By Fayruz Abdulhadi.
London, 11 June 2013:
One of perhaps the most popular misconceptions within and outside of Libya is . . .[restrict]that Libya is a rich country. Plenty of evidence does in fact point to this: LYD 65bn in yearly government revenues, some $168bn in overseas assets, one of the largest proven oil reserves in the world and one of the world’s largest capabilities for natural gas production.
Other indicators are also given: a small population, an enviable 2000km-plus stretch of coast on the Mediterranean Sea and a history of trade with the big regional Empires.
These are certainly the makings of a “rich” country but the often-quoted comparisons to the Gulf (UAE and Qatar in particular, with small populations and big hydrocarbon revenues) give both Libyans and foreign investors an inaccurate picture.
A lens of analysis not commonly applied to Libya and why Libya is so unique amongst the Arab Spring countries, is that the February 17 Revolution marks both a political and perhaps more importantly, an economic, break with the past. Libya pre-Revolution was in fact one of the last remaining outposts of Soviet-style command economics in the world.
Only after the international embargo on Libya was lifted in 2003, did the government begin to warm up to the idea of privatization and trade – but structural reform never did take place and to this day, Libyans continue to hold a deeply ingrained cultural and economic dependence on the state.
The transitional government has in fact inherited an enormous and sustained cost base in the form of LYD 18bn in public sector salaries and a widespread system of subsidies and transfers amounting to some LYD 15bn per year (oil and basic staples have been heavily subsidized in Libya since time immemorial).
The impact of this high cost base is very real: in 2012, the Libyan government recorded an estimated 7% budget deficit – that is, without borrowing from the Central Bank and printing more currency, the Libyan government is unable to pay its bills.
Signs from the Cabinet
The signs from the transitional government (Prime Minister Zeidan and his predecessors) have been mixed. The lack of public confidence in the state, made worse by their lack of handle on the security situation, means that to hold its tenuous post, the government has had to continue to make financial promises.
The latest from the Ministry of Social Affairs (headed by Minister Kamla Khamis Mazini), who plan to give out a monthly payment to some 4.5m Libyans under the age of 18 starting from Ramadan this year, sends people a clear signal: as a Libyan, your state will provide for you from birth to death, regardless of individual effort and need.
Aside from being a badly-conceived (if well-intentioned) policy, in that it doesn’t actually differentiate between families who are genuinely in need and those who may buy iPhones with the child subsidy, it has two serious long term consequences: it makes no cultural break with the past, instead sustaining the entitlement mentality and dependence on the state that exist, and it adds another recurring expenditure for a government budget already in dire straits.
Policies such as this may win short-lived favor, but are very difficult to untangle: no one wants to be the Prime Minister or political party – particularly around election time – cutting people’s benefits when the budget can no longer afford to pay for them.
On the other hand, there are encouraging signals from other parts of Zeidan’s cabinet. Minister of Oil, Abdulbari Ali Abdel-Hadi Al-Arusi, announced in May this year that by 2016, oil subsidies would be discontinued. What many Libyans don’t know in fact is that while oil is plentiful under Libya’s arid desert, it needs to be refined abroad to be used: the refining capacity in Libya, for example at the Ras Lanuf refinery, isn’t enough to sustain domestic demand.
Once refined, the government buys the oil back from abroad at market prices and sells it back to Libyans at a huge loss at the pump. Recently, one could fill a 50-liter tank for just over LYD 7 ($5.50) in Tripoli’s upscale Hay Al-Andalus district (sometimes termed the “Libyan Fifth Avenue”). The same tank in the U.S. would have cost $48.50, or LYD 62, to fill – just under ten times the price. Libyans may not be paying the full price at the pump, but they are nonetheless paying for it through a government budget unable to spend on infrastructure and development.
Cutting these subsidies once and for all will represent a huge relief for the budget, but requires significant political will from all parties to see it through to implementation. In part, it also needs to be compensated by a credible social safety net for the most impacted families at the bottom of the economic ladder who cannot afford to absorb a price increase.
This will not be an easy policy to enact – Saudi Arabia have been mulling over a similar policy for years and have yet to make a credible move towards its implementation for fear of public unrest (and Saudi Arabia, granted, has a government in control of its security apparatus).
Beyond cutting oil subsidies, there is more that the government can do. The public sector in Libya is bloated and inefficient: some 70% of the Libyan workforce is employed by the state, hiring continues and absenteeism is high.
This must be reversed in a number of ways. Privatizing state-owned companies such as Libyana and Al-Madar (and their umbrella company, the General Posts and Telecommunications Company) can take a significant number of employees off the government books, while also improving customer service, coverage and prices, by introducing competition.
Gulf telecom operators have been courting the Libyan telecommunications sector for years so selling partial stakes or handing out management contracts should be fairly easy.
The government can also introduce performance-based compensation in the public sector and strict control over absenteeism. Government employees should be expected to show up to work – a novel idea for some – and perform their duties. Anecdotal evidence across Libya shows that many public employees take a regular paycheck and spend the day managing their own side businesses or not working at all. This cannot be allowed to continue and non-performing employees should be given the opportunity for training or let go, sending a signal that having a government job is not a right, but a responsibility.
A stricter management culture within the public sector should also help recognize and promote public employees who do perform their duties and improve citizen’s experience with public institutions. The Zeidan government has been successful in cracking down on abuses to the payment system for the injured of the Revolution – a similar crackdown is required for the abuses within the public sector.
Finally, the government must provide support and incentives for entrepreneurship and private sector development – the biggest break from the country’s socialist past. Reliance on the state will continue so long as people have no credible alternatives.
The tools for policy implementation are many and varied: improving education to create a closer link between graduate skillsets and the needs of the economy (Libya is awash with doctors and pharmacists, while lacking bankers and IT specialists), incorporation laws need to be optimized to favor small businesses (registering as a corporation currently requires 50 shareholders) and the banks – 15 financial institutions and four specialized credit institutions – majority or wholly owned by the state,must be deployed as tools of macroeconomic policy: they should be dis-incentivized from holding reserves with the Central Bank and incentivized to lend to entrepreneurs.
Earlier this year, a law was passed, under pressure from interest groups, outlawing non-Shariah-compliant banking after 2015. Libyan financial institutions are wholly unprepared for this regulatory change and have since curtailed already-lackluster lending efforts due to uncertainty surrounding what will happen to existing interest-based loan portfolios once the law comes into effect. The deadline for implementation of this law must be extended and an amnesty given for non-compliant loans issued in advance of the regulatory change, to resolve the current paralysis.
Other initiatives can include setting up small business incubators to support budding entrepreneurs in their most vulnerable start-up phase and the process for obtaining licenses and permits should be simplified and fast tracked. The 30% of youth unemployed should be given a credible opportunity to start and manage their own businesses profitably, in the process educating them to depend on themselves, rather than the state, for their livelihoods.
A responsibility for all
While there is much that the government can do, part of the onus also rests on Libyans themselves as citizens, to break with old habits. Libyans should be willing to accept blue-collar jobs and envisage for themselves a life of hard work. This cultural change is something even the Gulf economies are struggling with, despite their rapid development, and initiatives for “nationalization” of private sector jobs in the Gulf have been only a partially successful retrofitted solution.
After all, for Libyans, there are plenty of role models to be found in recent history, in the form of the large merchant families that emerged during the Kingdom of Libya. These entrepreneurs emerged during the ‘50s and ‘60s despite the fact that in 1951, before the discovery of oil, Libya was the world’s poorest nation. When people believe that the state cannot provide for them, the impetus to become an entrepreneur, however small, emerges.
Libyans as political agents in a new democratic Libya should also support governments of any stripe and color who make difficult choices in support of fiscal restraint, even when the benefits may take years to accrue. A sense of civic responsibility cannot but start from the individual, particularly in the absence of solid leadership.
The benefits of freeing up the budget would be far reaching: a budget released from recurring spend in the form of wages and subsidies can be meaningfully deployed on infrastructure projects and the much sought-after improvements in healthcare and education. With the budget as it stands, these remain but pipe dreams, and the Libyan government a broke student with a big credit card bill staked on an uncertain future.
Fayruz Abdulhadi is an International Manager at one of the world’s largest financial institutions, currently based in London. She is a frequent commentator on Libyan economic and financial affairs and can be reached on Twitter @FayruzAbdulhadi.
The views expressed here are her own and do not necessarily reflect the views of her employer or Libya Herald. [/restrict]