Practical Usage of Financial Planning to Strategically Manage Rentier Economies: Libya as a Case Study

Prepared by the researcher  : Dr Mabruk Derbesh, L’université Paris 1 Panthéon-Sorbonne, Sorbonne University, Paris 1, France. Tripoli University, Faculty of Economics and Political Science.

Democratic Arabic Center

Journal of Human Resources Development for Studies and Research : Twenty-Third Issue – January 2024

A Periodical International Journal published by the “Democratic Arab Center” Germany – Berlin

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Abstract

Rentier state economies present unique challenges to managers, particularly in terms of market volatility and reliance on a single revenue source. This thesis argues that effective financial planning is critical to managing these challenges and achieving sustainable economic development. Using Libya as a case study, this thesis will examine the role of financial planning in managing rentier state economies and assess its effectiveness in achieving macroeconomic stability, diversification, and sustainable growth. The research will analyze financial planning tools and techniques through discussing the term “Rent economy” within the Libyan context, effective financial planning tools and their potential impact and present practical and suitable recommendations. The findings of this research will provide policymakers with actionable insights into how financial planning can be used to strategically manage rentier state economies, mitigate economic risks, and foster sustainable development. 

3. Introduction:

The infamous economies of rentier[1] states are characterized by the reliance on the exports of natural resources, such as oil, gas, or minerals, which ultimately provide most of the states’ revenues. Although rentier economies extend in definition beyond those commodities, the term has become associated with them. While this economic model has been successful in generating significant income for some countries, it has also been linked to monetary volatility and state structural fragilities that can hinder sustainable policy or the thought of it[2].

Therefore, effective financial planning is important to dealing with such challenges and achieving sustainable economic development. Financial planning involves setting various things, including objectives, developing strategies, and implementing policies to allocate resources efficiently and effectively. In the context of rentier economies, financial planning can play a critical role in managing and mitigating economic risks, fostering diversification, and ensuring macroeconomic reliability.

For the sake of this paper, Libya, an Arab state, is an optimal example of a rentier state that has been exponentially reliant on oil exports for state revenue[3]. The country has experienced significant economic challenges in recent years, which were the result of political instability, security concerns, and a decline in a lone source of revenue which is ever volatile and elastic oil prices. Consequently, the Libyan economy, in recent decades, has gone through severe macroeconomic imbalances, including a widening budget deficit, increasing debt, and an alarming declining GDP, which may cause further economic challenges in the short and long run alike[4].

4. Methodology:

This paper, using the methodology of an expository format, argues that financial planning is a critical tool for managing the challenges faced by rentier state economies and that effective financial planning can help to achieve sustainable economic development. Using Libya as a case study, within the format of expository tools, this paper examines the role of financial planning in managing rentier state economies. It assesses its effectiveness in achieving economic stability, diversification, and sustainable growth. The research will analyze financial planning tools and techniques, such as budgeting and forecasting, revenue and expenditure management, and debt management, and evaluate their application in the Libyan context.

The findings of this research, in the form of recommendations, will provide policymakers with actionable insights into how financial planning can be used to strategically manage rentier state economies, mitigate economic risks, and nurture sustainable development. Ultimately, this paper aims to contribute to the growing literature on financial planning within the context of rentier economies or states and provide those with interest the practical guidance on how to effectively manage these unique economies. This paper aims at practicality as a key element of the research sequence.

5. Overview of Libyan economy as a rentier state:

The Libyan economy can be defined by looking into a few parameters starting with whether Libya resembles the characteristics of the rentier states and the challenges that face any economy.

1. Definition and characteristics of rentier states:

A rentier state is a country that derives a significant portion of its revenue from the export of natural resources, particularly, but not restricted to, oil, gas, and minerals. Such countries are usually referred to as those with a lack of economic diversification and heavy reliance on one or two commodities. Rentier states typically have high levels of government spending and limited private sector activity, which can create economic imbalances and fiscal vulnerabilities. Moreover, the volatility of commodity prices can lead to unpredictable revenue streams and economic instability[5].

1. Overview of the Libyan economy as a rentier state:

Libya is a classic example of a rentier state, as it relies heavily on oil exports for government revenue. The country is estimated to have the largest oil reserves in Africa, and the oil sector accounts for over 90% of government revenue[6]. This counts for more than half of its GDP. The Libyan economy has been heavily dependent on oil exports since the discovery of oil in the 1960s, and efforts to diversify the economy have been talked about but continued to lack the political will to accomplish and are therefore limited[7]. After its independence from the British occupation and the soldiers’ revolution in 1969, the government has played a governing function in the overall economy, with state-owned enterprises and entities controlling key sectors such as energy, telecommunications, healthcare, and transportation[8].

1. Key challenges and constraints:

Despite its abundant natural resources, the Libyan economy has faced significant challenges in recent years, especially since the many civil wars that erupted since the debacle of the Gaddafi government, which many saw as a stable eastern government[9]. Since then, political instability and security concerns have created a challenging business environment, which has deterred investment, local and foreign, and hampered potential growth. Moreover, the decline in oil prices since 2014 has also led to a sharp reduction in government revenue, which has put pressure on public finances and led to a significant increase in public debt. The continuing closure of many of the oil fields due to political conflicts also reduced oil output. Also, the cultural reliance on the state as a source of income is one of the challenges[10].

Overall, the lack of economic diversification and heavy reliance on the oil sector has continued to make the Libyan economy vulnerable to external shocks and economic volatility. The Libyan economy is a classic example of a poorly run rentier state, nevertheless a typical one. It is heavily reliant on oil exports and faces significant challenges related to political instability, security concerns, management of wealth, nepotism, and socially tolerated corruption. The next section of this paper will discuss the role of financial planning in managing these challenges and fostering sustainable economic development in rentier state economies[11].

6. Financial planning as a tool for managing rentier state economies:
7. Importance of financial planning in rentier state economies:

Rentier state economies face unique challenges, such as revenue volatility, limited economic diversification, and macroeconomic discrepancies. Effective financial planning can help to mitigate these challenges and attain sustainability. Financial planning involves setting objectives, developing strategies, and implementing policies to allocate resources efficiently and effectively. In rentier state economies, financial planning has the possibility to play an integral role in qualifying economic risks, fostering diversification, and ensuring economic stability based on strategic views[12].

1. Financial planning tools and techniques

Several financial planning tools and techniques can be used to manage rentier state economies effectively. These include:

1. Budgeting and forecasting: Rentier state governments should develop realistic and comprehensive budgets that account for the volatility of commodity prices and the potential for unexpected shocks. Regular forecasting can help to anticipate future revenue streams and expenditure needs and ensure that resources are allocated efficiently.
2. Revenue and expenditure management: Effective management of government revenues and expenditures is critical to ensuring fiscal sustainability. Rentier state governments should develop policies and procedures for managing revenues and expenditures, including strict controls on public spending, transparent procurement processes, and effective tax collection.
3. Debt management: Given the volatility of commodity prices, rentier state governments should develop prudent debt management strategies to avoid excessive borrowing and ensure long-term fiscal sustainability. This includes developing policies for managing external and domestic debt, monitoring debt levels, and establishing debt sustainability frameworks.
4. Application of financial planning in Libya:

Despite the significant economic challenges facing Libya, financial planning can play a critical role in managing these challenges and furthering sustainable economic development. The Libyan government has taken some steps to improve financial planning, including the establishment of a Ministry of Finance and the adoption of a Medium-Term Expenditure Framework (MTEF)[13].

However, these efforts have been hampered by political turmoil and security vulnerabilities, which in turn have created sizable obstacles to effective planning. Stated that, the application of financial planning tools and techniques should assist in addressing some of the key challenges facing the Libyan economy. For example, developing realistic budgets and forecasting revenue streams can help to mitigate the impact of oil price volatility, while effective revenue and expenditure management can ensure that resources are allocated efficiently. Additionally, prudent debt management strategies can ensure long-term fiscal sustainability and elude excessive borrowing, which would most likely restrain economic prosperity and social programs.

7. Case study: Using financial planning to manage the Libyan rentier state economy:
8. Overview of the Libyan economy:

Libya is a rentier state that relies heavily on oil and gas exports for its revenue. The country has the largest oil reserves in Africa and is a member of the Organization of the Petroleum Exporting Countries (OPEC). Oil and gas exports account for over 90% of Libya’s export earnings and around 75% of government revenue. Despite its significant oil wealth, Libya faces numerous economic challenges, including high real unemployment, a lack of economic diversification, and a weak, lazy and deformed private sector that needs much business and logistical maturity. The so-called private sector in Libya has developed to become an additional burden. Additionally, the country has been plagued by political instability and insecurity since the overthrow of former president Muammar Gaddafi in 2011[14].

1. Financial planning challenges in Libya:

The Libyan government faces several challenges in implementing effective financial planning strategies, including:

1. Revenue volatility: Libya’s economy is worryingly reliant on oil and gas exports, which are subject to significant global pricing and volatility in international markets and consumption. This makes it hard to accurately forecast government revenue and plan expenditures, hence the need for cohesive planning.
2. Lack of economic diversification: The aforementioned reliance on the oil and gas sectors causes limited potential for long-term growth and job creation. Again, this makes it challenging to develop sustainable economic development strategies.
3. Weak public financial management: The Libyan government has a weak public financial management system that has, for a. long time now, hampered its ability to effectively allocate resources and manage expenditures.
4. Financial planning initiatives in Libya:

Despite these challenges and obstacles, the Libyan government, in the past 20 years, has implemented several financial planning initiatives to manage the country’s economy, such as:

1. Medium-Term Expenditure Framework (MTEF): The Libyan government has adopted an MTEF, which is a planning and budgeting tool that helps to align government resources with strategic priorities. The MTEF covers a three-year period and provides a framework for developing realistic budgets and allocating resources efficiently.
2. Public financial management reforms: The Libyan government has implemented a number of public financial reforms, including the establishment of a Ministry of Finance, a Ministry of Administrative Supervision, Entities of fiscal financial policies, and, on top of all that, the adoption of international accounting standards helped by known financial institutions. These reforms are intended to improve financial management, enhance transparency, and promote accountability.
3. Economic diversification: The Libyan government has initiated several measures to promote economic diversification, including the development of non-oil sectors such as tourism, agriculture, and manufacturing. Additionally, the government has encouraged foreign investment and privatization of state-owned enterprises.

However, most of these reforms were met with resistance either by the political elite or by the political struggles over power and overseas legitimacy.

1. Impact of financial planning initiatives in Libya:

While the impact of financial planning initiatives in Libya is difficult to assess given the ongoing political instability, these initiatives have the potential to stimulate sustainable economic development and alleviate the challenges faced by the Libyan economy. The MTEF, for example, can help to ensure that government resources are allocated efficiently and effectively, while public financial management reforms can improve transparency and accountability[15]. Furthermore, economic diversification can help to reduce the reliance on oil and gas and promote further job creation in non-oil sectors. Eventually, these initiatives are essential for creating a more stable and sustainable economic environment in Libya[16].

This paper argues that financial planning is a critical tool for managing rentier state economies, particularly in the context of significant economic challenges such as those faced by Libya. Effective financial planning should, with everything else being equal, diminish risks, adopt economic diversification, and ensure macroeconomic permanence or steadiness. Financial planning tools and techniques, such as budgeting and forecasting, revenue and expenditure management, and debt management, can be applied to manage the challenges faced by rentier state economies. While the Libyan government has taken some steps to improve financial planning, political instability and security concerns have created significant obstacles to effective implementation. Nevertheless, the application of financial planning tools and techniques can help to address some of the key challenges facing the Libyan state.

8. Recommendations:

Based on the analysis of financial planning in rentier states, including the case study of Libya, the following recommendations are made for improving financial planning in rentier state economies:

1. Develop a long-term economic diversification strategy: Rentier state economies are heavily reliant on a single commodity or sector, which makes them vulnerable to economic shocks. Therefore, it is fundamental, at this stage, to develop a long-term economic diversification strategy to reduce reliance on oil and gas exports and promote growth in non-oil sectors.
2. Establish a stable and predictable fiscal framework: Rentier states face significant revenue volatility, which makes it challenging to plan and manage government expenditures. A stable and predictable fiscal framework, such as a medium-term expenditure framework, can help to align government resources with strategic priorities and promote fiscal discipline.
3. Strengthen public financial management: Weak public financial management systems can hamper effective financial planning and budgeting. It is essential to strengthen public financial management systems, including budget preparation, execution, and monitoring, to ensure efficient and effective allocation of resources.
4. Enhance transparency and accountability: Transparency and accountability are critical for effective financial planning and management. Rentier states should adopt international accounting standards and develop mechanisms for ensuring transparency and accountability in government operations.
5. Promote private sector development: Rentier states often have weak private sectors, which limits economic growth and diversification. It is important, again, to promote private sector development through measures such as careful privatization, local investment, and the creation of a conducive and relaxed business environment.
6. Develop a modern tax system that is elastic and far reaching to ensure another layer of governmental supervision over public wealth to try to eliminate corruption and promote accountability.
7. Cut the overly populated public institutions with useless functions and inefficient methods of handling funds from and to the producer, which is the Oil Company, NOC and the Central Bank of Libya, CBL. For instance, the NOC transfers its revenue to the CBL through an added channel called the Foreign Bank of Libya. This procedure seems redundant and creates further red tape and unnecessary costs for no apparent reason or added value.
8. Secure better property rights with extraction companies. This may turn out to be difficult during the current political state of Libya as the bargaining chips are mostly in the hands of those foreign companies with their over-valuation of risk. This, however, is not impossible.
9. The Libyan state can enhance its revenue by using model contracts and transparent exemplary bidding practices such as what the Asian state of Timor-Leste did, with success, in recent years[17].

To improve financial planning in rentier state economies, developing a long-term economic diversification strategy, establishing a stable and predictable fiscal framework, strengthening public financial management, enhancing transparency and accountability, and promoting private sector development are recommended. Implementing these recommendations will require political will and commitment, as well as technical expertise and capacity-building efforts to evade what we learned from the rentier experience in Latin America, for instance[18]. Nonetheless, effective financial planning can contribute to sustainable economic development and help to address the challenges faced by rentier state economies[19].

9. Conclusion:

In conclusion, this thesis has examined the use of financial planning to strategically manage rentier state economies, using Libya as a case study. The research found that financial planning is a critical tool for managing the economic challenges facing rentier state economies, such as revenue volatility, overreliance on a single commodity or sector, and macroeconomic instability. Through effective financial planning, rentier states can moderate these challenges to a degree and build a sustainable economy for their citizens. These efforts have been somewhat fruitful in some Gulf states, although the verdict is still out in the case of Iran[20].

The case study of Libya highlighted the unique challenges faced by a rentier state, including a history of political instability, civil conflict, and economic sanctions. Despite these impediments, Libya has taken steps to improve its financial planning, including the implementation of a medium-term budget framework and efforts to diversify the economy. Those efforts are still in the early stages to fully credit them. Based on the analysis of financial planning in rentier states, including the case study of Libya and some of the Gulf states, several recommendations have been made for improving financial planning in rentier state economies. These include developing a long-term economic diversification strategy, establishing a stable and predictable fiscal framework, strengthening public financial management, enhancing transparency and accountability, and promoting private sector development[21].

Implementing these recommendations will require political will and commitment, as well as technical expertise and capacity-building efforts. Nonetheless, effective financial planning can contribute to sustainable economic development and help to address the challenges faced by rentier state economies[22].

This thesis has demonstrated the importance of financial planning in managing rentier state economies, and the potential benefits of adopting a strategic approach to financial planning. By addressing the unique challenges faced by rentier states and implementing effective financial planning measures, these economies can move towards sustainable economic development and reduce their vulnerability to economic shocks. However, its important to note here that Libya’s initial problems are based on its political and governance widespread and unashamed corruption.

10. References:

[1]    The term rent economy was found on the idea of renting a commodity such as land and has no other connotations in English; however, the term was translated to the word “الريع “ in Arabic and this word has many other inferences or cultural references that made researcher and the public confuse it with nomadic or even patriarchal economies or societies. The better term in Arabic, to simplify it should be “اقتصاد التأجير “.

[2]     Puranen, B., & Widenfalk, O. (2007). The Rentier State: Does Rentierism Hinder Democracy? In M. Moaddel (Ed.), Values and Perceptions of the Islamic and Middle Eastern Publics (pp. 160–178). Palgrave Macmillan US. https://doi.org/10.1057/9780230603332_7

[3]    Beblawi, H. (1987). The Rentier State in the Arab World. Arab Studies Quarterly, 9(4), 383–398.

[4]    Neal, M. (2019). Rentier state. In A Dictionary of Business and Management in the Middle East and North Africa. Oxford University Press. https://www.oxfordreference.com/display/10.1093/acref/9780191843266.001.0001/acref-9780191843266-e-139

[5]    Ulrichsen, K. C. (2016). The Gulf States in International Political Economy. Palgrave Macmillan UK. https://doi.org/10.1057/9781137385611

[6]   NOC. (2023). المؤسسة الوطنية للنفط—N.O.C. https://noc.ly/index.php/en/

[7]    Worldometer. (2023). Libya Oil Reserves, Production and Consumption Statistics—Worldometer. https://www.worldometers.info/oil/libya-oil/

[8]   Inglehart, R., & Baker, W. E. (2000). Modernization, Cultural Change, and the Persistence of Traditional Values. American Sociological Review, 65(1), 19–51. https://doi.org/10.2307/2657288

[9]     Derbesh, M. (2020). The Impact of Political Change on the State of Academia Including Academic Freedom in the Arab World: Libya as a Case Study. Global Society, 34(2), 245–259. https://doi.org/10.1080/13600826.2019.1667753

[10]   Gengler, J. J., Shockley, B., & Ewers, M. C. (2021). Refinancing the Rentier State: Welfare, Inequality, and Citizen Preferences toward Fiscal Reform in the Gulf Oil Monarchies. Comparative Politics, 53(2), 283–289.

[11]   Yamada, M., & Hertog, S. (2020). Introduction: Revisiting rentierism—with a short note by Giacomo Luciani. British Journal of Middle Eastern Studies, 47(1), 1–5. https://doi.org/10.1080/13530194.2020.1714267

[12]    Jäger, A. (2020). Populists, Producers and the Politics of Rentiership. The Political Quarterly, 91(2), 343–350. https://doi.org/10.1111/1467-923X.12838

[13]    Eden, H. V., Gentry, D., & Gupta, S. (2017). A Medium-Term Expenditure Framework for More Effective Fiscal Policy. In Modernizing China. International Monetary Fund. https://www.elibrary.imf.org/display/book/9781513539942/ch04.xml

[14]      Annual Reports – Central Bank of Libya. (2014). https://cbl.gov.ly/en/annual-reports

[15]    The World Bank. (2013). Beyond the Annual Budget Global Experience with Medium-Term Expenditure Frameworks [Text/HTML]. https://www.worldbank.org/en/home

[16]   Mahdavy, H. (1970). Patterns and Problems of Economic Development in Rentier States: The Case of Iran, hossein mahdavy (Harvard). In Studies in the Economic History of the Middle East. Routledge.

[17]    Barma. (2014). The Rentier State at Work: Comparative Experiences of the Resource Curse in East Asia and the Pacific.

[18]    Panzarelli, Maya. (2013). Populism, rentierism, and socialism in the twenty-first century: The case of Venezuala / Margarita López Maya and Alexandra Panzarelli.

[19]   Torre, C. de la, & Arnson, C. J. (2013). Latin American Populism in the Twenty-First Century. Johns Hopkins University Press. https://doi.org/10.56021/9781421410098

[20]   Cherif, R., Hasanov, F., & Zhu, M. (2023). Front Matter. In Breaking the Oil Spell. International Monetary Fund. https://www.elibrary.imf.org/display/book/9781513537863/front-1.xml

[21]    Herb. (2017). The Political Realities of Economic Reform in the Gulf Monarchies. https://erf.org.eg/publications/the-political-realities-of-economic-reform-in-the-gulf-monarchies/

Herb, M. (2019, January 30). Introduction: The politics of rentier states in the Gulf. Project on Middle East Political Science. https://pomeps.org/introduction-the-politics-of-rentier-states-in-the-gulf.

[22]    ÖZYAVUZ, SCHMID. (2015). Persistence and Evolutions of the Rentier State Model in Gulf Countries. https://www.ifri.org/en/publications/notes-de-lifri/persistence-and-evolutions-rentier-state-model-gulf-countries.