Libya, the sleeping oil giant, starts to stir

Following over a decade of diplomatic and economic isolation, Libya looks poised to reap the benefits of its decision in September 2003 to spill the beans on its clandestine weapons of mass destruction (WMD) program. UN sanctions, which were imposed in 1992, were lifted in September 2003. More significantly, this April the majority of US sanctions were removed. At the same time Washington withdrew its objection to Libya joining the World Trade Organisation (WTO). Although Washington and Tripoli have yet to reach an agreement on the lifting of the US arms embargo and its listing of Libya as a state sponsor of terrorism, Libya's international position has been transformed.

Oil and gas the main attractions
Libya is keen to capitalize on its new position. The improved geopolitical landscape has led to a frenzy of foreign investor interest in Libya over recent months. Although the authorities are keen to attract investment in all areas of the economy - construction, tourism and telecoms are key potential growth areas - the hydrocarbons sector is attracting the most attention. Libyan proven oil reserves stood at 36 billion barrels at the end of 2002, according to oil giant BP, equivalent to 3% of world reserves. Although gas reserves are small in global terms - 1.3 trillion cubic metres, or.7% of world reserves - the sector is attracting a lot of interest. Industry estimates suggest that both oil and gas reserves could be a lot higher than these figures suggest. Exploration work in the 1960s identified at least ten fields of billion-barrel size. Modern techniques could uncover more. Vast tracks of acreage remain unexplored: exploration licences cover only one-third of the country's surface area.

To many Libya is a 'sleeping oil giant'. Despite high reserves oil production has declined due to a lack of maintenance and re-investment. Sustained capacity stood at 3.3 million barrels per day (mbpd) in the 1970s. Today capacity is less than half this level. Latest estimates suggest June output hit a decade-high of 1.6 mbpd and Libyan oil officials have said output will increase to nearer 1.7 mbpd from late July. However, this may not be sustainable without a return of the big US producers and further industry reform. The National Oil Company (NOC) is understood to have held talks with the Oasis group and Occidental (the two were forced to abandon Libya after US sanctions came into force in 1986. NOC is being re-organized. The process of awarding exploration licences, which has been a major obstacle to development, is also being reformed. The authorities have set a target of raising oil production capacity to 2 mbpd by 2010 and 3 mbpd within 15 years. Both look feasible.

The path to sustainable growth
After decades of under-investment, there is now a drive to transform the economy from the socialist principals of Qaddafi's 'Green Book' to what the Libyan leader calls 'popular capitalism'. The appointment of reform-minded Shokri Ghanem as Prime Minister in 2003 as well as the appointment of like-minded reformists in the recent cabinet re-shuffle, highlights the new reform drive. A number of positive steps have been taken since 2002. In line with IMF advice the multiple exchange rate system was unified, and subsequently devalued - the Libyan dinar is now around 400% below its 1998 level. A 15% tax on foreign currency transactions was also eliminated. Progress has also been made with the transition to current account convertibility under the terms of the IMF's Article VIII, which Libya signed in 2003. 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.