While headlines still narrate a woeful tale of conflict in oil-rich Libya, many actors are hard at work planning for the country's future, once peace prevails.

On the 8 October 2015, UN Special Envoy to Libya Bernandino Leon put forward a suggested Government of National Accord for the consideration of warring Libyan factions. Members of the international community were swift to demonstrate support by organizing a meeting in Tunis on 11-12 October 2015, with a view to addressing the country's socio-economic problems and exploring ways to contribute to post-conflict recovery under a future unity government.

That same week the Transparency Working Group met for the sixth time to discuss some of these very challenges.

At the last Transparency Working Group (“TWG 5”), we reviewed fiscal priorities, identified ballooning subsidies and salaries as the key problems, and proposed measures to bring this scourge under control (since reflected in the budget, and implementation efforts by the Central Bank of Libya). We also recognized that sources of revenue need to move beyond hydrocarbons.

Diversification: easier said than done

Libya must look beyond extractives. Non-hydrocarbon business is less prone to predation—less easy for armed groups to blockade. Other sectors can generate meaningful jobs for many more young Libyans—those who fought the revolution and who expect something positive from it—and would imbue the economy with more resilience.

At TWG 6, NRGI presented evidence that, among extractive-based economies, the more diversified ones experience higher growth and reduced revenue volatility in the long term. Diversification also encourages more inclusive growth and reduces inequality. It depends on good macro-economic management, sound institutions, focused infrastructure investment, appropriate tax and tariff support, programs or regulations that bring down labor costs, and ideally a strong and engaged technocracy. However, in extractive-based economies institutions tend to be weak, the extractive sector usually lacks linkages with the rest of the economy, and Dutch disease makes for high local costs.

Over the last decade, especially with oil prices over $100 per barrel, Libya accumulated vast surpluses; part of this cash went to the Libyan Investment Authority and its subsidiaries. One particular subsidiary, the Libyan Local Investment and Development Fund (LLIDF), was established with the objective of diversifying Libya's non-oil economy and provide an enabling environment for the growth and participation of the private sector.

While sovereign wealth funds acting as off-budget institutions investing domestically is certainly not ideal in normal circumstances, “we are not in normal circumstances and therefore we require a non-conventional approach,” as one TWG member put it. We explored the implications of diversification for policy and for investment funds such as LLIDF. LLIDF has been working with Deloitte to develop a framework for active participation in (and promotion of public-private partnership opportunities for) investments to generate long-term financial returns and tangible socio-economic benefits by developing Libya's infrastructure.

New industries, old projects

The current climate provides a challenging setting for reform and diversification of the Libyan economy. In addition to political violence, institutional constraints identified were the difficulty micro, small and medium enterprises experience in accessing credit. Indeed, obvious conditions requisite for recovery and growth include political stability and an improved security situation, however this should be coupled with institutional stability, budget certainty, multi-year budgeting, and availability of sectoral and wider policies and master plans as context for investment decisions.

Investing in the non-hydrocarbon sector in Libya should contribute to economic growth and diversification through private sector development and supply chain localization. This should create jobs, drive innovation and support knowledge transfer to local businesses in the Libyan economy. The work by LLIDF highlights a few most promising sectors: health care, fisheries, waste management, information and communications technology (ICT), logistics, and renewable energy. LLIDF also concluded that special economic zones (SEZ) have the potential to contribute to diversification. These sectors were chosen based on their potential to yield significant socio-economic impacts and contribute to private sector competitiveness.

Among the “quick wins” identified were some of the large volume of legacy projects worth over $180 Billion, inherited from the Gaddafi era, especially many near-complete projects. There would be significant political and social benefits from resuming the best of these (selected on the basis of net return after sunk costs), and this could generate both economic activity and work experience for young Libyans.

While there is merit in considering stabilization as part of the LLIDF's short-term objectives, the question is how. Can the LLIDF, amidst all the political chaos today, actually fulfil its remit of job creation and economic diversification? To put this into perspective, we discussed what policies could be put in place in the current situation (i.e., two governments and two parliaments), what immediate priority stabilization policies are required, and what role the LLIDF should play in these efforts. The TWG agreed that the LLIDF might be a valuable vehicle for driving this forward, perhaps with the support of a reputable international institution. (INTOSAI was discussed at the TWG; in addition, the World Bank has already done some work on the legacy project portfolio.)

Green shoots of growth

Tatweer Research, an LLIDF subsidiary, has been ahead of the game, albeit on a small scale; it has successfully taken steps towards moving Libya away from an extractive economy to a knowledge-based economy through its graduate program. We all welcomed Tatweer's initiative, and Tatweer agreed to contribute to the next steps in the TWG's advice to the government as it moves towards stabilization and economic revival.

TWG members agreed to a number of next steps, which the Libyan Public Policy Forum will be coordinating in the next few months, the first of which is a draft of recommendations of short-term immediate economic stabilization measures to present to a Government of National Accord once it is in place. The second is an assessment of potential legacy projects in which the LLIDF could invest to produce “quick wins.” Finally, we will seek to gather feedback and generate debate with the LIA on its governance structure and its adherence to the Santiago Principles. The next TWG meeting will take place in mid-November in Tripoli.

NRGI is committed to supporting the TWG with support from UK DfID, and also working with civil society organizations and media, and providing technical assistance to the Libyan authorities in areas identified by the TWG.

Yusser AL-Gayed is NRGI's Middle East and North Africa deputy director. Peter Rundell is a stabilization, governance and development consultant to the World Bank Group.