Outlook for 2011-15

• Political power will remain vested in the Libyan leader, Muammar Qadhafi. Libya will retain its unique jamahiriya (republic of the people) system, but the structures of government will undergo halting reform.
• Colonel Qadhafi's most likely successor is his son, Saif al-Islam Qadhafi. However, he faces entrenched opposition from other elements in the regime, as well as rivalry from some of his siblings.
• Relations with the US and EU will be subject to periodic bouts of tension, despite the resolution of the Lockerbie affair and the scrapping of Libya's weapons of mass destruction programme.
• The hydrocarbons sector will dominate the economy, but non-oil growth will be strong. However, the government's inconsistent and unwelcoming policies risk deterring international oil companies and other investors.
• We forecast that real GDP growth will average 3.8% in 2011-15. Oil output is likely to rise modestly alongside strong growth in the non-oil sector.
• In line with international food and non-oil commodity prices, inflation will spike in 2011, reaching 4%, before flattening out at an average of 3% in 2012-15.
• Current-account surpluses will follow trends in international oil prices, which determine export values, rising to 21% of GDP in 2011 before dropping off to 9.9% in 2015.

Monthly review

• A civil society organisation owned by Saif al-Islam Qadhafi has published a report pointing to human rights failings, and Amnesty International has issued a report that is critical of the refugee situation in Libya.
• The Libya Press news agency has announced that it is closing its office in Tripoli after it faced harassment from security officials.
• Saif al-Islam has dismissed media reports that have hinted at divisions within the Qadhafi family.
• Arab Banking Corporation (ABC) has purchased a 49% stake in Libya's Mediterranean Bank after the Central Bank increased its stake in ABC.
• In a setback for the sector, the start of deepwater drilling by BP in the Gulf of Sirte has been delayed again while a new rig is transported to the area.
• The government has announced plans to triple power generation capacity by 2020.
• Growth in the money supply has slowed during 2010, which may have contributed to containing inflation.

The Libyan leader, Muammar Qadhafi, has ruthlessly repressed political dissent, and there are now few real domestic threats to his rule. He has been in power for over 40 years and will continue to be careful to balance the competing power structures within the political hierarchy. Colonel Qadhafi is likely to withdraw gradually from domestic politics, investing more time in international politics. There is no agreed process for the transfer of power, but Colonel Qadhafi's tacit support for a number of reforms proposed by his son, Saif al-Islam Qadhafi, has made him the most likely successor. However, Saif al-Islam faces considerable resistance from conservatives within the regime with large vested interests. They appear to be resisting any liberal reforms and have forced some of Saif al-Islam's news organisations to close down and his charitable foundation to narrow its remit. Saif al-Islam has long been in favour of creating a formal constitution and of implementing administrative and market-oriented reform. Other possible successors include one of Colonel Qadhafi's other six children. However, many Libyans would deeply resent an orchestrated dynastic arrangement, and someone may emerge from within the political elite. Competing claims on power could lead to a period of instability immediately after Colonel Qadhafi departs the scene. However, the succession is unlikely to become a pressing issue while Colonel Qadhafi retains power, which he is expected to do throughout the forecast period.

Significant political reform is unlikely. Colonel Qadhafi remains wedded to Libya's opaque and ineffective jamahiriya (republic of the people) system and continues to manipulate its structure to maintain the illusion of democracy-as demonstrated in 2009 by the apparent rejection by the local-level Basic People's Congresses (BPCs) and the General People's Congress (GPC, akin to a national parliament) of the Wealth Distribution Programme. The Libyan leader will continue to deny any individual minister the opportunity to build a personal power base. He will also be careful to balance the interests of reformers against those of the old guard.

There is at present little immediate threat to the ruling elite. However, if the socioeconomic environment were to deteriorate through, for example, rising unemployment, collapsing oil prices or growing inequality, the government could be faced with increased unrest. Feelings of political exclusion have been exacerbated by the disruption of Libya's independent media. However, with the economy expected to remain relatively strong and the opposition, with the exception of domestic Islamists, either in exile or lacking clout and coherence, the prospect of any threat to the regime appears limited.

The greatest fear for the authorities remains the challenge from militant Islamist groups, which have been responsible for assassination attempts against Colonel Qadhafi. There are also regionwide concerns over the threat posed by al-Qaida affiliates. Reconciliation and rehabilitation negotiations have proceeded secretly, and a steady stream of Islamists has been released from prison in recent months, including 39 from the Libyan Islamic Fighting Group-the largest local militant organisation, which recently renounced violence. This suggests that the local militant Islamist threat is declining.

Libya's political structure is based on 600 BPCs, which include everyone over the age of 18. The BPCs vote annually on representatives to the GPC and also on major decisions. However, key government officials are appointed by the prime minister, who is appointed by Colonel Qadhafi. There is little transparency in voting processes. Saif al-Islam's proposed constitution includes greater powers for elected representatives. This could offer him a route to gaining legitimacy. Saif al-Islam's ideas are increasingly being adopted by his father, and there is therefore some potential for more meaningful elections to be introduced late in the forecast period.

Foreign relations will generally improve now that Libya has been reintegrated into the international community after renouncing its weapons of mass destruction programme and reaching settlements over past involvement with terrorism, such as the 1988 bombing of a plane over Lockerbie, Scotland. Nonetheless, the Libyan government is likely to remain embroiled in unpleasant disagreements with various countries, although the majority of these will have no serious consequences. A dispute with Switzerland, sparked by the arrest of a son of Colonel Qadhafi in Geneva in 2008 for allegedly mistreating a maid, seriously damaged commercial and diplomatic relations and also threatened Libyan relations with the EU, although it has now been resolved. Libya's past involvement in terrorist activities will continue to resurface, souring international relations. The case of a British oil major, BP, which has been accused by US senators of lobbying for the release of the man convicted of the Lockerbie bombing, is an example. After much wrangling, a deal has finally been reached for co-operation on immigration between the EU and Libya, which should clear the way for an improvement in relations across a broad range of political and economic issues. Colonel Qadhafi will continue to seek to strengthen ties with the US and the EU, particularly Italy, while sporadically voicing anti-Western rhetoric and engaging with countries viewed as rivals of the US, such as Russia and China.

Efforts to integrate Libya into the international community will continue, and the country was recently elected to the UN Human Rights Council, although not without strong protests from human rights campaigners. Generally, economic imperatives, mainly in the oil and gas sectors, are likely to dictate relations with the West. Libya will also continue to have tense relations with a number of other Arab states. Poor ties with Arab states have encouraged Libya to focus on ambitions to lead Africa towards continental unity. The growing wealth of the Libyan Investment Authority, a sovereign wealth fund, and its increasingly strategic objectives will help to increase Libya's international clout, particularly in Africa, which will be a focus of investment.

Economic reform has been limited and is likely to remain so, despite recent proposals to liberalise the economy and privatise state companies. Saif al-Islam does appear to have been given a mandate for some reform. But, even if he is able to establish himself and implement his vision for economic development, it will take considerable time to carry this out. Any reform will face stiff resistance from vested interests, as some regime insiders are reluctant to relax their control over large swathes of the state-dominated economy-which has slowed progress on increasing private-sector and foreign-investor participation.

However, there have been some privatisations and reforms. Large public stakes in the banks have been sold, with more to follow, a new preliminary banking licence has been issued to UniCredit, an Italian bank, Bahrain's Arab Banking Corporation has purchased a 49% stake in Libya's Mediterranean Bank, and a second foreign banking licence is expected to be awarded in 2011. In conjunction with technical assistance from international organisations, this will help to modernise the sector. Bank lending to the private sector has increased significantly since 2007 and is set to continue to expand, which will help the small private sector to grow. The partial privatisation of two telecommunications companies and an iron and steel firm has been proposed, and the latter has planned an initial public offering of shares. The government is also committed to streamlining the bureaucracy and is in the process of transferring 340,000 workers to the private sector. Ten new laws were introduced in 2010 to improve the business and investment environment, but they are awaiting executive regulations to clarify how they will be implemented. The prime minister announced the introduction of new investment laws in November to clarify rules and make it easier for foreign companies to enter the market.

The whims of Colonel Qadhafi will continue to create uncertainty in policymaking. During 2009-10 the government suspended visas for EU citizens living within the Schengen visa area and hinted that it might nationalise the hydrocarbons sector. Despite the award of dozens of oil exploration permits, drilling success has been limited and discoveries small. When exploration has been successful, development of the discoveries has been impeded. Four companies decided not to renew their exploration licences for a further five years in October. This has dented the positive perceptions of investing in Libya's hydrocarbons sector and its entire economy more generally. Contractors regularly complain of delayed payments, and investment in Libya is widely regarded as a long-term commitment with large downside risks, driving up the rewards that investors will require. Foreign investment, which is vital for development, is therefore likely to become harder and more expensive for Libya to obtain, and more major foreign oil companies may leave-particularly as a number of exploration permits lapse this year. BP has confirmed its intention to proceed with its own major exploration programme, although its deepwater exploration has been delayed, which could be related to safety concerns resulting from the oil spill in the Gulf of Mexico.

The government is implementing public investment programmes to help to provide a foundation for economic development and to create jobs. Most of these programmes focus on major infrastructure developments in the power, desalination, transport and communication sectors. However, progress has been and is likely to continue to be slow, mainly owing to bureaucratic delays.

The government has usually had a healthy budget surplus in recent years owing to high oil revenue and a tendency to fall short of spending commitments. We estimate that the 2010 surplus was 9.1% of GDP, well below the average of 21% in 2006-09, mainly owing to plans to increase expenditure by 32%. Current expenditure is being driven higher as efforts to cut the size of the civil service have been delayed, a public-sector pay rise is planned and subsidies will be kept in place to control consumer prices. In 2011-15 oil prices will remain relatively high at an average of US$78/barrel. However, this will not be high enough to give the government confidence to significantly increase capital expenditure, which will therefore remain relatively stagnant. The upshot will be an increase in the budget surplus to 12.1% of GDP in 2012, although this will drop to 10.5% of GDP in 2015 as oil prices fall owing to excess global supply.

The currency is pegged to the IMF's special drawing rights (SDR), which restricts monetary policy flexibility. Nonetheless, the Central Bank of Libya cut benchmark interest rates by 2 percentage points in early 2009 and increased them back to 5% in early 2010. Pressure on the Central Bank to overhaul its approach to monetary policy and regulation of financial services is likely to increase as the banking sector is liberalised. Liquidity is excessive, and state-subsidised credit institutions are currently crowding out commercial bank lending. Efforts will be made to address these issues and there should be some improvements by the end of the forecast period. Possible reforms include fully liberalising interest rates, issuing Central Bank bills and allowing commercial banks to issue certificates of deposit.

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We estimate that Libyan real GDP expanded by 3.3% in 2010. This is well below potential and suggests that growth is being limited by structural constraints, such as the inefficiency of the bureaucracy. We therefore forecast that real GDP growth will be relatively weak, rising from 3.8% in 2011 to 4% in 2012. Economic growth is primarily determined by oil production and export volumes, and we only expect small increases in demand for Libyan oil. Libya primarily supplies Western, developed nations, where consumption is in decline, and may struggle to open up new supply lines to emerging Asian markets. OPEC quotas will also limit production, and we expect few reforms to be implemented to tackle structural constraints until there is a new leadership in place, which remains unlikely during the forecast period. Furthermore, although development work and new oil exploration will be carried out in an attempt to boost production capacity, these steps are only likely to move forward slowly. We therefore expect growth to decline in 2013-15, when it will average 3.7%. Investment and imports related to oil and gas developments will grow relatively strongly in 2011-15, provided that international oil companies are not significantly deterred by the recent threats to nationalise foreign oil operations or by subsequent regulations that aim to give the Libyan government greater control over the development of the country's hydrocarbons assets.

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. There is strong foreign interest in Libyan investment opportunities, and although reform tends to be slow and unpredictable, the government appears committed to encouraging private-sector participation. Moves to raise the proportion of locals in the workforce could stimulate greater private consumption, and strong growth in bank lending to the private sector could help to kick-start private-sector economic activity. However, these factors are not yet having a major impact on overall economic growth.

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We estimate that inflation averaged 2.5% in 2010. Libya's consumer price index rose by 2.9% in the year to November 2010. Inflation is forecast to rise to an average of 4% in 2011 in line with sharp increases in international food and non-oil commodity prices. Libyan inflation is mainly driven by imported products. Stabilisation in international prices will lead to a slowdown in the rate of inflation after 2011, which we forecast will average 3% in 2012-15. Inflation will be sustained, however, by a revival in consumer confidence and higher oil revenue leading to greater domestic liquidity. Price increases will also be caused by Libya's more open trading regime permitting the entry of higher-priced overseas goods, especially clothes, but also furniture and consumer goods. Government subsidies will be maintained, which will ensure that prices for many staple goods, particularly housing and healthcare, are kept in check.

The Libyan dinar is pegged to the SDR and is tightly managed. The huge stocks of foreign-exchange reserves mean that the authorities will be able to defend the currency should any pressure arise. We expect the peg to the SDR to remain over the forecast period. In 2011-15 the SDR is forecast to depreciate against the US dollar mainly owing to a depreciation of the euro, which is a component of the SDR, as a result of concerns about sovereign debt defaults and a possible break-up of the euro area. The dinar will therefore fall from an average of LD1.27:US$1 in 2010 to LD1.3:US$1 in 2015.

The current account is dominated by hydrocarbons exports. Earnings from goods exports are expected to average US$49bn a year in 2011-15, from US$46.5bn in 2010. Trends in exports will follow oil price movements; we expect dated Brent Blend to peak at an average of US$82/b in 2011 before dropping to US$71/b in 2015. The drop in oil prices towards the end of the forecast period will be compensated for by small increases in production. Goods imports will continue their trend of steady growth over the forecast period, rising from US$24.6bn in 2010 to US$32.7bn in 2015. Rising imports will be a result of growing inputs into government development projects and expanding consumer demand. Consequently, we forecast that the trade surplus will average US$19.8bn in 2011-15.

The most important element of the services account is oil-sector payments abroad, which are expected to almost stagnate in line with the slow development of the sector. We therefore expect the services deficit to remain steady at an average of US$4.8bn in 2011-15. The income surplus is forecast to increase owing to growth in dividends from Libya's rapidly expanding investments abroad and low growth in profit repatriation by foreign oil companies. Owing to the dominance of oil exports, the current-account surplus will rise and fall with oil prices and is expected to average US$14.7bn (16.5% of GDP) in 2011-15.

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In mid-December, the Qadhafi International Charity and Development Foundation (QICDF), a civil society organisation owned by Saif al-Islam Qadhafi, the son of the Libyan leader, Muammar Qadhafi, published its second annual report on human rights in Libya. In summation, the report stated that there was "significant progress on some issues and new failures on others", adding that it "regretted a dangerous regression" in the treatment of civil society associations, accusing the General People's Congress (GPC, akin to a parliament), of "intervening directly in the affairs of unions and professional associations".

It also criticised the government's suppression of press freedoms, urging the government to "review media policy in Libya, to lift its stranglehold on the media" and to provide the legislative framework for the development of private media in the country. The report expressed "regret" over the action taken against the news agency, Libya Press, and Oea, a local newspaper owned by Saif al-Islam, in November, when 20 journalists were arrested (December 2010, The Political scene).

The report also complained about the ongoing operations of the State Security Court, which had been slated for abolition a number of years. It stated that its continuing existence was a "shortcoming" that undermined the rule of law in the country.

More positively, the report welcomed the release of dozens of Islamists from prison in recent months, but lamented the lack of progress in the investigation into the 1996 massacre at the Abu Salim prison in the capital, Tripoli, where 1,200 prisoners were killed. The government announced the establishment of a committee to investigate the affair in 2009 and has offered families of the victims compensation, providing they renounce their rights to judicial redress. The report urged the authorities to engage in direct dialogue with the families of victims to "restore trust in state institutions".

The publication of the QICDF report came just one week before Amnesty International, a global human rights watchdog, issued a report on the refugee situation in Libya. The Amnesty publication criticises Libya for "indefinite detention, torture and other abuses" that it claims await refugees if they end up in the country. It also condemned Libya for failing to ratify the 1951 Convention Relating to the Status of Refugees and its 1967 Protocol and its refusal to sign a Memorandum of Understanding with the UNHCR, the UN refugee agency. Libya insists that it does not have refugees, only "irregular migrants".

The timing of the QICDF report was questioned in some quarters as having deliberately been released in order to deflect from the critical nature of the subsequent Amnesty publication. Certainly, the QICDF report was not as censorious as it had been the previous year. While being broadly critical, it also suggested that there had been "significant progress on some issues", but failed to substantiate this claim.

Saif al-Islam Qadhafi's position is being weakened

The tepid nature of the annual human rights report issued by the Qadhafi International Charity and Development Foundation (QICDF) was highlighted by the subsequent announcement that it would be the Foundation's last such report. Following a meeting of the board of trustees in London on 16th December, the QICDF announced that it would "no longer include advocacy for political and human rights reform [in Libya] among its activities", and would instead be "redoubling efforts to fulfil its core charitable mission of delivering aid and relief to disadvantaged populations, primarily in Sub-Saharan Africa".

The announcement reflects a serious retreat for Saif al-Islam Qadhafi, who has suffered a number of political setbacks. He failed to take up the post of general co-ordinator that was offered to him by his father, the Libyan leader, Muammar Qadhafi, in October 2009. According to recent US embassy cables released by WikiLeaks, a whistle-blowing website, this was because he didn't want to be "tainted by association" with the current regime. Without an official political position, Saif al-Islam has conducted much of his political activity through his two organisations, the QICDF and the Al Ghad Foundation, a media group, both of which are geared towards reform.

However, just as QICDF has been forced into retreat, Al Ghad has suffered from attacks by conservatives in recent months and its activities have been curtailed. In early December, the Libya Press news agency, which is part of Al Ghad, announced that it was closing its office in the capital, Tripoli, and would relocate to London and other European capitals. It was the first and only private news agency in Libya and had been operating for less than six months before it announced its departure. According to the agency, it decided to close its office due to "security harassment" and "deliberate restrictions" aimed at its journalists and operations. Owing to this intensified activity by the security forces, who informed the agency that its "presence inside Libya was not desirable", Al Ghad officials felt that they were unable to offer the agency's journalists sufficient protection. The decision came just one month after a crackdown on some of Al Ghad's other media outlets, including Oea and Quryna. Both newspapers were suspended earlier this year, but recommenced publishing in July. Oea was suspended once again in early November, and 22 of its journalists arrested. They were released shortly afterwards.

An international press watchdog, the New York-based Committee to Protect Journalists (CPJ), said that the decision by Libya Press to close its office "illustrates the difficulties of conducting reporting that is not in lockstep with the government's official positions". Amnesty International said that "this escalating harassment of privately-owned media outlets stands in sharp contrast with the Libyan government's rhetorical assertions that press freedom is respected". In August the Libyan government submitted a report to the UN Human Rights Council stating that "press in the Libyan Arab Jamahiriya is free and uncensored other than by journalistic conscience". In the 2010 press freedom index drawn up by the French organisation, Reporters without Borders, Libya was ranked 160th out of 178 countries.

With the QICDF also retreating from reform efforts and Saif al-Islam's independent media facing serious restrictions and harassment, it seems that Saif al-Islam is losing the battle against conservative elements within the regime. This could prove to be a worrying setback for reform in Libya. Saif al-Islam's foundations were in effect the country's only opposition, albeit a loyal opposition. The QICDF tried to push for constitutional and judicial reform, while his media outlets attempted to hold the government to account. But with the former redirecting its activities abroad, and the latter having been driven abroad, Saif al-Islam's domestic influence looks to be severely diminished. Certainly, events would suggest that the conservatives have gained ground and out-manoeuvred him in most aspects over the course of 2010.

These developments have prompted a flurry of media reports that have hinted at divisions within the Qadhafi family. There has been speculation that a shift in the balance of power towards conservatives has given greater momentum to a younger brother of Saif al-Islam, Mutassim Qadhafi, as a successor to his father. The media reports also prompted an unusual statement from Saif al-Islam, who denied any family rift. In an official statement appended to the records of a meeting in London of the QICDF, he said that "the press reports that have suggested that I've been involved in a power struggle with my brothers behind the scenes in Libya" were nonsense and that he had "an excellent relationship" with his family.

Such a statement certainly gives rise to the suspicion that there is indeed friction between Saif al-Islam and his brothers and perhaps father as well. The publicity-shy Mutassim is known to be close to many of the hardliners in the regime, particularly Mousa Kousa, the foreign minister, and Saif al-Islam's diminished stature will certainly benefit him. Mutassim Qadhafi's official post is national security adviser, which could feasibly have given him the capacity to have orchestrated the clampdown against Al Ghad and the QICDF.

It is likely that Saif al-Islam overstepped the mark. His criticism of the regime and individuals within it was clearly too much too soon for a regime used to controlling all flow of information and brooking no dissent. The hardliners view Saif al-Islam as a threat to their own interests and have clearly been able to build a coalition against him.

However, Saif al-Islam shouldn't be written off. He still holds much sway in the hierarchy, within which the fortunes of personalities ebb and flow. Indeed, it was only in July of last year that reports circulated that Mutassim had been removed from his post, yet six months later, the rumours suggest he is in the ascendancy. Furthermore, Saif al-Islam has bowed out of politics before, only to bounce back and it is likely that he will do so once again; already speculation suggests that he may set up a separate organisation through which he will resume his old reformist activities.

The Economist Intelligence Unit's 2010 democracy index ranks Libya 158th out of 167 countries, putting it among the 51 countries categorised as "authoritarian" and making it the third-lowest-ranked country in the Middle East and North Africa after Saudi Arabia and Iran. Libya's score has fallen slightly as civil liberties have been eroded by restrictions on the media and on freedom of association. However, its ranking improves, as it has overtaken Iran, which has seen a particularly severe downgrade in its index score following the controversial election in 2009. Our index also shows a general decline in democracy across the world since the previous index in 2008.

The country's overall score is depressed by the zero score for electoral process, which is a reflection of the lack of national elections and of the concentration of power over the past 40 years in the hands of the Libyan leader, Colonel Muammar Qadhafi. There are thus considerable concerns about the fate of the government after his departure, with no provision as to how a new leader will be selected and no precedent for either an elected head of state or a dynastic succession, with one of Colonel Qadhafi's taking over the leadership. It is uncertain whether this would prove acceptable to the population. A new constitution has been proposed by one of the leader's sons, Saif al-Islam Qadhafi, but little progress appears to have been made on this front and it is unlikely to address such sensitive questions as the leadership.

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The government's legitimacy is personal rather than institutional

At a modest 1.11 out of 10, the score for political participation is higher than that for electoral process because of the jamahiriya (republic of the people) system of government. Under this system, local-level Basic People's Congresses (BPCs) are asked annually to debate and vote on government policy, the outcome of which is then communicated by their delegates to the annual General People's Congress-the closest Libya has to a parliament. Neither has any formal power to block or initiate legislation. Colonel Qadhafi is under no obligation to accede to the consensus of the BPCs or GPC, but doing so allows him to maintain the façade of a popular democracy. For example, Colonel Qadhafi went along with the BPCs when they voted against his Wealth Distribution Programme, which proposed to dismantle central government and distribute oil revenues directly to local administrations.

Economic hardship threatens to foment unrest

Political culture and civil liberties are also suppressed. Expression of dissent is tightly controlled by a pervasive security apparatus and consequent self-censorship, and sporadic outbreaks of popular protest are under-reported by a tightly controlled media, where even private organs are constrained in what they write. The government has taken steps to release members of the Islamist opposition, the only group with the organisation and coherence to command wider public support, and other political prisoners. The steps could be designed to appease supporters of the opposition, but it could also indicate that the opposition has become so weak that it is no longer considered a credible threat by the authorities.

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Democracy index 2010: Democracy in retreat, a free white paper containing the full index and detailed methodology, can be downloaded from www.eiu.com/DemocracyIndex2010.

Note on methodology

There is no consensus on how to measure democracy and definitions of democracy are contested. Having free and fair competitive elections, and satisfying related aspects of political freedom, is the sine qua non of all definitions. However, our index is based on the view that measures of democracy that reflect the state of political freedom and civil liberties are not "thick" enough: they do not encompass sufficiently some crucial features that determine the quality and substance of democracy. Thus, our index also includes measures of political participation, political culture and functioning of government, which are, at best, marginalised by other measures.

Our index of democracy covers 167 countries and territories. The index, on a 0 to 10 scale, is based on the ratings for 60 indicators grouped in five categories: electoral process and pluralism; civil liberties; the functioning of government; political participation; and political culture. The five categories are inter-related and form a coherent conceptual whole. Each category has a rating on a 0 to 10 scale, and the overall index of democracy is the simple average of the five category indices.

The category indices are based on the sum of the indicator scores in the category, converted to a 0 to 10 scale. Adjustments to the category scores are made if countries fall short in the following critical areas for democracy:

• whether national elections are free and fair;
• the security of voters;
• the influence of foreign powers on government; and
• the capability of the civil service to implement policies.

The index values are used to place countries within one of four types of regimes:

• full democracies-scores of 8 to 10;
• flawed democracies-score of 6 to 7.9;
• hybrid regimes-scores of 4 to 5.9;
• authoritarian regimes-scores below 4.

In early December, the Central Bank of Libya (CBL) bought an additional 17.72% stake in the Bahrain-based Arab Banking Corporation (ABC) for an undisclosed sum. The stake, purchased from the Abu Dhabi Investment Authority (ADIA), takes the CBL's overall share in ABC up to 59.37%. The CBL started to build up its stake in ABC in March 2010, when it acquired ADIA's rights in ABC's US$1.1bn capital issue, which took its original holding up from 29.5% to 41.7%. The Kuwait Investment Authority is the bank's other principal shareholder, with 29.7%. ABC is Bahrain's second-largest offshore bank, with total assets of over US$26bn.

The acquisition was not wholly positive from a credit-rating perspective; two weeks later, Fitch Ratings downgraded the bank's short-term issuer default ratings (IDR) from F2 to F3, its long-term foreign-currency IDR from BBB+ to BBB, the rating on its senior unsecured debt from BBB+ to BBB and the rating on its subordinated debt from BBB to BBB-. The downgrade reflects Fitch's concerns that the CBL is not as robust a shareholder as ADIA, although Fitch maintained its outlook as stable, suggesting that it believes that there remains a "high likelihood" of support from its main shareholders, should the necessity arise.

Shortly after the CBL's acquisition, ABC itself purchased a 49% stake in Libya's Mediterranean Bank for US$60m, boosting its presence in Libya, where it has had a representative office since 1988. Given its stake in ABC, the CBL is in the slightly anomalous situation of granting regulatory approval for the deal, which is expected before the end of the first quarter of 2011. The deal continues a policy of increasing foreign presence in the banking sector. BNP Paribas (France) and Arab Bank (Jordan) have stakes in local banks and a joint-venture banking licence was awarded to UniCredit (Italy) in August.

The start of deepwater drilling by UK-based BP in the Gulf of Sirte has been delayed once again. Originally scheduled for November, it was subsequently put back until December, and now BP states that it will take place "some time in 2011". The latest delay is due to a decision not to use the drilling platform that was originally slated for the operation; instead BP is now waiting on the delivery of a second rig, which is currently being prepared in the Gulf of Mexico. The decision may prove costly for BP; the owners of the original rig, Noble Corporation (US), have initiated arbitration proceedings against both BP and Exxon (US), to whom the rig had originally been contracted, but who had then transferred it to BP.

It is also a delay that Libya could do without. Despite a few small discoveries in recent months (three discoveries were made in December alone), Libya's oil ambitions have failed to live up to expectation and during 2010 a number of oil companies signalled their intention to halt operations. Furthermore, according to the chairman of the National Oil Corporation (NOC), Shokri Ghanem, Libya does not expect to issue any new oil concession licences in 2011. Currently, the bulk of Libya's oil output comes from onshore or shallow-water fields and the NOC is placing great store in exploration in the new deepwater fields in the Gulf of Sirte.

In this regard, BP is vital, since it is the only company that has so far committed to deepwater exploration in Libya. Although BP and others in the oil industry have drilled to much greater depths than those in the Gulf of Sirte, at 1,700m, some 200m deeper than the Macondo well in the Gulf of Mexico, which suffered a blowout last year, BP is not taking any chances.

BP is also still facing ongoing ethical questions over its conduct in Libya. The furore in the US over BP's alleged involvement in the release of the Lockerbie bomber, Abdelbaset al-Megrahi, from a Scottish prison, has been reignited with the release by WikiLeaks, a whistle-blowing website, of government cables sent from the US embassy in Tripoli to the State Department in Washington. The cables suggest that Colonel Qadhafi threatened to cut all trade ties with the UK, warning of "enormous repercussions" if Mr Megrahi died in prison. Evidently BP would have been targeted should these repercussions have come to pass. In a cable sent in January 2009, the US ambassador to Libya, Gene Cretz, stated that "the consequences if Megrahi were to die in prison ... would be harsh, immediate and not easily remedied", adding that "the regime remains essentially thuggish in its approach".

The government has announced its intentions to boost Libya's power-generating capacity threefold over the next decade, in order to meet the rapidly rising energy demands that will inevitably occur as the country's economy develops. Conversely, the authorities believe that they will not be able to attract foreign investment if the country cannot guarantee secure and stable power supplies. Libya currently produces around 6.2 gw of electricity; it aims to raise production to 20 gw by 2020. This should be more than sufficient for Libya's domestic needs, allowing for the export of any surplus energy.

Currently, Libya uses oil to produce most of its power, but the country has hopes that greater gas discoveries will allow it to switch to gas-fired power stations, while still leaving some gas, and freeing up more oil, for export. The Libyan authorities also hope to supply 10% of the country's energy needs from renewable sources, mainly solar and wind power. The targeted capacity increase of 20 gw by 2020 seems highly optimistic given the limited increases in capacity that Libya has achieved to date.

According to the latest data released by the IMF in its International Financial Statistics report, Libya's supply of broad money, or M2, contracted in the third quarter of 2010 on a year-on-year basis, the first time it has done so for nearly eight years. Since the end of 2009 broad money supply growth has slowed sharply, falling from 22.3% year on year in the first quarter of 2010, to 0.7% in the second quarter, to contraction of 5.5% in the third quarter. The deceleration in M2 growth was driven primarily by a contraction in narrow money supply, or M1, although the supply of quasi-money, or time and savings deposits, also narrowed in the third quarter.

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The sudden contraction in money supply is perplexing. Given the unsophisticated nature of Libya's economy, which is driven chiefly by public consumption supported by oil revenue, money supply trends generally follow, with a slight lag, government expenditure patterns and oil revenue inflows. But oil output in 2010 remained steady, averaging 1.56m barrels/day (b/d) over the eleven months to end-November, slightly higher than the annual average of 1.55m b/d recorded in 2009. Furthermore, average oil prices were higher in 2010 than in 2009, so the government will have received more cash from the sale of oil. The bottleneck must therefore be in government expenditure. Oil revenue may be arriving in the government exchequer, but may not be being spent in the wider economy. The lack of up-to-date fiscal figures and recent fiscal policy announcements makes this assumption difficult to confirm.

In addition, the latest data show that inflation remains steady. In the absence of any robust monetary tools, changes in the money supply can have a knock-on effect on consumer prices-higher money supply can lead to higher inflation, and vice versa. The stagnation of the money supply may therefore be contributing to containing inflation, which has been picking up elsewhere in the region. Annual consumer price inflation has averaged 2.4% in the first 11 months of the year.

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Please see graphic below

Please see graphic below

Please see graphic below

Land area

1,759,540 sq km

Population

6.16m (2007 mid-year estimate, IMF)

Main towns

Population in '000 (2003 estimates, National Authority for Information and Documentation)

Tripoli (capital): 1,149

Benghazi: 636

Misurata: 360

Al Mirqab: 328

Al Bitnan: 142

Sebha: 126

Climate

Hot and dry with mild winters

Weather in Tripoli

Hottest month, August, 22-30°C (average daily minimum and maximum); coldest month, January, 8-16°C; driest month, July, 1 mm average rainfall; wettest month, December, 94 mm average rainfall

Language

Arabic

Measures

Metric

Currency

Libyan dinar (LD) = 1,000 dirham. Average official exchange rate in 2009: LD1.21:US$1

Time

2 hours ahead of GMT

Public holidays

Commercial offices and government establishments are closed on Fridays. Other than the usual Islamic celebrations, national holidays include Declaration of the People's Power Day (March 3rd); Evacuation Day (June 11th); Revolution Day (July 23rd); and National Day (September 1st)

Official name

The Great Socialist People's Libyan Arab Jamahiriya

Form of state

Since 1977 Libya has been a jamahiriya (republic of the people) in accordance with the Third Universal Theory propounded by Muammar Qadhafi in his Green Book, which is a blend of socialist and Islamic theories inspired by tribal traditions. The jamahiriya system defines the political and social order, which is also governed by the Holy Quran. The General People's Congress is the highest legislative body. In 1992 Colonel Qadhafi changed the political structure by dividing Libya into 1,500 mahallat (communes), each with its own budget and legislative and executive powers, formerly vested in the Basic People's Congresses. The mahallat and the congresses are supervised by Revolutionary Committees directed by secretaries, who are chosen personally by Colonel Qadhafi

Head of state

Colonel Qadhafi was appointed supreme leader by the General People's Congress in March 1990 after taking power in a coup in 1969. Saif al-Islam Qadhafi was put forward as general co-ordinator of the Popular Social Command in October 2009 with power over the legislature

Executive

In 2000 Colonel Qadhafi abolished most central government executive functions, devolving responsibilities to the 26 municipal councils that make up the General People's Congress. Centralised control is maintained over the economy, finance, defence and security, energy, infrastructure, foreign affairs, social security and trade portfolios, the heads of which all report directly to the prime minister's office

Legislature

The General People's Congress, delegates to which are chosen by the Basic People's Congresses

Secretary of General People's Committee (prime minister): Baghdadi al-Mahmudi

Key ministers

Agriculture & fisheries: Abu Bakr al-Mabruk al-Mansouri

Communications: Mohammed Ali Zeidan

Economy, industry & trade: Mohammed Ali al-Huwaij

Education & scientific research: Abdel-Kabir al-Fakhri

Energy: Ali Shamikh Mohammed

Finance & planning: Abdel-Hafez Zleitni

Foreign affairs & international co-operation: Mousa Kousa

Health & environment: Mohammed Mahmoud al-Hijazi

Industry & mines: Ali Yusuf Zikri

Justice: Mustafa Mohammed Abdel-Jalil

National security: Abdel-Fattah al-Ubaidi

Social affairs: Ibrahim al-Zarruq

Utilities: Matouq Mohammed Matouq

Secretariat of the General People's Congress

Foreign affairs: Suleiman Sasi al-Shahumi

Popular Committees: Huda Fathi bin Amir

Popular Congresses: Ibrahim Abderrahman Abjad

Secretary (speaker): Mohammed Abdul Quasim al-Zwai

National Oil Corporation chairman

Shokri Ghanem

Central Bank governor

Farhat Omar Bengdara