Prior research suggests that accounting developments in a specific country are basically influenced, among other things, by their economic environment (HassanElnaby et al., 2003). Prior research also suggests that accounting development, to a large extent, depends on the economic stability of the country (Iqbal, 2002). This section sheds light on the Libyan economic environment both prior to and after the discovery of oil.
Prior to the discovery of oil in Libya, Libya was considered as one of the poorest countries around the world with no natural resources, no skilled labour, severe weather conditions, and with no potential economic prospects. It was also described as a “hopeless case”
(Higgins, 1968, p. 819). The economic condition at that time (prior to the oil discovery) can be seen through Higgins7 (1968) description of the Libyan economic situation as follows:
“Its [Libya] great merit as a case study is as a prototype of a poor country. We need not construct abstract models of an economy where the bulk of the people live on a subsistence level, where per capita income is well below $50 per year, where there are no sources of power and no mineral resources, where agricultural expansion is severely limited by climatic conditions, where capital formation is zero or less, where there is no skilled labor supply and no indigenous entrepreneurship. When Libya became an independent kingdom under United Nations auspices … it fulfilled all these conditions. Libya is at the bottom of the range in income and resources and so provides a reference point for comparison with all other countries” (p. 819).
This situation remained until the discovery of oil in commercial quantities in 19598. The country then became one of the principal oil producers in the world which transformed the country from a poor to a wealthy nation (Zagoub, 2011). The petroleum sector then became the core sector in the Libyan economic system; it has become the main source of finance and significant economic growth took place9 for the first time. According to Chami et al (2012), oil revenues amount to about 90% of total revenues for the government. Table
7 Higgins worked as an economic advisor to Libya in the early 1950s (Mahmud, 1997).
8 The export of crude oil started in 1961 (Zagoub, 2011).
9 Before oil discovery, Libyan economy was suffering from deficits and the main sources for public expenditures were domestic revenues and foreign aid (Mahmud, 1997).
2.1 illustrates the total revenues divided into oil and non-oil revenues for the years of 2008, 2009, and 2010.
Table 2.2: Libyan Total Revenues (LD10 million)
Items 2008 2009 2010
Oil revenues 64,417.0 35,347.0 55,713.0
Non-oil revenues 8,324.2 64,38.0 5,790.1
Total revenues 72,741.2 41,785.0 61,503.1
Oil and natural gas % 88.5% 84.5% 90.5%
Adaptation from: the Central Bank of Libya (2012).
The rapid growth of the Libyan economy influenced by the oil discovery has been described by El-Mallakh (1969, cited in Mahumd, 1997) as follows:
“If the economic growth occurring today in Libya were described without identifying the country, it would be dismissed most likely as an extremely hypothetical case, too dramatic to be real” (p. 308).
Being the main source of the country’s finance, the oil sales have played an important role in the country’s development and infrastructure. This makes the petroleum sector the prime sector in the Libyan economy. Oil revenues have been responsible for enabling the country to develop its infrastructure system (Zagoub, 2011). In its report on Libya, the Oxford Business Group (2008) commented on the Libyan natural resources as follows:
“Hydrocarbons are by far the most important natural resources at the country’s disposal. Libya’s total proven oil reserves amount to approximately 44bn barrels of crude oil. Currently 12 oil fields are in the process of being explored and around 25% of the country is covered by exploration agreements with oil companies, suggesting that the potential for the country’s energy industry is enormous” (p. 14).
Hydrocarbon revenues amount to about 70% of the country’s Gross Domestic Product (GDP) and more than 95% of its exports (Chami et al., 2012). Table 2.2 shows the oil and non-oil revenues compared to the country’s GDP for 2008, 2009, and 2010.
Table 2.3: Libya GDP (LD million)
Economic Sector 2008 2009 2010
Oil and natural gas extraction 81,149.8 47,087.1 60,814.5
Other economic activities 35,489.8 39,201.9 41,723.8
Total GDP 116,639.6 86,289.0 102,538.2
Oil and natural gas % 69.5% 54.5% 59%
Adaptation from: the Central Bank of Libya (2012).
10 The conversion rate of Libyan Dinar to Pounds Sterling was approximately 2.06 as at 31/12/2013.
Libya has a significant position in the world’s energy market holding about 3.5% of the world’s proven crude oil reserves (Chami et al., 2012). Before the revolution of 17th Feb11, the Libyan economy was characterised by remarkable levels of growth. After that date, because of the revolution and the freezing of the country’s foreign assets by the UN the country’s economy was adversely effected. The African Economic Outlook (2012) has commented:
“Libya’s economy, previously known for impressive levels of growth driven by its oil and gas industry, was seriously disrupted by the 2011 civil war. In addition to the impact that the freezing of the country’s assets had on liquidity, the economy was disrupted by the shutdown in oil production and exports, as well as the decline of productivity resulting from the loss of human capital and the destruction of infrastructure” (p. 4).
Oil production dropped to its lowest level of 22,000 barrels per day12 due to the crisis which is a big hit for the economy bearing in mind that the production level before the crisis was 1.77 million barrels per day. However, the economy began to recover in early 2012 when the crude oil production again exceeded 1 million barrels per day and it is expected to reach the pre-crisis level by 2014 (Chami et al., 2012). Figure 2.2 illustrates the crude oil production of the Libyan State during the period January 2000 until May 2012.
11 On 15th Feb 2011 a public revolution to overthrow the regime had started to declare the country’s liberty on 23th Oct 2011 (BBC, 2012). It was planned to start revolution on 17th Feb, the date when a demonstration started in Benghazi in 2006 against the Italian ministry who appeared on TV showing the photo of who made the film that abusing our Prophet Mohamed, but the Libyan police by time arrested a human rights campaigner who used to guide demonstrations against the regime in Benghazi which provoked people against the regime and start the Revolution (BBC, 2012a).
12 The official production quota, according to OPEC, is 1.47 m barrels per day (AfDB et al., 2012).
Figure 2.2: The Oil Production Stream in Libya for the Period 2000-2012
Source: U.S Energy Information Administration.
The modern development of Libya has been significantly influenced by the discovery of oil, the September military coup (Zagoub, 2011) and of course by the revolution of 17th Feb 2011. There is widespread agreement that an economic system of a country is, to large extent, influenced by its political system. Roberts et al. (2008) conclude that:
"Differences in political systems will be reflected in differences in how the economy is organised and controlled. This will in turn influence the objectives or role of accounting" (p. 202).