Libya is one of Africa’s richer nations. It has the continent’s biggest proven oil reserves and is the third main producer behind Angola and Nigeria. Libya was only fairly hit by the global economic and financial crisis. Beginning data indicate that real gross domestic product (GDP) growth slow to 2 % in 2009, due to the fall in international oil prices and the Organization of the Petroleum Exporting Countries (OPEC) lower production quotas.
Lower commodity prices also eased inflation to approximately 2.5 % for the first nine months of 2009, compared to 10.4 % year-on-year. It is expected to stabilize over the medium term at about 5.5 %. The fiscal and external current account surpluses shrank in 2009 to 10.6 % and 16.8 % of GDP respectively, from 26.9 % and 40.7 % over the previous year. Growth forecasts for 2010 and 2011 are around pre-crisis levels of 5.2 % and 6.1 % respectively as global demand for oil helps prices recover.

Despite significant efforts over the past two decades to diversify its economy, Libya remains highly dependent on hydrocarbons, which account for close to 70 % of GDP, and generate more than 90 % of government revenues and 95 % of export earnings. According to the 2006 census, Libya is struggling with an unemployment rate of 20.7 % due to its poor ability to generate jobs.
To lessen its dependence on oil and the resulting vulnerability to shocks from volatile commodity prices, as well as counter the high unemployment rate (especially among young graduates), Libya has embarked on reforms aimed at rationalising its oversized, low performing public sector; and promoting trade, the private sector and foreign investment. The opening up of Libya’s economy has triggered the interest of foreign investors attracted by opportunities in energy and construction, and to a lesser extent by the new and promising tourism sector. According to the UN Conference on Trade and Development 2009 World Investment Report, foreign direct investment (FDI) in Libya quadrupled between 2005 and 2008.
 

 

Still, the country suffers from a business environment that many call unpredictable and cumbersome, with weak coordination, a complex decision-making process and inadequate human skills and manpower for the new private sector demands. Coupled with opaque legal and institutional frameworks, these structural constraints significantly hinder Libya’s efforts to diversify its economy.

While extreme poverty is now largely eradicated and per capita income has been increasing, Libya still has weak healthcare and education systems in dire need of reform to lay the groundwork for a more private sector-led economy.

The limited exposure of Libya’s financial sector and sound macroeconomic management meant the country was not badly hit by the global financial crisis. Despite lower world oil prices, Libya has maintained a positive albeit lower growth level, as well as strong fiscal and external balances.
Under pressure from falling commodity demand and lower OPEC production quotas (a 1.5 % cut in Libya’s case), 2009 real GDP growth decelerated to approximately 2 %, from 3.8 % in 2008, and an average of 6.4 % from 2005 to 2008. Oil and tax revenues fell. However, non-oil growth progressed by 6 % in 2009 and is forecast to reach a regular rate of 7 % to 8 % over the medium term with the renewed dynamism of the non-hydrocarbon sectors, and public and private investment.

Oil output increased a little in the first three quarters of the year, but declined in the last quarter after the OPEC quota reduction. Production for the year was comparable to 2007 at about 1.78 million barrels per day (bpd). However, with proven reserves estimated at 43.66 billion barrels (the largest in Africa), production capacity could easily be raised to levels that would make Libya the continent’s largest oil producer within three to five years. According to Libyan authorities, oil production is to reach 3 million bpd around 2012-2013.

Libya is also actively diversifying energy production, primarily by developing largely unutilised natural gas reserves, which are estimated at 1.54 trillion cubic metres (m3). The estimated cumulative gas production only represents about 12 % of proved reserves (US Government data, July 2009). In addition, alternative energy sources, such as solar and wind power are being considered. Approval has been given for a 200 mega watt solar power plant at Sebha, 700 kilometres south of Tripoli, for an amount equivalent to 1.5 billion euros (EUR). Hydrocarbons constitute the largest source of public finance and the revenues generated are such that the government relies only moderately on taxation and other domestically generated revenues.

The oil and gas industry remains largely state-owned, although more than 50 international oil companies operate in Libya under Exploration and Production Sharing Agreements (EPSA). These include ENI, Repsol, Total, Shell and BP. In 2007, Libya asked for the renegotiation of legally-binding EPSAs, causing concern among the oil majors over the exploration and production terms and conditions. More recently, the resignation of the chairman of the National Oil Corporation (NOC) in September 2009 triggered new worries among oil companies who viewed him as a consistent and stabilizing force within an erratic and unpredictable regulatory environment. The concerns rapidly eased however, when it was announced that the chairman would return to his post with the aim of streamlining the NOC’s heavy bureaucracy.

Although no lasting effects on the oil and gas operators were observed, these events reflect the country’s weak legal and regulatory environments and damage efforts to implement much-needed structural reforms to promote private enterprise and foreign investment.

To capitalise on the high growth and reduce dependence on hydrocarbon revenues, Libya is committed to pursuing economic diversification and privatisation, with a particular focus on the non-oil energy sector and other high growth-potential sectors such as real estate and tourism. Libya has embarked on a massive 270 billion Libyan dinars (LYD) (about 225 billion US dollars [USD]) Public Investment Plan (PIP) for 2008–2012. This will entail annual planned expenses of over LYD 50 billion. The plan comprises an ambitious infrastructure programme estimated at LYD 140 billion (USD 114 billion), to be spent on housing, utilities, transport, power and information and communications technology; including LYD 40 billion (USD 32 billion) on residential, industrial, and commercial property; LYD 30 billion (USD 24 billion) on water, electricity and sanitary utilities; and about LYD 20 billion (USD 16 billion) on roads, airports and ports to address key structural gaps. Trade is also viewed as a key element in opening up the economy. To boost trade, an Export Promotion Centre under the General People’s Committee for Industry and Trade has been created to widen the non-oil economic base by promoting agriculture, light manufacturing and other under-promoted sectors. Similarly, a centralised export centre has been created at the Tunisian border to facilitate the export of Libyan products to key regional markets.

In August 2009, the Privatization & Investment Board established a one-stop shop to centralise, standardise, speed up and make more transparent the allocation of business licenses. These initiatives are expected to improve the business climate and enhance investor confidence in Libya. According to the chairman of the Privatization & Investment Board, 110 companies have been sold off since 2004, representing a volume of USD 2 billion. These include firms in the utility and chemical industries. The objective is to attract between LYD 5 billion to LYD 10 billion of foreign investment by 2015. Overall, the non-hydrocarbon sector, a particular target of the privatisation process, represents 20% of GDP, mainly in petrochemicals, iron, steel and aluminium, real estate, trade, transport, communications and construction. The new tourism sector has seen new hotels and resorts built and there are plans to expand the capacity of several airports. Despite investment in the agricultural sector, Libya still imports about 75% of the food it needs, due to poor output.

The medium-term economic outlook appears promising and the economy is expected to continue relatively strong growth, based on higher oil revenue projections, an increased inflow of foreign investment, and improved public expenditure. The current account surplus and fiscal surplus are expected to reach 32 % and 15 % of GDP respectively in 2010. Despite efforts to increase the share of the non-oil sector in GDP, the Libyan economy is likely to continue being driven primarily by hydrocarbon exploration and production. The NOC plans to double oil production by 2012 to about 3 million bpd and huge public investment is planned to modernise and expand public services and to remedy gaps in infrastructure and social services.

On the social front, a Wealth Distribution Programme initiated by the Libyan leader Muammar al-Qadhafi in March 2008 to redistribute part of the oil wealth to the population, has so far approved only LYD 4.6 billion (USD 3.8 billion) of spending in the 2008 budget. The 2009 programme was put on hold over concerns about a potential impact on inflation and the provision of basic public services. According to the Libyan authorities, a study on the performance and functioning of the programme is being carried out before it is resumed.

Fiscal Policy
The fiscal surplus remained at about 27 % of GDP in 2008 and contracted to about 10 % of GDP in 2009 despite a projected 40 % decline in oil revenues. The government is also trying to reduce the wage bill with incentives for senior civil servants to leave on early retirement or join the private sector. The government’s fiscal stance has been supported by sound macroeconomic policies which balance short and long-term considerations. The small decline in public expenditure in 2009 is a clear break with the very large increases in recent years, which have raised concerns about expenditure quality. The government is revising downwards its Public Investment Plan (PIP), even if an IMF Fiscal Sustainability Analysis has said it is sustainable. Current outlays increased by 25 % while capital spending fell by 20 %, resulting in a small decline in overall expenditure. Despite the global economic and financial crisis, fiscal efforts to boost demand were only moderately expansionary in 2009.

A major part of the oil wealth is channelled through the Libyan Investment Authority (LIA), Libya’s largest sovereign wealth fund. Created in 2007 with a starting capital of USD 65 billion, it manages investment funds in various areas including agriculture, real estate, infrastructure, oil and gas and in global markets in the form of securities and equity stakes. The LIA’s overall conservative and prudent investment strategy over the past year has shielded the country from fallout from the crisis and allowed the government to amass considerable net foreign assets, estimated at USD 86 billion in 2008, in addition to those held at the central bank. The LIA has begun pursuing a more aggressive strategy and it is finalizing several investments in Europe, Africa and Latin America aiming to benefit from post-crisis opportunities. By investing outside Libya, the LIA is also limiting domestic inflationary pressure from the build-up of assets and diversifying sources of future income.

Libya has maintained a relatively low and stable external debt. When set against more than USD 150 billion in foreign assets (mainly foreign reserves and the LIA portfolio), the estimated external debt of about USD 4 billion appears minimal. Due to substantially lower nominal GDP and export revenues in 2009, the ratio of external debt to exports are estimated by the Institute of International Finance to have risen to 10 % in 2009, compared to just over 5 % in 2008. The growth of debt ratio from 1.7 % in 2008 to 4.7 % in 2009, mainly because of lower exports, should not undermine Libya’s debt sustainability in the short to medium-term. Libya has been more willing to pay foreign debt as it normalises relations with external creditors. In March 2009, Standard & Poor’s Ratings Services assigned an A- long-term and A-2 short-term foreign and local currency rating.

Expenditure is expected to increase in 2010, in line with a revenue boost from predicted higher oil prices and increased OPEC production quotas. Efforts to cut the size of the civil service have been delayed and a pay increase is planned, which will add to spending. But delayed projects will limit spending and some reductions in subsidies are expected.

Monetary Policy
Monetary policy is conducted by the Central Bank of Libya (CBL), which adopted a prudent approach throughout 2009. The Libyan dinar’s peg to the International Monetary Fund’s special drawing rights provides a strong monetary anchor while allowing flexibility in the exchange rate against individual major currencies. IMF econometric estimates suggest that the dinar’s real effective rate has moved from a moderate undervaluation in 2008 to a moderate overvaluation in 2009. This is consistent with the change in the underlying fundamentals, in particular the decline in global oil prices. Net international reserves in 2008 were equivalent to 22 months of the following year’s imports, which is the similar estimate for 2009 and expectations for 2010.

Inflation has come down from around 10 % in 2008 to around 2.5 % in 2009, due to lower consumer demand and the sharp decline in prices for imported commodities and goods. The CBL reduced its discount rate to 4 % in an effort to mitigate any fallout from the global lending crunch. Libya’s banking and financial system has been relatively spared from the financial turmoil, supported to a large extent by its highly liquid commercial banks. Excess liquidity in the system was tackled through a reduction in budgetary allocation to state–subsidized specialized credit institutions (SCIs) to prevent them from crowding out commercial bank lending with their concessional terms -- zero-cost of funding and low interest rates -- as well as to improve the management of government deposits and payments.

As the main bank regulator, the CBL is committed to strengthening public financial management and improving overall planning, monitoring and control of banking activities. The CBL is undertaking a vast programme to upgrade the monetary policy framework and strengthen bank supervision, seeking to bring regulations in line with international standards and enhance bank reporting, skills and supervisory procedures.

A financial stability report being produced as part of the programme is expected to lay the groundwork for an assessment of financial stability and sustainability across the Libyan banking system. Finally, a credit bureau has been established to support efforts to optimise and rationalise financial resources allocation.

Looking ahead, inflation is expected to pick up slightly to an annual average of around 5.5 % in 2010 and 2011, as consumer confidence returns, expected reductions in subsidies are implemented, and higher oil revenue increases domestic liquidity. A slightly stronger dinar is also likely to contain imported inflation during the same period. The CBL’s discount rate is expected to remain at 4 % in the short to medium term, pending signs of global recovery and higher hydrocarbon prices.

 

The current account surplus in 2009 is estimated to have dropped to around 17 % of GDP from 40 % a year earlier owing to a significant decrease in hydrocarbon exports and associated revenues while imports rose compared to pre-crisis levels (38.4 % of GDP in 2009, against 25.7 % in 2008). This was due to increased demand and a relatively stable exchange rate.
The higher imports and fall in oil prices after the financial crisis pushed the 2009 trade surplus down to about 36.4 % of GDP from 47.9 % in 2008. As planned in the 2009 budget, public expenditure declined marginally in 2009 from the previous year, ending three years of large fiscal expansion, which raised concerns about expenditure quality and composition.
Despite the global crisis, the overall external position has remained relatively stable and the 2010 outlook is favourable. From USD 136.1 billion, total foreign assets are estimated to have increased to USD 147.4 billion in 2009 and expected to further grow to USD 166.1 billion in 2010 as the international economy recovers.

Overall, there is a large trade surplus. Oil, natural gas and petroleum-based commodities make up 97 % of exports. The rest comes mainly from agricultural and fisheries products. More than 80 % of exports go to the European Union, with Italy the main destination. Libya imports a wide range of industrial and agricultural products, with Italy, Germany, China, Tunisia and France the main trade partners.
Libya is a signatory of the Greater Arab Free Trade Area (GAFTA) and the Arab Maghreb Union (AMU), with ties to the Community of Sahel–Saharan States (CEN-SAD) and the Common Market for Eastern and Southern Africa (COMESA). It has bilateral trade agreements with Morocco and Jordan, and applied for membership of the World Trade Organization (WTO) in 2004. In 2008, Libya began negotiations on a free trade agreement with the European Union, its main trading partner. According to the European Commission, this could increase Libya’s annual exports to the EU by up to 7.8 % across all sectors and imports from the EU by up to 15.3 % by 2018.

In preparation for WTO membership and the other agreements, and to orient the country towards a more open economy, Libya has made trade reforms in recent years, including reducing subsidies and the number of state importing monopolies, limiting the number of import bans, abolishing import tariffs and licenses for most goods. Since the opening of the Libyan economy and efforts started in 2003 to promote the private sector and foreign investment, private capital flows have increased from just over USD 1 billion in 2005 to almost USD 3 billion in 2008. In 2009, foreign direct investment is estimated to have decreased to about USD 2 billion, because of the global slowdown, in particular in the oil and gas industry, which is the main recipient of foreign capital.
Libya’s debt remains sustainable in the short to medium term, owing to low foreign debt and the continued accumulation of foreign-exchange earnings.

With the lifting of economic sanctions in 2003, Libya has opened up its economy and pursued privatisation and economic diversification as a top government priority. Libya’s determination to diversify led to a dramatic reduction of the minimum investment threshold from USD 50 million to USD 4 million in 2006 and foreign investors have been allowed to borrow up to 50 % of their investment capital from local banks. In August 2009, the Privatization and Investment Board established its new “one-stop” streamlined business licence application procedure. All these initiatives should improve the overall business climate and enhance investor confidence in the non-oil and traditional oil sectors.

However, the business environment continues to suffer from administrative delays, institutional bottlenecks and inefficient regulations which hamper the strong political commitment to change. The relatively high minimum capital investments for establishing ventures; an opaque, discretionary and ad hoc regulatory environment; and a lack of available information pose substantial challenges to trade and investment.

Labour code and land regulations hardly encourage new businesses and private ventures. The 2009 African Competitiveness Report ranked Libya 120th out of 134 countries in terms of wage determination and human resources management policies. Labour laws lay down minimum wage rates, number of work hours, night shift rules, and dismissal regulations, which have often been criticized, notably by the US Heritage Foundation, for hindering employment and productivity growth. Mandatory quotas for Libyan employees by foreign firms are also reported as a limiting factor which affects productivity, although it has helped the high unemployment rate. Efforts are being made to reform the labour and land regulations but these are still slow.

Libya’s banking system has been relatively resilient to the global financial crisis owing to a favourable financial position of Libyan banks which are considered secure by international standards. The sector has remained traditional, deposit-based, and largely government-owned. Indeed, when sanctions were lifted in the early 2000s, Libya recognised the need to develop a modern banking sector to help channel the large amounts of liquidity coming in and out of the country and provide funding for the large-scale investment projects that have proliferated in the country. Commercial and retail banks are very well capitalised and rely on domestic deposit growth to finance credit to the local economy.

Some progress was achieved in implementing much-needed economic reforms. However, inconsistent political decision making has had a detrimental effect on the process. In January 2009, a proposal was made to nationalise the hydrocarbon industry. This was not followed through but caused a stir among oil and gas operators in Libya. The following month, a proposal was made to dismantle Libyan ministries. The General People’s Congress ultimately rejected it.

The ineffectiveness and uncertainty surrounding reforms in Libya is slowing their progress. In the social sector, however, some positive developments have boosted the hopes of non-governmental organisations to become more involved in the country. After years of refusal, Tripoli finally gave Human Rights Watch permission to issue reports on rights in Libya, and in November 2009, the General People’s Congress announced a new reform that would, if adopted, allow for non-partisan organisations to be established and operate in the country.

 

Other Recent Developments

Over the past years, significant and consistent progress has been made on financial reforms, including privatisation. With the restructuring of state-owned commercial banks, further improvement of financial intermediation is expected. Aside from the oil and gas industry, banking is now the single most important sector receiving policy makers’ focused attention.

Privatisation in the banking sector, which started in 2007, is continuing a strong trend. Two of the five public commercial banks have been privatised to reputable foreign banks, with immediate management control and the option to purchase up to 51 % stakes in three to five years. Two of the remaining three banks merged in April 2008, and most regional banks have also been merged into a single entity. Going forward, authorities plan to privatise the remaining public commercial bank through the newly established stock market. Moreover, agreement has been reached with financial institutions from the United Arab Emirates and Qatar to establish two new banking groups. The easing of regulations, allowing local commercial banks to seek strategic partnerships with foreign banks, should help open up the sector further. Despite the improvement, access to private financial services is limited by fundamental structural issues and distortive incentives. Most access to credit occurs through government-backed Special Credit Institutions. However, these institutions are said to be crowding out commercial bank credit with their zero-cost of funding, lax lending standards and minimal interest rates.

Some progress was achieved in implementing much-needed economic reforms. However, inconsistent political decision making has had a detrimental effect on the process. In January 2009, a proposal was made to nationalise the hydrocarbon industry. This was not followed through but caused a stir among oil and gas operators in Libya. The following month, a proposal was made to dismantle Libyan ministries. The General People’s Congress ultimately rejected it.

The ineffectiveness and uncertainty surrounding reforms in Libya is slowing their progress. In the social sector, however, some positive developments have boosted the hopes of non-governmental organisations to become more involved in the country. After years of refusal, Tripoli finally gave Human Rights Watch permission to issue reports on rights in Libya, and in November 2009, the General People’s Congress announced a new reform that would, if adopted, allow for non-partisan organisations to be established and operate in the country.

The quality and scope of existing infrastructure cannot meet rapidly increasing demand for significant upgrades and new construction, but a massive infrastructure investment plan, mentioned above, spells out the priorities and investments needed in housing, utilities, transport, power, and information and communications technology in coming years. Major transport projects are being studied or built, including the new USD 2.1 billion Tripoli International Airport due to be completed in 2011. This should strengthen Libya’s position as a North African aviation hub. The Tripoli Underground Railway Project will feature 73 stations and close to 100 kilometres of railway. In light of the increase in cultural and historical tourism, airport development has also started. There are major expansion plans for airports in Benghazi, although no timeframe and financial information is available.

Since sanctions were lifted, Libya has experienced an economic boom. Most of the revenue has come from oil and gas, which have accounted for over 60 % of GDP in the past five years. Nevertheless, while hydrocarbon revenues have generally experienced a stable increase, non-hydrocarbon revenues have risen from LYD 2.65 billion in 2005 to an estimate of over LYD 10 billion in 2009. Their contribution to GDP has increased from 4.5 % in 2005 to an estimated 13 %. While hydrocarbon revenues have followed world prices and production levels for oil and other emerging energy sources, tax revenues have risen with the opening up of the economy to the private sector and the modernisation of tax laws and administration. As a country which receives very little official direct assistance, Libya’s main source of non-tax revenue has been the returns from investments made by the Libya Investment Authority (Libya’s major sovereign wealth fund) and other investments located abroad.

Overall, taxation is not considered a major impediment to doing business in Libya. The government has in recent years adopted new tax laws and pursued other reforms to clarify the tax structure and administration as part of efforts to open up the economy. The 2009 Africa Competitiveness Report assigns a score of four out of seven on the perceptions of business executives on the level of taxes, placing Libya as high as 37 out of 134.

Tax on employment income ranges from 8 % for annual salaries up to LYD 4 800, to 15 % for those over LYD 9 600. An employee also pays 1 % of gross salary into a Solidarity Fund which is taken out by the employer and a jihad tax, ranging from 1 % of salaries up to LYD 50 per month to 3 % if exceeds LYD 100 per month. Social security contributions by employers are 11.25 % of gross salary while employees pay 3.75 % of their gross salary.

Libya’s efforts to increase revenue mobilisation have been driven to a large extent by pressure to significantly boost non-oil tax revenue at time of falling oil prices. However, the pressure is expected to ease in coming years, as oil prices are expected to rise again on the back of rebounding world demand. Detailed information about the taxation system remains scarce.

Under IMF guidance, the government has also sought to broaden the tax base and improve revenue collection. Non-oil revenue performance has improved with reforms. In 2006, the government established a large taxpayers’ office in an attempt to strengthen revenue administration, streamline the tax and customs departments, and strengthen controls.

With a population of 6.3 million, which grew by 2.1 % in 2009, Libya has the highest UN Development Programme (UNDP) Human Development Index (HDI) on the African continent, rising steadily by 0.44 % annually from 0.821 to 0.847 between 2000 and 2008. In the same trend, the UNDP Human Poverty Index (HPI-1) slightly decreased from 13.6 % in 2008 to 13.4 % in 2009, despite the impact of the global economic crisis. Seventy-eight percent of the population lives in urban areas and there is a median age of 23.9 years, an average life expectancy of more than 77 years, and an average literacy rate of 82.6 %, which puts Libya on the right path to achieving the UN Millennium Development Goals (MDGs).

Despite these commendable social attributes, Libya still faces serious human capital weaknesses, notably in education, health and gender equality, which could significantly slow the country’s transformation and transition to a market economy.

Despite ambitious policies, social attitudes still hinder women’s participation in the labour market (Libyan women have one of the lowest female-to-male participation ratios), and in business and politics, contrasting with the seemingly strong support for women’s involvement in economic and social activities from the country’s leadership.

The health care sector is benefiting from reforms aimed at improving the quality of care provided in public hospitals and clinics, limiting the incentives for the population to seek treatment in neighbouring countries, especially Tunisia and Egypt, and addressing a brain drain of Libyan healthcare professionals. To date, little progress has been observed and Libya’s healthcare system continues to suffer deficiencies due to poor capacity, low wages for healthcare personnel and poorly-equipped facilities. The system is struggling to recover from UN sanctions.

The education sector is undergoing substantial reform in a bid to promote human and sustainable development. Libya was successful in achieving universal enrolment in primary education and quasi-universal in secondary education, with gross enrolment rates of more than 100 % and around 94 %, respectively. Tertiary education enrolment rates hovered around 56.3 % in 2009, with little to no change compared to the previous year. Despite satisfactory overall enrolment rates, the curriculum needs to be overhauled and aligned with the economic needs of the labour market. At the same time, Libya has made considerable investment in reforming its higher education and scientific research. Several educational exchange programmes with European and American higher education institutions have been concluded. With more than 1 000 Libyans enrolled in US graduate schools in 2008, this number is expected to increase more than four-fold in the next three to five years.

As the energy sector is the main economic driver but a relatively low employer (70 % of GDP but only 5 % of the formal workforce), Libya struggles with unemployment. Beating this is a challenge, especially as the government and social sector accounted for close to 61 % of the 1.64 million-strong formal sector in 2009. At the same time, it appears that wealth from the energy sector is redistributed through extensive “welfare” employment in the public sector, making it much less productive, despite the role it has effectively played in reducing income disparities since the 1990s. The government provides extensive social support through subsidies and higher pensions, including indirect subsidies, such as cheap utilities and oil and gas products at below international prices.
 

Industry is at an exciting stage of development and stands to benefit from the government’s privatisation drive. The government has ambitious plans to develop the long-overlooked mining and minerals segments, while the petrochemicals sector is feeling the benefits of an injection of foreign capital. The cement production and steel industries are thriving thanks to the flourishing construction industry in both Libya and the MENA region, while the development of light industries, such as food processing and textile production, is rapidly gaining momentum. Misurata Free Zone (MFZ) is at the forefront of Libya’s drive to attract FDI to the country’s industrial sector and focuses in particular on four segments: food processing, petrochemicals, cement and other construction materials and metallurgical industries that rely on local raw materials such as iron, steel and hydrocarbons.

Companies that will be approved to operate in the MFZ include the German firm CCI Cereals Commodity International, the Egyptian cement company ASEC, Asamer and Austrian cement company, and Tripcair, a cement firm from Cyprus. The 30 companies approved for the MFZ add up to a total investment of $3.61bn. Outside of the MFZ new plants are also being planned including ones for petrochemicals, construction and cement. As the government’s drive for privatisation picks up, opportunities for foreign investment and collaboration are set to increase.

In spite of the appearance of foreign brands in recent years, the local retail market remains dominated by the informal sector, with traditional souks and individual shopkeepers still supplying the demands of the majority of Libyan consumers. Wholesale and retail trade, and restaurants and hotels accounted for 5.2% of GDP in 2006 and it is one of the most important sources of employment, especially in major urban areas.

Libyan GDP per capita is also high by regional standards and shopping is a popular leisure activity. Despite the consumer appetite, the government restricts foreign participation in the sector, making it difficult for brands to develop a presence in the country. There are only a few major shopping centres, such as the Andalus Gate and the Oasis Centre, and even these establishments offer very few internationally branded shops. Libya’s first major international-class shopping mall, with a 26,000-sq-metre, supermarket-anchored property, will come online in 2012 as part of the Bab Al Medina development in the capital.

Like many other areas of the Libyan economy, the pace of change will be measured and the government is unlikely to relax its restrictions on foreign participation in retail ventures. Genuine brands also face competition from the widely available selection of counterfeit products. Still, the country’s retailing culture and rising number of wealthy expatriates in Tripoli should be sufficient enough to encourage a substantial amount of future interest in the sector.

The construction market has been largely inactive since the late 1970s, so there is latent demand that offers ample opportunity for early investors to reap substantial benefits. With a large, young and fast-growing population, as well as high government liquidity from oil revenue, the market has several key demand drivers, which have led it to become one of the country’s most buoyant sectors in its early attempts at diversification away from hydrocarbons. While the government is focusing most of its attention and public sector work on residential provision – pledging 500,000 additional units by 2010 – private sector companies are addressing some of the shortage in other areas. International construction giants from countries such as Turkey, Malaysia, France, Lebanon, and some Gulf states, are undertaking significant projects, often in joint ventures with government departments. Securing adequate resources is the key challenge in a country undersupplied with cement and iron. With many companies having to import technologies and materials, the government needs to concentrate more on improving domestic output.

For many companies Libya represents a virgin market, with existing building stock long outdated and a dilapidated and an increasingly wealthy government and people keen to modernise numerous aspects of the country’s buildings. As traditional household living patterns start to shift and urbanisation trends continue – about 90% of the population currently lives in 10% of the land area, concentrated in the northern cities of Benghazi and Tripoli – the demand for new residential space is set to soar.

Commercial space is also in high demand, especially for foreign companies working in the hydrocarbons and private-sector development. Estimates place the need at 5500 new offices per annum. The retail market is also positive and poised to react to the new market conditions being encouraged by government incentives. Shopping centres have been successful, with 100% occupancy rates in the new Oasis Centre, Zakher Al Yamama and the Andalus Gate.

However, these centres remain very small in comparison with their Gulf counterparts, and as yet no large-scale retail facilities exist, despite market appetite. The main challenge is the supply side of material and labour demand. The country is not producing construction materials at a rate to satisfy this exponential demand growth and will need to source good import markets to guarantee prices and construction times for the vast range of real estate due to come online over the next few years.