Within three years of the popular and internationally supported overthrow of the Qaddafi regime, the initial optimism that Libya would put itself on a path toward stability, democracy, and prosperity gave way to a decade of insecurity and turmoil. Ultimately, in 2019, Libya's situation would devolve into a full-blown violent conflict, fueled by external actors engaged in intense geopolitical competition. The recent fighting has deepened political, regional, and tribal divisions, as well as exacerbated the fragmentation of government institutions and policymaking. The conflict has also sharply undercut the wellbeing of ordinary citizens, whose living standards have deteriorated in line with the country's fortunes since 2011.

Libya's poor economic performance over the past decade has exposed its extreme dependence on the oil sector. Macroeconomic outcomes have not only been at the mercy of volatile international oil prices, but also the National Oil Company's (NOC) ability to access and operate oil fields, pipelines, and export terminals. Domestically, local actors and their international backers have weaponized the oil sector, deploying production shutdowns and export disruptions toward political, financial, and military ends. As a result, oil revenues have become insufficient to cover a rising public sector wage bill and fuel subsidies since 2014, leading to ballooning fiscal deficits, double-digit inflation, and the depletion of international currency reserves.

Faced with tightening budget constraints, the central government in Tripoli and the parallel government in Baida have increasingly resorted to deficit financing through the Central Bank of Libya (CBL). The introduction in 2015 of a parallel currency by the CBL branch in Baida and disruptions to banking payment systems compounded recurring liquidity shortages and accelerated the depreciation of the exchange rate on the black market, all as an informal and illicit economy expanded in size and scope across the country. Heightened external concerns about inadequate domestic safeguards to combat money laundering and terrorism financing hastened the growing isolation of Libyan banks and businesses from the international financial system.

As would be expected, Libya's deepening political divisions were reflected in the increasing fragmentation of government institutions, including those tasked with economic policy and financial affairs. The international community's efforts to facilitate organizational unification, budget coordination, and policy reform yielded few tangible or permanent outcomes. Even within the confines of the Tripoli-based Government of National Accord, fiscal and economic policy coordination has been minimal, often requiring the intervention of external actors and international financial institutions. Extended delays to salary payments, chronic summer power cuts, and periodic shortages in fuel products have become the norm over time. The consequences of a crumbling health care system have been widely felt during the COVID-19 pandemic.

Solutions to Libya's political and economic crises are not readily evident. Despite recent positive developments, such as the United Nations-brokered ceasefire agreement in October 2020 and selection of a new interim national unity government in February 2021, the underlying drivers of Libya's conflict remain. Competition for control over Libya's oil wealth, concerns around perceived inequalities in resource distribution, and continued potential for armed groups to profit from instability means that there are still opportunities for spoilers to derail progress toward a permanent political settlement. Even in the best of circumstances, Libya will face profound challenges in building its capacity for effective governance and realizing the economic reforms needed for a sustained recovery.

Still, investments by local and international actors can help build the foundations for good policy outcomes. Across all levels of government, institutions are struggling with capacity constraints; years of conflict and political instability have critically fragmented and weakened government institutions. Thus, an immediate priority for involved actors should be to unify the key national institutions that drive the economy, including the CBL, the Ministries of Finance and Economy, the NOC, and the Audit Bureau. This effort will be both politically complicated and technically complex. International actors should also provide the Libyan government with technical assistance in the areas of policy coordination, budget execution, and project implementation, as well as support bold steps to combat endemic corruption in the public sector.

Until conflict actors reach a common understanding on priorities for a national government, it is likely that any governance improvements will come from the local level. Working with municipal governments and local civil society organizations, international organizations can effect positive change in the lives of Libyan citizens by improving the delivery of crucial public services, including infrastructure, education, and healthcare. Focusing on security at a municipal level offers opportunities to engage armed groups constructively and to professionalize public security. Enhancing local governance can also set the foundation for national-level improvements, as successful cities can provide examples of reform that can then be taken up across Libya.

While private sector development might depend largely on the realization of political stability, encouraging small and medium enterprises and broader private sector growth can help create jobs for Libya's youth and provide alternative pathways to militia members. A private sector development approach fits well within a municipal engagement strategy because local governments can compete to create business-friendly regulatory environments and work with local businesses to build value chains and foster investment. Crucially, private-sector-led economic reform need not be premised upon national solutions; rather, local stakeholders can work together to realize their collective goals city by city.

Over the medium to long term, Libya needs to limit the dependence of its economy on the oil sector and create alternatives to subsidization and mass public employment, especially in the context of low international oil prices, years of underinvestment in Libya's oil infrastructure, and a structural shift in international markets toward renewables. These factors alone might, in the longer term, force Libyans to reimagine their development model. In the short term, the country can use its oil wealth to stabilize the economy, facilitate a shift toward diversification, and address long-standing perceived inequities. A sustained economic recovery will reinforce Libya’s ongoing progress on the political track and pave the way for the gradual return of political stability.