Libya's rebounding oil sector critical to stabilization

Libya's rebounding oil sector critical to stabilization

Commentary



Critically, the Central Bank must become more transparent when it comes to the management of Libya’s oil wealth.

In January, two oil and gas majors, Shell and BP, loaded their oil tankers off the coast of Libya, raising hopes that the country’s oil sector might be rebounding. Over the course of 2017, production had more than tripled from the lows of 2016, and Chairman of the National Oil Company (NOC), Engineer Mustafa Sanalla, recently indicated that production might return to its previous level of 1.6 million barrels per day.

This is a laudable development given the challenges the NOC has to contend with. In a country that remains in the throes of multi-polar political struggles, proliferating militias, and rampant corruption, Libya’s oil sector holds both the potential for stabilization and the risk of accelerating the descent into chaos. International actors have a role to play in deciding how Libya’s oil sector impacts the country’s economic and political stability.

The structural challenge

Colonel Muammar Qaddafi’s rule over Libya injected the oil sector with a particular mix of capitalist and socialist characteristics that has been difficult to manage since his removal from power. Like most rentier states in the region, under Qaddafi’s rule, Libya developed as a typical petro-state in which Qaddafi and his family played a crucial role in overseeing, and benefiting from, the country’s oil wealth.

Qaddafi’s populist economic model imbued Libyans with a strong sense of ownership over their oil wealth and expectations regarding the manner in which this should be shared among the population. Under his rule, Libya’s oil wealth was distributed mainly through a bloated public sector and subsidized basic goods.

A sovereign wealth fund, known as the Libyan Investment Authority (LIA), was also established, but more than 80% of Libya’s oil revenue was distributed through state-employment, as the state came to employ a majority of the country’s workforce.

In addition to low levels of productivity, this transactional system of oil revenue distribution meant that Libya never developed sophisticated institutions of state or a diversified economy that could leverage this wealth into greater value.

The absence of a functioning bureaucracy was also the result of Qaddafi’s highly personalized grip on state affairs. His removal from power, therefore, created a destabilizing vacuum and gave rise to competing political forces and armed groups that sought to replace, challenge, or control the mechanisms by which “the people’s oil wealth” was distributed.

Whether through militias smuggling oil for profit; disenfranchised communities blockading energy infrastructure to extort their share of the wealth; or new political forces seeking regional control over wealth distribution, the oil sector became central to the country’s power struggles.

Yet the NOC recovered from the above setbacks to become one of only three entities that was ultimately able to regain nation-wide authority (the others being the Central Bank and the Electricity Company). It regained control by adopting various measures to limit oil smuggling and blockading of energy infrastructure, including mediation and community engagement, coercion, threats, public-shaming, and leveraging of international influence.

But as the NOC regained its jurisdiction over Libya’s oil sector, the entity itself became a battleground for control between the various political players and militia groups in the country. Last year, for example, the internationally-recognized Government of National Accord (GNA) attempted to limit the NOC’s jurisdiction by creating a Ministry of Oil that would supplant the NOC’s authority. This prompted Sanalla to turn to the international community and call for measures to ensure that the NOC remains ring-fenced from such political struggles to ensure the integrity of Libya’s oil sector, which continues to be the case today. 

The state’s oil revenue which is collected by the NOC is transmitted to Libya’s Central Bank, which funds and manages public expenditure. The Central Bank’s functions are critical for Libya’s stability. Nonetheless, one of Libya’s persistent problems has been the lack of transparency surrounding the bank’s decision-making on wealth distribution. In the post-Qaddafi era, this opacity has become a lightning rod for popular discontent.

Allegations of corruption have become rampant, raising fears that increasing oil production will merely accelerate the loss of national wealth. This threatens to further incentivize the proliferation of oil profiteering and to inflame instability as various communities pursue other means of safeguarding their economic interests.

Stabilization through decentralization

Libya’s most pressing challenge is one of security, or the lack thereof, resulting from the proliferation of armed groups, often with foreign backers that have vested interests. While much of this insecurity is driven by politics, there are prominent economic factors that fan the flames. As such, the mechanisms of oil distribution have the potential to mitigate or lessen some of the security challenges that plague the country.

On the economic level, Libya’s oil revenue is not large enough on its own to mitigate disenfranchisement among the population. Libya’s oil revenue is close to $15bn dollars, and its population is around 6 million. On a basic distribution model, the oil wealth would generate annually $2,500 per individual. With an average household of almost 7, this translates into an annual household income of merely $17,000. This figure is far lower when actual state expenditure, which includes significant energy subsidies, are factored in. Libya is currently running on a deficit as its expenditure exceeds the oil revenue itself. This economic reality demonstrates the need for a more effective system to leverage the oil revenue into greater value.

On the security level, the absence of a trusted central authority that could distribute oil wealth has created zero-sum competition among armed groups: controlling the oil wealth means controlling Libya. Decentralization and proposals for federalism, particularly with the oil-rich Eastern provinces, have been proposed as partial solutions to this problem. Under such decentralization initiatives, local mayors or municipalities would be given the authority to determine how best to distribute the oil wealth among their communities. Local control of oil revenues would reduce the rationale for militarized activity.

Other proposals have included the creation of a social welfare system where Libyans are paid a base public salary. Rather than having to be employed by the state as a form of guaranteed wage, Libyans would have another pathway for enjoying their country’s riches while remaining free to pursue alternative employment. Alternative welfare proposals called for citizens to “cash-in” their share of the oil wealth. This model would encourage entrepreneurship, thereby resolving issues related to employment and economic diversification.

Such mechanisms could enhance how Libya’s oil wealth trickles down to the communities that would most benefit from it. They would strengthen economic growth, create jobs, and inject local accountability and autonomy. From a security perspective, they might help provide enough stability for the institutions of state to be rebuilt from the bottom-up, as local communities and municipalities are strengthened and faith is revived in the systems of state. Furthermore, international donors are well-positioned to remove the economic incentive of insecurity by developing a coordinated approach for disbursing funds to local communities.

Strengthening the centre

Yet even with decentralized economic empowerment and a more equitable and transparent distribution of wealth, the need for a central decision-making body that is responsible for longer-term wealth management persists.

For longer term stability, significant portions of the oil wealth collected by the NOC have to be apportioned for investments, primarily in Libya’s crumbling oil infrastructure, to ensure the continued capacity to sustain production. Currently the Central Bank allocates to the NOC far less than the oil company’s capital budget.

Oil wealth also needs to be apportioned for state expenditure beyond the transactional transfer of revenue to citizens, including by revisiting the LIA’s investment strategy and directing more funds towards rebuilding the country.

In order for the central authority to regain the capacity to carry out these duties, it must rebuild public trust. This will require the Central Bank to become more transparent when it comes to the management of Libya’s oil wealth. Libyans must buy into this process and extend to the Central Bank the constitutional authority to manage their national wealth. In the absence of such confidence, there will continue to be grassroots support for armed militias vying for control over oil resources.

International support

There is scope for the international community to assist in this effort. First, it can call for more transparency from the Central Bank and end the process of implicitly supporting or turning a blind eye to the rampant corruption that is taking place in the folds of that opacity. Some of the individuals associated with this corruption invest or reside in European capitals, and efforts to limit their activities could go some way in alleviating the feelings of distrust among Libyans. International actors could also assist in the procedural reforms needed to implement transparency.

Second, there might be prospects for international partnership or cooperation around issues related to oversight and management of Libya’s oil wealth, for example through the creation of an international monitoring scheme.

Third, the international community must persist in calling for Libya’s NOC to remain independent, and for securing the foreign investment needed to ensure production from Libya’s oil fields remains viable and sustainable. While these measures will by no means end the security challenges on their own, they will go a long way in supporting decentralized bottom-up state-building that could begin to stabilize the country.

Read more on: The Middle East and North Africa,North Africa,Libya

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