The fallout of the Arab Spring brought its fair share of highs and lows, and while Egypt and Tunisia have had to grapple with some very worrying challenges, perhaps no country has embodied the elation and the trepidation of the new political landscape as Libya.
The political upheaval of the Arab Spring complicated the region’s economy. Economic grievances were a significant factor in the uprisings, but the resulting instability drove away foreign capital, dragged down output and spurred a rise in unemployment. However, Libya, nearly three years into the post-Gaddafi era, has seen some encouraging progress made in terms of restarting the economy and fostering a broader and more inclusive base for growth, but continuing unrest and the stubborn problem of armed militias continues to limit gains. There is no doubt that the country offers significant potential for investors, but the question remains: at what cost?
On the face of things, Libya ought to face the most grueling uphill struggle to restart its economy, given its prolonged conflict and the historical lack of any centralized governance structure. However, with proven oil reserves of 48 billion barrels, making up for around 3.5% of the global total, and a relatively small population of 6.5 million, the country has a wide range of policy options at its disposal to restart long-term sustainable growth—far more so than Tunisia or Egypt.
This is due in large part to the country’s natural largess. In 2012, oil accounted for 78% of GDP, 98% of exports, and 95% of all fiscal revenue. Oil exports also foot the bill for a vast system of regressive subsidies, which for electricity and fuel can be anywhere between 11% and 14% of GDP annually. With production averaging 1.5 million barrels per day (bpd) in the first half of 2013—up from a low of 30,000 bpd in 2011 and just short of the pre-revolution levels—revenues are also funding the country’s large public sector wage bill, which is estimated to cost roughly one-fifth of GDP but is a necessity, given the urgent need to expand employment and reduce the country’s poverty rate of almost 33%.
While the country’s resources give it a comfortable tool to jump-start growth and minimize short-term unrest, Libya’s broader performance over the past 18 months has also been comparatively strong. In July 2012, the country went through relatively peaceful general elections and by early 2013, headline indicators were impressively robust. The country saw real GDP growth of 95.5% in 2012, although this figure was distorted by the economy’s contraction of 60% in 2011. Nonetheless, the IMF is projecting 17% growth for 2013—the highest on the African continent—followed by more stable growth rates of 7% set to take place until 2017.
The strong growth has managed to recoup some of the capital that was withdrawn during the height of the country’s conflict. Outflows in 2011 were unsurprisingly significant. Most companies shut down operations completely and in some cases evacuated staff in a frenetic rush. The drop was all the more noticeable given the country’s star status in the preceding years. The end of United Nations sanctions in 2006 brought about an impressive growth in foreign direct investment into the country, in spite of caps on ownership requirements and the outsized-role of the state in directing activity. While post-Gaddafi Libya still grapples with a cumbersome bureaucracy and a burdensome regulatory framework for new investments, some of the less risk-averse companies have started to move in.
Oil is obviously one of the ripest attractions for foreign investors, particularly since Libya’s government is planning outlays of $10 billion over the next few years to boost overall production to 2.2 million bpd. Firms have been quick to move back in and the government moved quickly following the end of fighting to reaffirm the validity of existing contracts. Some companies—like Italy’s ENI, who holds signifcant stakes in the upstream sector—even resumed activity as early as mid-2011, although given the burdensome requirements of the previous regulatory code and the lacklustre rate of discovery, there are expectations that terms of some exisitng contracts may be renegotiated.
Foreign capital is also coming into the country’s long under-developed tertiary sector. While the state-dominated banking industry has nonetheless been grappling with a post-conflict jump in NPLs and decline in asset quality—and more worryingly, legislation in January 2013 that banned interest on all transactions in the country—there is abundant liquidity and no shortage of possible clients, which has attracted investors like Qatar National Bank, who acquired a 49% stake in Libya’s Bank of Commerce and Development.
Finally, infrastructure—which was a major recipient of foreign investment under the previous regime—is an area that offers enormous potential due to the volume of work needed. There is a need for capital in everything from sanitation to transportation to electrical transmission, and even property—particularly residential and commercial. There is less than 100,000 square meters of gross leasable area for grade A commercial property in Tripoli, a figure expected to grow tenfold over the medium-term. The new investment commitments and strong headline indicators represent the country’s highs but there are still plenty of lows that it must grapple with, both in the short- and long-term. The past 18 months have seen some notable and encouraging advancements, but a rosy outlook is far from assured.
One of the greatest challenges has been maintaning security and overall stability. The country’s loosely-organized militias were central to Gadaffi’s ouster, but controlling them after the revolution has proved to be problematic. Some of the larger militias in both Tripoli and Benghazi have resorted to kidnapping and extortion, in part to help pay wages, while armed groups have also used explicit threats and displays of force to pressure the government into passing favorable legislation, such as a ban on former government employees holding public office. Targeted attacks on diplomatic and government buildings in 2013 have also led to foreign embassies and corporations evacuating their staff again.
Recent months have also seen a troubling eruption of broader civil unrest, including strikes by workers, street protests and militia groups, primarily over insufficient and inadequate political representation or economic exclusion.
In August, a number of refineries, ports and pipelines were forced to shut down as a result of workers downing tools and militia blockades. Offloading and receiving capacity was already hurt by the damages incurred to key ports during the 2011 fighting, and given the heavy reliance on both imports—which account for 75% of food staples—and export earnings, recent port stoppages are weakening the overall economy further.
The lost earnings could amount to $4 billion a month and the damage in terms of output and attracting capital is a concern and could have longer-term implications. Concerns over supply reliability may force the country to discount its oil price in future contract negotiations, and some operators, like the United States-based Marathon Oil recently announced that they are exploring a potential sale of their stake in a local consortium.
Libya currently finds itself at a critical juncture and how things play out over the coming months will have a significant impact on the country’s long-term prospects. Libya has the ability to emerge from the fallout of the Arab Spring in far better shape than either of its neighbors, but with the stubborn problem of militia violence and continuing unrest, it looks like a challenging task.

A New Dawn Of Uncertainty

Recently, I asked a diplomat attached to one of the Western embassies in Pretoria whether the Arab Spring had been predicted in a scenario by his government. The answer was no: it came out of the blue and surprised everybody. In the words of Nassim Taleb, it was a Black Swan event.
Next, I asked him whether a retrospective analysis had identified any flags that they should have picked up on in researching the future of the countries affected by the Arab Spring. He said most definitely yes: in all the countries concerned, there was a high rate of youth unemployment, coupled with a sense of alienation from society. Furthermore, the advent of social networks like Facebook had brought a new dimension of organization to young people in terms of putting together mass demonstrations and filming them.
In South Africa, we have all those conditions. We have an unemployment rate among young people aged 18-24 which is estimated to be somewhere between 40 and 50%. Although most of them are ANC supporters, they are highly frustrated by the lack of progress since 1994 in creating a participative and open economy with an emphasis on economic freedom.
Moreover, the vast majority are up to speed on the latest communication gadgets and the internet.
In order to avoid our own version of an Arab Spring in South Africa, we need to call upon the negotiating skills of our leaders and citizens to put together a blueprint for a new economic order. Codesa I and II in the early 1990s demonstrated that South Africans can pull the iron from the fire through negotiation and avoid the slippery slope into chaos and a civil war. These two conventions for a democratic South Africa fashioned a new constitution and paved the way for the fully open election, which went ahead peacefully on April 27, 1994.
We now need a Codesa III, which I call an ‘Economic Codesa’, because there was unfinished business in the first two Codesas. While we have a political democracy, we certainly do not have an economic democracy in South Africa. There is no way the government alone can achieve the latter. It will require a partnership between the principle economic actors and the government. In the category of economic actors, I would put the CEOs of the top 50 companies in South Africa, representative business bodies, leading entrepreneurs, community champions, the unions and others chosen by civil society.
The Economic Codesa I have in mind would not be a summit or talk shop, but a genuine negotiation, with give and take on all sides. One of the most important outcomes would be to create the conditions for instilling a new entrepreneurial culture in the country, giving small business owners the space and support systems to grow their firms from start-ups to companies that may one day be listed on the Johannesburg Stock Exchange. It is common cause among leading thinkers in government and business that the largest percentage of jobs to be created in order to bring South Africa’s unemployment rate down to an acceptable level, will be in the small business sector.
Indeed, one of the key targets of an Economic Codesa would be to establish an environment within which one million new businesses of a viable nature are likely to be launched by 2020. That is the only way to create five million new jobs and give gainful employment on a widespread basis to young people, either as entrepreneurs or employees. Not everyone has to be an entrepreneur, but on the assumption that the average small business has five employees, the percentage of entrepreneurs in the nation has to be around 20%. The figure is quite achievable with economic freedom in our time.

Tag: Arab Spring

FORBES AFRICA SOCIAL MEDIA

A New Dawn Of Uncertainty

Business Must Negotiate Or Face Another Arab Spring