We expect the Libyan economy to contract by 24.6% in 2011 owing to the disruption to oil production and exports caused by the ongoing political turmoil. This is a fairly optimistic estimate, which is based on the assumption that the political situation will be resolved later this year, allowing oil production and exports to resume gradually. We estimate that GDP growth will average 2% in 2011-15. Resumed activity in the hydrocarbons sector will depend heavily on the return of foreign oil service companies, which have withdrawn from the country, citing security concerns.

There is potential for the non-oil sector to grow rapidly, albeit from a low base, supported by government infrastructure investment programmes, particularly in the construction, utilities, communications, transport and financial sectors. However, government funding of infrastructure projects will decline in the immediate future as the regime focuses on strengthening its position by trying to pacify Libyans using direct transfers while also spending heavily on arms and foreign mercenaries. We expect foreign direct investment to decline steeply in 2011-12 as investor interest is all but erased amid continuing political uncertainty.

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