THE ECONOMIC OUTLOOK FOR LIBYA

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700010030-6
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 15
• Document Creation Date: December 22, 2016
• Document Release Date: February 1, 2010
• Sequence Number: 30
• Publication Date: May 1, 1971
• Content Type: IM

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01416a /-.Dli 7/-7 03
Secret
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
The Economic Outlook For Libya
Secret
ER IM 71-79
May 1971
Copy No. 61
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WARNING
This document contains information affecting the national
defense of the United States, within the meaning of Title
18, sections 793 and 794, of the US Code, as amended.
Its transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
May 1971
INTELLIGENCE MEMORANDUM
THE ECONOMIC OUTLOOK FOR LIBYA
Introduction
1. On 1 September 1969 a small group of relatively unknown Libyan
army officers staged a bloodless coup, replacing ldris's conservative regime
with a radical and staunchly Arab-oriented one. The new government has
budgeted for increased economic development, increased Libyan control of
the economy, realigned government spending, and has negotiated large
increases in oil revenues. These revenues, which will total more than $2
billion in 1971 and $3 billion a year later, may be used to finance
development projects, increased arms purchases, or additional aid. Even so,
a massive accumulation of reserves probably will be unavoidable. Thus the
prospect is for an anomaly - and one with great potential for disruptive
activities - a radical state with great uncommitted wealth.
Discussion
Economic Life Under the Idris Regime
2. From 1965 through 1968, the last full year of the Idris regime,
Libya's economy grew explosively, almost entirely because of rapidly
expanding oil production. Oil production increased an average of 29%
annually, causing gross national product (GNP) to grow 17% annually.
Domestic investment, almost entirely by the government and expatriate
residents, was concentrated in public works and luxury housing. While this
stimulated rapid growth in Libya's construction industry, it did very little
to develop other sectors of the economy.
Note: This memorandum was prepared by the Office of Economic Research
and coordinated within the Directorate of Intelligence.
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3. Although per capita GNP grew rapidly, reaching more than $1,000
by 1968, most Libyans experienced little increase in their standard of living.
Much of the income was repatriated by the oil companies, while some of
Libya's share was merely added to reserves, which grew at a rapid rate.
Corruption syphoned off considerable sums and rising ordinary government
expenditures benefited mainly a handful of civil servants and wealthy natives
and expatriates. Development spending was meager, mainly for public works
and some infrastructure projects; the average Libyan benefited very little.
Most expenditures, as well as rising consumer imports, flowed to the two
major urban centers - Tripoli and Benghazi - the rural areas where nearly
40% of the Libyans live received almost no benefit.
4. In spite of rapid economic growth, the oil industry still accounts
for about 80% of GNP, the remainder consisting mainly of primitive
agriculture and service activities. Many Libyans are still nomadic. There is
virtually no industry, and about 60% of food and agricultural raw material
supplies for the roughly 2 million inhabitants are imported. Total imports
are equal to about 27% of GNP.
. S. Despite increased revenues, Idris did not expand defense
expenditures significantly. The defense budget for fiscal year (FY) 1969 J
was only $40 million or 41A of total expenditures. A government contract
for substantial arms purchases in the United Kingdom was never
implemented.
6. Idris made no attempt to use Libya's growing financial resources
to influence events in other countries, either politically or economically.
Despite repeated pleas, Libya gave only moderate aid to other Arab states.
Under great pressure from his fellow Arabs, ldris did agree to an annual
payment of $25 million to Jordan and $59 million to Egypt following the
1967 Arab-Israeli war and subsequently extended a few ad hoc loans and
grants.
The RCC V Tares Over
7. In marked contrast to the conservative, slow-moving Idris regime,
the new RCC government is vigorously trying to achieve vague goals of
economic growth and increased political esteem in the Arab world. The
RCC, however, has directed its energies toward seemingly unrelated and
even contradictory ends.
1. The Libyan fiscal year runs from I April of the previous year to 31
March of the stated year.
2. Revolutionary Commanrd Council, the official name of the new
government.
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az%.,nri i
8. Initially, the new government sharply reduced domestic outlays
by curtailing ordinary expenditures and scuttling some development projects
started during the Idris regime. Although government spending was on the
rise by mid-1970, I/ it probably remained below the 1968 level. Efforts
to eliminate corruption and a careful review of day-to-day spending
continue to restrain ordinary expenditures. Although substantial sums have
been nominally allocated to new industrial and agricultural investment, little
has actually been spent to date because almost none of the planning and
other preparatory acts have been undertaken. There probably has been some
small increase in development spending, however, since several old
infrastructure projects have been revived.
9. In contrast to relatively low spending for domestic economic and
social purposes, Tripoli has been more than liberal in spending for the
foreign aid and defense programs. Aid to other Arabs more than doubled
during the RCC's first year and reached at least $300 million in the 12
months ending March 1971. Two large contracts, one with the USSR for
arms and the other for arms and aircraft with France, have been signed,
and additional arms contracts have been sought with other, mainly Western,
suppliers.
10. One major RCC policy objective has been to gain control of the
country's economic assets. Thus far, these efforts have been cc.icti.!rated
in the non-oil sector. The sizable Italian community, which owned a0
operated most of the country's few modern farms and scores of small
businesses in Tripoli, was summarily expelled in July 1970 and their
property, worth more than $300 million, confiscated. Banks, insurance
companies, hospitals, newspapers, and assorted private firms have also been
either nationalized or Libyanized. J The regime has ordered the complete
Libyanization of the non-oil sector by 2 May 1971, after which all foreign
firms outside the oil industry must limit their ownership to 49% of no
more than three firms.
11. Although still small, RCC participation in the petroleum industry
has increased. Through the Libyan National Oil Company (Linoc), the
fledgling state oil company, the government is at least nominally involved
in all aspects of the industry. Linoc's producing wells are limited to a small
field relinquished by Phillips Petroleum, but the company is exploring for
oil under a joint venture with French companies. Linoc markets its own
3. The budget for FY 1971 was announced in May 1970.
4. Private firms are Li/ yanized when ma/ority ownership is transferred
to the state or primate Libyan citizens.
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6L' I.K JS 1
small production and has sold some royalty oil. V All domestic distribution
facilities, nationalized in 1970, are owned and operated by Linoc. The
company also holds a majority interest in a handful of firms providing
services to the oil industry and has recently completely nationalized one
such company.
12. The RCC's greatest success has been sharply increasing revenues
from foreign-owned oil companies. Through a series of agreements in
September 1970 and again in April 1971, the RCC obtained significant
concessions from oil companies and established itself as a formidable
bargaining force. These negotiations were conducted with advice from the
Algerians and a leading Middle East oil consultant. ?J
13. Conducting the first round of negotiations at a time of tanker
shortages and sharply rising demand for oil in Western Europe, the RCC
threatened to cut off all Libyan exports and did order selective cutbacks
that reduced output 20% from the peak of 3.7 million barrels per day
achieved in May 1970. J Occidental Petroleum, an independent US
company with virt,,illy all its producing assets in Libya, was the
government's prime target. Its output was reduced by 50%, and further
reductions were threatened. Unable to obtain either oil or financial support
from other oil companies, Occidental acceded to most Libyan demands.
The other companies soon followed suit. After this settlement had been
reached, the RCC continued to restrain output and, although production
has increased, it is still below the record achieved in May 1970.
14. The second agreement was negotiated in the context of larger
OPEC discussions $J in which Libya represented countries supplying oil
directly to the Mediterranean. J The RCC was able to obtain gains several
times as large as in the earlier agreement.
15. The two successive agreements guaranteed Libya greatly increased
revenues for years to come. The negotiated increase in the posted price LQ/
5. Royalty oil is oil taken by the state in lieu of royalty payments made
in cash.
6. Abdallah Tariqi, former Minister of Petroleum and Mineral Wealth in
Saudi Arabia.
7. At that time, Libya supplied ahnost 30% of Western Europe's oil
imports.
8. Organization of Petroleum Exporting Countries through which the oil
producing countries have presented a united front in dealing with foreign
oil companies.
9. Similar negotiations had been conducted by Persian Gulf producers
and were settled on 14 February 1971.
10. The posted price is the price upon which taxes and royalties are based.
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from $2.210 to $3.447 a barrel and other adjustments will raise government
revenues by about $0.90 per barrel. If the production rates of December
1970 of 3.19 million barrels per day are maintained, government oil revenues
will rise by 140%, from $1.3 billion a year in FY 1970 to $3.1 billion
a year (see Table 1) by FY 1973.
16. The early actions taken by the RCC caused a slowdown in
economic activity and considerable unemployment among skilled
and semi-skilled workers. Uncertainty pervaded the non-oil sectors of the
economy, and construction activity declined by 17% in 1969 as projects
were suspended. The subsequent expulsion of the Italian community
reduced commercial activity, at least temporarily. Some increase in
government spending under the new budget revived the construction
industry, but in general the non-oil sectors of the economy remain
depressed. Almost nothing has been done to improve the lot of the natives
outside the two major urban areas. Growth in the all-important oil industry
declined to only 6.8'%o in 1970, when the government restrained production
as a bargaining lever in negotiations. Growth in GNP apparently was a
modest 5.5%, compared with 23% in 1969. In recent months, economic
activity has begun to quicken. Formerly Italian-owned shops were reopened
by new Arab owners and construction activity has picked up. The virtual
cessation of oil investment, however, has prevented complete recovery to
the pre-coup level.
Financial Outlook for 1971
17. Libya's already huge financial reserves are almost certain to
increase in the future. In February 1971 the country's gold and foreign
exchange holdings were $1,688 million, enough to finance 30 months'
imports at the 1969 level. Even this is understated, however, because a
high percentage of imports in 1969 were used to expand the oil industry,
and new investment has since slowed dramatically. Oil revenues are expected
to increase from $ 1. 6 billion in FY 1971 to $2.3 billion in FY 1972
and to $ 3.1 billion in FY 1973, even allowing for no increase in
production. 11 Although the FY 1971 budget allocated very large sums
to development, and the government has committed substantial amounts
for arms purchases, the prospective revenues far exceed likely spending.
Libya almost certainly will increase expenditures when it sees potential
economic gain, but opportunities during the next year or so will by 'united.
In FY 1972, revenues are likely to exceed expenditures by some $1. , billion,
I1. Being genuinely concerned over possible exhaustion of reserves and
now assured of a high inflow of revenue. Libya may well continue to hold
oil production at present levels. So far, at least, Libya has given no indication
of any relaxation in production controls.
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Oil Revenues, by Fiscal Year
1969 a/
1970 1
1971 b/ 2-/
1972 b/ d/ e/
1973 b/ e/
Taxes due on prior year's production f/
782
753
674
523
401
Revenues due on current year's production
538
874
1,780
2,688
Of which:
Due to permanent increase in posted price q/
1,571
2,393
Due to temporary Suez allowance g/
48
- 87
Due to temporary freight allowance q/
56
103
a. Last full cf the Idris reicr; fi-ures are as reported by the Idris government.
b. CIA estimate. cased on a posted Trice of $2.447 pertarreZ for 40? API crude oil, average production
costs of $0.35 per Larrel, and production of 3.19 miZZicn barrels per day in 1971 and 1972.
C. Effective September 1970, the posted trice was raised from $2..".1 per barrel to ::2.53 per barrel and
scheduled to escalate 2; arrualZ, the first of every ear. The tax rate was raised from 50% to 55%.
d. Effective 20 Marc;: 1971, the posted price was raised to '2.447 per barrt1 and scheduled to escalate
2~ on 1 January 1972.
e. Including retroactive royalty and tax payments of 2175 million.
f. Beginning in FY 1370, oil revenues were placed o a new schedule which: was designed gradually, to
place oil tax payments or. a current basis b. F7 1373. Previousl companies had paid tares in one lump
sum payment in April of the year following the actual year of production. Loes not allow for the
currently minor royalty payments made in kind.
g. The $.:.447 per barrel posted price effective 20 .'March 1071 is the cur of a $3.197 per barrel
permanent Costed price and a 20.25 per barrel freight allowa%:ce, ,'0.12 of which is the result of the Suez
Canal elosu,? and $0.13 of abnor'ally high world tanker rates. When the Suez reopens, and/or tanker rates
fall, the posed price will be adjusted according 1-..
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and the balance-of-payments surplus in FY 1972 will probably be about
$1.6 billion, which will about double foreign exchange reserves.
Prospects for Development Spending
18. RCC interest in expanding economic development spending is
clearly demonstrated by the FY 1971 budget, which calls for $560 million
in new investment, or $170 million more than that actually spent by Idris
in FY 1969. Unlike the previous regime, which tended to spend primarily
on infrastructure and public works, much of the RCC budget is directed
to industry and agriculture. Libya's ability to increase investment spending
by much in the short run, however, is doubtful. The problem is that the
government has not developed a comprehensive plan for economic
development, and none seems to be in the offing. The only clue to the
RCC's development thinking is a vague outline in the FY 1970 budget.
Identifiable industrial projects are limited to a handful of small processing
plants and four petroleum-related installations. J Contracts for the
petroleum plants have not been let thus far nor have detailed plans or even
feasibility studies been made. Although plans for the Kufra Oasis project
and a few other minor projects have been made, budget allocations amount
to only $16 million. Moreover, the dearth of skilled managers and
technicians, which has increased under the RCC, will hamper implementing
development spending. Many technocrats present under Idris have been
purged, and most Westerners have left. Many Egyptians have entered Libya
to replace Westerners, but they are concentrated in the security forces,
health services, and education. Moreover, distrustful of foreigners, the RCC
has resisted technical assistance from either the West or the East and has
shown some reluctance to admit large numbers of other Arabs. Palestinians,
in particular, are not welcome in large numbers.
Prospects for Expanded Foreign Aid
19. Libya's foreign aid spending probably will depend largely on the
political leverage such assistance could be expected to yield. Disillusioned
with past results, the RCC recently has reduced aid expenditures sharply.
Hussein's treatment of the fedayeen prompted the RCC to end aid to
Jordan, while Syrian restoration of Tapline 13/ is believed to have led to
a stoppage of aid to that country. Khartoum payments to the UAR
continue, but ad hoc aid to Egypt appears to have ceased since Sadat began
peace overtures to Israel. Some recent payments to the fedayeen have been
12. A small refinery, an
black plant.
ammonia plant. a methanol plant, and a carbon
13. The curtailment of oil shipments through Tapline had enhanced Libyan
bargaining power during the oil negotiations.
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made, and the Libyans have indicated a willingness to give additional aid,
but only if the guerrillas provide adequate accounting and justification.
Additional aid will depend, in large part, on the status of the war with
Israel. Under conditions of tension but no hostilities, Libya probably will
continue Khartoum payments to Egypt and perhaps extend some ad hoc
assistance. An all-out war effort against Israel would cause a dramatic rise
in Libyan aid while a negotiated peace might cause such assistance to
terminate. In the absence of renewed Arab-Israeli fighting, the only likely
cause of significant aid increases would be within the framework of
the tri-partite federation. L4J But the amount Libya would provide would
not likely be large in terms of the country's revenues (see Table 2).
Potential Arms Purchases
20. Unaffected by financial restraints for a number of years, Libyan
arms expenditures have been determined by RCC desires. The RCC is
currently seeking approximately $700 million of arms. Two contracts
totaling $500 million were signed with France ($400 million) and the USSR
($100 million
Longer Term Prospects
21. Although the Libyan government will have increased opportunities
to increase development spending in the next few years, and its military
and foreign aid outlays may remain high, it will be hard put to spend more
than half its foreign exchange income.
22. If the RCC manages to organize a development program, it could,
in the next few years, overcome shortages of skilled and even slightly skilled
labor by hiring foreigners, while at the same time importing the necessary
equipment. However, the RCC probably will not carry its Pan-Arab
sentiments so far as to risk a dilution of Libya's national identity. 15/
To date, it has restricted the entry of non-Arabs and Palestinians and
14. The alliance of the UAR, Syria, and Libya.
15. Some willingness to accept Egyptians more readily could result from
the embryonic union of Libya, Egypt, and Syria, but this is uncertain.
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Allocation of Libyan Revenues
in FY 1972
Total revenues
Million US $
2, 543
2,303
Non-oil 240
Anticipated expenditures 1,200
Ordinary 560
Development 400
Aid 100
Arms 140
Surplus 1,343
a. Including only Khartoum payments to
the UAR and fedayeen subsidies.
restrained the inflow of other Arabs to avoid this contingency. Until this
policy changes, labor shortages will severely constrain economic
development. Substantial expenditures could also be made on welfare,
following the example of Kuwait, out unlike that o".' Kuwait, the Libya
regime is strongly inclined toward a conservative social policy and is unlikely
to undertake large-scale welfare spending. In any event, Libya will be unable
to increase either welfare or development expenditures greatly in the next
two or three years because of the inevitable lags between planning and
implementation.
23. Given these constraints on development and welfare spending,
Libya will probably have balance-of-payments surpluses of nearly $1.5
billion a year in 1972 and 1973. As shown in Table 3, even rapid increases
in civilian imports (50% in three years), combined with Payments on the
large arms contracts already made or expected and continuation of
Khartoum payments, would give this result. Even a level of per capita
imports equal to that of Kuwait -- an extremely unlikely development
would still leave a surplus of more than $1.0 billion in 1972. This assumes
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Table 3
Projection of Major Balance-of-Payments Items
by Calendar Year
Million US $
1968
1969
1970
1971
1972 1973
Oil revenues b/
768
970
1,460
2,490
2,910 2,300
Local expenditures by oil companies
170
316
110
1i0
110 110
I
Imports and net services
t=7
n
o
Military
N
i
i
-98
-26
N.A.
-140
-140 -140
on-m
l
tary
-652
-760
-700
-810
-940 -1,080
H
Foreign aid
-85
-122
-350
-60
-100 -100
Other .
51
1
50
Reserve accumulation
154
379
570
1,590
1,840 1,090
Total reserves
539
918
1,488 c/
3,048
4,888 5,978
a. Reported.
b. Based on constant output and terms of new agreements. Figures are adjusted to
reflect rescheduling of revenue payments.
c. A djusied to reflect soft currency holdings reported as reserves.
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constant oil production. Under these circumstances, imports for use in the
ail industry would be small. If oil production increased, foreign exchange
earnings would be further raised, but a small part would be spend on
increased imports for the oil industry.
24. The chances are good, therefore, barring large new foreign aid,
that Libyan foreign exchange reserves could rise to more than $6 billion
by the end of 19'13. This amount exceeds Japan's current reserves by about
20% and is equal to about 40^Io of present US reserves. For a regime
committed to raising its prestige, especially in the Arab world, and willing
to use its economic muscle to gain political advantage, the potential for
using this v'ealth to cause problems for the West is considerable indeed.
The RCC could finance military expenditures in other more populous Arab
countries such as Egypt. It could finance insurgencies that served its political
purpose. Going beyond the Arab world, the Libyans could support Black
African movements against Portugal or South Africa. Perhaps more serious
would be their leverage in the world's financial markets, such as a threat
to unload a substantial portfolio of UK securities. Libya could also demand
that the US government convert large amounts of dollar holdings into gold.
On the other hand, the RCC may eventually plan to take over the assets
of the oil companies operating in Libya.
Conclusions
25. In its first 18 months in power, the resent Libyan government
halted expansion of oil production, delayed or canceled many investment
projects, and expelled numbers of foreigners. The effect of all this has been
a marked economic slowdown, which may be temporary. But the
government also has successfully bargained for a massive increase in
revenues. Libya's annual foreign exchange revenues, already more than $1
billion, will double in the next two years, even if oil production remains
constant.
26. The expected increase in revenue far exceeds any likely growth.
in foreign exchange expenditures for civilian and military imports. Libya
cannot use or maintain substantially more military equipment than it has
already contracted for. Development spending will rise, but Libya's
absorptive capacity is limited by a severe shortage of skilled labor, and
the regime shows no signs of accepting large-scale immigration. Welfare
spending could raise imports of consumer goods, but the regime's social
ideology appears to preclude massive welfare programs. Libya could increase
its aid to other Arab states, but past experience shows that it will carefully
weigh the political benefits it can expect to receive in return. In summary,
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the regime will be likely to have a balance-of-payments surplus of more
than $1.5 billion this year and almost $2 billion in 1972.
27. Surpluses such as these could raise Libya's foreign exchange
reserves to about $6 billion by the end of 1973, or mw e than the level
of Japan's current reserves. The potential for disrur ive action by an
ideologically motivated government with such wealth and few domestic
needs is vast, ranging from direct support of Arab military action against
Israel to using its financial leverage to force political concessions from the
West.
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