Libyans like to say their country will one day be seen as “Dubai on the Mediterranean” -- rich, successful and advanced. But as their country struggles with a fitful political transition from autocracy to democracy amid storms of militia violence, political squabbling and lawlessness, they are now hearing for the first time talk that Libya could go bankrupt.
That could happen in four years, according to Revenue Watch Institute, a New York-based think tank.
In a study by its economic analyst, Andrew Bauer, a former member of Canada’s G7 and G20 delegations, Libya has all the oil resources it needs to become the richest country per capita in North Africa but “if current trends continue, the nation of 6.5 million may well go bankrupt by 2018.”
Libyan government officials scrambled to dismiss the forecast but just a few days ago, the deputy governor of the Central Bank of Libya, Ali Salem, warned that Libya’s overdependence on oil “could become a nightmare.” Directly addressing the hopes of Libyans of an Emirate-style future, he cautioned at a seminar in Tripoli that Dubai’s enormous wealth comes not just from oil, but is generated by a diversified economy.
Because of economic policies pursued during the 42 years of Col. Moammar Gadhafi’s dictatorship, Libya lacks a diversified economy and has only a fledgling private sector. Half of all of those in the labor force are on the government payroll.
Bauer says the biggest immediate problem is a drastic fall in government revenues because of a months-long oil blockade by federalist militias who want semi-autonomy for eastern Libya. “Since the start of a series of blockades at oil fields and ports
, revenues from oil, which represent over 90 percent of all government revenues, have plummeted.” Oil exports are now less than 10 percent of what they were before the blockade began last July.
As result the government’s budget deficit will exceed $4 billion in 2013 and more this year, if the blockade is not lifted soon, he says. On top of that government spending is rising rapidly with a 20 percent across-the-board salary hike for the country’s 950,000 government workers and large increases in family allowances and food and housing subsidies.
In addition, the government has been paying salaries to 200,000 people who registered as veterans of the uprising that toppled Gadhafi, despite the fact that most analysts believe the actual rebel fighting force was made up of no more than 25,000.
Much of the increased spending is a bid to buy peace, admits Mohammad Saad, a member of Libya’s General National Congress. “The problem is that people think that as we have money we can do and buy anything – that’s okay for an individual but not for a government,” he says.
Saad, like Bauer, worries that there has been little productive and capital spending on the country’s neglected and shoddy road system and infrastructure, on hospitals and schools – all things that help long-term growth and assist in economic diversification. Just 11-percent of government expenditure last year was dedicated to capital expenditure.
Bauer says, “Libya could be in big trouble soon.” And that could happen despite the fact the government is sitting on almost $200 billion – $120 billion in foreign reserves and $65 billion in Libya’s sovereign wealth fund. But at the rate Libya is spending “the country could go bankrupt within four years.”
It is all a far cry from the picture in 2012. After contracting by almost 60 percent in 2011, the year of the uprising, the economy grew by 120 percent in 2012, thanks to oil output returning almost to where it was before the rebellion erupted. The International Monetary Fund
forecast a 16 percent growth rate for 2013 and the same for every year until 2018.
High oil prices allowed Libya’s new rulers to maintain the high spending without worrying, using the public purse to fund the subsidies and allowing it to maintain salaries for revolutionary militiamen and those who claimed veteran status without incurring a deficit.
All of the spending has fueled a consumer boom, most noticeable in upscale districts in Tripoli and Benghazi where dilapidated stores have undergone makeovers with bright new facades and contemporary shop fittings.
The Tripoli district of Gargaresh has led the way where on late afternoons the area is full of new model Kias and hijab-chic mothers and daughters eyeing the latest Western and Gulf fashions. The shops are stocked with up-to-date electronics, food from Italy and fruit from as far away as Ecuador. Many of the store signs are in English – a snub to the past; Moammar Gadhafi banned signs in English.
But the entrepreneur behind much of the retail boom, Hesham Husni Bey, Libya’s richest businessman, has been expressing his worries for months about the direction the country is taking economically. He complains about over-regulation tying down the private sector. “The government is doing nothing to educate Libyans about the workings and benefits of a free market and to get them to shake off the inherited mentality of expecting the government to provide everything,” he says.
The country is not rich enough for that mentality to persist, Bey says. “We are not the Emirates or Qatar.”