A troubled context

Libya is today at a crossroads with a choice of paths opened for the future. It can fall into the trap of many resource-rich countries fostering its hydrocarbon dependence or it could follow a roadmap for sustainable, inclusive growth led by an increase in private-sector activity.

Located in Northern Africa, Libya is a relatively large country with a small population concentrated very narrowly along the Mediterranean coasts. Tripoli, the largest city and capital is home to 1.7 million of Libya’s 6.4 million of people, 27.7 % of whom are under the age of 15. The revolution of 2011 has unleashed the potential for more diverse and inclusive growth in which small and medium enterprises have a big role to play. On the other hand the conflict accompanying the revolution had a severe impact on the economy.

Libya faces now the complex challenges of stabilizing the economy and responding to the aspirations of the revolution. The short-term challenges are to manage the political transition, normalize the security situation while maintaining budget and macroeconomic stability. Libya also needs to address issues including capacity building, improving education, rebuilding infrastructure, establishing a social safety net, developing the financial system and reducing hydrocarbon dependency.

With such a high rate of young population and the need to transition to a market-based economy, small and medium enterprises (SME) and entrepreneurship in general have a true role to play to rebuild the economy and switch the cursor from hydrocarbon dependency to diversification. This article will explore the newly arising prospects and challenges in Libya for SME entrepreneurs, their engagement and the management of community resources.

Predominance of a controlled hydrocarbon state

Libya is a rentier state with its economy mainly structured around the energy sector. Its oil and gas industry generates about 80% of GDP, about 95 % of export earnings and more than 90 % of government income, giving Libya one of the highest per capita GDPs in Africa. Non-hydrocarbon activities only account for 30 % of GDP and are a negligible part of total exports. Climatic conditions and poor soils severely limit agricultural output, and Libya imports about 80% of its food. In addition the state has played a predominant role in the economy by taking control over much of oil and gas production and distribution in the 1970’s and 1980’s. It has killed private sector activities in most sectors and has not used its wealth to develop national infrastructure or the economy. Today the public sector is deemed corrupted, oversized and inefficient.

Therefore it is not a surprise that Libya is scoring poorly on diversification in all the available global rankings. During the conflict the Libyan economy severely suffered and crude oil production fell to 22,000 barrels per day in July 2011. Consequently non-hydrocarbon economic activity was also affected by the destruction of infrastructure and production facilities, disruptions to banking activity, limited access to foreign exchange and the departure of expatriate workers: the non-hydrocarbon output contracted by 50% with a GDP in 2011 60% lower than in 2010.

The growing importance of SMEs in Libya

For a couple of years SME have started to be seen as potential growth engines for Libya’s private sector in order to alleviate hydrocarbon dependency, kick-starts the growth and helps in the re-building effort.

Back in the former regime, the Economic Development Board had formed a Small and Medium Sized Department whose role was to carryout nation-wide programmes to train Libyan and support them starting-up their own businesses with loans. Qaddafi’s Baghadi Mahmoudi government even announced LD 500 million to be guaranteed by the Loans Guarantee Fund. However due to the high level of corruption nothing ever happened. In 2010 the basic legal infrastructure for private-sector development was adopted with 22 new laws changing fundamentally commerce, customs, income tax, stock market, labour, communication and land registry.

As of today the SMEs are geographically concentrated and on a few sector basis. SMEs are more concentrated in the North Western part of Libya (about 46% of total number) than in the North East (about 36%). About 80% of them are privately owned and run by individuals, while only 16% are established in the form of small corporations, and 3% are family-owned. SME mainly engage in the production of food products, wood products and metal for construction. Smaller Libyan firms are also involved in the production of clothing, ceramics and bricks, grain milling and press and publication goods. In addition most of them are located in Tripoli, Misurata, Benghazi, Jebel Akhdar and Al-Marqab.

Small-scale manufacturing firms have the potential to embrace economic growth through the development in areas such as tourism (Libya’s rich archaeological sites, souvenirs), tourism, glass and leather goods industries, and fisheries. One can even imagine to link with the Oil and Gas Industries providing services to the industry or the labour community on sites. The potential is clearly here and could help as well bridging the gap between a young population and high rates of unemployment.

Addressing Libyan SME challenges

Yet to date the value added contribution and growth performance of the SME have been very low. This gap between potential and reality on the ground can be explained by all the challenges SMEs have to face starting with a structural issue of lacking know-how, facing problems of economies of scale, poor managerial, financial and marketing capabilities.

An immediate challenge for SMEs is the access to flexible capital. SMEs need debt and equity financing on appropriate terms structured to fit their specific needs across the lifecycle of the business. According to a study conducted by Mukhtar E. Eltaweel, the Libyan financial system does not work well for SMEs being highly concentrated, rudimentary, bank-dependent and shallow. Despite substantial changes over the past decade and the privatization of two state-owned banks, the banking sector remains heavily controlled by the government. Consequently SMEs are more counting on informal financing (family loans or through individual networks for instance). The equity market is almost non-existent with a low quality and the debt markets are constrained and weak due to government’s control. Information on the financial conditions of borrower is not wide-spread and banks have difficulties in evaluating the risk of lending to small businesses, which makes borrowing very expensive with high percentage of collateral required, as much as 125 % of the sum of the loan in some cases.

A more global challenge for SMEs linked to the financial sector is a well-functioning governance and advantageous regulation: the implementation of adequate laws, change in governance and adaptation of institutions. Since the vote of the basic legal infrastructure promoting private-sector development, the next step remains to ensure the laws are indeed implemented effectively, which means coordination among agencies, transparency, fair governance and an efficient and reliable judiciary system. The regulatory framework still needs to be streamlined, improved and attractive to counteract the situation making transaction and start-up costs too high and uncertain. Helping successfully SMEs to start in Libya is adjacent to a deep structural change of Libyan institutions, attitude towards corruption and transparency that the revolution has promised.

Enabling business environment is also key to foster a culture of entrepreneurship within the population. Today Libya ranks 113 out of 144 on the Global Competitiveness Index with poor scores in basic requirements (institutions, infrastructures, health and primary education) and even lower rankings in efficiency enhancer and in innovation and sophistication factors.

 

Source: Global Competitiveness Index 2012-2013, World Economic Forum

 

Sources: World Economic Forum, Global Competitiveness Report, 2010–11; Economist Intelligence Unit, Country Forecast, September 2010.

1 Economies ranked from 1–139, with first place being the most competitive. Regional Average is a simple average of the rankings for

Algeria, Bahrain, Iran, Iraq, Kuwait, Libya, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.

2 Scores for 2005–09 based on a scale from 1 (very bad for business) to 5 (very good for business). Regional average is a simple average

of scores for Algeria, Bahrain, Egypt, Iran, Israel, Jordan, Kuwait, Libya, Morocco, Qatar, Saudi Arabia, Tunisia, the United Arab Emirates,

Angola, Kenya, Nigeria, and South Africa.

 

Not only does an improvement of the business environment require a transparent governance framework with clear accountability rules, but also a true structure dedicated to the support of SMEs development in order to have:

– Business development assistance to bolster the business skills and knowledge of the entrepreneurs thanks to training and an open flow of information

– Market linkages to link SMEs to supply chains, pools of development, businesses and communities and investment projects.

Hopes for Libya

Finally hopes for Libya are great following the revolution as the country faces a unique position of having the choice: remaining a hydrocarbon giant or choosing the sustainable path of diversification to ensure a long-term fate. One of the most promising initiatives has been taken by the MENA Transition Fund supported by the OECD in April 2013 on the occasion of the G8 to develop a Libyan SME Development Strategy.

This strategy would aim at enhancing entrepreneurship and SME development by supporting the Libyan government in the implementation of policies and measures to reinforce SME development. This program is very ambitious and plans to address the business climate and innovation by setting clear priorities for the promotion of high-growth enterprises and start-ups, by promoting foreign direct investment and linkages between SMEs and multi-national companies. Libya Enterprise, in charge of SME promotion, should receive clear directions to provide SME with the right public inputs and services, as well as education, infrastructure and taxation structure, complementing Libyan plans to set up Special Economic Zones and incubators in the country.

It is too early to understand if such a strategy can already be implemented in the country, but its existence shows that SMEs is high on the political agenda and put entrepreneurs at the forefront of Libya’s new growth. From the success of this initiative will depend the direction where Libya is heading[/premium_content]

Sources:

CIA Factbook, Libya entry

Wikipedia, Libya entry

“The Global Competitiveness Report 2012-2013”, by Klaus Schwab, World Economic Forum

“Business Linkages: Lessons, Opportunities, and Challenges” by Beth Jenkins, Anna Alkhakatsi, Brad Roberts and Amanda Gardiner, IFC & Harward University working paper

“Technical Assistance for Small and Medium Enterprise Development in the Socialist People’s Libyan Arab Jamahiriya”, African Development Bank

“Small and Medium Sized Enterprises in MENA: Leveraging Growth Finance for Sustainable Development”, by Jennifer Airey and Khalid Al-Yahya, HeartMind Strategies

“How are small businesses in Libya Financed?”by Mukhtar E. Eltaweel,  International Conference on Business, Finance and Geography (ICBFG’2012) December 18-19, 2012 Phuket (Thailand)

“Libya beyond the revolutions: challenges and opportunities”, Prepared by a staff team led by Ralph Chami, and comprising Ahmed Al-Darwish, Serhan Cevik, Joshua Charap, Susan George,Borja Gracia, Simon Gray, and Sailendra Pattanayak, IMF

“The World Bank “Doing Business” report – ramification for Libya”, by Sami Zaptia, Libya Herald, 19 april 2013

“Searching for the Finance-Growth Nexus in Libya” by Serhan Cevik and Mohammad Rahmati, IMF Working Paper, No. 13/92.

“Libya, 2013 Article IV Consultation”, IMF, country report No 13/150

“Project proposal for the MENA transition fund: SME Development Strategy for Libya”,  MENA Transition Fund April 2013

 

 

 

 

 

 

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laurealazet
About Author: laurealazet
Laure has been working as an analyst in the energy sector with a focus on emerging markets. She has lived and worked in France, Russia, China, Central Asia and the UK.