libya - country report 2005

Country Report

Libya

October 2005

The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom

Libya at a glance: 2006-07

OVERVIEW 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.

Key changes from last month

Political outlook • The political outlook is unchanged. Colonel 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. Nevertheless, the fiscal surplus will still fall in 2006, contracting more sharply in 2007, although it will remain healthy at 5% 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.

Economic forecast • Libya�s economic outlook has improved owing to the upward revision to

our oil price projection. Real GDP growth will average almost 8% over the forecast period, and, after expanding rapidly in 2005, the current-account surplus will narrow in both years of the forecast period, closing at around 5.5% of GDP.

The Economist Intelligence Unit

The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide.

The Economist Intelligence Unit delivers its information in four ways: through its digital portfolio, where the latest analysis is updated daily; through printed subscription products ranging from newsletters to annual reference works; through research reports; and by organising seminars and presentations. The firm is a member of The Economist Group.

London The Economist Intelligence Unit 15 Regent St London SW1Y 4LR United Kingdom Tel: (44.20) 7830 1007 Fax: (44.20) 7830 1023 E-mail: [email protected]

New York The Economist Intelligence Unit The Economist Building 111 West 57th Street New York NY 10019, US Tel: (1.212) 554 0600 Fax: (1.212) 586 0248 E-mail: [email protected]

Hong Kong The Economist Intelligence Unit 60/F, Central Plaza 18 Harbour Road Wanchai Hong Kong Tel: (852) 2585 3888 Fax: (852) 2802 7638 E-mail: [email protected]

Website: www.eiu.com

Electronic delivery This publication can be viewed by subscribing online at www.store.eiu.com

Reports are also available in various other electronic formats, such as CD-ROM, Lotus Notes, online databases and as direct feeds to corporate intranets. For further information, please contact your nearest Economist Intelligence Unit office

Copyright © 2005 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of The Economist Intelligence Unit Limited.

All information in this report is verified to the best of the author's and the publisher's ability. However, the Economist Intelligence Unit does not accept responsibility for any loss arising from reliance on it.

ISSN 0269-4328

Symbols for tables �n/a� means not available; �� means not applicable

Printed and distributed by Patersons Dartford, Questor Trade Park, 151 Avery Way, Dartford, Kent DA1 1JS, UK.

Libya 1

Country Report October 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005

Contents

Libya

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators 6 Quarterly indicators

7 Outlook for 2006-07 7 Political outlook 8 Economic policy outlook 10 Economic forecast

12 The political scene

21 Economic policy

24 The domestic economy 24 Oil and gas 30 Infrastructure

31 Foreign trade and payments

List of tables 10 International assumptions summary 12 Forecast summary 23 Money supply 24 Domestic credit 32 Reserves

List of figures 12 Gross domestic product 12 Consumer price inflation 25 Oil prices

Libya 3


Libya October 2005

Summary

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.

Colonel Qadhafi celebrated 36 years in power in September, an event marred by incidents that suggested his regime still intimidates dissidents and their families. The Qadhafi International Charitable Foundation has continued its efforts to shore up Libya�s human rights image and has entered into dialogue with the overseas opposition. Tensions still exist in the cabinet, hindering reform, although Libya has managed to make headway in its relations with the US, opening the possibility of a high-level visit later this year.

Libya looks set to double its fiscal surplus in 2005, although there has been little progress in the privatisation programme. More detail has emerged concerning the new banking law. Money supply growth has soared and domestic credit growth remained negative.

Some 66 foreign companies pre-qualified for the second oil concession licensing round, the results of which are imminent, although rumours emerged that the licensing rules may be changed for the next round. Foreign firms are jostling for position in the oil market, and US companies are ready to return. Phase 2 of Western Libya Gas Project came on stream and other gas infrastructure developments have made progress. Further contracts have been awarded for the Great Man-made River Project as well as for waste management schemes.

Customs tariffs have been eliminated and are likely to be replaced with a tax on service imports. Libya�s main overseas investment agency, the state-owned Libyan Arab Foreign Investment Company, diversified its overseas investments. Foreign-exchange reserves have continued their strong growth.

Editors: Philip McCrum (editor); Hania Farhan (consulting editor) Editorial closing date: September 28th 2005 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

Outlook for 2006-07

The political scene

Economic policy

The domestic economy

Foreign trade and payments

4 Libya


Political structure

The Great Socialist People�s Libyan Arab Jamahiriya

Since 1977 Libya has been a jamahiriya (republic of the masses) in accordance with the Third Universal Theory propounded by Colonel Muammar Qadhafi in his Green Book, which is a blend of socialist and Islamic theories inspired by tribal traditions. The jamahiriya system defines the political and social order, which is also governed by the Holy Quran. The General People�s Congress is the highest legislative body. In 1992 Colonel Qadhafi changed the political structure by dividing Libya into 1,500 mahallat (communes), each with its own budget and legislative and executive powers, formerly vested in the Basic People�s Congresses. The mahallat and the congresses are supervised by revolutionary committees directed by secretaries, who are chosen personally by Colonel Qadhafi

Colonel Qadhafi was appointed supreme leader by the General People�s Congress in March 1990 after taking power in a coup in 1969

In 2000 Colonel Qadhafi abolished most central government executive functions, devolving responsibilities to the 26 municipal councils that make up the General People�s Congress. Centralised control is maintained in the areas of the economy, finance, defence and security, energy, infrastructure, foreign affairs, social security and trade, all of which report directly to the prime minister�s office

The General People�s Congress, delegates to which are chosen by the Basic People�s Congresses

Assistant secretary for services Maatuq Mohammed Maatuq Deputy prime minister Ali Baghdadi al-Mahmudi Economy & foreign trade Abd al-Qadir Bilkhair Energy Fathi bin Shatwan Finance Mohammed Ali al-Huwaiz Foreign affairs & international co-operation Mohammed Abderrahman Chalgam Justice & public security Mohammed Ali al-Misurati Planning Taher al-Hadi al-Jehaimi Secretary of General People�s Committee (prime minister) Shokri Ghanem

Assistant secretary Ahmed Mohammed Ibrahim Foreign affairs Suleiman Sasi al-Shahumi Head of Higher Planning Council Abdel-Hafez Zleitni Popular Committees Ibrahim ali Ibrahim Popular Congresses Ibrahim abd al-Rahman Abjad Secretary (speaker) Zenati Mohammed Zenati Social affairs Amal Nuri Abdullah Safar Tourism Umar al-Mabruk al-Tayyif Trades unions, federations & vocational associations Mohammed Jibril al-Urfi

Abdullah Salem al-Badri

Ahmed Munaisi Abdel-Hamid

Official name

Form of state

Head of state

Executive

Legislature

National Oil Corporation chairman

Central Bank governor

Secretariat of the General People�s Congress

Key ministers

Libya 5


Economic structure

Annual indicators

2001a 2002a 2003a 2004b 2005b

GDP at market prices (LD bn) 17.2 24.3 29.4b 34.0 47.9

GDP (US$ bn) 28.4 19.1 22.7b 26.0 36.8

Real GDP growth (%) 3.4b 3.2b 9.1b 9.3 8.5

Consumer price inflation (av; %) -8.8 -9.8 -2.1 -3.4 -1.0

Population (m) 5.4 5.5 5.6 5.7 5.9

Exports of goods fob (US$ m) 10,985.0 9,851.0 14,664.0 19,062.0 30,792.8

Imports of goods fob (US$ m) 4,825.0 7,408.0 7,200.0 8,590.0 10,823.4

Current-account balance (US$ m) 3,683.0 122.0 3,642.0 5,647.0 14,440.8

Foreign-exchange reserves excl gold (US$ m) 14,800.5 14,307.4 19,584.0 25,688.8a 32,111.3

Total external debt (US$ bn) 4.5b 4.4b 4.2b 4.1 4.3

Debt-service ratio, paid (%) 6.6b 6.8b 4.7b 4.0 3.0

Exchange rate (av) LD:US$ 0.605 1.271 1.293 1.305a 1.300

a Actual. b Economist Intelligence Unit estimates.

Origins of gross domestic product 2003 % of total Components of gross domestic product 2001 % of total

Agriculture, forestry & fishing 8.4 Private consumption 53.8

Oil and gas 32.6 Government consumption 24.2

Mining 1.8 Gross fixed capital formation 17.1

Manufacturing 4.2 Change in stocks 0.2

Construction 2.0 Exports of goods & services 23.3

Services 44.5 Imports of goods & services 18.7

Main destinations of exports 2004 % of total Main origins of imports cif 2004 % of total

Italy 37.1 Italy 27.2

Germany 16.3 Germany 10.8

Spain 11.9 Tunisia 6.6

Turkey 7.2 UK 5.6

France 6.3 Turkey 4.9

Switzerland 3.5 France 4.0

6 Libya


Quarterly indicators 2003 2004 2005 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 QtrFinancial indicators Exchange rate LD:US$ (end-period) 1.36 1.30 1.31 1.32 1.32 1.24 1.28 1.33Deposit rate (av; %) 3.0 3.0 2.3 2.0 2.0 2.0 2.0 n/aLending rate (av; %) 7.0 7.0 6.3 6.0 6.0 6.0 6.0 n/aMoney market rate (av; %) 4.0 4.0 4.0 4.0 4.0 4.0 4.0 n/aM1 (end-period; LD m) 8,152 8,341 8,683 9,539 9,638 10,154 10,688 n/aM1 (% change, year on year) 6.4 6.3 11.0 22.2 18.2 21.7 23.1 n/aM2 (end-period; LD m) 10,555 10,819 11,233 12,020 12,000 12,753 13,530 n/aM2 (% change, year on year) 6.8 7.8 13.8 22.7 13.7 17.9 20.4 n/aSectoral trends Crude oil production (m barrels/day) 1.43 1.46 1.47 1.51 1.59 1.61 1.61 1.65Crude oil production (% change, year on year) 7.1 8.7 5.5 5.6 11.4 10.5 9.5 9.3Foreign trade & reserves (US$ m) Exports foba 3,522 3,650 4,017 4,159 5,176 5,962 5,448 n/aImports fobb -1,467 -1,569 -1,780 -1,963 -2,271 -2,107 -1,991 n/aTrade balance 2,055 2,081 2,237 2,196 2,905 3,855 3,456 n/aReserves excl gold (end�period) 17,587 19,584 20,674 21,371 22,798 25,689 27,731 30,596

a DOTS estimates. b DOTS estimates; cif data do not include defence imports.

Sources: IEA, Monthly Oil Market Report; IMF, International Financial Statistics; Direction of Trade Statistics.

Libya 7


Outlook for 2006-07

Political outlook

There is little risk of substantial change in the domestic political environment in 2006-07. Following staggered cabinet reshuffles during 2003 and early 2004, economic reform remains�at least ostensibly�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. This tug-of-war will ensure that the process 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 fickle) and by bureaucratic bottlenecks.

Whatever the extent and pace of economic reform, it will not be accompanied by political liberalisation. Colonel Qadhafi is highly unlikely to introduce any reforms that would compromise his hold on power; instead, any changes that do occur will be calculated to consolidate further his own authority. To this end, random portfolio reshuffles will be so designed as to deny any individual minister the opportunity to build up a personal power base, as well as to balance the competing power structures within the political hierarchy. Policy formulation and implementation will remain subordinate to this overarching goal.

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 perhaps by reforms that could exacerbate unemployment (such as privatisation), or by a collapse in oil prices, or even by a sense amongst ordinary Libyans that they are not getting a share of the spoils from the lifting of sanctions, 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�most probably Saif al-Islam Qadhafi�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.

The government will attempt to consolidate its rehabilitation within the inter-national 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

Domestic politics

International relations

8 Libya


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.

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. 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, Colonel 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, given its meddlesome reputation in the past.

Relations with Arab countries will continue to be strained. Tensions with Saudi Arabia over an alleged Libyan-backed plot in 2004 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 fragile. 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 Colonel 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.

Economic policy outlook

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 govern-ment�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.

Policy trends

Libya 9


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 pre-occupation with the hydrocarbons sector could entail the emergence of a two-speed reform process, resulting in a two-tier economy.

Libya will take advantage of historically high oil prices to boost spending over the forecast period, although the rate of expenditure growth is likely to slow. In 2006 capital spending is expected to expand by over 40% to LD10bn (US$13.2bn), as more development projects come on line with Libya looking to upgrade its dilapidated infrastructure. Recurrent expenditure will likewise increase, but by a smaller margin of 11% to LD13.6bn, as the easing of subsidies creates savings, despite the raising of salaries to compensate. This will lift total expenditure by 17% to LD23.6bn. Revenue will grow much more slowly, however. Oil receipts will rise by 1.7%, as an increase in oil production offsets a decline in prices, and total revenue will expand by 3% to LD33.9bn.

Spending growth in 2007 will slow further 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 13% to LD26.7bn. Oil revenue is projected to drop by 17% as oil prices, too, fall by 17%, although receipts will still be almost double those recorded in 2000. Despite the rise in non-oil earnings over the forecast period, in 2007 the fall in oil prices will negate these gains and total revenue is expected to decline by some 14% to LD29.3bn. Overall, the budget surplus will contract to LD10.3bn (19.3% of GDP) in 2006, before narrowing more sharply in 2007 to LD2.6bn�equivalent to a still-healthy 5% of GDP.

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 efforts by the Central Bank of Libya to loosen 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 the authorities are unlikely to move quickly to adopt any other monetary measures, which means there will be little change in monetary policy over the forecast period.

Fiscal policy

Monetary policy

10 Libya


Economic forecast

International assumptions summary (% unless otherwise indicated)

2004 2005 2006 2007

Real GDP growth World 5.1 4.3 4.0 4.0

OECD 3.3 2.4 2.3 2.4

EU25 2.4 1.6 1.9 2.2

Exchange rates US$ effective (1995=100) 86.0 84.1 82.0 79.5

US$:� 1.244 1.257 1.293 1.343

¥:US$ 108.1 107.8 103.0 96.3

Financial indicators US$ 3-month commercial paper rate 1.48 3.46 4.79 5.00

� 3-month interbank rate 2.13 2.08 2.00 2.88

Commodity prices Oil (Brent; US$/b) 38.5 57.0 56.3 46.8

Gold (US$/troy oz) 409.5 430.1 410.0 370.0

Food, feedstuffs & beverages (% change in US$ terms) 8.6 -0.6 1.1 0.6

Industrial raw materials (% change in US$ terms) 21.0 5.8 -6.3 -8.8

Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.

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, driven in particular by more sluggish economic activity in the key economies of the US and Japan. We expect world GDP growth (on a purchasing power parity basis) in 2006 and 2007 to slow to 4%, down from 4.3% this year.

Despite the slowdown in global growth, energy demand will remain strong, forcing a further upward revision to our oil price forecast in 2006. The benchmark dated Brent Blend is now projected to average US$56.3/barrel in 2006, down from an estimated record of US$57/b in 2005, before declining markedly to US$46.8/b in 2007 as supply bottlenecks are circumvented and sociopolitical tensions in key oil producing regions ease. Nevertheless, 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.

Real GDP growth is expected slow slightly, to 8.1%, in 2006, from 8.5% in 2005, as domestic demand is weakened by more sluggish activity in the oil sector. Nonetheless, high rates of investment growth, which will be sustained by continuing commercial interest from abroad, will help buoy growth. Despite a contraction in oil revenue in 2007, domestic confidence will be maintained, with both government and private consumption remaining strong, although slowing. Libya�s development programme will continue to attract the attentions of overseas investors, but will also demand continued high volumes of imported industrial inputs, and as a result real growth will ease again slightly, to a still-high 7.6%.

International assumptions

Economic growth

Libya 11


Following expected deflation of around 1% in 2005, we project that consumer prices will increase by an average of 1.8%, the first price rise in seven years. The increase will come on the back of the government�s easing of subsidies, although it is difficult to gauge the extent of any rise, owing to the many rigid price controls likely to remain in place.

The relative stability of the Libyan dinar should offset some of the inflationary impact of higher import costs, although strong domestic liquidity (as demonstrated by sharp increases in money supply growth) will add to price pressures and we envisage that consumer price inflation will accelerate slightly in 2007, to 2.2%.

The Libyan dinar is pegged to the IMF�s special drawing rights (SDRs), and is managed through tight official controls. The country�s ample foreign reserves�US$30.6bn (an estimated 32 months of import cover) at end-May 2005�will help sustain this policy and ensure the continuation of a stable exchange-rate regime over the forecast period and beyond. The SDR is projected to strengthen against the US dollar over the forecast period; consequently, the dinar will track these movements, averaging around LD1.31:US$1 in 2006 and LD1.29:US$1 in 2007. In late September 2005 the dinar was trading at LD1.32:US$1.

Owing to falling oil prices and growing domestic oil consumption, Libya�s export receipts will stay virtually static in 2006, supported only by a slight rise in output. Total export revenue should therefore reach US$31bn. However, in 2007 export earnings will show a significant drop of around 15%, as oil prices are projected to fall by some 17%, reducing overall revenue to US$26.4bn. 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 22% in 2006, to US$13.2bn. In 2007 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 24%, to US$16.4bn. Overall, the trade surplus will contract by over 10% in 2006, to US$17.8bn, before tumbling by over 40% in 2007, to close the forecast period at US$10bn.

The services and income balances will continue to run a combined deficit, however, as services costs associated with imports grow and foreign oil firms repatriate higher levels of profits. 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 significantly dent the trade surplus, however, although the current-account surplus will nonetheless contract to US$11.4bn (a still-large 28.1% of GDP) in 2006. It will narrow more sharply in 2007, to US$2.4bn (5.5% of GDP).

Inflation

Exchange rates

External sector

12 Libya


Forecast summary (% unless otherwise indicated)

2004a 2005 a 2006b 2007b

Real GDP growth 9.3 8.5 8.1 7.6

Oil production ('000 b/d) 1,548c 1,643 1,680 1,722

Oil exports (US$ bn) 20.0 29.6 29.8 25.3

Consumer price inflation (av) -3.4 -1.0 1.8 2.2

Consumer price inflation (year-end) -2.2 0.3 2.0 1.1

Deposit rate 2.1c 2.0 2.0 2.0

Government balance (% of GDP) 14.8 26.8 19.3 5.0

Exports of goods fob (US$ bn) 19.1 30.8 31.0 26.4

Imports of goods fob (US$ bn) 8.6 10.8 13.2 16.4

Current-account balance (US$ bn) 5.6 14.4 11.4 2.4

Current-account balance (% of GDP) 21.7 39.2 28.1 5.5

External debt (year-end; US$ bn) 4.1 4.3 4.5 4.8

Exchange rate LD:US$ (av) 1.305c 1.300 1.310 1.285

Exchange rate LD:� (av) 1.623c 1.634 1.693 1.725

Exchange rate LD:¥100 (av) 1.207c 1.206 1.272 1.335

Exchange rate LD:SDR (av) 1.933c 1.935 1.982 1.998

a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts. c Actual.

The political scene

On September 1st Libya marked the 36th anniversary of the coup�officially known as the �revolution��that brought Muammar Qadhafi to power in 1969. The date is a fixture in Libya�s calendar and year after year is marked by stage-managed celebrations in Green Square, in the centre of Tripoli. This year was much the same, except that following a conference of Libyan opposition movements in London in June the Libyan authorities appeared to make an especial effort to give an impression of widespread popular support for Colonel Qadhafi. Participants representing a cross-section of Libyan society were bused

Colonel Qadhafi defiantly celebrates 36 years in power

Libya 13


into Tripoli, and reports indicated that well over 100,000 people attended the celebrations�an impressively large figure, even if it was far short of the 1m claimed by the organisers.

The streets were festooned with banners congratulating Libyans and Colonel Qadhafi, some overtly from Western companies (including at least one US oil company), and amid fireworks, music and light displays, Colonel Qadhafi made his usual flamboyant appearance. In a typically blunt message, during the festivities Colonel Qadhafi was presented with a document that was proclaimed as a �charter of fidelity� signed �by the Libyan people�. Meanwhile a commentator on state-owned Libyan television declared that the large crowds were �an expression of the people�s allegiance towards their guide�. Referring to the opposition figures (or �mercenaries�) who had met in London, the commentator asked: �what democracy are they talking about, set against this grandiose spectacle?�

In truth, the brash spectacle of the celebrations does not reflect general public sentiment and will have persuaded few, if any, Libyans that Colonel Qadhafi deserves their support. Owing to Colonel Qadhafi�s pervasive security apparatus, Libyans are still wary of criticising the leader in public, although it is widely accepted that privately he is deeply resented. He is held culpable for years of international isolation and economic deprivation, and many Libyans yearn for change. However, there are enough beneficiaries of the political status quo in Libya to ensure the continuation of orchestrated demonstrations of support not just for Colonel Qadhafi, but also for the regime itself.

This prevailing undercurrent of antipathy for Colonel Qadhafi and his regime has never coalesced into an identifiable political movement owing to the leader�s tough resolve to crush dissent and political opposition. His rule has often been challenged�both intellectually and violently�only to meet with brutal and ruthless repression. And in spite of Libya�s growing international acceptance and the concern aired by interlocutors such as the US and the EU over human rights abuses, little appears to have changed. Although Libyan opposition movements and activists have become more vociferous in the past six months�albeit from the relative safety of foreign shores�the dangers they face have been grimly illustrated by a series of killings and arrests. In July the 85-year-old father of a Paris-based Libyan dissident, Hadi Shaluf, was murdered in an eastern district of Tripoli. No evidence has yet emerged about who killed him, but if it was an assassination at the behest of the Libyan authorities�as is widely suspected�it is a disturbing reminder of how far some elements in the government will allegedly go to deter political opposition.

The murder of Mr Shaluf came only a few months after a prominent journalist and writer, Daif al-Ghazal, was tortured and executed in Libya (July 2005, The political scene). Meanwhile, it has emerged that another Libyan journalist, Abd al-Raziq al-Mansuri, has been detained without trial since January, allegedly because he possessed a pistol without a licence. According to the US-based Human Rights Watch, which met Mr Mansuri during a visit to Libya in May, Mr Mansuri believes he was detained by Libya�s internal security because of articles he wrote for a Libyan opposition website, Akhbar Libya. Mr Mansuri

Political opposition still faces dangers

14 Libya


also said that he was incarcerated for a while at an internal security department established for combating �terrorism and zealots�.

Further uncorroborated reports intimate that relatives of dissidents involved in an opposition conference in London in June (July 2005, The political scene) have allegedly been intimidated by members of the security services, a tactic that is well-rehearsed in Libya, whereby families are often denied various public services or subsidies and are even sometimes imprisoned.

The recent killings, and the government�s response to the activities of opposition movements abroad, highlight outstanding concerns over Libya�s human rights record. The government has offered little more than platitudes to address the issue, leaving the opaque but ostensibly humanitarian organisation, the Qadhafi International Charitable Foundation (QICF), headed by Colonel Qadhafi�s son, Saif al-Islam Qadhafi, as one of the few domestic public advocates of note focused on improving the human rights situation in the country (July 2005, The political scene).

Mr Qadhafi and the QICF have recently attempted to raise the profile of its human rights operations, staging high-profile prison visits, offering prisoner amnesties and guaranteeing the safe return of exiled Libyan dissidents. In late August the QICF announced that the authorities would release some 130 Islamist political prisoners, most of whom were allegedly members of the Muslim Brotherhood, and all of whom had pledged to stay out of politics. The release was to coincide with the September 1st anniversary, when Colonel Qadhafi usually announces a prisoner amnesty�this year some 1,675 prisoners were released. However, most of these were reportedly serving time for only petty crimes and had already served half their sentences, and the QICF failed to secure the release of the hundreds of prisoners of conscience still languishing in Libyan jails.

Separately, speaking at a launch in August of a report on the activities of the QICF from 2000 to 2004, Mr Qadhafi indicated that the QICF had so far helped some 787 Libyans abroad to return to Libya, 304 of whom returned after being contacted directly by the QICF. The QICF�s efforts in this regard followed a call by Colonel Qadhafi earlier in 2005 for Libyans living abroad to return home, with the assurance that they should not fear persecution.

Laudable though these efforts are, they are modest in comparison with outstanding grievances that need to be addressed, as outlined in recent reports by both Amnesty International and Human Rights Watch. Furthermore, despite the fanfare surrounding the QICF�s operations, Mr Qadhafi�s personal commitment to basic human rights, such as freedom of expression, and to democratisation remain ambiguous. Most notably, however, as long as a vibrant civil society is denied a forum in Libya and the QICF remains the only organisation nominally campaigning for human rights, the government�s commitment to expanding personal liberties in Libya will remain questionable.

The QICF�s operations are not solely devoted to human rights, however, and in the past have included sending aid and material assistance overseas, such as medical aid for Palestine, or help to build mosques in Chad. However, it is

Libyan opposition movements explore possibility of dialogue

QICF has much work to do on human rights

Libya 15


becoming apparent that Mr Qadhafi is beginning to use his foundation more as a political platform, from which he can launch political initiatives. In August, for example, he announced the outline of a proposal for political and human rights reform, calling for measures to address a wide range of issues, including national reconciliation with opposition groups, past human rights abuses, political prisoners and constitutional wranglings.

The idea was welcomed by a number of opposition groups, notably the London-based Libyan Human Development Forum (LHDF) and the Muslim Brotherhood (although other groups such as the National Front for the Salvation of Libya rejected it). In September the LHDF published a letter on a number of Libyan websites calling for a �national conference for the forces of reform� to be held, which would explore �the appropriate mechanisms� to implement Mr Qadhafi�s proposals for reform in Libya. The letter urged Mr Qadhafi and the QICF to organise the conference and invite Libyans from both inside and outside Libya to attend.

It is understandable that some Libyan opposition movements should now explore the possibility of dialogue with the Libyan government, rather than choose the well-worn, but apparently futile, path of confrontation. Following Libya�s international rehabilitation, and given the interest of the US in Libyan co-operation in the �war on terror�, there is significantly less scope for Libyan opposition movements to receive political or financial support from the US or Europe with which to challenge the Libyan government. In short, at present neither the US nor Europe wants to see Libya destabilised. This is corroborated by an unnamed London-based Libyan exile and advocate of democratic reform who was quoted as saying, �opponents [of the Libyan regime] have written off the possibility of receiving tangible political support from the United States�. The Libyan government is also fully aware of the US�s priorities and knows that it will not be pressing too hard on democratisation in the near future. This gives organisations like the QICF ample scope to debate political reform at length, without actually having to do anything about it. The exercise, however, will do no harm to Mr Qadhafi�s profile: he will gain international kudos by demonstrating his democratic credentials, while perhaps boosting his domestic reputation by being seen to engage with�rather than repress�the regime�s opponents.

Despite the general acceptance of Colonel Qadhafi�s overweening political authority, he maintains the impression of being above the grubby machinations of day-to-day politics. In doing so, he can at least maintain a distance from the implementation of policy, avoiding blame when policies fail and accepting the plaudits of success. His supremacy is further buoyed by political rivalries within his cabinet, which ensure that ministers are more preoccupied by preserving their own authority than by challenging his. Although the past quarter has seen little political manoeuvring within the cabinet, there is no doubt that tensions persist, the most consequential of which are between the prime minister, Shokri Ghanem, and a number of veteran ministers and officials who oppose his reform plans and resent his influence. These tensions were brought to the fore at the session of the General People�s Congress (GPC) in January this year, when the assistant secretary of the GPC, Ahmed Mohammed Ibrahim, made a

Cabinet tensions persist

16 Libya


thinly-veiled rebuke of Mr Ghanem�s reform plans. Lesser squabbles in the cabinet are mainly caused by the vying for power of ministers, many of whom have seen their fortunes rise and fall several times, always at the whim of Colonel Qadhafi. Ultimately, these tensions are more significant in determining political outcomes, than are the various differences that also exist over the technical aspects of policies, exemplified by the approach used for awarding oil and gas exploration licences, a matter that divides the minister of energy, Fathi bin Shatwan, from Mr Ghanem and the head of the National Oil Corporation, Abdullah Salem al-Badri.

That Mr Ghanem has now survived as prime minister for more than two years (he was appointed in June 2003) is testament to his powerful backing and his political skills. The most significant of his supporters remains Saif al-Islam Qadhafi, Colonel Qadhafi�s most influential son, although Mr Ghanem is also supported by Mr Badri and two reformist ministers, Abd al-Qadir Bilkhair, the economy and foreign trade minister (the post that Mr Ghanem used to hold), and Taher al-Hadi al-Jehaimi, the planning minister (and former head of the Higher Planning Council). However, although Colonel Qadhafi gave Mr Ghanem a strong mandate for reform when he appointed him, which he reiterated in 2004, he still maintains a notable distance from the prime minister. Mr Ghanem is a key player in Libya�s transformation in that he possesses the requisite economic expertise and authority to push through economic reform and presents an acceptable face to the outside world. However, he operates under a degree of political restraint, which ensures that his mandate is clearly delineated and which prevents him from tampering with the domestic political apparatus. This limited mandate makes Mr Ghanem both more accountable and easily expendable and gives Colonel Qadhafi ample scope to replace him should he feel the need to make a concession to Mr Ghanem�s opponents or should Mr Ghanem begin to develop too strong a personal power base.

Although the issue of the 1988 Lockerbie bombing is now firmly off the list of obstacles to Libya�s international rehabilitation, following Libya�s agreement in 2003 to pay compensation, questions surrounding the case remain. The most concerning of these is centred on question-marks over the only conviction resulting from the trial, that of Abdel-Basset al-Megrahi, a former Libyan intelligence official. A number of lawyers and observers have held serious doubts about his conviction ever since it was secured in January 2001, when the only other person tried for involvement in the bombing (Al-Amin Khalifa Fahima, another former Libyan official) was acquitted. There was also surprise when Mr Megrahi lost an appeal against his conviction in March 2002, since when he has been serving a life sentence in a Scottish jail. However, the recent emergence of several important claims concerning the investigation has added to residual doubts about the conviction, and Mr Megrahi�s lawyers are now intent on securing a retrial.

The latest claim came in August from a retired Scottish senior police officer, who has given a written statement to Mr Megrahi�s lawyers claiming that a crucial piece of evidence in the case�a fragment of circuit board, which allegedly came from the timer used to detonate the bomb�had been planted by the US Central Intelligence Agency (CIA). The claim is not new: in 2003 a

New doubt raised over Lockerbie conviction

Libya 17


former CIA agent also gave a statement to Mr Megrahi�s lawyers alleging that the circuit board had been planted, and claimed that that the CIA �wrote the script� of the investigation to incriminate Libya. Furthermore, rumours about the circuit fragment being planted date back to before the trial: the circuit board was found in an area of woodland some miles from Lockerbie and months after the bombing. However, until now no-one close to or involved in the investigation has given a written statement to back up the claim. The police officer apparently refrained from doing so before because of fear of vilification and his expectation first that a conviction would not be secured, and then, when it was, that it would be overturned at appeal. As neither eventuality occurred, the officer in question reportedly felt he then had no choice but to come forward with his evidence.

Mr Megrahi�s lawyers are now likely to argue that the new claim is especially significant given that the circuit board was presented as a vital piece of evidence in the conviction of Mr Megrahi. Their wish for a retrial is also supported by others, such as Jim Swire, the father of one of the Lockerbie victims and a representative for some victims� families, who has said that he believes Mr Megrahi is innocent. The likelihood of a retrial has therefore increased, although for now the decision on whether to order a retrial rests in the hands of the Scottish Criminal Cases Review Commission.

However, whether or not a retrial does come about, the case is unlikely to jeopardise relations between Libya, the UK and the US. The Libyan authorities long ago accepted responsibility for the bombing and have paid the bulk of the compensation deal and have been rewarded with international political acceptance. Although the actual financial cost of the Lockerbie compensation is large (US$2.7bn), it is much less than Libya was losing under the sanctions regime and much less than the benefits Libya is reaping from the lifting of those sanctions. While the Libyan government may make noises over the fate of Mr Megrahi, particularly in the event of an acquittal, it is unlikely to want to rake up old arguments. In any event, Libya will be much more concerned with securing its removal from the US State Department�s list of countries considered to be involved in �terrorism�, an impasse over which the two states are still quibbling and on account of which the payment of the final US$540m tranche of compensation for the Lockerbie bombing is still outstanding.

Despite this last remaining hurdle, however, in every other respect relations between Libya and the US continue to prosper. From Washington�s viewpoint the advantages of deepening engagement with Libya�in particular co-operation and exchange of information in the US�s �war on terror� and more accessible oil�outweigh the disadvantages, such as concerns over democracy and human rights. For the time being at least, the US appears to have clear priorities with regard to Libya, with oil and �terrorism� trumping other issues. Reflecting this, a steady stream of senior US officials have continued to visit Libya. In June the US Treasury Department�s under-secretary for terrorism and financial intelligence, Stuart Levey, visited Libya and met with Colonel Qadhafi, as well as the finance minister, Mohammed Ali al-Huwaiz, and the governor of the Central Bank of Libya, Ahmed Munaisi Abdel-Hamid, to discuss measures to combat money-laundering. Subsequently, in July, a delegation of six members

Libyan-US relations continue to prosper

18 Libya


of the US Congress visited Libya to meet Colonel Qadhafi and attend an energy conference. Their visit was ostensibly against the wishes of the US State Department, but the delegation nonetheless travelled on a US military jet. Justifying the visit, one member of the delegation, a Republican congressman, Mark Souder, explained succinctly that Colonel Qadhafi �wants to become an energy player, and, simply put, we need oil�.

Following these visits, in August the chairman of the US Senate Foreign Relations Committee, Richard Lugar, spent two days in Libya during which he also met Colonel Qadhafi. Afterwards, Mr Lugar confirmed that US and Libyan officials were working towards reopening embassies in each other�s country, and ending the US designation of Libya as a country involved in �terrorism�. Mr Lugar said that he had told Colonel Qadhafi that the US was committed �to a continually improving relationship� as co-operation between Libya and the US grew. However, as Mr Lugar subsequently revealed, Colonel Qadhafi took the opportunity to complain that Libya had not received enough in return for renouncing its programmes to develop weapons of mass destruction (WMD). According to Colonel Qadhafi, Iranian and North Korean officials had asked him what he had got in return for the renunciation, and he had answered nothing. When Mr Lugar asked Colonel Qadhafi what sort of reward he had been expecting, Colonel Qadhafi answered that he had wanted sophisticated weapons from the US and the UK and, rather inexplicably, nuclear technology for turning seawater into drinking water.

These remarks highlight Colonel Qadhafi�s trademark eccentricity, as well as his disingenuousness. Libya renunciation of its WMD programmes was richly rewarded, resulting in the lifting of US and EU sanctions and securing the country�s political and economic reintegration into the global community. More recently, in late August, the US also signed an agreement with Libya on using nuclear technology for peaceful purposes.

Mr Lugar returned to Washington with an invitation for the US president, George W Bush, and the US secretary of state, Condoleezza Rice, to visit Libya. A visit by the US president is a non-starter, although following Ms Rice�s meeting with the Libyan foreign minister, Mohammed Abderrahman Chalgam, in New York on the sidelines of the UN summit, there is a possibility of her visiting Tripoli in the future should the two countries finally fully normalise their relationship. Indeed, rumours have already started circulating that she will travel to Libya sometime before the end of the year. At the meeting, according to a spokesman, Ms Rice �reaffirmed the US commitment to working to broaden and deepen the relationship between Libya and the US,� while also stressing the need for more progress on democratic and human rights reforms. With regards to opening a full diplomatic mission in Tripoli, the spokesman was quick to assert that �we�re not at that point yet�.

The case of six medics�five Bulgarians and one Palestinian�sentenced to death for allegedly infecting some 400 children in Benghazi with HIV remains the key stumbling block in relations between Libya and the EU. In May a Libyan court postponed until November a hearing of the defendants� appeal against the death sentence that was passed on them in 2004. The defendants are widely

Ms Rice meets Mr Chalgam

Obstacles remain over relations with Europe

Libya 19


believed to have been unfairly convicted, and Bulgarian and European officials have long been looking for ways to resolve the case. In August the Bulgarian foreign minister, Ivailo Kalfin, said that Bulgaria would not pay �blood money� (known as diyya in Islamic law) to the victims� families to secure the release of the medics, as to do so would mean accepting guilt. Some of the victims� families had in any case indicated that they were unwilling to accept blood money. However, Mr Kalfin reiterated that the Bulgarian government was willing to give assistance to Libya on humanitarian grounds, provided that this was not considered to be an indemnity.

Although the case has dragged on for longer than the defendants and the Bulgarian authorities may have expected, international support for the Bulgarian government�s efforts to secure the release of the medics has been building. Notably, the US has indicated to Bulgarian officials that it will not normalise relations with Libya until the case is resolved. Meanwhile, in July, the European Commission released �1m (US$1.2m) in funding for its �HIV Action Plan for Benghazi�, a programme it agreed with the Libyan government to provide policy advice and technical support on dealing with HIV and AIDS, as well as help to upgrade to international standards the Benghazi Centre for Infectious Diseases and Immunology. Officially, this assistance is not connected to the Commission�s efforts to secure the release of the Bulgarian and Palestinian medics. However, the connection between the two is plain enough, and the Commission will be hoping that as its aid programme progresses a solution to the medics case will be reached.

Relations with Europe�most notably with Italy�also continue to be strained by the issue of migrants crossing the Mediterranean from Libya and landing illegally on Italian territory. The scale of the problem is extensive: according to the Sicilian coastguard, on one day alone in July, some 800 migrants landed in four separate groups in different locations. The same month, the Maltese navy announced that it had captured some 60 small boats, each 6 metres long and capable of carrying 25 people, which it believes have been used for smuggling migrants from Libya to Italy via Malta. However, these boats evidently represent only a fraction of the overall number of vessels being used to transport migrants across the Mediterranean. All the while, the Italian government has been frustrated by what it considers to have been excessive Libyan demands for material assistance in return for its co-operation. For its part, the European Commission has insisted that any EU aid to help Libya deal with illegal immigration must be dependent on human rights guarantees.

There are emerging signs, however, that Libya may become more co-operative over illegal migration. In early July Libya and the EU held their first �technical� meeting on the subject of how to prevent the deaths of migrants crossing the Mediterranean, at which they agreed to start preparations for joint search and rescue exercises, to begin in 2006. The same month, the Italian interior minister, Giuseppe Pisanu, paid a surprise visit to Libya in an attempt to revive discussions. At the same time the Italian and Libyan navies completed their largest joint naval exercise in the Mediterranean since the two countries resumed joint annual exercises in 2002. The exercise, called Nurs-2005, was intended to develop naval co-operation in order to enhance maritime security

Illegal immigration remains a problem

20 Libya


and prevent smuggling. Later that month, Tripoli also hosted an international conference on maritime security in the Mediterranean, convened by the QICF and the Advisory Committee on Protection of the Seas (ACOPS), a London-based international non-governmental organisation. The conference included representatives from Britain, France, Italy and the US, as well as Libya, and although it produced no tangible outcomes, it was seen as an important step in fostering dialogue.

Nevertheless, although enhancing naval capabilities will help tackle part of the problem, it fails to challenge the core issue. Libya�s economy employs large numbers of migrant workers, who come mostly from sub-Saharan Africa and who perform the menial tasks that most Libyans refuse to do. For the fore-seeable future Libya will continue to need its large migrant worker population; indeed, the demand for migrant labour has been boosted by the surge in oil revenue, which is contributing to a marked growth in the construction sector, the industry in which most migrants are employed. In addition, Colonel Qadhafi is showing no signs of wanting to renounce his Africa policies, which include the espousal�at least in theory�of the free movement of people within Africa, making Libya easily accessible to economic migrants from south of the Sahara. Its proximity to Europe makes it all the more attractive.

Persuading Colonel Qadhafi to curb some of his African policies, based on a somewhat fanciful vision of a united states of Africa, will be difficult and require considerable concessions from the EU. Africa provides a stage on which Colonel Qadhafi has real influence and power and he is unlikely to give it up easily. He remains fully engaged in the affairs of the continent; indeed, much more so than those of the Arab world.

Most recently, Colonel Qadhafi promptly added his voice to that of the chairman of the African Union (AU), Olusegun Obasanjo, in condemning the coup in Mauritania in August, and calling for a swift restoration of con-stitutional government. Libya�s support of AU policy, which pledges to uphold democratic principles, contrasts with accusations made by the overthrown Mauritanian government that Libya was involved in several previous coup attempts in Mauritania. However, there was never any clear evidence of Libyan involvement in previous incidents, and there was no suggestion of Libyan involvement in the August coup. With Libya at the time also chairing the Arab Maghreb Union (AMU), the Libyan foreign minister, Mohammed Abderrahman Chalgam, and the secretary-general of the AMU, Habib Boulares, flew to Nouakchott to meet with the new Mauritanian president, Colonel Ely Ould Mohammed Vall. After hearing Colonel Vall�s assurances, Mr Chalgam tactfully said that Libya approved of the change of government in so far as the Mauritanian people supported it.

Meanwhile, elsewhere in Africa Libya has continued its attempts to consolidate its reputation. In August the Tanzanian government announced that Libya had agreed to cancel US$102m in debts owed by Tanzania to Libya, thereby halving its debt to Tripoli. The Libyan authorities agreed to the cancellation on the condition that the resulting savings would be spent on education, health and water. The same month, the Libyan authorities also agreed to waive price

Efforts continue to consolidate reputation in Africa

Libya 21


increases on jet fuel needed by UN aid agencies, including the World Food Programme (WFP), for airlifting humanitarian supplies from Libya to Darfur. The price of jet fuel was due to rise from US$0.13/litre to US$0.33/litre, an increase that would have cost the WFP an extra US$1.5m a month. Such gestures contrast strongly with Libya�s past reputation in Africa, where it was widely believed to have assisted armed opposition groups in a number of countries and fomented coups in others. Its more supportive policies are partly designed to improve its credentials with the West, as well as to gain influence across the continent.

Libya continues to give much less priority to its relations with the Arab world than to its relations with the West and Africa. Colonel Qadhafi seems to enjoy antagonising the Arab League and sometimes other Arab leaders. However, he and his government are careful not to jeopardise relations entirely, and in the end most differences are diplomatically smoothed over. Relations with Saudi Arabia are the latest example. In August the new Saudi ruler, King Abdullah bin Abdel-Aziz al-Saud, announced the pardon of five Libyans accused of involvement in a plot to assassinate him. The next month, the Libyan deputy foreign affairs minister, Hassuna Shawish, announced that Libya had told the Arab League that it was ready to restore diplomatic relations with Saudi Arabia. Nevertheless, even if diplomatic ties are restored, they are likely to remain frosty, with little love lost between Colonel Qadhafi and King Abdullah.

It is likely that Libya�s relations with its Arab neighbours may be tested again shortly, with growing rumours that Colonel Qadhafi is considering visiting Israel. The move will come as a surprise to many, since Colonel Qadhafi has been an outspoken critic of Israel in the past, and one that the Israeli government for many years believed to be a serious threat to its security. More recently, however, he has been touting his own unique solution to the Israeli-Palestinian conflict based on a bi-national state called �Isratine� and he was quoted as calling both Israelis and Palestinians �idiots� for being unable to sort out their differences.

It is unclear exactly what Colonel Qadhafi would achieve by visiting Israel, apart from a spectacular opportunity for grandstanding and handing the Israeli government an unsurpassable public relations coup. While seriously antagonising many of his Arab neighbours, a visit would no doubt earn him a degree of extra credit in Washington and would help smooth the path towards Libya�s inclusion in the EU�s Euro-Mediterranean Partnership programme (for which recognition of Israel is a prerequisite). However, with the likelihood that he would receive nothing tangible in return, it would appear that the idea of a visit appeals more to his sense of grand occasion and showmanship than to any deeply considered political strategy.

Economic policy

The Ministry of Finance is very poor at disseminating up-to-date data on the government�s budget and fiscal position. Despite the absence of information, however, it is evident that the government�s fiscal position remains very strong,

Relations with Arab world are steady

Fiscal surplus set to double

22 Libya


thanks to the high oil revenue generated by the combination of greatly increased oil prices and a rise in output. The Economist Intelligence Unit estimates that average oil prices in 2005 will be about 48% higher than in 2004, and more than double the 2003 average. By August monthly average output, at 1.65m barrels/day (b/d), was 4% higher than the same period a year earlier. We estimate that average annual production will remain around the August level, which will entail a rise of around 6% on the previous year. With around 75% of total government revenue accruing from oil receipts, these developments in the oil sector will drive a marked expansion in government income, which should increase from an estimated LD22.2bn (US$17bn) in 2004 to LD33.9bn in 2005. This rise will more than offset increases in budgeted and unbudgeted spending in 2005 and is likely to result in a doubling of the fiscal surplus to almost LD14bn, equivalent to a massive 29% of GDP.

In January the General People�s Congress passed a new law, No. 2 of 2005, on combating money-laundering. The law was drafted with international assistance and is designed to start the process of bringing Libya into line with international standards regarding banking sector oversight and combating money-laundering. Until the introduction of the law, Libya did not have any clear mechanism for dealing with money-laundering, and public scrutiny of the banking sector has been minimal. The new law is therefore a welcome addition and will help to mitigate US and international pressure to clamp down on money-laundering that may support �terrorist groups�. However, the law is also timely given that the government is currently trying to overhaul the banking sector by privatising a number of state-owned banks and inviting in foreign banks.

At the time of its approval, few details regarding the law were published and it is only now that more information is coming to light. Under the new legislation, the Central Bank of Libya is required to establish a Financial Information Unit and a subsidiary unit for information on money-laundering, which will be responsible for gathering data and monitoring all banking and financial sector activities and transactions. The bank should also prepare relevant bylaws and establish an inter-departmental National Committee for Combating Money-Laundering. The committee should be chaired by the Central Bank governor or his deputy, and should comprise representatives from the ministries of economy and foreign trade, finance, foreign affairs, justice and public security, as well as from the customs and tax authorities and the Central Bank. It should also include at least one person from the government financial and technical supervision committee.

Although the enactment of the new law is a positive signal of intent by the government, the Central Bank faces a long uphill struggle if it is to implement these measures in a meaningful way. The base from which it starts is one of minimal financial transparency, both in the banking sector and in fiscal and monetary policy and operations. However, over the past two years there have been some glimmers of progress, exemplified by the government�s co-operation with the IMF and the publication of the reports on the IMF Article IV consultations.

New measures to improve banking sector oversight

Libya 23


In September the Libyan authorities announced that they intend to privatise the National Company for Feed and Mills (NCFM), a state-owned enterprise that operates 15 plants producing animal feed, milling wheat and pasta. According to the government, NCFM is worth US$219m and employs 1,664 workers, who are to be offered 10% of the shares in the company. NCFM is reportedly the second-largest Libyan public enterprise to have yet been put up for privatisation, after the Arab Cement Company earlier this year. Aside from these points, the lack of other publicly available information about the privatisation of NCFM makes it difficult to assess its divestment, particularly who might be likely buyers. Similarly, no further information has yet come to light about the government�s proclaimed privatisation of the Sahari and Wahda banks (July 2005, page 26), nor is it clear how far the authorities have progressed with the wider privatisation programme, in which some 360 public-sector entities were slated for divestment in a plan launched in January 2004.

Narrow money supply (M1) growth in the 12 months to May slowed slightly compared with the annual rate of expansion witnessed at the end of the first quarter of the year, a period during which M1 growth had accelerated at an unprecedented rate of over 27%. Despite the slowdown in April and May, however, the amount of money in circulation, at around LD10.7bn, is almost 60% greater than in 1998, the year before the suspension of UN sanctions. Quasi-money supply also continued to expand, following six months of contraction at the end of last year, helping to fuel continued rapid growth in broad money (M2), which expanded by over 16% year on year. The strong increase in money supply growth is likely to be directly linked to record oil earnings and, more broadly, to the associated rise in government spending as well as the booming economy.

Money supply (LD m unless otherwise indicated; end-period)

2004 2005

1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr May

M1 8,351.5 9,175.6 9,245.5 9,909.5 10,652.8 10,653.8

% change, quarter on quarter 0.1 9.9 0.8 7.2 7.5 0.0a

% change, year on year 6.8 17.6 13.4 18.8 27.6 16.1

Quasi-money 2,579.4 2,428.9 2,312.4 2,542.9 2,845.4 2,846.4

% change, quarter on quarter 0.4 -5.8 -4.8 10.0 11.9 0.0a

% change, year on year 26.0 22.0 -3.8 -1.0 10.3 17.2

M2 10,930.9 11,604.5 11,557.9 12,452.4 13,498.2 13,500.2

% change, quarter on quarter 0.2 6.2 -0.4 7.7 8.4 0.0a


a % change between end-March and end-May.

Source: IMF; International Financial Statistics.

Although the rate of domestic credit growth is continuing to slow, the government is still depositing more with the monetary authorities than it is borrowing. This situation has existed since January 2003, when oil prices started to rise in the run-up to the US-led invasion of Iraq, and reflects the windfall that the government is continuing to enjoy from sustained high oil prices. This is the primary cause of continuing negative domestic credit, an

Information about privatisation remains scarce

Money supply growth soars

Domestic credit still negative

24 Libya


anomalous situation in which the government�s borrowing has been curtailed by the massive inflows of petrodollars into the economy.

Of continuing note is the sluggish growth in the private sector, which, despite picking up somewhat over April and May, remains lacklustre, reflecting the lack of economic activity outside of the state-controlled enterprises.

Domestic credit (LD m unless otherwise indicated; end-period)

2004 2005

1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr May

Claims on central government (net) -5,569.4 -13,616.7 -15,940.3 -18,700.5 -21,239.5 -23,332.0

% change, quarter on quarter 33.8 144.5 17.1 17.3 13.6 9.9a


Claims on non-financial public enterprises 9,978.1 10,911.6 11,424.0 10,953.1 11,710.3 12,067.8

% change, quarter on quarter 11.4 9.4 4.7 -4.1 6.9 3.1a


Claims on private sector 4,309.4 4,343.1 4,398.2 4,452.3 4,435.8 4,579.5

% change, quarter on quarter -3.4 0.8 1.3 1.2 -0.4 3.2a

% change, year on year 6.5 7.5 0.2 -0.2 2.9 2.4

Domestic credit 8,876.2 1,881.4 142.6 -3,052.5 -4,862.1 -6,487.6

% change, quarter on quarter -5.6 -78.8 -92.4 -2,240.6 59.3 33.4a

% change, year on year -15.0 -79.9 -98.6 -132.5 -154.8 -453.5

a % change between end-March and end-May.

Source: IMF, International Financial Statistics.

The Libyan dinar remains stable, only fluctuating in line with the slight variations in the value of the IMF�s special drawing rights, against which it is pegged. In late September the exchange rate was averaging around LD1.32:US$1, unchanged since July. With the Central Bank sitting on very large foreign reserves (equivalent to more than 30 months of import cover in June), the exchange rate is expected to remain stable for the foreseeable future.

The domestic economy

Oil and gas

Crude oil prices have continued to surge, averaging US$50/barrel in the first half of 2005 and breaking through US$60/b in early August. In the aftermath of the damage caused by Hurricane Katrina to oil rigs and refineries in the Gulf of Mexico and the southern US, oil prices rose still further, hitting a new peak of US$70/b. This brought crude prices close to the record real (inflation-adjusted) price of about US$80/b experienced in 1979. By the end of September, prices had eased slightly, settling at around US$61/b.

Climatic conditions aside, the main short-term reason for the continuing upward trend over the third quarter was the tight market for gasoline (and, to some extent, diesel) in the US and Europe, which together account for about 50% of global oil consumption. More structurally, demand has been very strong (particularly in China), with supply barely keeping pace. However, with increasing OPEC production having led to a build-up in inventory levels,

Oil prices soar

Exchange rate remains stable

Libya 25


especially of crude, which now stand well above their five-year average, (sufficient to ease concerns in the market about potential supply disruptions), the real pressure on oil prices has come from a bottleneck in refining capacity. Indeed, one sign of how well the crude oil market was still supplied came in early September when the US government found that it could sell only one-third of the amount it had believed necessary from its strategic petroleum reserve.

On the demand side, the Economist Intelligence Unit forecasts that global oil consumption will grow by 2.1% in 2005. This is a slowdown from the heady 3.4% growth rate experienced in 2004 and reflects the expected moderation in global GDP expansion. However, it is still a relatively robust rate when compared with the average annual demand growth rate of 1.5% since 1990. China is the single most important country behind the rapid growth in demand. All told, we expect the price of the benchmark dated Brent Blend to average US$57/b in 2005, and US$56.3/b in 2006, as OPEC production gradually rises and global stocks continue to build. However, there remain substantial upside price risks, owing to higher than expected demand or politically driven supply disruptions.

By the time of the OPEC meeting on September 19th, the price of Brent had already eased to around US$63/b, after the spike caused by Hurricane Katrina. Nonetheless, OPEC ministers decided to make available to the market for a period of three months�should it be required�an extra 2m barrels/day (b/d) above its quota of 28m b/d. In truth, the announcement carried little weight since the cartel also acknowledged that its members were estimated to be currently producing over 30m b/d and that production is close to capacity. With OPEC�s producers also unable to deliver the lighter, low-sulphur crude that the market is demanding, the cartel�s ability to bring prices down is limited. It was noted at the conference, however, that member countries are implementing costly investment plans to accelerate the expansion of crude production capacity from about 32.5m b/d to at least 38m b/d by 2010, to meet future demand growth.

OPEC increases quota

26 Libya


Libya is one of the OPEC members producing almost to capacity and has maintained its output at around 1.66m b/d, which is about 11% higher than its quota of 1.5m b/d, over the past two years. Libya has long been pushing for a greater share of OPEC�s overall production, since it is seeking to attract sufficient investment into its hydrocarbons sector in order to regain its pre-sanctions production levels of over 3m b/d. However, with Libya�s recent output near to its current estimated full capacity of 1.7m b/d, and the National Oil Corporation (NOC) unable to increase capacity to over 2m b/d for at least another year, recent calls for higher quotas have been muted.

Indeed, Libyan officials and in particular the energy minister, Fathi bin Shatwan, appear to be ambivalent over the balance between prices and quotas, with Libyan officials recently suggesting that the organisation should be prepared to cut its quotas if oil prices fall below US$40/b. In August the NOC raised prices for most grades of Libyan oil by between US$0.25/b and US$0.40/b. The NOC left prices unchanged in September, with all grades selling at between US$0.80/b and US$2.15/b less than Brent, with the exception of Esharara, which is currently priced at US$0.40/b above Brent.

For some time the NOC has been talking of a target production capacity of 3m b/d by 2010. Even given the surge in investment and exploration since sanctions were lifted, and the award of new exploration and production licences, the timetable is unrealistic. In the longer run, however, 3m b/d is certainly possible, provided the operating environment remains stable and secure and OPEC�s quota regime allows such an expansion. Despite the significant recent increases in Libya�s capacity and output�average output has risen by some 200,000 b/d since 2003�the country is still under-producing relative to its share of proven oil reserves and past production levels. Today its proven oil reserves are estimated at 39.1bn barrels, which is about 3.3% of the global total, but its current average output of almost 1.7m b/d represents only 2% of total global production. With Libya also offering low extraction costs, good oil quality and proximity to markets, the NOC targets are certainly achievable, and Libya is destined to become a key producer in the years to come.

The Libyan authorities are due to announce on October 2nd the results of the licensing round launched in May for 17 concessions covering 44 blocks spread across the Cyrenaica, Ghadames, Kufra, Murzuq, Sirte and offshore basins. International interest in this round has been particularly wide, reflecting the large number of licences on offer�nearly three times as many as in the previous round�and the expectation that there would be a broader spread of winners than in the previous round, in which US companies won the lion�s share. As of September the NOC was understood to have pre-qualified 66 of the 97 foreign firms that originally expressed interest in the blocks. Bidders included many of those that bid in the earlier round, ranging from US and European companies to Petrobras of Brazil and the Indian Oil Corporation and Oil India Ltd, as well as other Asian firms. Contracts for this round are due to be finalised in the second half of November.

Libya patient over its quota

Potential capacity growth is still great

New raft of awards imminent

Libya 27


This latest licensing round is the second under the open bidding process that the NOC adopted in 2004, and uses Libya�s new exploration and production-sharing agreement, EPSA-IV. This time, however, the size of the blocks on offer average around 4,000 sq km, which is less than half the average of 8,500 sq km in the earlier round. The rationale for this is that the distribution of more licences should, the NOC hopes, result in more exploration. Under the terms of the EPSA-IV, if companies fail to make a discovery in five years, they must return the acreage to the NOC. Furthermore, licence-holders can only subcontract other companies to work on the field once they have themselves fulfilled 50% of their spending and work commitments.

Although the two licensing rounds under the open bidding process have been successful, at least in terms of competition, Mr Shatwan has continued to disagree with the NOC chairman, Abdullah Salem el-Badri, about the optimum way of allocating exploration and production licences. Mr Shatwan would prefer to see a return to directly negotiated concessions, which offer more scope to be selective about which companies take on what work, but so far Mr Badri has had the support of the prime minister for using the open bidding process. However, both the NOC and the Ministry of Energy appear to be increasingly concerned about how to encourage more development of existing infrastructure and more downstream investment. As a result, there are suggestions that the NOC may launch a licensing round in late 2006 or early 2007, in which it will award development and production-sharing agreements designed to attract investment in run-down fields.

Despite the large number of new awards in 2005, and the apparently more open bidding process, some foreign oil and gas companies have been exploring the option of partnerships with firms already operating in Libya, in order to facilitate their entry into the country. In July Shell, the Anglo-Dutch oil group, signed a Memorandum of Understanding with Liwa, a UAE company that is a partner with Occidental, a US oil firm, on the licences it won in January. Shell�s partnership appears to be intended to help it finalise an agreement with the NOC on exploring five blocks in the Sirte basin. Similarly, Gazprom, the Russian gas giant, has reportedly been exploring the possibility of teaming up with Total, the French oil group, in order to improve its chances of gaining acreage in Libya. Total is well-established in Libya, and Gazprom already has links with two other oil companies involved in Libya�Soco, a British firm, and Oilinvest, a Libyan company�through a joint venture called Odex. However, according to the London-based Middle East Economic Digest (MEED), Odex has been trying since 2004 to get the NOC to award it six onshore concessions, without success.

With the steady improvement in relations between the US and Libya, US oil companies are well-placed to resume or start operations in Libya. In July Occidental received the final go-ahead from the Libyan authorities to resume operations in the four blocks it had held in Libya before 1986, when sanctions forced it to leave the country. The chairman of Occidental, Ray Irani, also confirmed that�as expected�there is �significant potential for future production growth through new investment in enhanced oil recovery projects�. With the addition of the shares it won in nine new blocks awarded in January,

NOC may change licensing approach

Foreign companies look for partners

US oil companies are well-placed

28 Libya


Occidental now has an interest in some 130,000 sq km of oil and gas acreage, more than any other foreign company. It is also understood to be bidding in the current licensing round.

Compared with Occidental, the other firms comprising the US Oasis consortium�Amerada Hess, Conoco and Marathon�have had a longer struggle to secure the go-ahead from the Libyan authorities. In February the General People�s Congress rejected their application (it is not clear on what basis), and despite subsequent talks and optimistic pronouncements from the companies (who hosted a dinner for Libya�s foreign minister, Mohammed Abderrahman Chalgam, while he was in New York in mid-September), as of end-September no agreement had been finalised. However, it is unlikely that the firms will have to wait much longer: ultimately, Libya only stands to benefit from Oasis resuming the operation of its holdings, and the NOC is probably only holding out to get the best possible deal.

After several years of trying to find a buyer for two concessions that it has held in Libya since the 1990s�Block NC100 in the Ghadames basin and Block NC101 in the Murzuq basin�the state-owned Bulgarian Oil Company (BOC) has finally lost its Libyan holdings. The concessions had been due to expire in March, but the NOC gave the BOC a three-month extension to find a buyer. In June, however, the NOC ruled that the concessions had expired. The NOC will probably now try to sell the concessions directly to a new investor, or alternatively include them in the next licensing round (which has yet to be announced).

The failure to sell the concessions will have been a disappointment to the Bulgarian government, which claims to have spent US$150m exploring the concessions, although they remain undeveloped. As such, they should attract a buyer, given the interest in the Libyan market and, for that reason, it seems rather strange that the Bulgarians were unable to sell them. The matter will not have helped relations between the two countries, which are still locked in an ongoing dispute over the fate of five imprisoned Bulgarian medics (see The political scene).

In August the NOC and Eni, an Italian oil firm, commenced trial production from the Bahr Essalam gasfield, the offshore component of the massive Western Libya Gas Project (WLGP). Onshore production from the project began in October 2004 and since the start of 2005 has been running at 4bn cu metres/year. When the offshore field comes fully on stream it should add around 6bn cu metres/y, bringing the total output from the project to 10bn cu metres/y, as planned. Of this output, 8bn cu metres/y will be exported to Europe by the undersea Greenstream pipeline between Libya and Sicily, which has until now been carrying just the onshore output. The remaining 2bn cu metres/y will supply the domestic market in Libya.

The WLGP is proving to be an excellent advertisement for Libya�s gas sector. Although the attention of major foreign energy companies has focused mostly on the prospects for Libya�s oil sector, the outlook for its gas sector is just as good, if not better. Libya�s proven gas reserves are estimated at 52.6trn cu ft,

Bulgaria loses concessions

Phase 2 of Western Libya Gas Project comes on stream

Libya 29


which is about 0.8% of the global total. However, its unproven reserves are estimated to be as much as double this amount. In 2004 total production was only around 7bn cu metres, equivalent to just 0.3% of total global output, although its total production will now have increased because of the WLGP. The gas exploration deal announced in May by Shell has the potential to lead to a further substantial increase (July 2005, The domestic economy: Oil and gas).

The positive prospects for the gas sector are being bolstered by gradual progress on existing gas infrastructure developments. In August the Waha Oil Company, a subsidiary of the NOC, requested revised bids by the end of the month from three foreign companies�Athens-based Joannou & Paraskevaides, Bonatti of Italy and MAN of Germany�for the second phase of development of the Faregh gasfield, 200 km south of Tripoli. The original scope of the project, which will cost an estimated US$200m, was the construction of a 180m-cu ft/d gas processing plant next to existing oil production facilities. The revision is understood to cover an increase in the planned capacity of the plant and arrangements to use more US suppliers on the project, at the expense of European companies. The planned initial output from the plant is 47m cu ft/d.

Progress is also being made towards the award of contracts for the construction of a 120-km pipeline from Melitah to Tripoli and the completion of a 160-km pipeline from Khoms to Tripoli. The contracts, which are expected to be worth around US$100m and US$170m respectively, are likely to attract considerable competition, with some 14 foreign companies expressing an initial interest. Technical and commercial bids were due to be submitted to the Sirte Oil Company (SOC), another subsidiary of the NOC, by mid-September, with the SOC expected to announce imminently a short list of five bidders. Meanwhile, Zueitina (another NOC subsidiary) has asked five short-listed companies to submit final revised prices for the construction of a 215-km gas pipeline between Zueitina�s supply base on Block 103A in the Sirte basin and the Brega coastal pipeline. The bidders for the pipeline, which is expected to cost around US$70m-80m, are Bonatti, Joannou & Paraskevaides, MAN, Petrojet of Egypt, and Punj Lloyd of India.

In September the prime minister, Shokri Ghanem, confirmed that Libya wants to sell 60% of Tamoil, an oil refining and distribution firm that is owned by Oilinvest, a Netherlands-based but Libyan state-owned company. Tamoil has refineries in Hamburg (Germany), Cremona (Italy) and Collombey (Switzerland), as well as distribution networks in a number of European and African countries. However, the company has also made a number of bad investments in Africa in recent years, although in 2004 its total sales were still worth �7.8bn (US$9.4bn).

The government has not publicly explained its thinking behind the proposed divestment of Tamoil. Talks were reportedly held with a potential Italian buyer in April, but in September the NOC chairman said that consultants were still working on finding potential foreign or local buyers. If the sale eventually goes ahead it will be the first example of privatisation of a Libyan state-owned enterprise in the hydrocarbons sector. Such privatisation was mooted by the Libyan leader, Muammar Qadhafi, in 2004, when he called for Libya�s

Government confirms intent to sell majority stake in Tamoil

Gas infrastructure development makes progress

30 Libya


economy to be modernised. However, it is unlikely that it will be extended to Libya�s more profitable upstream oil and gas companies, either now or in the near future.

Libya 31


Infrastructure

In early August it was reported that the Great Man-made River Authority (GMRA) had awarded a total of nearly US$2bn of contracts for the third phase of the Great Man-made River Project (GMRP). The largest contract, worth some US$1.1bn, went to SNC Lavalin, a Canadian company that has a long track record of working on the GMRP. The contract covers a four-year extension to SNC Lavalin�s operation of a pipe manufacturing plant at Sarir, in eastern Libya, and the supply of pipes for a 383-km pipeline from the Kufra wellfield to Sarir. The engineering, procurement and construction contract for the pipeline was awarded to Tekfen of Turkey and is scheduled to be completed in five years at an expected cost of around US$700m. The GMRA awarded a further contract jointly to Oztas of Turkey and the North General Contracting Company, a local firm, for the construction of a 116-km pipeline extension to the GMRP Phase 1 pipeline, to run between Abu Ziyyan and Al Ruhaybat, near Tripoli. The contract, which is worth around US$140m, covers the procurement, supply and installation of glass reinforced plastic piping and the construction of 44 concrete water tanks.

The GMRA has also awarded two contracts related to the main intended end-use of water supplied by the GMRP, namely agriculture. According to MEED, Brown & Root North Africa, a UK-based company of US origin, has been awarded a one-year contract to project manage the completion of the largest reservoir on the GMRP, the 24m-cu metre Omar el-Mukhtar reservoir, which will supply water for agriculture in the Benghazi area. The other contract, worth LD58.3m (US$44.8m), to design, supply and build five 86,000-cu metre water storage tanks, was awarded to a joint venture between two Indonesian firms, Citramegah Karya Gemilang and Inti Karya Persada Tehnik. The contract is expected to take 28 months. The water tanks will be at a site 40 km south of Tripoli and are intended to be used in a coastal areas agricultural programme.

It remains to be seen whether these two latter projects will contribute to any agricultural growth. Originally, the main intended purpose of the GMRP was to support a massive expansion of agriculture. That plan, like many others in Libya, has so far proved wildly over-ambitious. However, it is still easily within the capacity of the GMRP to support some agricultural expansion, although this will depend to some extent on the implementation of appropriate agricultural schemes and policies.

According to MEED, the municipal authorities in Misurata, Libya�s third-biggest city, have awarded a US$35m contract to STFA of Turkey to upgrade the city�s drainage and sewerage network in order to improve sanitation. The contract will run for four years and includes modernisation of the city�s existing wastewater pump-houses. Meanwhile, the municipal authorities in Benghazi, Libya�s second-largest city, have awarded a consultancy contract to Brown & Root North Africa for the upgrading of the city�s water supply and wastewater systems. Such an upgrade is long overdue: over the past two decades the lakes surrounding Benghazi have become increasingly polluted, and as a result a stench of untreated wastewater often blows across parts of the city. However,

Contracts for Phase 3 of GMRP awarded

Waste management still wanting for investment

32 Libya


the contract only covers the development of a new water network, based on a masterplan devised by Brown & Root North Africa in the early 1990s. A clean-up may therefore still be some way off.

In addition to the issue of wastewater, Benghazi suffers from a rubbish manage-ment problem, which has yet to be tackled. Unofficial rubbish dumps litter the city, its surroundings and the neighbouring Jebel Akhdar area. As a result, the city and its lakes offer few recreational attractions, despite their potential, either for residents or for tourists visiting the classical sites of Cyrenaica�indeed, the lakes are a far cry from the legendary ancient Gardens of the Hesperides, which are reputed to have been located there. Elsewhere across Libya, the manage-ment of waste disposal is similarly poor. This is partly because of neglect and poor budgeting; but most of all it reflects the lamentable state of public services in Libya and a disillusioned public whose weary acceptance of inadequate municipal service delivery has long since diminished their expectations.

In July Libya�s General Electricity Company (GEC) short-listed three bidders for the engineering, procurement and construction contract for the planned 750-mw Misurata power plant, west of Tripoli. The bidders included two US companies, Bechtel and Black & Veatch, the latter bidding jointly with Gama of Turkey. The third bid was from Hyundai Engineering and Construction, a South Korean company that has already done much construction work in Libya�s hydrocarbons and power sectors. Notably, Hyundai has been contracted to convert the Zawia power station near Tripoli to gas and to expand its capacity from 660 mw to 810 mw. Meanwhile, in June the Korean Electric Power Corporation signed a 32-month co-operation agreement with the GEC. South Korean involvement in the power sector therefore looks set to continue, whether or not US companies now make inroads.

Foreign trade and payments

In July the Libyan authorities clarified that they would lift customs tariffs (ie, import duties) on all goods except cigarettes with effect from the start of September. According to the economy and foreign trade minister, Abd al-Qadir Bilkhair, the old scheme of customs tariffs�covering some 3,500 items�had earned the state around US$462m a year. The aim of lifting the tariffs was �to boost the country�s role as a services importer and encourage re-exports and transit�. The authorities have indicated that they aim to make up the lost revenue through direct taxes; some of this may come from a 4% tax on service imports, which the government has indicated it intends to introduce.

Libya�s main overseas investment agency, the state-owned Libyan Arab Foreign Investment Company (Lafico), recently signed an agreement with a Brazilian construction firm, Norberto Odebrecht, to carry out a feasibility study for a 60,000-ha irrigation project in the Brazilian state of Bahia. The rationale behind this potential investment is unclear, but would be in keeping with Libya�s eclectic approach to overseas investments, which range from valuable shares in Italian companies and football clubs, to small investments in mineral interests, agricultural schemes and hotels in Africa. Like most public entities in Libya, it is

US companies make a short list for Misurata power plant

Customs tariffs replaced with service import tax

Overseas investments are diverse

Libya 33


unclear how Lafico and Libya�s other main overseas investment body, the Libyan Arab African Investment Company, are funded, and whether for example they receive funding from the Ministry of Finance�s �oil reserve fund�. However, with Libya currently earning record levels of hard currency as a result of high oil prices, it is likely that Lafico will be seeking additional new investments.

Libya�s foreign reserves continue to grow strongly. After surging by over 30% in both 2003 and 2004, Libya�s holdings of dollars grew by a further 19% in the six months to June, which would equate to annualised growth of just under 40%. The jump in the rate of expansion has coincided with the rapid rise in oil prices.

Reserves (US$ m unless otherwise indicated; end-period)

2005

2000 2001 2002 2003 2004 Juna

Total reserves excl gold 12,461 14,800 14,307 19,584 25,689 30,596

% change 71.2 18.8 -3.3 36.9 31.2 19.1

a % change between end-2004 and end-June.

Source: IMF; International Financial Statistics.

Reserves continue strong growth

libya - country report 2005

Documents

economic policy outlook

economist building

economist group

economic reform

economic structure

economic growth

month political outlook

political structure