World Economy

Libya Near Economic Collapse

Libya Near Economic CollapseLibya Near Economic Collapse

The rapid deterioration of Libya’s oil-dependent economy is threatening the objectives of the country’s new western-backed government and budding efforts to confront the Islamic State in North Africa, political and security analysts say.

Within hours of arriving in Tripoli two weeks ago, the government made controlling the nation’s oil a priority. It convinced a powerful militia to hand over three oil terminals, and the national oil company gave its support, AFP reported.

But the road to securing Africa’s largest reserves is riddled with even greater obstacles, and bringing the battered industry back to its full potential promises to be a colossal mission. With global crude prices in a slump, there is a sense of urgency for the unity government to boost oil production and alter Libya’s trajectory.

“Libya is on the verge of economic and financial collapse,” said Claudia Gazzini, senior Libya analyst for the International Crisis Group.

Instability has sharply reduced production levels as armed factions have taken over oil and gas regions. If the government fails to exert control, the contest for energy resources could deepen political fissures and trigger more violence, preventing the unified front that Washington and its allies seek against the Islamic State, analysts say.

  Fear of New Refugees

Resurrecting Libya’s oil production is crucial to preventing economic ruin, which could force the country to become heavily dependent on western aid and propel more Libyans to flee to Europe, adding to the refugee crisis there. It’s also vital for the government’s survival.

“As far as the economy is not solved, as far as the economic power has not been shared, you will not be able to find a political solution,” said Merin Abbass, regional director of Friedrich Ebert Stiftung, a German political foundation working on peace building in Libya. “Who has the access to the oil in Libya, has also the political power.”

The challenges include regional and ethnic power struggles, and independent efforts to sell or smuggle oil. Two other self-declared governments–one in the capital, Tripoli, the other in the eastern city of Tobruk—are also competing for influence.

The Libyan economy has long relied almost entirely on oil and gas extraction, which accounts for 95% of its export earnings and 99% of government income, according to UN statistics.

Today, Libya’s oil production stands at roughly 360,000 barrels per day—a 78% drop from five years ago.

The economic impact is already palpable. The central bank is running a massive deficit, spending six times more than the income from oil sales, depleting the state’s reserves. Shortages of fuel, food and other basic goods have caused prices to rise.

Analysts warn that if oil production levels and global crude prices don’t rise, a wider crisis, such as a sudden devaluation of the Libyan dinar, could severely hurt millions.