bargaining process among Libya’s social constituencies over control of the state. The lack of formal, organized representations for these constituencies means that these diverse interest groups are represented largely by informal social networks encompassing neighbourhood-, town- and city-based identities, tribal and familial loyalties, and religious, political and ethnic identities.
Given the fragmented nature of this social fabric, the contest for power and access to economic rents has resulted in the division of the state (and of control of its institutions and resources) among multiple actors. The dominant logic of this trend – explicitly reinforced by internationally supported efforts to secure political consensus – has been predicated on power-sharing.
Libya’s post-2011 power-sharing system initially included a wider array of elite interests than are influential today. However, since 2021 – following the consolidation by Khalifa Haftar of control in eastern Libya and the appointment of the Government of National Unity (GNU) in Tripoli – this circle of elites has narrowed.
People in positions of authority have become increasingly distant from the social constituencies they claim to represent, as elite consolidation has accelerated.
This pattern has corresponded with a reduction in the delivery of public goods by the state, as governance and public sector performance have been undermined by corruption, a lack of capacity, internal disputes and inefficiency.
State largesse has remained visible in persistent public sector salary increases, However, the salary bill is divided among an increasing number of state employees on modest salaries, while other channels of spending show lavish payments to supporters of well-connected elite interests.
(In just one example, videos emerged on social media in September 2025 depicting a games lounge kitted out with luxury computer gaming stations and a café for members of the state-affiliated 111 Brigade, which is closely aligned with the GNU in Tripoli.) The result is that reported spending of the state budget (salaries) and (operating expenses, including state officials’ salaries and other procurements) has grown from 11 per cent of GDP in 2008 to 34 per cent of GDP in 2024.
Economic and political marginalization – real and perceived – has played a potent role in Libya’s conflict and continues to present significant questions about the future of the Libyan state with regard to the locus of authority between the country’s western and eastern regions.
Groups that clearly have been marginalized – such as the Tebu and Tuareg communities, based predominantly in the country’s south – have fought to improve their status, but have had relatively little impact over national-level governance. Yet, in recent years such problems have become increasingly subordinate to the governance challenges associated with state capture.
The state as a resource
Libya’s economy is dominated by the state at all levels. To the extent that hyper-centralized, Gaddafi-era structures remain in place, economic governance has, formally at least, changed little since 2011. Gaddafi’s regime had accelerated ‘Libyanization’ reforms – whereby internationally owned commercial enterprises were nationalized by the state – following his ascent to power in 1969.
This resulted in all oil companies and banks being under state ownership by the end of the 1970s. In the 1980s, the regime went further as political institutions were reformed to deliver ‘direct democracy’.
In the economic realm this translated into the partial abolition of the private sector in favour of state-run enterprises, and in the nationalization of most remaining foreign-owned companies and assets. This state dominance created a complex web of committees, agencies and monopolies.
If anything, the situation has become even more complicated in the post-2011 period, as more institutions have been formed while existing institutions have remained in place.
This legacy means that state institutions and state-owned enterprises effectively have dominion over the sectors in which they operate. For example, the Central Bank of Libya (CBL) not only is responsible for monetary policy and financial regulation, but also has ownership stakes across most of the banking sector.
Consequently, the CBL has over the last 10 years been able to influence appointments at commercial banks which the CBL owns. In the post-2011 period, a number of CBL employees accepted board roles at these commercial banks, creating potential conflicts of interest.
Moreover, the CBL maintains a monopoly on the distribution of foreign currency and must authorize all documentary letters of credit for the import of goods. These extensive powers place the CBL in a dominant position in the banking sector.
The situation is mirrored elsewhere in the state system, notably in relation to the National Oil Corporation (NOC). The NOC owns 15 subsidiaries and is part owner of nine joint ventures. International companies operating in the Libyan oil sector can only hold minority shares in these joint ventures.
The dominance of state institutions and state-owned enterprises leaves little room for development of the private sector based on fair competition. Indeed, the principal customer of Libya’s private sector is very often the state itself, rendering private companies reliant on cultivating relationships with state entities and officials.
Private companies operate as contractors to the state in areas ranging from construction to catering to oil services. In recent years, companies associated with armed groups have expanded in these areas. Because state institutions are the customers, control of these institutions in turn assures control over the distribution of contracts. Private companies also complain that state-owned enterprises enjoy market-distorting advantages.
In some instances, procurement rules explicitly stipulate that state-owned entities should be given preferential treatment. State-owned enterprises are also often shielded from considerations of profit and loss, meaning that works can be subcontracted to the private sector at inflated prices, sustaining corrupt practices.
These factors have facilitated the expansion of patronage networks and the rise of vested interests. Officials in control of state institutions are often able to use their positions to sign contracts with companies in which they may hold a beneficial interest.
Where this happens, the state entity loses money and the official gains private profits. This pattern has become particularly notable in sectors such as healthcare, where procurement is strongly impacted.
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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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