Business in Conflict Zones: Libya Outlook

All eyes are on Libya as some positive headlines have come out of the country over the past several months. ISIS was driven out of its stronghold in Sirte in December 2016; oil production more than doubled from 300,000 barrels per day (bpd) to around 700,000 (bpd) in early 2017; the Italian and Turkish embassies reopened in Tripoli; and Tripoli International Airport is expected to be operational in mid-March after being destroyed in 2014. Are these signals that MNCs should return to Libya?

Despite signs of improvement in Libya, severe political risks still plague the country. Three political factions – the UN-backed Government of National Accord (GNA) in Tripoli, the House of Representatives loyal to Field Marshall Khalifa Haftar in Tobruk, and the Government of National Salvation in Tripoli – are all vying for power. Now that their common enemy, ISIS, is weakened, there will likely be even greater tensions between the three to assert control over the country. Because of the influence of external powers like Russia, Egypt, and the UN, a quick political solution is unlikely, as the deep divide between political and tribal factions will be difficult to overcome.

As Libya tries to come to a political resolution, MNCs must also consider key challenges that remain in the business environment:

Libyan dinar: Currently, the Central Bank holds the value of the dinar around LYD 1.4 to the dollar. However, a severe cash shortage has widened the gap between the official rate and the black-market rate, which now fluctuates between LYD 5.5 and 6.0 to the dollar. This 300% difference in the official and black-market rate and rapidly falling foreign reserves create an urgency to devalue the dinar. Although there were potential plans of devaluing the dinar in two phases, this option would have dangerous short-term implications on the economy, especially on consumers, and could be a driver of unrest. The more likely option would be a policy of gradual devaluation, which could prevent greater social discontent. However, it is important to note that disunity between government institutions will delay quick implementation of sound monetary policy.

Access to money supply: Libya’s foreign reserves, which stood at $125 billion in 2012, have now fallen to around $40 billion, and access to US dollars, as well as Libyan dinars, is extremely limited. Banks have implemented monthly cash limits for consumers, while the Central Bank continues to ration dollars only for essential goods, also making it difficult for MNCs to get sufficient access to finance. This issue is likely to persist in 2017 as Libya’s oil-dependent economy continues to struggle, oil prices remain stagnant, and no effective plans for reform are in sight.

Channel disruptions: Ongoing security risks and damage to infrastructure from the past six years of chaos are still likely to create disruptions to businesses’ distribution channels. Fighting between rival militia groups in major cities like Tripoli are likely to persist, despite efforts to put a ceasefire agreement in place. Protests over jobs and salaries are also common and could disrupt operations. For example, flights in Tobruk airport were suspended due to protesters demanding jobs in February 2017. Additionally, Libya is experiencing frequent power outages, which puts a limit on productivity.

Limited government finances: The combination of several years of low oil prices and damage to Libya’s oil production facilities have created an excruciating strain on government revenue, while political disunity makes it nearly impossible for Libya to efficiently allocate whatever financial resources it does have. Because Libya’s House of Representatives does not recognize the GNA, an official budget cannot be passed. However, the GNA, in coordination with the Central Bank, passed the “Temporary Financial Arrangements for 2017” deal. This $26 billion budget will cover public sector salaries, operating expenditures, development initiatives (largely for the oil, gas, and electricity sectors), and subsidies for medicines, electricity, fuels, and garbage collection. Authority remains with the Central Bank to ration these budget funds to the GNA, creating risks around delays in the release of the funds if there are tensions between the two institutions. Thus, MNCs in the B2G sector will see limited opportunities from the government in 2017.

Libya remains a high-risk market, although there will be great potential for MNC operations when the country begins its reconstruction. A severe shortage in health care services means there will be large future demand for pharmaceutical companies, while the need to improve Libya’s infrastructure indicates the potential for future demand in the industrials sector. The opening of opportunities for MNCs depends upon the country’s ability to come to a political resolution and for the government to improve its sources of financing. MNCs should actively monitor the peace process and economic developments related to the cash crisis to guide their investment strategy in Libya.

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