Last week’s attack on the US diplomatic mission in Benghazi, which killed US ambassador Chris Stevens, is the most significant security incident to have taken place in Libya since the end of the 2011 conflict.

It had an immediate impact on business, with airspace temporarily closed, trade delegations postponed and expatriates relocated to Tripoli or overseas.

But the nature of its impact on the Libyan economy, while clearly damaging, needs to be put into perspective.

First, as one of our previous posts noted, the post-war economic recovery has essentially been underpinned by oil production, which was not disrupted by last week’s events. Revenues from oil reached LD37.9bn ($30.1bn)  in the first seven months of 2012 and it is this income that pays for the billions of dinars in state salaries and subsidies already spent by the government this year. That spending, in turn, is helping to maintain local consumer demand by providing income for much of Libya’s workforce and keeping basic foods and fuel artifically cheap. Without it there would be even more serious unrest. 

On a macro level, then, GDP growth and the government’s financial position is not likely to be affected by the attacks. The Libyan economy has not been reliant on inflows of foreign money since the pre-oil era, and a shock to foreign investor confidence - unlike, say, Tunisia - will not have a tangible immediate impact.

Second, while what happened will doubtless discourage many foreign companies from exploring business opportunities in Benghazi, and perhaps Libya as a whole, the incident did not come out of the blue. There have been a number of (mostly failed) attacks on Western diplomatic interests in Benghazi since the start of 2012, and last week’s assault – while far more significant in its outcome – has not exactly shattered a pristine peace.

Those foreign companies with an operational presence in Benghazi (and they are relatively few), are already likely to be familiar with the local situation and managing the risk it presents. And while the target of the attacks may particularly concern Western firms, the effect on Turkish, Korean, Chinese or Indian companies – whose return will play a crucial role in kick-starting projects – may actually be more important in determining how the wider business environment is affected.

That effect still remains to be seen, although there are already signs of additional caution, with the Filipino government deciding to tighten rules on its nationals working in the Libyan construction sector (although the restrictions do not apply to Filipinos working in other sectors).

Fourth, a geographical distinction needs to be drawn. Had any attacks taken place in Tripoli, they would have been far more detrimental to the economy and the business environment. But although many NGOs, diplomats and foreign workers may have been pulled out of Benghazi, there has been no mass exodus from the capital – partly because there are relatively few foreigners in the city in the first place.

Finally, unlike Egypt or Tunisia, Libya does not have a tourist industry. While last week's events hardly promote Libya as a destination, neither will they have any meaningful impact on local businesses involved in catering to foreign visitors.

Yet while the attacks in Benghazi may not greatly alter the current economic dynamics in Libya, they make it harder to shift away from them.

Ministries and public-sector companies may now need to work harder to persuade foreign contractors to return to the country, and those contractors are now likely to charge higher prices to compensate for the added risk they will feel is involved with doing business in Libya. This is especially true in the construction sector, which relies on large quantities of imported manpower.

Moreover, the incoming government, which the new Prime Minister Mustafa Abu Shagour is expected to name in the next few weeks, is now likely to be overwhelmingly focussed on security. That issue is of course critical, and was always going to be at the top of the agenda, but there is a risk that making progress on restarting infrastructure and utilities projects may be neglected. The two should instead go hand-in-hand.

A related danger is a scenario whereby Benghazi, and perhaps the north-east more generally, becomes increasingly marginalised in economic terms because of a deterioration in security. If contractors – whether Libyan or foreign – are unwilling to take on projects because they deem it too risky, then the perception of government marginalisation will only increase, and this will play into the hands of those seeking to foment unrest.

It may also thwart efforts to turn Benghazi into a second administrative centre for the country, making it more difficult for government ministries or agencies to be relocated to the city if they are considered to be a target. Foreign companies with an existing presence in Tripoli may be similarly discouraged from opening representative offices in Benghazi.

A similar argument applies to oil and gas exploration, which Libya needs to undertake in the not-too-distant future if state revenues are to keep pace with spending. An unstable security situation will be conducive neither to developing new concessions nor to extracting greater resources from existing fields, especially if contractual terms remain as stringent as they were before 2011. 

In summary, little may actually change in the Libyan economy as a result of what happened in Benghazi last week, but the point is that things do need to change – and that process will now only be harder and longer.