Muammar Qadhafi’s position as head of state will be unchallenged, supported by his family and trusted aides. Economic reform, of which privatisation is claimed to be a central thread, will provide the focus of government policy, although there will be little change in the political environment. The reform process will be geared towards strengthening global economic ties and attracting more foreign direct investment, both of which have gained momentum since the lifting of US sanctions. Nevertheless, progress will be slow, constrained by bureaucracy and policy reversals. A two-speed reform process is likely to emerge, with the government prioritising the development of the hydrocarbons sector above other areas of the economy. Economic growth will remain strong and inflation, though rising, will stay low.
The political outlook is unchanged. Qadhafi will pursue his objective of greater international acceptance. With the lifting of US and EU sanctions, Libya’s political rehabilitation is almost complete, although the US has kept Libya on its list of state sponsors of terrorism.
Economic policy outlook.
The economic policy outlook has improved on the back of an upward revision to the Economist Intelligence Unit’s oil price forecast. The fiscal surplus will rise strongly in 2005, but fall in 2006, although it will remain healthy at over 14% of GDP. The government’s primary policy objective will remain focused on attracting foreign investment into all areas of the economy, and in particular the oil sector.
Libya’s economic outlook has improved owing to the upward revision to our oil price projection. Real GDP growth will average 8.1% over the forecast period and, after expanding rapidly in 2005, the current-account surplus will narrow in 2006, but still be equivalent to over 22% of GDP.
Outlook for 2005-06: Domestic politics
There is little risk of substantial change in the domestic political environment in 2005-06. Following staggered cabinet reshuffles during 2003 and early 2004, economic reform is—at least ostensibly—firmly at the top of the government agenda, championed by the prime minister, Shokri Ghanem. His authority, though tempered by the retention of some of the old guard within the cabinet, is buoyed by the presence of reformists in key ministerial roles. The reform process is designed to improve the investment environment in order to draw in much-needed capital and expertise from abroad. However, the process will be slow and will be characterised more by word than by deed, although progress, as evinced by recent moves to lift subsidies and customs tariffs, will be perceptible. More rapid development is likely to be hindered by policy reversals (the Libyan leader, Muammar Qadhafi, is notoriously capricious) and by bureaucratic bottlenecks. Entrenched attitudes within the establishment will also constrain the pace of policy implementation, frustrating many of Mr Ghanem’s efforts.
Whatever the extent and pace of economic reform, it will not be accompanied by political liberalisation. Qadhafi is highly unlikely to introduce any reforms that would compromise his hold on power; instead, any changes that do occur will be designed to further consolidate his own authority. Consequently, any periodic alterations to the cabinet will be so designed as to maintain Qadhafi’s control: policy will remain subordinate to this overarching goal. More specifically, his reshuffles will be shaped to ensure that no individual minister is able to build up a personal power base, as well as to balance the competing power structures within the political hierarchy.
General domestic dissent will remain at low levels, although the exiled opposition looks likely to grow more voluble. Internal threats to the regime—such as those posed by Islamists in the 1990s—should they emerge, will have to contend with a pervasive security apparatus and are unlikely to prove a danger. However, should the socioeconomic environment deteriorate, precipitated by reforms that could exacerbate unemployment and impact negatively upon standards of living, the government may be faced with spontaneous outbreaks of unrest, which could threaten to blow up into a more focused campaign.
Although there are no signs of an imminent handover of power, the Libyan leader appears to be preparing his children to play important roles in the running of the country, with the possibility that one of them will eventually succeed him. However, with no formal mechanism in place to ensure a smooth transition of power, whether this comes to pass remains moot. Indeed, it is highly likely that the immediate post-Qadhafi era will be characterised by political tension and uncertainty, with various sociopolitical forces vying for power.
Nonetheless, Saif al-Islam Qadhafi has already carved himself a commanding political niche and is viewed as the most likely of the Libyan leader’s offspring to succeed him. Despite apparently being keen to give the impression that his ambitions lie outside the political arena, he is playing more of a political role, both publicly and privately. Saif al-Islam has been an important influence on Libya’s policy shift and is a key supporter of economic reform. Indeed, his continued involvement in front-line politics should ensure that the economic reform programme does not stall. Importantly, his pivotal—and little publicised—role in the conduct of negotiations surrounding the Lockerbie bombing and Libya’s weapons of mass destruction (WMD) programme has provided Western democracies with a relatively broadminded interlocutor, whose authority is proven. By assuming an increasingly public role, Saif al-Islam is having some success in presenting a modern, outward-looking face of Libya. His profile—both domestically and internationally—will rise as Libya deepens its economic and diplomatic relations with the West.
Outlook for 2005-06: International relations
The government will attempt to consolidate its rehabilitation within the international community, which, with the removal of remaining US and EU sanctions—including the EU arms ban—on Libya towards the end of last year, is now well established. Tripoli has hosted most of Europe’s senior leaders and is frequently visited by key US politicians, further cementing Libya’s diplomatic and political gains. Libya’s rehabilitation was instigated by its government’s acceptance of "responsibility for the actions of its officials" over the 1988 Lockerbie bombing and the conclusion of a compensation settlement for the families of its victims. Of equal significance was the announcement in December 2003 that Libya would abandon its WMD programmes and accept more stringent weapons inspections than would ordinarily occur for a signatory state of the Nuclear Non-Proliferation Treaty (NPT).
With the country’s international relations much improved, Libya will seek to reap the greatest economic benefit from its new status. Commercial interest in Libya—notably in its hydrocarbons industry—has grown, as evidenced by strong recent competition for a number of oil exploration and production contracts on offer by Libya’s National Oil Corporation (NOC). Such activity gives a future indication of the dynamics of Libya’s international relations, which will be primarily conducted in the economic, rather than the political, arena.
Notwithstanding this, Qadhafi will persist in attempts to play a more high-profile role on the global political stage, although these efforts will amount to little more than rhetoric. This will be especially evident within Sub-Saharan Africa, where Libya will continue to be active, seeking to gain influence through financial and material beneficence. Its continued efforts to mediate over the crisis in Darfur exemplify this. However, Colonel Qadhafi’s Africa policy is unlikely to secure much reward, and will continue to be a point of contention with the larger Sub-Saharan states, such as Nigeria and South Africa, which do not look kindly on attempts to undermine their own authority in the region. The US will also remain concerned about Libya’s intentions in Africa, reinforced by lingering—albeit unsubstantiated—accusations of Tripoli’s involvement in a coup attempt in Mauritania last year (unrelated to the successful one this year), possibly one of a number of contributory factors in the delay in removing Libya from the US’s list of "state sponsors of terrorism".
Relations with Arab countries will continue to be strained. Tensions with Saudi Arabia over an alleged Libyan-backed plot to assassinate the then crown prince (now king), Abdullah bin Abdel-Aziz al-Saud, led to the two countries’ respective ambassadors being recalled. The situation has been calmed following Saudi Arabia’s pardoning of the alleged Libyan plotters, although relations still remain brittle. Further occasional bilateral disputes with other Arab states are likely. However, the risk of Libya’s total estrangement from its Arab partners is negligible, as Qadhafi is unlikely to alienate himself completely from his regional neighbours while he attempts to establish a position for himself on the wider political stage.
Outlook for 2005-06: Policy trends
The government consistently states that it is committed to a course of economic liberalisation and reform in a drive to attract greater levels of foreign investment into Libya. However, progress in most areas of the economy will continue to be tentative and subject to periodic reversals, as recently shown by Colonel Qadhafi’s reported decision to renounce plans to develop a nationwide rail network in favour of upgrading the road system. In particular, the government’s much-trumpeted privatisation programme has gained little momentum, although recent moves to ease subsidies and lift customs tariffs demonstrate that the reform agenda is ticking over.
A major obstacle in assessing the government’s attempts at reform is its lack of transparency and communication; more often than not measures undertaken are only publicised at the last minute, or indeed after the event, with details inevitably scant.
Nevertheless, the government appears committed to fast-track development in the hydrocarbons industry—from where the vast majority of its revenue accrues—in order to meet the official objective of raising oil production capacity to 3m barrels/day by 2015. This can only be achieved with considerable levels of foreign direct investment, with official estimates suggesting that the industry needs to attract US$30bn by 2010 in order to meet its development plans. The recent award of oil exploration and production contracts—with promises of more to come—are evidence of the government’s focus, although its preoccupation with the hydrocarbons sector could entail the emergence of a two-speed reform process, resulting in a two-tier economy.
Outlook for 2005-06: Fiscal policy
Libya will take advantage of historically high oil prices to boost spending over the forecast period. Despite a stronger US dollar in 2005, which will lead to cheaper euro-denominated imported goods (although this trend will reverse in 2006), government expenditure will nonetheless rise, as volumes of imported inputs for development projects increase considerably. In 2005 capital expenditure is expected to expand by almost 40% to LD7.9bn (US$6.1bn) as the development programme progresses. Recurrent spending will likewise increase, but by a smaller margin of 20% to LD12.2bn, as the government compensates for the easing of subsidies by raising salaries. This will lift total expenditure by 25% to LD20.1bn. This spending growth will be funded by increased revenue, which is further boosted by an upward revision to the Economist Intelligence Unit’s oil price forecast and expanding oil production. Consequently, a 47% rise in oil receipts in 2005 will drive a similar level of growth in overall revenue, which will reach almost LD32bn.
Spending growth in 2006 will slow as the government attempts to rein in expenditure in response to an expected drop in oil revenue. However, with its development programme gathering momentum and its wage bill remaining stubbornly high, the government’s success will be limited. Total expenditure is therefore expected to rise by 18% to LD23.8bn. Oil revenue is projected to drop by 5% in 2006 as oil prices fall, although receipts will still be almost 40% greater than those recorded in 2004. Despite the rise in non-oil earnings over the forecast period, in 2006 the fall in oil prices will negate these gains and total revenue is expected to decline by 2.5% to LD31.1bn. Overall, the budget surplus will widen to LD11.8bn (25.2% of GDP) in 2005, before contracting sharply in 2006 to just LD7.3bn—equivalent to a still healthy 14.3% of GDP.
Outlook for 2005-06: Monetary policy
Libya does not employ a particularly active monetary policy as part of its macroeconomic management. In March 2004 the discount rate was lowered to 4% from 5%—the first time it had been altered since 1998—illustrating an attempt by the Central Bank of Libya (CBL) to tighten the monetary environment. The interest rate shift was in line with recommendations advanced in the IMF’s 2004 Article IV report, which encouraged a more positive monetary stance by introducing a wider range of market-based instruments (such as Treasury bills). Libya has not made any further adjustments to its interest rates since then and it is unlikely that the authorities will move quickly to adopt any other monetary measures, ensuring that monetary policy remains largely unaltered over the forecast period.
After several years of strong expansion, the global economy is likely to be characterised by a gradual deceleration in output and demand growth over the forecast period. Indeed, growth is already slowing in some major economies, and the outlook for 2005-06 is for a more modest pace of economic expansion. World GDP growth (on a purchasing power parity basis) will slow from 5.1% in 2004 to 4.2% in 2005 and 4% in 2006.
Despite the slowdown in global growth, energy demand remains strong, forcing a further upward revision to our oil price forecasts. The benchmark dated Brent Blend is now projected to average a record US$53.3/barrel in 2005, declining to US$50.5/b in 2006. The average of US$52/b over the two-year period is more than US$27/b higher than the average over the previous ten years. The sustained high prices are a result of strengthening global demand and concerns over supply as OPEC, with its March decision to raise production, moves closer to output capacity. Recent data also suggest that non-OPEC production is not as strong as previously anticipated. Additionally, there remains a risk of global supply disruptions owing to geopolitical events. As a result of all these factors, oil futures prices are also rising, indicating that average oil prices, though easing from 2005 levels, will remain elevated well into the medium term.
Outlook for 2005-06: Economic growth
Despite oil output in 2005—and hence export volumes—expanding at a slower rate than in 2004, we expect real GDP growth to remain high at 8.5% as increased revenue from rising oil prices feeds through into stronger government spending and domestic demand. Economic growth levels in 2005 will also be supported by accelerating investment growth as the economy attracts reinvigorated commercial interest from abroad, with international companies keen to make the most of the opportunities provided by Libya’s dilapidated infrastructure. These factors will sustain domestic confidence into 2006, with both government and private consumption remaining strong. However, with oil output growth slowing again, as capacity constraints contain production expansion, and with Libya’s development programme demanding continued high volumes of imported industrial inputs, real growth will ease further in 2006, to a still high 7.6%.
Outlook for 2005-06: Inflation
Recent IMF data show that prices in Libya, as measured by the consumer price index (CPI), are still contracting. Previous Fund estimates indicated that prices have been rising since 2003. As a result of the new data, we believe that Libya will still experience deflation in 2005, although it will not be as marked as last year, when prices contracted by an estimated 3.4%. With strengthening domestic demand exerting upward pressure on consumer prices, we now expect deflation of around 1% in 2005.
In 2006 the full impact of the government’s easing of subsidies and lifting of customs tariffs is likely to be felt and prices are expected to increase, although it is difficult to gauge the extent of any rise, owing to the many rigid price controls likely to remain in place. However, we now envisage that consumer prices will increase by an average of 1.8%, the first price rise in seven years.
The relative stability of the Libyan dinar should prevent higher import costs from adding significantly to inflationary pressures, although these may be exacerbated by greater liquidity from expanding demand and investment, as demonstrated by sharp increases in money supply growth. If current levels of money supply growth continue into 2006, it is likely that upward pressure on consumer prices will build.
Outlook for 2005-06: Exchange rates
The Libyan dinar is pegged to the IMF’s special drawing rights (SDRs), and is managed through tight official controls. The country has ample foreign reserves to sustain this policy over the forecast period and beyond. The SDR is projected to weaken against the US dollar in 2005, but then strengthen again in 2006; consequently, the dinar will track these movements, averaging around LD1.31:US$1 in 2005 and LD1.29:US$1 in 2006. In July 2005 the dinar was trading at LD1.32:US$1. Libya’s massive stock of international reserves—US$29.8bn (an estimated 31 months of import cover) at end-May 2005—will ensure the continuation of a stable exchange-rate regime.
Outlook for 2005-06: External sector
Helped by a further upward revision to our oil price forecast and growing oil export volumes, Libya’s export receipts will rise by 45% in 2005. Total export revenue should therefore reach US$29.3bn. However, in 2006 export earnings will drop by around 4%, despite a small forecast rise in oil production, as oil prices are projected to fall, reducing overall revenue to US$28.3bn. With expectations that government expenditure on development projects will continue to rise, import spending will increase, and we forecast that the import bill will surge by 26% in 2005, to US$10.8bn. In 2006 spending will continue to increase firmly as domestic demand and development work on capital projects remain strong. The import bill is therefore expected to rise by a further 22%, to US$13.2bn. Overall, the trade surplus will rise by almost 60% in 2005, to US$18.5bn, before tumbling by 19% in 2006, to close the year at US$15.1bn.
The services and income balances will continue to run a combined deficit, however, as services costs associated with imports grow and foreign oil companies repatriate higher levels of profit. Additionally, Libya’s debt servicing will become more expensive in line with the rise in US and global interest rates. The current transfers account will stay in deficit as Libya’s expatriate community remains economically insignificant and the number of foreign workers in the country rises. The growing non-merchandise deficit will not be sufficient to undermine the trade surplus in 2005, ensuring that the current-account surplus expands to US$13bn (a massive 36% of GDP). It will narrow to US$8.8bn (22.1% of GDP) in 2006—a sharp fall, but a huge overall surplus nonetheless.
Source: The Economist, EIU
