Libya’s SME Ecosystem

INTRODUCTION

Although the reforms that address privatization of the Libyan economy have a long history, the impacts haven’t been powerful enough as expected (Salama and Flanagan). Therefore, Libyan public enterprises continued to maintain their dominant role in the economic field. Furthermore, the insufficient performance of the private sector has led to some structural economic problems in Libya, such as unemployment, oil-dependence, and a deteriorating public debt. Moreover, the Libyan private sector started to face greater difficulties notably with the civil war that has started in 2011. In this context, the recovery of the private sector and the re-development of SMEs during the reconstruction process of Libya should be taken into account as an important agenda item. This article highlights the main obstacles that the SMEs are facing in the current Libyan business environment and offers suggestions for overcoming these difficulties.

Today, political and economic turmoil constitutes one of Libya’s most important problems. The armed conflict, which has caused great damage to the national economy and civilian population, has been continuing since 2011. According to commentators, the impact of the armed conflict has significantly worsened the structural economic problems of the country’s developing economy. In this context, it would be suitable to take a quick glance at the political history of the country to examine most crucial economic difficulties of Libya. During the Qaddafi era, the Libyan economy converted to a centrally planned system (Khader and El-Wifati). Although this decision of the Libyan government was an attempt to find an answer to needs such as the implementation of huge infrastructural projects that needed large sums of money, state-centered economic policies have created long-term problems for the Libyan economy. For instances, public enterprises have become the dominant sector in all economic activities and the role of the private sector has been marginalized for three decades as a result of the series of economic policies (Shernanna). Moreover, the public sector has been criticized for becoming the main employer of the workforce in society and causing a series of increased public financial burdens (Shernanna).

On the other hand, unemployment rates along with the underdeveloped private sector still holds a very central place amongst the problems of the country worn by the civil war. According to sources pointing to this problem, it is vital that the Libyan government takes steps to diversify the economy through the expansion of the private non-oil sector (Mezran and Khan). Second, it underlined that the implementation of economic reforms in order to reduce youth unemployment in the country should be implemented to create a balanced and effective restructuring after the conflict (Mezran and Khan). For both of the items, strengthening SMEs presents strategic benefits. First, SMEs are highly functional to reduce unemployment figures due to their potential to create employment (OECD). Furthermore, through SMEs, it is more likely to employ disadvantaged segments of the population, such as women, youth and refugees, who experience the most severe economic effects of armed conflict during the last decade (OECD).

The SME ecosystem in Libya is unevenly distributed across different parts of the country. Today, most of the small-scale manufacturing is located in Benghazi, while commercial SMEs are concentrated in Tripoli, Benghazi and Mistrata (OECD). Thus, the central and southern regions of Libya are including fewer SMEs compared to the northern region, while also hosting a higher proportion of micro-scale enterprises and informal enterprises. One of the possible explanations of the lower level of SME performance in the southern regions can be stated as less developed infrastructure and fewer investment opportunities (Eltaweel) (Abdesamed and Wahab). There are also significant sector differences between regions. For instance, the agricultural sector being more dominant in rural areas, although agriculturally productive regions are also located in the coastal plains near Tripoli in Jifarah and Jebal Al Akhdar in the eastern part of the country, as well as Sabha in the south. On the other hand, Tripoli holds an important position as a political, and financial center. Today, it’s possible to state that the SME sector in Libya is small, but relatively diverse, and still plays a key role in small-scale manufacturing sectors (OECD).

In many parts of the world, SMEs face similar barriers such as financial problems, particularly the limited access to funding, and non-financial problems, especially on know-how, marketing, accounting and other business aspects of management (Elmansori and Arthur). However, in Libya’s case, it is possible to see that the policies which took place during the last half-century have a decisive impact on the country’s overall economic situation and the private sector expansion. While state-centered economic policies have led to the suppression of private sector development, with the changing political climate during the 80s the Libyan government launched a series of economic reforms to move towards a more liberal economy (Shernanna). However, the impact of reforms remained significantly limited. The reason why endeavors for privatization have not yielded results may lie in the attempt to implement reforms independently of institutional infrastructure. For example, the institutional structure required for privatization which established only twenty years after the initiation of reforms can be counted as the prior reason that caused the stability of the reforms to be insufficient (Shernanna). Eventually, the National Economic Strategy recognized for the first time the critical role of private enterprises in creating wealth and prosperity in Libya in 2006. Although this decision played an important role in setting the main policy objectives that established the conditions for private sector innovations that are expected to strengthen the SMEs ecosystem in the country, over the following five years, only limited progress was made. Furthermore, since the start of civil unrest in 2011, the country’s fragile political structure and lack of security have further hampered the necessary economic reforms. In this context, the Libyan economy is still largely driven by SOEs that are active in many sectors (Shernanna).

Another reason affecting the development of the private sector can be stated as the widespread culture of self-employment. Considering that the private initiative was almost non-existent in Libya for decades, the ongoing armed conflict causes very low rates of entrepreneurship in the country. In addition, the informal economy in the country makes it difficult to investigate the private sector and SMEs activities and creates negative effects on the country’s economy. While informality is present to a certain extent in every economy, however it tends to be smaller in countries with business-friendly regulations. Libyan businesses reviewed for 2015 identified the six most problematic factors for doing business in Libya: government instability, access to finance, an under-educated workforce, inefficient government bureaucracy, policy instability, and corruption (World Bank Group). These topics explain the steps that the government should take for the private sector and specify the legal arrangements vital for the development of SMEs. However, another issue that is as important as these topics is the quality of the infrastructure in the country (Mikaïl and Engelkes). Some of the leading infrastructural tools for the development of the private sector can be described as roads, ports, airports, electricity and water supply and telecommunication networks. In particular, the infrastructural deterioration experienced in the country affected by the civil war directly affects the private sector and SMEs ecosystem. Another problem in terms of private sector development is the low potential of Libyan women to become entrepreneurs (OECD). One of the reasons is that the resources allocated for the integration of women entrepreneurs in the sector are generally low. Secondly, the lack of fundamental rights by women such as mobility, property and inheritance also aggravate this situation. Regrettably, women who are in working age in Libya are much less likely to be employed as entrepreneurs than Libyan men. The Libyan government can increase the number of women entrepreneurs by providing necessary technical and educational support and by facilitating women’s access to capital.

CONCLUSION

Although SMEs generate large incomes for the country’s economy and are considered one of the drivers of employment, they have special needs that must be met by the state in order to compete with larger companies (Eltaweel). In this context, services such as easy credit opportunities, tax advantages and free consultancy are essential for the development of SMEs. In addition, the government should reconsider the privatization efforts what started almost half a century ago, and carry out its reform program through established and transparent institutions. On the other hand, the Libyan administration should take the necessary measures to reduce the informal business activity in the country for the development of the private sector, and make legal arrangements that support the establishment and governance of SMEs. Last but not least, the government should take the necessary steps for women’s integration into the SMEs sector as entrepreneurs.

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