Publication Details

Ali, I. & Harvie, C. (2015). Oil-related shocks and macroeconomic adjustment under different nominal exchange rate policies: the case of The Libyan economy. Journal of Energy and Development, 40 (1 and 2), 23-50.


Libya is a country heavily dependent on its oil sector since the 1960s and recently has experienced a considerable increase in oil revenue as a result of increased oil prices particularly after 2000 and oil production rehabilitation since 2011. Like many natural resource-rich developing countries, however, the country has suffered from widespread corruption, including that related to old oil production contracts and a cumbersome bureaucracy, which has resulted in misuse of oil revenues and poor economic performance. By 2011, the country experienced a civil war and political turmoil for a period of eight months.1 The civil war, in conjunction with international sanctions imposed by the United Nations, adversely affected the domestic economy, in particular the oil sector, and upward pressure on oil prices occurred and oil-related infrastructure was devastated. According to the International Monetary Fund's 2012 Annual Report, the gross domestic product (GDP) considerably contracted and crude oil output was almost halted in July 2011.2 Moreover, nonoil economic activity was mainly influenced by the destruction of infrastructure and production facilities, the departure of foreign workers, interruptions to the functioning of the banking system, and limited access to foreign exchange.3 Since the end of the Libyan revolution in late 2011, Libyan oil production has been rehabilitating, registering about 1.2 million barrels per day (b/d) by February 2012. As the restoration of oil output continues, with the aim of reaching the pre-revolutionary level of 1.7 million b/d, significant revenue will be generated to the domestic economy4 and downward pressure might be placed on global oil prices. If used effectively, such windfall revenue will play a critical role in the future prosperity of Libya and challenge the idea of a "resource curse";5 alternatively, it could cause adverse effects arising from so-called "Dutch disease"6 consequences. Therefore, evaluating the impact of windfall revenue arising from oil production recovery is of considerable contemporary importance not only to the Libyan economy but also European nations that are the predominant source of demand for Libyan oil as well as other key regional trading partners.

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