Libya: Gradual reforms to continue

Libya's outlook continues to improve on the back of greater integration into the world arena, high oil prices and its economic reform program. Importantly, in May, Washington decided to renew full diplomatic ties with Tripoli and remove Libya from the US' list of state sponsors of terrorism. The US had lifted many economic sanctions and restored some ties in 2004 after Libya renounced
weapons of mass destruction. The latest move will boost economic activities between the two countries, especially in the oil sector.

However, the removal of the pro-reform prime minister, Shokri Ghanem, in a cabinet reshuffle in early March has raised concerns over the progress of the market reform program, with many fearing the reshuffle brings an end to the program. During his 3-year tenure, Ghanem moved to modernise the economy and the government took steps to liberalise the trade environment and open some sectors to foreign investment. Overall, the plan emphasised attracting private investment to increase the growth potential of both the oil and non-oil sector, while reducing the role of the government. Although Ghanem had the support of Muammar Qadhafi and his son Saif al-Islam al-Qadhafi (who is seen as being groomed for succession and is a key supporter of reform), he has isolated the powerful local committees and the more conservative members of the General People's Congress, who dominate the parliamentary body. The committees had attacked Ghanem's plans for privatising state companies, freezing salaries and reducing subsidies on essential products. This resulted in the implementation of the reform program being slow and subject to reversals.

The removal of Ghanem can initially be seen as a victory for the conservative 'old guard'. However, this does not necessarily mean the end of the reform program. Baghdadi Mahmudi has been appointed prime minister; he was deputy prime minister in the previous cabinet. He generally adopted a low profile, although he is on good terms with Seif al-Islam, suggesting an element of continuity. Adding to the reformist credentials of the new cabinet, Mohammed Ali al-Huwaiz, the former finance minister and a supporter of economic reform, was appointed deputy prime minister. Ahmed Munaisi Abdel-Hamid, the former governor of the Central Bank of Libya, replaced Mr Huwaiz as finance minister. Meanwhile, the Economy and Trade portfolio was
taken over by Tayeb Safi Tayeb, a political heavyweight.

The continuation of the reform programme is also supported by the fact that the cabinet members are politically astute and are expected to bring a less confrontational tone with the old guard. Many have revolutionary backgrounds and understand how the system works, while Ghanem was viewed a political outsider. Although the economic reform program will continue, especially with smoother relations between the new government and the political establishment, the process will still move at a snail's pace. The cumbersome bureaucracy and erratic decision-making will also slow the restructuring process.

Since being appointed premier, Mahmudi has reiterated that the oil-rich country will continue reforms to stimulate growth. The prime minister has particularly emphasised banking sector reform, including opening of the sector to private and foreign banks. The government also plans to continue taking measures that will make Libya more attractive to foreign direct investment. Reducing bureaucracy and complex regulations are key priorities. Although the government will continue with certain policies advocated by Ghanem, there is likely to be some change in emphasis. The cabinet has highlighted that it will focus attention on those with low income and improving infrastructure. This indicates the government is unlikely to tackle certain sensitive areas, such as subsidies, while focusing on areas that will be relatively less painful. Consequently, market reforms are likely to not be as deep as advocated by Ghanem. There are indications that many Libyans have become wary of the 3-year old reform program.

Meanwhile, Ghanem has been moved to the head of the National Oil Cooperation (NOC), thereby making him the dominant force in the oil industry. Ghanem served as head of research at the OPEC secretariat in Vienna before being recalled to Libya to become economy minister at end-2001. Placing him in charge of the oil sector is an attempt to accelerate Tripoli's efforts to
modernise and upgrade the industry following the lifting of most international sanctions. The reshuffle has further enhanced the role of NOC by replacing the energy ministry with a new ministry for industry, electricity and mineral resources. The National Oil Company (NOC) is expected to have more latitude to make decisions and to negotiate more freely with the oil companies.

However, the government reshuffle has delayed the 3rd licensing round, which was slated to have been held in March. The government hopes to build on the success of two previous bidding rounds that brought in a wide array of firms to develop the country's largely unexplored acreage. But oil officials had said the details of the latest round were still being debated.

The continuation of the economic reform program, including maximising the economic potential of the hydrocarbon sector, remains vital. Although the economy has benefited from high oil prices over the last few years, especially on the external and fiscal fronts, structural problems resulted in weaker that expected growth in 2005. In its recently released conclusion to Article IV Consultation with Libya, the IMF estimated real GDP growth rate slowed to 3.5% in 2005, from 4.5% in the previous year. This was a result of the oil sector expanding at a modest 1.5%, owing to capacity constraints.

However, with the increased investment, we expect the hydrocarbon sector to have a positive effect on economic expansion. As such, in 2006, we expect real GDP to accelerate to 5.5% (capital imports destined for the energy sector will mean that this figure is unlikely to be higher). However, in 2007, we anticipate that real GDP growth will accelerate to around 7.0% as new fields come on-line and oil and gas production starts to pick up.

Outside the oil sector, strong population growth (at around 4% per year) and high unemployment (around 13%) means the need for diversification of the economy remains great. Expansion of the non-oil economy and job creation will depend on forging ahead with the economic reform program and increasing the attractiveness of Libya for non-hydrocarbon companies to invest in. The IMF noted the continuation of current policies, characterised by uncoordinated reform measures, are likely to result in subdued economic growth over the medium term. In recent years, non-oil sector growth has mainly been driven by fiscal stimulus which is unsustainable without comprehensive structural reforms. Along with the dependence of the economy on the hydrocarbon sector, the economy suffers from decades of centralised management. Increasing the management capability of the government remains vital.