With the ninth-largest proven oil reserves in the world, Libya has all the 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. Just a couple of years after the revolution that toppled Muammar Gadhafi’s regime, what has gone so wrong?
The biggest problem is a drastic fall in government revenues. 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 less than 10 percent and production less than 20 percent of what they were before the blockades began in mid-2013. As a result, Libya’s budget deficit will likely exceed $4 billion in 2013. Unless the blockades end soon, that figure may increase significantly in 2014.
But just as worrying is a massive increase in government spending. The bill for government wages was already high, comprising 38 percent of the budget in 2013; this is because the government pays at least half—and possibly much more—of the formal work force of 1.9 million workers. (There is also significant salary fraud, whereby some people collect more than one income.) This wage bill is expected to rise further following the government’s announcement of a 20 percent across-the-board wage increase and a 67 percent increase for oil workers starting this month.
Wages are not the only source of increased spending. The General National Congress (GNC), Libya’s legislature, recently adopted two other pricey policies: a child allowance and a wife allowance. As of 2014, each family will receive 100 dinars ($80) per child per month and 120 dinars ($95) per wife per month. As Haythem Troug, an official from the Central Bank of Libya, puts it, “It is now more profitable to have four wives than one.”
Further adding to the tab are more than 200,000 people who have registered as veterans of the revolution to claim a salary, ranging from $400 to $2,300 a month—although estimates of the actual number of combatants are much lower.
Finally, subsidies could cost the government over $15 billion per year. While food subsidies like those for wheat are a major drain on the budget, by far the largest subsidy is for fuel. Gasoline prices remain some of the lowest in the world, costing the government over $1 per liter when compared to prices the same gasoline would fetch in Europe. This has led to high fuel consumption and fuel smuggling to other North African and European countries. Subsidies on fuel and electricity are estimated to have cost the Libyan government $100 per month per capita, or more than 11 percent of GDP in 2012—double the amount spent by the government on education and health combined.
What’s more, spending has been largely recurrent, on things like wages and subsidies. Capital expenditures—like roads, hospital equipment and education programs that generate long-term growth and help diversify an economy—have actually shrunk as a percentage of government spending, from 52 percent in 2010 to just 11 percent in 2013.
At this rate of spending, Libya could be in big trouble soon. Despite approximately $200 billion in government savings – $120 billion in foreign reserves, $65 billion saved in the Libyan Investment Authority (Libya’s sovereign wealth fund), and a handful of other assets – the country could go bankrupt within four years. The resulting sharp cuts in spending could prime the country for further conflict and leave segments of the population open to radicalization.
Borrowing to stave off these cuts is an option; Libya’s government is nearly free of debt. However borrowing comes at a cost, saddling future generations with interest and principal payments. Also, few private creditors may be willing to lend to Libya if they see that government spending is out of control. It is not inconceivable that Libya will need an IMF bailout or support from donor nations within the decade.
One Libyan politician is on a mission to bring Libya’s finances under control. He is Abdulsalam Abdullah Nassiya, the head of the General National Congress (GNC) finance committee. “Our most pressing issue is to end the blockade of oil fields and to bring our production back to what it was before June 2013,” Dr. Nassiya says. “It is a political problem and it should be solved politically.”
Members of his committee are also tackling the government’s other urgent problems. For instance, they are pushing the government to use national identification numbers to eliminate duplicate payments to public sector employees. They are also cutting benefits such as gasoline stipends to civil servants and working to reduce the number of subsidized products.
Yet some of the biggest challenges persist. As several GNC members stated recently at a meeting organized by the Revenue Watch Institute in Beirut, little can be done while security remains fragile. The militias are strong and small arms are widespread. What’s more, entrenched political interests will fight hard against reforms, for instance on fuel subsidies that benefit smugglers or food subsidies that benefit monopolies.
In an attempt to find both economic and political solutions to these challenges, Revenue Watch and the Libyan Public Policy Forum (LPPF), in partnership with DFID, have convened the new Transparency Working Group, to which both organizations also provide technical assistance. Made up of members of the GNC; officials from the ministry of finance, central bank, and other government bodies; and representatives of Libyan civil society, the working group’s members have pledged to address some of Libya’s biggest problems while promoting greater transparency and accountability.
“The new transparency group has a crucial role to draft policy papers and to promote recommendations in the media and to the decision-makers,” says Dr. Nassiya. “There is a political will for reforms in the sector and the fact that parliamentarians and the administration are [coming together to] discuss the sector challenges means that there will be reform.”
Dr. Nassiya understands that he and his colleagues in the GNC and in government face an uphill battle. Still, he remains optimistic. “I am not afraid for Libya’s future,” he says. “I know that our country will not go bankrupt as many claim.”