Libya, the sleeping oil giant, starts to stir (page 2 of 2)

In addition a new investment law has been introduced and some subsidies scaled back. The key interest policy rate has also been aggressively cut, most recently by 200 basis points to 3% in a bid to stimulate lending to private business. A number of new initiatives have been announced including plans to establish a stock exchange. Privatisation is also being discussed, though oil and electricity will remain under state control.

However, numerous obstacles to reform remain and progress will be slow. Not least is the unpredictability of Libyan leader Qadaffi. Although there is no doubt that PM Ghanem could not have moved without Qadaffi's tacit approval, his commitment to reform could be tested if reforms pose a threat to social stability. There is already considerable opposition to the removal of subsidies on basic items such as energy and water.

Decades of state-dominance have also left the tiny private sector in chronic shape. Entrepreneurial skills are limited. The banking and financial sectors also remain under-developed. High levels of unemployment (30%) pose a challenge to Ghanem's privatisation plans given the State's role as main employer. However, sustainable growth can not be achieved without a drastic reduction in the dominant role of the public sector - a view endorsed by the IMF.

Economy benefits from oil
Economic growth has picked up recently due entirely to the favorable conditions in the global oil market. Oil dominates the economy, accounting for 95% of exports, 75% of government receipts and 30% of GDP. It is also the principal source of foreign exchange. High oil prices helped underpin growth in 2003. Real GDP is estimated to have grown by around 5.5%. Given current oil prices and the pick up in output (average H1 production was 1.5 mbpd, up 5% on average 2003 output), economic growth prospects remain positive. Both the budget and current accounts also stand to benefit from expected increased hydrocarbon revenues. With the hydrocarbon sector's domination of the economy not about to change, Libya's economic prospects remain firmly tied
to developments in the global oil market.