Libya floods: Economic impact will be 'immense' although energy outlook remains steady

Country remains highly dependent on the hydrocarbons sector, which accounts for about 95 per cent of government revenues, say experts

Rescuers search for bodies after the floods in Derna, eastern Libya. More than 880,000 people were directly affected, said the UN. Reuters

The floods in Libya, which inundated about a quarter of the city of Derna, killed thousands of people and flattened entire neighbourhoods, will have an “immense” economic toll on the country, which is starting to assess the damage and begin the rebuilding process.

Torrential rains from Storm Daniel caused two dams to collapse near the eastern port city and resulted in flash flooding overnight on September 10.

Government officials and aid agencies have given death tolls ranging from about 4,000 to more than 11,000, and the floods have directly affected more than 880,000 people, according to the UN.

“The economic impact of the flood will end up being immense,” said Francois Conradie, lead political economist at Oxford Economics Africa.

That will be “through the big hit to the population of the city, the infrastructure that will need to be rebuilt, the decline in final household demand as surviving families have been left impoverished, and through the effects of government's emergency spending envelope”, he said.

Libya faced major socioeconomic challenges before the floods, from high unemployment rates to the over-reliance on the oil sector, political fragmentation and volatile security conditions, according to Nassib Ghobril, head of economic research and analysis at Byblos Bank.

“The floods have generated output losses for the economy that have yet to be calculated and that have shifted the attention of the local politicians and of foreign stakeholders to rescue and reconstruction efforts,” he said.

Humanitarian agencies are requesting $71.4 million to respond to the most urgent needs of 250,000 people targeted out of the 884,000 people estimated to be in need, over the next three months, according to the United Nations Office for the Co-ordination of Humanitarian Affairs.

The destruction at Derna was exacerbated by “two fundamental governance errors”, according to Jason Pack, an analyst on Libya and author of Libya and the Global Enduring Disorder.

“The first was the condition of what are now being referred to as the ‘dams of death’– the Wadi Derna and Wadi Al Rakha dams … Like much of Libya’s critical infrastructure, including its roads, hospitals, and oilfields, these two dams have long needed maintenance,” he said.

While money had been allocated for the project, work has not taken place due to a number of factors, such as the security situation, foreign government travel advice, lack of payment to contractors and visa issues.

“Libya had the knowledge that the dams needed to be fixed, had the money to repair the dams, had relationships and contracts to repair the dams – yet nothing happened,” said Mr Pack.

The second governance failure relates to the lack of precautionary measures in place, Mr Pack said, attributing the issues to dysfunctionality in Libya’s political system and its economy.

Economic shift

Libya has had little peace since the 2011 Nato-backed uprising against Muammar Qaddafi, and it split in 2014 between warring eastern and western factions. Major fighting concluded following a ceasefire in 2020.

The country, the seventh-largest crude oil producer in Opec, has been looking to boost oil production after years of being plagued by conflict and political instability.

The International Monetary Fund, which resumed its economic health check in Libya in June, its first in a decade, said the success of the country's reforms will hinge on political stability and the development of institutional capacity.

Libya should focus on strengthening institutions and the rule of law, said the IMF.

The Libyan government should avoid spending more when the economy is performing well and save for times when the economy might slow down, to guard against risks from lower oil revenue and a potential loss of reserves, according to the fund.

The country's real gross domestic product growth is estimated at 17.5 per cent in 2023 after shrinking by an estimated 12.8 per cent in 2022, according to the latest IMF data.

This is “following an increase in activity after an oil blockade limited production in 2022. However, the key challenge will be to diversify away from oil and gas while fostering stronger and more inclusive private sector growth”, the fund added.

The hydrocarbons sector accounts for about 95 per cent of Libya’s exports and generates nearly 95 per cent of government revenue, Mr Ghobril said.

“Therefore, the country’s economic outlook will be contingent on oil and gas production for the foreseeable future, which leads to significant downside risks, such as a decline in global oil prices and the global transition to renewable energy.”

Energy outlook

While the recent floods did lead to an immediate surge in oil prices, Libya's crude facilities were not majorly affected.

“Libya has been able to manage to reach a production of 1.2 million barrels per day and it has been sustaining that, but if we go back to last year, that was not the case where the production was being limited to half of its capacity,” said Fiza Jan, an upstream analyst at Rystad Energy.

“The situation since [June last year] has changed a lot due to the political dynamics of the country … Things have become quite stable as compared to what it was a year back, but we would not want to comment on whether the situation will remain as it is because the condition in Libya is very dynamic.”

Many international oil companies – including Eni and TotalEnergies – are increasingly interested in the country, and are in talks with the state-owned National Oil Corporation to step up investments.

Libya is also gearing up for its next licensing round in 2024, which will be the first one since 2007, Ms Jan said. Measures by the NOC to address pain points such as improving wages for the workers and taking steps to revive the ageing fields are also supporting the oil and gas sector.

The country has set a target of 1.3 million bpd by the end of this year and production of around two million bpd by 2027.

But both those targets are “quite ambitious”, considering the infrastructure, said Ms Jan.

Rystad expects the country to exit this year at an average production of little more than 1.2 million bpd.

“Investments are flowing in now, but it will take some time for it to stabilise,” said Ms Jan.

“We still believe in our base case scenario, they'll be able to reach somewhere around 1.4 million to 1.5 million bpd by 2027.

“And in our high-case scenario, we do estimate it to reach around somewhere close to 1.8 million bpd.”

IOCs are unlikely to be deterred by incidents such as the recent flooding disaster, or the volatile political situation.

“I think whosoever is entering the region, they would be aware of the risks that the region holds,” said Pranav Joshi, who leads the Africa upstream research team at Rystad Energy.

“So, that is a strategic call that they would eventually make considering all those risks.”

While the IMF has urged for economic diversification in Libya, it will remain challenging in the medium term, according to Mr Ghobril.

“The political fragmentation and the painstaking political process have been taking precedent over economic diversification and other issues, despite their importance and urgency,” he said.

“Economic diversification efforts have been lagging before the floods for multiple reasons. So, I expect this trend to continue in the short term, as the floods and other more pressing daily issues take precedent over the long-term objective of economic diversification.

“In fact, economic diversification is a long-term and painstaking process, with the need for functioning institutions, capacity building and a clear vision to move forward with this process,” said Mr Ghobril.