By Hafed Al-Ghwell.
Washington DC, 17 June 2013:
Last week, the Libyan National Oil Company (NOC) said that Libya’s oil production has fallen . . .[restrict]below one million barrels per day, due to ongoing protests that forced the closure of oil terminals and oil fields. This comes in addition to major security concerns that prompted a number of international oil firms to either pull out completely from Libya for the time being, or reduce their presence on the ground. All this comes on top of a national context of a post-conflict situation and a difficult political transition period.
These developments have an added significance, with respect to Libya, because of the total dependence of the country on crude oil and gas exports, which represent 95% of the government revenues, which are needed to finance almost everything, from food imports, to the badly needed reconstruction of the country’s rudimentary infrastructures, to one of the highest public sector wage bills and indiscriminate subsidies programs in the world.
If we add to this picture, the inherent volatility of the energy markets, the certainty of oil reserve depletion, the global trend towards reducing dependency on fossil fuels due to the urgent impact of climate change – and which will impact Libya and the region on the two fronts of oil exports and imported food prices -, and the new technologies, such as Shale oil, which has reduced the need of the largest economy in the world, the US economy, for imported oil and will enable it to produce 8.1 million bpd by 2014, a 24 percent increase from 2012 levels, it is hardly difficult to realize that Libya’s economic development and very future will be seriously effected in the long term and measures to address such potential major changes in the energy markets must be put in place from now to soften the impact of any hard landings.
It is also important to add, that within the context of Libya, where there is a national policy of maintaining a fixed or pegged exchange rate, and the above-mentioned dependency on oil revenues, fiscal policy – government spending – is the main policy instrument for marinating and managing macroeconomic stability. It is therefor imperative that Libya’s public financial management reforms should be the most urgent priority at this critical time for the country’s economic authorities.
From the above context, Libya must ensure the best possible management of its oil revenues and should invest any surpluses during periods of high oil prices in alternative future revenue sources when oil is depleted or oil exports are no longer able to generate the needed returns.
Over the past decade, while Libya has been able to accumulate significance surpluses and develop a sizable reserve buffer, its non-oil sector has deteriorated significantly, judging from the quality and composition of its public expenditures, which have gone mainly to pay for public sector wages and subsidies, and not in developing diversification of the economic base.
At this stage, Libya needs to be able, in addition to understanding the global and oil specific dynamics that will effect its sole source of income, to also have a full national strategy to manage its current pool of resources which may have an incalculable impact on its present and future as a viable nation. Continuing on this course of simply withdrawing from this “saving account”; oil and gas reserves, to spend on living necessities and consumption with no strategy of developing alternative and diversified sources of wealth, and real and viable economy, is unsustainable.
In the context of a difficult post-conflict transition, and in the pursuit of this goal of developing a real economy with diversified sources of revenues that can actually provide jobs and opportunity in the 21 century for the current and future population of Libya, over 65% of whom are currently below the age of 30 years old, who will need good jobs that will allow them to pursue their simple goals of being able to earn a decent living, get married, buy a house, a car, and plan for the future of their children, Libya needs to focus on a number of critical areas starting from now, including:
- Developing the physical infrastructure of the country, roads, electricity, telecommunication, water, public works etc.
- Reforming the entire education system from the ground up.
- Reforming and restructuring the whole healthcare system, including healthcare finance and management.
- Massive capacity building and training programs to upgrade the professional and business abilities of those who already graduated but still lack the skills needed for a modern economy.
- Reviewing and reforming the legal framework, which was designed to limit the ability of the private sector.
- Deep restructuring of the public administration with the view of creating a smaller, more efficient, and highly skilled administration that is geared towards providing public service and supervisory and quality control rather than direct ownership and management of economic activity.
- Rethinking and reforming the safety net system to target those who are in need rather than providing welfare to the whole population which has skewed both the political and economic incentives.
Three fundamental issues that must also be mentioned that must be carefully considered and thought off as such reforms are set in motion:
- Sequencing such programs so they don’t cancel each other out or become obstacles for each other is extremely important.
- All of the above mentioned reforms must be designed along the framework of Public Private Partnerships. The government must not, and should not undertake these programs directly, but must confine its role to planning, financing, and supervising the programs, and allowing the private sector to take the lead in doing the work in partnership with international partners who have the expertise and skills necessary, and who can transferee such knowledge to Libyans in the course of their cooperation.
- There is no need to reinvent the wheel on many of these reforms, many countries around the world have done them in the past, and Libya can learn from both their successes and failures, and focus on contextualizing such lessons to the Libyan context.
It is needless to say however, that none of the above can be achieved without the necessary security framework that will allow for such an ambitious and massive effort, and in the absence of an overall economic strategy that lays out the objectives, tools, and measurements for such national plan.
Hafed Al-Ghwell is an Advisor to the Dean of the Board of Executive Directors at the World Bank Group in Washington DC. http://www.hafedalghwell.com
The views in this article do not necessarily represent those of Libya Herald. [/restrict]
