Since the fall of Qaddafi, Libya has continuously fallen victim to armed militias and political deadlock, weakening its economy and eroding public trust in the new government. Diversification is key as the nation’s main oil fields remain under blockade. With a switch to an Islamic financial system on the horizon, Libya is on track to lessen its dependence on oil and increase incentives for foreign direct investment.
Two and a half years after the overthrow of Col. Muammar el-Qaddafi, Libya continues to find itself in an internal struggle for its future. There was much hope after the 2011 revolution that an end to autocratic rule would bring Libya greater economic prosperity and increased security, freeing up the nation to foreign direct investment. The new government, however, has proven incompetent in the face of both a deeply divided Congress, and armed militia groups that have taken control of many of the country’s oil fields.
Prime Minister Ali Zeidan hopes that a new constitution will help Libya secure its transition to democracy and ensure security. Elections were held this past February for a constitutional-drafting assembly, but turnout among registered voters reached only 14 percent. Potential voters may have been deterred by a lack of security, as militia groups bombed and shut down key polling stations. But with registration barely above 30 percent, voters were more likely deterred by a lack of faith in a government unable to resolve its budget issues and provide its citizens with basic security.
Budget worries continue to mount in Libya, where protests and blockades at key oil ports have driven down oil production and choked state revenue. Oil production stood at 1.4 million barrels per day (bpd) until mid last year, when militias took control of three eastern oil terminals. Libya’s oil output has since fallen to just 230,000 bpd.
The World Bank estimates that the oil crisis has already cost Libya more than $10 billion in revenues over the past six months. In a nation where the oil sector accounts for 70 per cent of GDP and 95 per cent of state revenues, any disruption to output will cause a significant ripple-effect through the economy.
To make matters worse, the militias holding Libya’s oil fields hostage are on the payrolls of the defense and interior ministries. In an effort to co-opt militia groups that helped to topple Muammar el-Qaddafi, the government agreed to put them on the state’s payroll. The militias stay loyal to their own commanders, however, often carrying out orders that harm both the government and its access to vital resources. With this in mind, one could argue that Libya is funding its own economic collapse.
So the question becomes: Is there any hope left for Libya? While a new constitution will potentially ensure new economic freedoms for citizens, Libya must work to lessen its dependence on oil and increase incentives for foreign direct investment. Fortunately for investors, Libya is on track to do just that.
Libya plans to transform its banking and economic system to fully comply with Islamic law, opening its doors to investments in Islamic bonds and investment funds. Economy Minister Mustafa Abu Fanas says he hopes the transition to an Islamic system will “build up a strong economy,” saying Libya has “become too dependent on its oil sector.”
Transitioning to an Islamic financial system is challenging, however. Islamic law bans interest payments on bonds and loans, which are essential to most banking and financial schemes. For this reason, Islamic financial institutions issue asset-backed securities called sukuk. Investors who buy sukuk are rewarded with a share of the profits derived from the return of the underlying asset. Libya plans to fully ban interest payments by the start of 2015.
Libya’s stock market is only valued at $3 billion, making it the third-smallest market in the Arab world. The government hopes that introducing Islamic investment funds will help to propel its market value to new heights.
According to Ahmed Karoud, the Director of Libya’s stock exchange, two Islamic real estate funds are in the works. The first sukuk issue is due in April 2014, and will be worth $163 million, with a projected annual return of 20 percent. The second fund is expected to follow a few months later.
As global demand for Islamic investments continues to rise, Libya must remain steadfast in its quest to diversify its economy away from oil and towards its banking and financial sectors. Although questions of security and democracy remain, some hope for Libya still persists.