The government has usually had a healthy budget surplus in recent years owing to high oil revenue and a tendency not to fulfil its spending commitments. As the hydrocarbons sector provides 89% of government income, we expect that a sharp decline in oil production and hydrocarbons exports in 2011 will result in a fiscal deficit of 25.4% of GDP. Higher oil prices owing to widespread unrest in the Middle East, will partly compensate for falling hydrocarbons export volumes. Capital expenditure will stagnate in the short term as the regime struggles to remain in power. As oil revenue falls, the regime will seek to draw down its foreign-exchange reserves, largely to fund its war against the opposition. However, its access to overseas funds has been curtailed by the imposition of asset freezes and other sanctions by the international community. If the opposition succeeds in overthrowing Colonel Qadhafi we expect oil revenue to recover as production and exports resume gradually. However, if Libya fragments into opposition- and Qadhafi-controlled regions, the recovery scenario will be limited to the east of the country.