Previous Quarterly Editions
Expropriation Risk: 83 71 78 78 ► Political Violence Risk: 74 73 68 68 ► Terrorism Risk: 55 55 55 55 ► Exchange Transfer and Trade Sanction Risk: 82 82 82 73 ▼ Sovereign Default Risk: 75 83 75 75 ►
TREND ▼
The appointment of the interim Government of National Unity (GNU) -- Libya’s first unified executive since 2014 -- in early 2021 raised hopes that the country could move beyond seven years of civil conflict. However, slow progress towards securing a constitutional framework for elections planned for December 24 raises the prospect of the United Nations political roadmap going off track. Equally slow progress in unifying military forces and disarming militias means security volatility persists despite a ceasefire agreed last October.
Prime Minister Abdulhamid Dabaiba has struggled with the internal politics of his unwieldy cabinet, which comprises more than 30 ministers. Furthermore, he remains without a budget despite presenting a proposed spending plan to the House of Representatives in April. Instead of focusing on the GNU’s primary task of preparing the country for elections and tackling a long-standing electricity crisis as well as the COVID-19 pandemic, Dabaiba promised construction projects to local authorities across the country, raising concerns that state expenditure may balloon, and corruption become more entrenched. This partly explains why the legislature has stalled approving the budget. Dabaiba himself remains the subject of controversy due to allegations of vote-buying by his associates at the Libyan Political Dialogue Forum, where he was chosen as interim prime minister in early February.
A nine-month blockade of oil terminals and fields in 2020 meant hydrocarbons-dependent Libya recorded one of its worst economic performances last year. The National Oil Corporation (NOC) aims to increase crude production to 1.45 million barrels per day by the end of 2021.The economy is expected to rebound by 20.9% due to increased output. But tensions between NOC chairman Mustafa Sanalla and Mohamed Aoun, the GNU oil minister, have recently burst into the open, with Aoun pushing for the NOC veteran’s removal in a way that has unsettled investors.
Libya’s multiple economic challenges have been further aggravated by COVID-19. The country’s healthcare system, already close to collapse before the pandemic, is struggling to deal with a surge in coronavirus cases and needs massive investment.
The GNU is showing signs of expecting to remain beyond its original mandate. Many Libyans want to see the planned elections take place in December, but others believe they could cause an escalation in violence. With no legal framework yet in place for such a ballot, the prospect of the GNU remaining in place well into next year cannot be ruled out. Furthermore, the underlying military-political and economic divisions that have driven the civil conflict since 2014 remain capable of derailing the reunification process, as do competing external actors allied with domestic factions.
TREND ►
Dabaiba has sought to present Libya as open for business but significant obstacles to investment remain. The brittle security situation poses a substantial threat to all sectors, particularly the oil and gas industry. After years of conflict, key energy infrastructure is in a pronounced state of disrepair and requires considerable investment. Other critical infrastructure including the Man-Made River, which supplies most of the population with potable water, is also state of urgent disrepair, prompting United Nations agencies to warn of the risk of a complete collapse of water supplies.
The oil and gas sector has recently been rocked by escalating tensions between NOC chairman Sanalla and oil minister Aoun. Some observers believe Aoun is pursuing a personal vendetta against Sanalla. So far, Dabaiba appears to be siding with Sanalla, who has been NOC head since 2014. The debacle has unsettled international oil companies with a long-standing presence in Libya, given that their working relationship with Sanalla has generally been good.
In general, overhauling the hydrocarbons sector does not appear to be a priority for Dabaiba at present, though that may change if the GNU remains in place beyond December. Instead, the prime minister has been focused on reconstruction efforts, including the country’s power crisis, though he has failed to deliver tangibles, partly due to the fact he has not been granted a budget. On the broader investment front, the short mandate of the GNU meant that major deals were always more likely to be struck following planned elections in December. If that ballot does not take place, the GNU may try to push ahead with a more ambitious investment agenda for 2022.
General Khalifa Haftar’s continuing ambivalence towards the GNU is cause for concern, raising the possibility that he may resort to previous tactics including military escalation and oil blockades to assert himself. The ceasefire agreed between Haftar and his opponents in October 2020 remains fragile and confidence-building measures between the two sides have been piecemeal. The agreement to re-open the key coastal road between Misrata and Sirte was an important breakthrough, but progress otherwise remains sluggish.
Nationwide anti-corruption protests in August 2020 were a reminder that popular discontent can easily boil over. The grievances that drove those demonstrations remain unaddressed and the GNU may be faced with similar protests if it fails to improve living conditions.
Violence may also erupt during the run-up to planned elections in December, as various factions try to position themselves for Libya’s first national ballot since 2014. More generally, the security situation may not be conducive to free and fair elections, particularly in Haftar’s stronghold of eastern Libya, recently shaken by a series of assassinations.
Islamic State (IS) and al-Qaida in the Islamic Maghreb (AQIM) remain present in Libya, with their networks concentrated mostly in southern and central regions. In 2020, forces aligned with the Tripoli government and their rivals under Haftar’s command arrested high profile individuals -- including the leader of IS in Libya, Abu Moaz al-Iraqi -- and disrupted terrorist cells in several parts of the country, contributing to a decrease in attacks since.
The threat from IS remains moderate -- the group continues to maintain sleeper cells in Tripoli and other coastal cities -- while AQIM is considered largely dormant. IS has claimed a number of attacks in 2021, most of them in the Fezzan region of south-western Libya, including one in the regional capital Sebha which killed several security officers.
With Libya’s oil economy largely dependent on oil revenues, a nine-month blockade of critical oil facilities by Haftar’s forces in 2020 made it difficult for the monetary and fiscal authorities to defend the country’s currency peg. Last December, for the first time in five years, the board of directors of the Central Bank of Libya agreed to devalue the currency to LYD 4.48:USD 1.00.
This new rate is supposed to apply to all governmental, commercial, and personal foreign exchange transactions. It will also help narrow the increasing gap between black market and official rates. The central bank, divided since 2014 as a result of the wider national power struggle, has taken steps to reunify but tensions remain, particularly regarding the role of Sadiq al-Kabir, the long-serving governor. Disputes over central bank management will hamper the implementation of wider economic reforms.
To mitigate the extreme deficit caused by the nine-month oil blockade, the government slashed public sector salaries and reduced subsidies, particularly on fuel. A tax on foreign exchange sales introduced in late 2018 has also helped to ease the pressure on public finances. In 2021, the resumption of oil production will improve public accounts, but revenue streams remain vulnerable to domestic volatility and global oil price shocks.
The rebalancing of the current account deficit will alleviate pressure on Libya's foreign exchange reserves (estimated at under USD70bn in mid-2020) which the central bank used to try to maintain foreign currency supply to the market that year. Libya’s external debt is one of the lowest in the world -- estimated at 5.8% of gross domestic product in 2017 -- but domestic debt has increased significantly in recent years. Most of Libya’s sovereign wealth fund has been frozen under United Nations sanctions since former leader Colonel Muammar Gaddafi’s fall. Its assets were valued at USD67bn in 2012. Requests by the Libyan authorities to lift the sanctions have been refused because the United Nations wants to see a stable government in place before doing so.
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