Libyan Crisis Severely Impacts Private Sector: Report

 

Story Highlights

  • More than three quarters of enterprises in Libya sustained direct impact in renewed crisis.

  • Political and economic instability, corruption, and the high occurrence of crimes and theft were the main constraints to growth for the private sector.

  • Despite the recent losses, private investors are still willing to increase employment and investment, provided that security, economic outlook and connectivity improve.

 

More than three quarters (77%) of enterprises in Libya report to have sustained direct impact since renewed crisis began in the country. Political and economic instability, corruption, and the high occurrence of crimes and theft were the main constraints to growth for Libya’s private sector, according to a recent report by the World Bank Group.

The report, Simplified Enterprise Survey and Private Sector Mapping 2015, found Benghazi and Tripoli the worst-hit regions, with 86% and 81% of enterprises being directly impacted, respectively. This is, in part, because the two cities experienced the most intense fighting since the start of the crisis.  

About 30% of the companies surveyed had to move their main offices or sites of production due to the crisis, while one out of four enterprises suffered extra losses from material damages such as looting, theft, or vandalism since July 2014, the study revealed.

Employment is another area that has suffered greatly in the recent crisis. Companies sampled in the survey had to reduce their staff by 44% on average and reported an average reduction of more than 70% in revenues and sales. The recent crisis also triggered a major decrease in domestic investment, with surveyed firms reducing their investment on average by 60%, compared to previous levels.

 

Predominance of public over the private sector

The findings of the survey are discouraging for Libya, especially since the recent empirical studies show that the private sector experienced strong growth in 2012 and 2013, mostly driven by construction and trading companies focusing on retail of consumption goods.

Traditionally, the Libyan economy is largely skewed towards the public sector, with a total of 1.7 million public employees working directly for the government or for government-owned companies, accounting for a wage bill of USD 21.6 billion or 42% of the Libyan budget.

However, after recognizing the importance of diversifying government revenues, Muammar Gadhafi’s regime introduced new regulatory policies that encouraged foreign investment. The first wave of privatization began in 2003, and by 2006 the government allowed foreign enterprises to invest in up to 65% ownership of joint ventures with Libyans. By 2009, the regime introduced new laws that increased foreign investors’ rights to enter a wider range of sectors and provided tax exemptions, but this was not fully implemented before the revolution began in 2011.

 

Recent development in Libya begs for renewed assessments

The Enterprise Survey, which was funded by the Middle East and North Africa Transition Fund, was conducted through telephone interviews with 457 Libyan private enterprises. Its overall objective was to focus on the impact of the recent conflict and to identify potential areas for economic growth, increased employment, as well as potential further obstacles to business transactions. The study was also aimed at providing analysis and data to inform possible interventions, either in Libya or abroad, in order to support the private sector throughout what looks likely to be a protracted conflict. It is however important to state that the situation in Libya is fluid, and therefore the report “is not as representative of the Libyan economy as would be the case under normal conditions.”

 

Potential interventions

The report offers a number of recommendations for potential interventions.  Among them, the report encourages continued capacity building efforts to help build strong institutions for Libya that can better resist a political struggle in the future. In order to reduce the impact of political risk, the report recommends testing the merits of impact evaluations of insurance schemes in comparable countries, such as Egypt.

In a bid to help end corruption, the report highlights the need to support the state in strengthening control mechanisms, providing technical advisory services on how to control corruption and enforce laws, and advocating the benefits of transparent mechanisms among companies.

Since state-owned enterprises are driving most of the growth in the country, the report also encourages public-private partnerships through advocacy with states to develop awareness.

The report found that Libyan banks are still far from exhibiting best practices, which hinders further growth of the private sector. Therefore, the study recommends working with the Central Bank to support Islamic Finance and to integrate it in the current banking system, among other steps.

Surveyed firm managers pointed to inflation and a lack of access to foreign currency as major obstacles to their growth in Libya, as US dollars can only be found via informal channels. To remedy this, the report suggests that the Libyan government should be supported to take strong fiscal and monetary policies and to implement growth and inflation controls.

The survey also found that Libya’s future prospects were not all doom and gloom. Half of the firms surveyed for this report expressed a willingness to increase their level of employment in the next year - of course, subject to developments on areas of security, economic outlook and connectivity. Additionally, slightly more than half of those sampled also said that if conditions improve, domestic investors were prepared to increase investments in the next two years.