Libya: Risk Assessment
Country Risk Rating
Business Climate Rating
- Large gas and oil reserves (the largest in Africa)
- Very low external debt
- Strategically located on the Mediterranean near Europe
- The country is split in two: Tripolitania in the west is run by the Government of National Accord, which is recognized by the international community and led by Prime Minister and Chairman of the Presidential Council Fayez-al Sarraj; Cyrenaica in the east is governed by the Al-Beida government led by Prime Minister Abdullah al-Thani and the Tobruk Parliament, and has the backing of Field Marshal Khalifa Haftar
- The south of the country (Fezzan) is facing an upsurge in trafficking (human, weapons, drugs) and conflict between the Tuareg and Toubou groups
- Social tensions; political and tribal fragmentation
- Poor business environment (186/190 in the Doing Business 2020 ranking)
- A large portion of the country’s infrastructure has been destroyed
Escalating tensions and a resurgence in violence
After several unsuccessful attempts at mediation under the aegis of the United Nations, the Libyan crisis seems to be deadlocked once again. Undermined by political fractures that resurfaced following the 2011 revolution and the post-Gaddafi political vacuum (caused by the intervention of France, the United Kingdom and the United States, under the auspices of the United Nations), Libya is a divided territory. Two governments continue to compete for the right to rule: the Tobruk Parliament in the east, supported by Field Marshal Khalifa Haftar’s self-proclaimed Libyan National Army (LNA), and the internationally recognized Government of National Accord (GNA) based in Tripoli in the west. Although formally the legitimate authority in Libya, the GNA has very little power over the territory and relies on Islamist militias for its defense. Following an offensive against Tripoli launched by Field Marshal Haftar in April 2019, the country plunged into a new period of open civil war between the two rival governments. After initial territorial gains by the LNA, the front lines around the capital have remained stable, with Haftar controlling the vast majority of the territory including the “oil crescent” region. Air strikes in populated areas and the use of military drones have resulted in civilian and military casualties. The conflict is also fuelled by interference by foreign powers, which are supporting either the GNA (Qatar and Turkey) or the LNA (UAE and Egypt) in breach of the UN arms embargo. Russia’s increasing involvement alongside Haftar’s troops since September 2019 could tip the balance of power.
Despite the appointment of Ghassan Salamé as head of the United Nations Support Mission in Libya (UNMIL) in 2017, which had rekindled hopes for a political resolution of the conflict, progress remains weak. The April offensive led to the indefinite postponement of the National Conference that was to be held in April 2019 in Tripoli in order to pave the way for legislative and presidential elections and a constitutional referendum. According to Mr. Salamé, the current situation could lead to the permanent division of the country. Germany is planning to hold an international conference on the future of Libya, with the aim of forcing the many foreign actors to stop financing and arming the warring parties. Berlin hopes to position itself as neutral party, as previous conferences in France and Italy have failed in part due to the interests of the two countries in Libya (oil, but also issues connected with the jihadist movement and migrants).
Economy dependent on developments in the conflict and oil activity
Oil production remained around one million barrels per day on average in 2019, allowing activity to grow for the third consecutive year. Nevertheless, the escalation of the conflict affected production, which began to fall in mid-2019 due to oilfield shutdowns. Given the current stalemate, this trend could continue into 2020, as the deterioration in security reduces the prospects for new investment in the sector and increases the risk of attacks on oil infrastructure. Thus, although oil companies continue to operate, the National Oil Corporation (NOC) has warned of possible shutdowns. The British and Italian companies, BP and ENI, have indefinitely delayed exploration projects planned for 2020 in the Ghadames Basin, which has become the scene of clashes between the LNA and militias backing Tripoli. Non-oil sectors are being hurt by the lack of resources and instability. In December 2018, the government imposed a tax on foreign exchange sales, which reduced the gap between the official exchange rate and the black market rate and slowed inflation. Household consumption could benefit from this, although high unemployment, recurrent shortages and persistently high prices are squeezing purchasing power. The shortages and high prices are largely caused by corruption and smuggling, mainly of foreign exchange and refined oil.
Substantial twin deficits
Although the LNA controls the vast majority of oilfields, only the NOC, located in the west, is authorized to export Libyan oil. The central bank, based in Tripoli, collects the revenues and distributes them to both the eastern and western governments. The increase in budgetary revenues led to a significant reduction in the government deficit compared to 2017. However, a decline in oil production, in addition to weighing on exports, would significantly limit revenues (91% of which come from oil), leading to a simultaneous deterioration in the public and external accounts. This imbalance would be exacerbated by a decline in oil prices in 2020. The security situation entails significant military spending and is scaring off foreign investors. Salary and subsidy expenditures are traditionally the largest expenditure item. In 2018, 60% of the GNA budget was allocated to salaries, including militias. The Tripoli government is expected to continue to obtain financing from the Libyan central bank, but also from Libyan assets accumulated abroad under the Gaddafi regime. Eastern institutions will remain dependent on financial support from countries such as the United Arab Emirates and Saudi Arabia. The country imports 80% of its consumption needs, including refined oil (mainly from Italy).