Corruption undermines Libya's oil-rich economy

Petroleum makes Libya one of Africa's richest countries but corruption and bureaucracy have left even the country's leader Muammar Gaddafi scratching his head about what happens to all the money.

OPEC member Libya has estimated reserves of 42 billion barrels -- the third largest in Africa -- and pumps an estimated 1.8 million barrels per day.

Revenues from that, which account for 75 percent of the state budget and 95 percent of exports, have led to a surge in construction and consumer spending but efforts to modernize the economy have made slow progress.

The development of major sectors like health, education and infrastructure remains far from satisfactory, and many Libyans have failed to benefit at all despite the government's avowedly socialist policies.

The government softened its rigid socialism after the United Nations ended its 11-year embargo in 2003 and has encouraged private enterprise, to boost employment and reduce the financial burden of state subsidies.

"Where does the oil money go?" Gaddafi asked recently, pledging to lead "a revolution against corruption" by closing ministries and distributing the money directly to the people, though he has yet to act on his decision.

His son Seif al-Islam has lambasted "a civil servants' mafia," which he accuses of opposing reforms.

Where does the oil money go?

Muammar Gaddafi, president

Improvements needed

In its last update on Libya, the International Monetary Fund said it was "crucial" for the country to strengthen the management of public finances and "improve the legal and administrative framework governing the state budget."

It urged the authorities to improve economic statistics and accounting standards to bring them into line with international practices.

According to a French diplomat in Tripoli, much remains "to be done in the field of day-to-day management of the state, which remains slow and bureaucratic."

Libya's 2008-2012 strategic plan allocated a total of $75 billion over five years to major infrastructure projects, equal to 60 percent of the normal state budget for five years.

But projected spending was slashed following last year's fall in oil prices.

Economy imbalances

Meanwhile, the increase in the number of big projects has led to a labor shortage and a bottleneck in the supply of construction materials.

"Most materials are imported and this has caused a big rise in prices, forcing businesses to reassess the cost of carrying out their projects," the diplomat said.

Yet the rapid increase in imports -- 29 percent in 2008 -- has been more than offset by a sharp rise in oil exports, giving a new boost to Libya's foreign assets, which reached $136 billion by the end of last year.

Some of the assets are held directly by the powerful Libyan Investment Authority. It manages several funds with holdings everywhere in the world but especially in Africa.

In hydrocarbons, four licensing rounds for exploration blocks have brought in 40 foreign operators from all over the world. The aim is to lift output from around 1.8 million barrels a day to around three billion by 2013 at a projected cost of about $30 billion.

The jump in oil revenues in the past few years spurred an explosion in prices, chiefly for real estate and food in a country which has to import around 90 percent of its equipment and nutrition.

Inflation soared from negative figures at the end of the 1990s to a record 13 percent in July last year, before plunging to one percent in June this year, according to the Central Bank of Libya.

Most materials are imported and this has caused a big rise in prices, forcing businesses to reassess the cost of carrying out their projects

French diplomat