Oil and economic development: Libya in the post-Gaddafi era

Economic Modelling: Libya experienced traumatic political and economic upheaval during 2011 arising from an eight-month-long civil war that cost thousands of lives, resulted in major economic dysfunction, destroyed part of the country's infrastructure, almost halted oil production, the country's major source of revenue generation and exports, as well as destroyed part of the sector's support infrastructure. While the civil war resulted in the ending of 42 years under Muammar Gaddafi rule, the economic legacy as represented by the costs of reconstruction efforts is enormous. While the freeing up of tens of billions of dollars of frozen assets may be the key to the country's short-term rehabilitation, longer-term reconstruction, growth and stability will fundamentally depend upon rehabilitating the country's oil sector. Interestingly, this rehabilitation will also have a wider global impact.

This paper uses a deterministic dynamic macroeconomic model to analyse the effects upon key macroeconomic variables of a recovery in Libyan oil production to levels that existed prior to the revolution. Model simulation results indicate that additional oil revenue brings about: an increase in government revenue, increased government spending in the domestic economy, increased foreign asset stocks and increased output and wages in the non-oil sector. However, increased oil revenue may also produce adverse consequences, particularly upon the non-oil trade balance, arising from a loss of competitiveness of non-oil tradable goods induced by an appreciation of the real exchange rate and increased imports stimulated by increased real income. Model simulation results also suggest that investment-stimulating policy measures by the government produce the most substantive longer-term benefits for the economy.