By Amr Nabil News Focus Syria Thinks Small Damascus turns to microfinance to combat poverty An Industry Unraveling Once a symbol of national pride, cotton’s prospects are coming apart at the seams A New Way of Doing Business Non-profit group promotes economic development by giving companies a helping hand The Science of Buying Marketers examine the brain to find out what makes consumers tick Digital Booty With electronic piracy plaguing the music business,legitimate media companies scramble for a business model that pays A Rocky Start Theft, corruption and a little chaos mark the launch of a new property levy meant to haul the country’s tax system into the modern era Highway Robbery Reputation of white taxi program takes a hit as drivers caught rigging meters

By Robert Tashima, Oxford Business Group

After decades of sanctions and diplomatic isolation, Libya has increasingly begun to assume the swagger of a regional economic heavyweight. Yet, while the country continues to suffer from an over-dependency on hydrocarbons, it has implemented a number of reforms in recent years that the government hopes will strengthen its markets and make its growth more sustainable.

The country boasts Africa’s largest oil reserves and, with a population of only 6 million, it is more than able to spread its wealth around. Furthermore, following over three decades of a centralized economy experiment, Libya is diversifying away from oil, liberalizing its markets, privatizing state assets and opening the country up to foreign investors. In recent years, the North African country — which also currently holds the presidency of the African Union — has put the billions it has raked in from oil exports to use in a massive spending spree, buying shares in everything from London properties to Italian financial institutions through sovereign wealth funds like the Libyan Investment Authority (LIA) and Libyan Africa Investment Portfolio.

The numbers help illustrate the country’s trajectory. According to the Central Bank, nominal GDP has almost doubled in the past few years, reaching LD 89.26 billion (LE 4.04 trillion) in 2007, although more recently, oil volatility and the global downturn has impacted growth rates, which are expected to slow to around 2% in 2009. Still, Libya has managed to escape relatively unscathed from the crisis. Revenue from oil is projected to fall almost 40% in 2009 from the record highs of 2008 and public expenditures were slightly downsized in response — for example, spending under the Wealth Distribution Program was readjusted to LD 3.3 billion (LE 14.9 billion) from the LD 4.6 billion (LE 20.8 billion) set in the 2008 budget. Similarly, the LIA has followed a low-risk investment strategy, which has shielded it from the losses suffered by other sovereign wealth funds.

The centrality of the energy sector proved to be fortuitous, with the recent boom having dramatically increased oil exports last year, offsetting the 29% rise in imports. IMF figures put the external current account surplus at an impressive 41% of GDP and the fiscal surplus at a still-very-healthy 25% in 2008. Government revenues jumped by 37% thanks to higher petroleum exports and tax administration, and the net foreign assets of the Central Bank and the LIA leapt to LE 749 billion.

These positive numbers owe a lot to the energy sector; with over 44 billion barrels of reserves, energy provides the lifeblood of Libya’s economy, contributing some 70% of GDP. Hydrocarbons alone account for nearly all export earnings and almost nine-tenths of government revenue. Much of this prosperity has come about following the dismantling of sanctions in 2003. A number of bidding rounds have since been held, while investment has accelerated dramatically on the back of increased interest from international oil companies. Over 50 foreign companies, ranging from Petrobras to Shell, are now present in Libya — up from 11 in 2003 — with many of them keen to drill into Libya’s largely unexplored fields.

However, while GDP growth and state revenues have skyrocketed on the back of high crude prices, there’s no doubt that Libya’s increasingly influential position on the world stage is also thanks in large part to the reforms that it has launched over the past five years.

Diversification has become one of the foremost policy priorities for Libya, as it seeks to wean itself off of its overreliance on the volatile commodities markets and establish a more sustainable base for future growth. Yet while oil and gas will likely serve as the engine for Libyan growth in the medium term, the attention the government is lavishing on other sectors, ranging from real estate to industry is beginning to bear fruit. Data from the IMF indicates that non-oil activities as a proportion of real GDP grew by about 8% in 2008 and are expected to grow by an additional 6% in 2009 — above the global norm.

So far, improvements in the business climate and regulatory framework are helping speed up investment in non-oil sectors. Part of this is simply a case of making up for lost time. The end of sanctions opened the floodgate for foreign investment, with foreign direct investment (FDI) rising almost 1,200% from $75 million in 2004 to $1.2 billion in 2005. However, a constant raft of reforms has opened up amongst others, the industry, health, tourism and agriculture sectors to outside investment, and there is a strong focus on boosting FDI. Libya’s Foreign Investment Law 5 of 1997 provides an impressively liberal framework for investors, allowing 100% foreign ownership for certain projects, offering a blanket tax exemption on import duties and guaranteed protection from nationalisation or expropriation, and exempting them from capital tax for the first five years.

The government has similarly taken a new approach to redistributing wealth, shifting from centralized planning to the marketplace by encouraging private business, opening the country to foreign investment, and transferring state-run businesses to private hands.

A campaign for privatization, launched in 2003, led to the establishment of the General Board of Ownership, Transfer of Economic Companies and Economic Units, which has converted hundreds of Libya’s state-run companies, from banks to airports, into private enterprises. Some 86 production and service companies with capitalisations of £300,000-£370 million (LE 2.7 million - 3.3 billion) have been privatised; 57 have been transferred to the public companies liquidation fund; 14 are undergoing the evaluation process; and 87 are in the preparation process. The total value of privatization thus far is LD 1.85 billion (LE 8.3 billion).

To broaden the private ownership base the government has also set up the Libyan Stock Market, which is seeing increased interest on the back of educational programs and initial public offerings for major state-owned enterprises. The country has also embarked on a major reform program of the state-dominated banking sector, during which the entire system will be restructured and several banks privatised, allowing the Central Bank to operate solely as a regulator.

Similarly, Libya is deepening its engagement with cross-border trade and production networks. Libya is already a signatory of the Greater Arab Free Trade Area and the Arab Maghreb Union, and boasts ties to the Community of Sahel-Saharan States and the Common Market for Eastern and Southern Africa. The country’s ongoing discussions on WTO accession also bode well for the future.

The success of the Misurata Free Zone is equally telling. With over 30 companies licensed in the MFZ in the trading, industry and service sectors, the free zone has created 2,500 jobs and LE 19.7 billion in investments and these numbers are only expected to increase.

Obviously, all of this change is not without its challenges. Even rose-colored glasses cannot obscure the fact that unemployment remains high and government bureaucracy still remains an impediment for investors. A recent executive decree mandating the appointment of Libyan CEOs for all joint ventures has caused concern among some foreign companies, and delayed contracts have held up construction of the new Tripoli airport. The government has recently provoked controversy by intervening in the sale of Canada-based oil producer Verenex to state-run China National Petroleum Corporation, effectively forcing the Canadian firm to sell its Libyan assets at a 30% discount to the LIA. Similarly, a bloated public sector and growing demographic pressures have taken their toll.

However, these difficulties are by no means insurmountable and the government has already begun laying the groundwork to overcome them. Over LD 5.82 billion (LE 26.3 billion) has been set aside for overhauling the higher education sector, while business licensing processes have been improved.

Libya, in a sense, is benefiting from a rare opportunity to develop the economy in a way that can produce quick results, by using the windfalls of recent oil boom to lay the foundations for a fully integrated marketplace. Certainly, the early results of efforts to widen the economy’s ownership base and distribute wealth through private enterprises, rather than through the state, are largely positive. While obstacles will likely remain through the medium term, if the country continues on its current path, it has a promising future ahead. bt