Operational Adaptability in Fragile Settings

By Farhad Peikar 

Conflict and fragility have been the main hurdles to implementing projects in conflict-affected countries, causing many fragile states to fall behind on their development agendas. In many past cases, international financial institutions (IFIs) have had to suspend or cancel ongoing activities as violence and instability increased, affecting national institutions and making project objectives untenable. For these reasons, the importance of flexibility and adaptability to conditions on the ground is key to avoiding total disengagement. A MENA Transition Fund-financed project, the Small Medium Enterprises (SME) Development Strategy in Libya, presents such a case.

Supported by the OECD, the project began implementation in mid-2013, with the objective of contributing to the sustainability of Libya’s economic growth through diversification. In particular, the project was designed to develop and strengthen the overall legal and institutional framework for promoting entrepreneurship and high-potential SMEs in Libya.

However, when conflict re-erupted in Libya in 2014 following a two-year lull, the events on the ground inevitably affected the continued development of planned activities. Constraints on travel to high-risk destinations and on Libyans’ ability to travel abroad hindered project progress, and the OECD had to consider alternate implementation arrangements to ensure whatever progress had been achieved was not lost as a result of the conflict.

The most notable adjustment was brought to component 2, which initially intended to develop a SME strategy for Libya. Given that developing a strategy required a functioning government with stable institutions - which is not the case currently in Libya - the project will instead focus on delivering tangible results in a Short-Term Action Plan. The new plan aims to bring together relevant Libyan and international stakeholders to agree on main priorities for the next two years to recover and strengthen capacities and tools of institutions working to support SMEs and entrepreneurship in the context of fragility.

Diagnostic analysis

With the war still raging in Libya, regional and international experts conducted painstaking research and analysis between 2013 and 2016 outside Libya to prepare the country for a post-conflict recovery. Capitalizing on information from existing national authorities, such as the Central Bank, Libya Enterprise, and from international sources, the OECD successfully completed the first component of the project – a diagnostic study: SMEs in Libya’s Reconstruction.

The findings of the study, which was launched in October 2016, were the main basis for determining required adjustments to the project. The study is intended to contribute to the implementation of policies in post-conflict Libya to promote private sector development. It analyzes the structural economic framework and conditions prevalent in Libya, highlights potential drivers of development and considers the role of SMEs and entrepreneurship promotion in driving post-conflict recovery.

Moreover, the report identifies the necessary legal frameworks, institutions and policies for the promotion of SMEs and entrepreneurship. The findings and recommendations of the report, which comes at the time when there is a lack of studies and analysis on Libya, could be used as a baseline for new activities in the future.

Hopes for stability over the horizon

The formation of the new Government of National Accord (GNA) in Libya in early 2016 stirred optimism among Libyans that the conflict and political deadlock could finally come to an end. The Libyan Political Agreement, signed in December 2015, listed a number of priorities for the GNA. Among its economic priorities, the agreement calls on the central government to “provide short-term employment opportunities, especially for youth, and in particular to support small and medium-sized enterprises.”

Taking the local demand for project implementation into consideration as well as realizing the unstable situation in Libya, the OECD explored alternative ways in which it could continue implementation. Besides extending the closing date and introducing other adjustments, the OECD decided to carry out its trainings, workshops and seminars outside Libya, namely in Tunis, Istanbul or Paris. Additionally, it relies on its local partner, Libya Enterprise, to conduct local consultations and other activities within the country.

Why promoting SMEs in Libya?

The Libyan economy is largely driven by and dependent on state-owned enterprises, which control all major sectors, including its sole natural resource – oil. These sectors together account for 85 percent of the country’s GDP, while oil alone accounts for more than 95 percent of export revenues. On the other hand, the private sector only accounts for 5 percent of Libya’s GDP. Around 95 percent of the private sector are SMEs, which largely operate in the informal economy.

The civil conflict and political stalemate since the 2011 revolution have prevented Libyan public firms from fully exploiting the country’s natural resources. Massive reductions in revenues have also pushed fiscal and current account deficits to record highs, pushing the country’s economy to a “near collapse”.  More than 2.4 million people in Libya, including 350,000 internally displaced people, are currently in need of humanitarian assistance, according to the United Nations. The conflict has also affected the private sector as more than 77 percent of enterprises report having sustained a direct impact as a result of the crisis, with infrastructure destroyed and daily operations affected.

Provided that the recent international-backed efforts succeed, the most urgent needs for the country to focus on are the socio-political fragmentation, cessation of hostilities, and the process of reconciliation and transition, according to the study. The economic outlook is rather bleak, and immediate measures need to be taken to address the cash crisis and resume oil production.

Once these conditions are met, Libya needs to develop a dynamic private sector, particularly SMEs and entrepreneurship, which are essential for longer-term prosperity. A revamped private sector will be a critical conduit to economic recovery and stabilization in a post-conflict context.  A strong private sector would also contribute to sustainable employment – particularly for youth and ex-combatants – greater productivity, and a more balanced and diversified economy. 

Laying foundations for the future

Although the project was put on hold, the OECD was able to carry out a number of activities, including holding workshops, conducting trainings and convening regional meetings. At least 160 Libyans took part in workshops between 2013 and 2016 in Tunis, Tripoli, Paris and Istanbul, while more than a dozen Libyan government officials participated in regional policy dialogue meetings and over 40 staff received project specific trainings.

Going forward, as the Libya Enterprise develops an SME law, the project will extend its support by reviewing the draft and assisting in the legislative process. Although the situation continues to be fragile, conditions still allow for activities to take place. The project will focus on the Short-Term Action Plan and building capacity within Libyan Institutions - with Libyan government officials continuing to participate in MENA-OECD working groups and trainings.

Realizing that there is no peace without development and vice versa, and recognizing the development challenges of fragile states, the timely adjustments introduced to the project design were vital in advancing implementation in a conflict affected environment. These changes are intended to help Libyan authorities rebuild institutions in a bid to smooth the way for developing a SME strategy when the conditions on the ground allows.