It has now been almost a year since the end of the conflict in Libya, and the country’s economy remains in a state of flux. Against the backdrop of a thorny political transition and a volatile security situation, the business environment has so far thrown up a rather mixed bag of opportunities for both local and foreign companies.

On the one hand, anything catering to local consumer demand appears to be doing well. Shops, cafes and restaurants are busy, banks have lifted restrictions on cash withdrawals, ports are working at full capacity, and flights to and from Libya are filled with passengers. Pent-up private-sector energy, previously restricted by a heavy-handed state apparatus, is now starting to be released into the economy and is not directly reliant on the political transition.

This consumer sector recovery is, however, being indirectly underpinned by oil production, which has now almost bounced back to pre-war levels. Oil revenues are paying for Libya’s huge public-sector wage bill, which in the first half of 2012 accounted for more than 30% of total state spending and has been inflated by sharp rises in government salaries put in place by the Gaddafi regime in early 2011.

Oil earnings are also supporting consumer spending by helping to maintain artificially low prices for many basic goods and services, including electricity, water, fuel, healthcare and foodstuffs. The government expects to spend more than a fifth of its 2012 budget on subsidies, with fuel subsidies alone devouring about 19% of expenditure between January and June.

On the other hand, the vast majority of infrastructure and development projects in Libya remain on hold. Some large tenders are being issued for essential services, but many government organisations and companies are being restructured internally and the authorities are planning to review hundreds of projects that were contracted before February 2011, a process that will no doubt be closely watched by businesses seeking to resume previous work or secure new opportunities.

That process will also hinge on the political transition. The recently-elected General National Congress (GNC) was expected to name a new cabinet and Prime Minister by 8 September, a step that many hope will provide the catalyst to revive major state-led projects. But there are still unanswered questions about the role and authority of different government agencies and the degree of coordination between them, raising the risk that political in-fighting may result in slow progress on delivering new public services or infrastructure.

Many eyes will also be on the new legal framework, particularly in terms of how foreign companies are able to operate in Libya. Last month the Ministry of Economy published new legislation that limited foreign shareholdings in local joint venture companies to 49% - a lower proportion than under the Gaddafi regime – although it remains unclear whether this may be amended by a new government in the future.

In terms of overseas trade, this two-speed recovery has benefited some countries more than others. Turkish manufacturers are amongst those who have capitalised on the rebound in consumer demand, with total exports to Libya rising to above $1bn in the first half of the year and on track to be above 2010 levels. Korean exports have also recovered strongly, as have those from neighbouring Tunisia.

In contrast, those British or French companies with interests in Libya tend to be involved in government contracts across the construction, transport or utilities sectors. Exports from both countries have so far been lacklustre in 2012, and their future growth will hinge partly on the resumption of state-led projects and partly on the security environment, another factor that will be crucial in shaping the business environment for the rest of the year.

While Libya may have so far disappointed those who had hoped – perhaps unrealistically – for an immediate flurry of contracts, there are nonetheless reasons to be positive. Unlike its neighbours in Tunisia or Egypt, the government wields substantial financial resources and is not dependent on external sources of funding. The Libyan private sector should play a much greater role than in the past, creating new opportunities and potential clients for foreign firms. And perhaps most importantly, there will be huge popular pressure on the new government to deliver improvements on virtually all basic services, whether it is roads, schools, hospitals or houses. 

This article was specially written for the October issue of "Opportunity Middle East" magazine, published by the Middle East Association (MEA).