Internal conflict has dogged Libya’s economy since the first civil war in 2011, triggered by the Arab Spring. And while recent years have seen the cultivation of hard-fought stability, no final settlement has been achieved.

There are still multiple factions still vying to govern Libya. Yet, all seem interested in establishing peace and reinvesting in infrastructure as well as recovering from the Coronavirus pandemic.

Furthermore, as elections approach, all parties are willing to accept democracy, ratified by an external source. Certainly, the recent conflicts that have arisen in Libya have been comparatively minor and are usually solved in hours and days instead of months, with government officials arriving on the scene to facilitate open communication. Despite the difference in viewpoints, all parties are therefore committed to fostering a period of growth and prosperity, founded on democracy and peace.

Responding to global challenges

But Libya has also had to contend with evolving global challenges, such as the current war in Ukraine. The sanctions placed on Russia have impacted Libya’s agricultural sectors, resulting in a 10 to 20% shortfall in wheat and seed imports. This has been somewhat mitigated by both replacement imports of grain, minimising disruption, and by an increase in oil revenue. While Libya’s oil export capabilities remain below their peak, oil export prices have almost doubled since the beginning of the conflict, boosting revenue. This has allowed Libya to bridge the revenue gap it was experiencing within the oil sector. Meanwhile, the relative fiscal freedom afforded by the additional income has allowed necessary investments to be made into the country’s infrastructure, which is further aiding recovery.

Can Libya afford to rely on oil alone?

However, some headwinds are approaching. Europe is focusing on sustainable development and using renewable energy sources, in a bid to decrease carbon emissions and fossil fuel reliance, slowly reducing its use of hydrocarbons in favour of green energy. Given that the oil sector currently accounts for around 98% of Libyan Government revenues , decreasing European reliance on fossil fuels in the coming decades could pose a significant threat to Libya’s recovery.

Libya as a conduit for trade

Europe is not the only market for Libya’s oil, however. The country’s geographic and political links to a rapidly developing Africa mean that there will be demand for oil from the emerging and industrialising economies to the south. This trade with Africa is built on historically positive relationships, helped in part by Libya’s previous commitment to promoting African unity.

 Libya also has the potential to forge a key role in Arab-African trade, due to its membership to the Greater Arab Free Trade Area (GAFTA). Although the country is not a member of the African Continental Free Trade Area (AfCFTA), it offers a promising link between Africa and the Middle East. By maintaining positive relationships with both African and Middle Eastern nations, Libya can support and benefit from AfCFTA initiatives.

One such initiative is the drive to formalise undocumented cross-border trade, which is estimated by the African Import Export Bank at between 15% to 40% of all African trade . By formalising intracontinental trade, Libya can then support African nations in their bid to be viewed as viable trading partners with the rest of the globe, as well as reducing smuggling and stabilising trade routes. And by improving trade links between Africa and the Middle East, Libya can also act as a conduit for African and European trade, in part due to its entrepôt location.

Looking ahead

That said, a key focus for Libya’s future will be diversifying away from fossil fuels. Of course, oil will remain a staple for years to come. But the future cannot be ignored, and Libya needs to diversify. One sector on the rise is tourism, utilising its extensive coastline and rich cultural history. Further diversification is also possible via both agriculture and solar power. Infrastructure development will be important for both, with an urgent need to upgrade roads, railways, and ports.

As peace and stability become embedded, however, Libya can attract investment, particularly from Europe. These investments will need to be facilitated by specialist banks who will continue to support the Libyan economy as it develops. Indeed, FDI and diversification are the route to prolonged and sustainable growth in Libya. And in this respect, the prospects are promising.