Libya's once-promising economy quickly turns bleak

TRIPOLI, Libya (AP) — Libya's currency is down 30 percent in just two weeks, its oil has slowed to a trickle, its bazaar is eerily empty, and the shops are increasingly bare.

In the span of less than a month since the rebellion started, a once-promising economy has turned around. Before, cranes dotted Tripoli's skyline and luxury housing projects were on offer, loans backed by foreign bank branches in the city; now bread lines run long and the bakers have fled across the borders.

Libya's economy was projected to grow by solid 4.7 percent this year. But that expectation came to an abrupt halt as the unrest that has swept the Arab world turned on Moammar Gadhafi, the country's strongman for the past 41 years.

As the man known as Brother Leader fought back against rebels, international sanctions piled up, exacting a price on the country that is home to Africa's largest oil reserves. Each step his troops take to recapture the east appears to dim the economy's immediate prospects.

"People are afraid and business is down," said one gold trader who, like most others in the Libyan capital, declined to be identified fearing reprisals. "The price of gold is already high and now, with the expats gone, no one is buying."

About 280,000 people have fled the country, according to the United Nations — an exodus that includes the foreigners working for international oil companies and cheap labor drawn from Egypt, Africa and Asian nations.

The oil exodus has hit particularly hard, depriving Libya of the expertise to run the vital sector.

But the flight of the workers and their cash, in tandem with sanctions that have frozen Gadhafi assets, as well as many belonging to the government, has created a new problem.

Analysts and experts say Libya appears to be short of liquidity, with the Central Bank reportedly allowing for the re-circulation of bank notes once withdrawn. In addition, with expectations that the sanctions could lead to shortages, prices are spiking and the Libyan dinar is taking a beating.

"The expats who are leaving need the dollars, so business is good now," said one money changer who was among many offering $1.6 or $1.7 to the dinar — a roughly 33 percent devaluation from its level two weeks earlier.

The government has tried to stabilize the price of staples like bread — a move aimed at defusing what could easily become a major source of anger against Gadhafi.

But the worries are evident, with bread lines running into the dozens of men and women waiting to get a loaf for 50 piastres, a price unchanged since the rebellion began.

"There is a crisis with the bread shortage," said one taxi driver, who had a dozen loaves in his back seat.

The foreign workers "who used to bake the bread have all left, so there is a shortage," he said.

The contrast is depressing for Libyans who, after years of sanctions, had begun to enjoy the trappings of the country's rebirth into the international community. With sanctions lifted years earlier, oil companies began to return, as did foreign businesses eager to plant roots in a country that imports virtually everything.

But the latest international sanctions, targeting huge swaths of Libya's foreign assets as well as those of Gadhafi and his family, threaten to plunge the nation back into the dark years when it was ostracized because of what many in the West said was Gadhafi's support for terrorism.

"The economy is going through a process of dollarization," said George Joffe, a Libya expert with Cambridge University's Center of International Studies.

The run on dollars is fueling the dinar's depreciation. But raising new fears is the uncertainty of just how much liquidity the country has.

Libya's sovereign wealth fund has between $60 billion to $70 billion, according to several analysts, and the Central Bank has additional foreign currency reserves.

But the U.S. and Britain have moved to freeze tens of billions of dollars in Libyan funds, while sanctions are largely discouraging buyers from purchasing what little oil the country may still be producing.

The country relies on oil sales for most of its government budget. Hard figures are difficult to come by, but estimates are that Libya's normal output of 1.6 million barrels per day has been slashed by over two-thirds and the International Energy Agency said this week it believes that production is down to "a trickle."

Experts say sustained sanctions could ultimately lead to shortages, leaving only the most basic goods and driving inflation up. Taken together, that is a recipe for even more challenges for Gadhafi, even if he survives the rebellion.

"Life is going to become gradually harder and harder ... unless Libya can find alternative mechanisms of raising revenues," besides oil, said Joffe.

Libyans may be getting a taste of what could lie ahead.

Tripoli's celebrated Old City, famed for its bazaar and gold shops, is a ghost town.

Entire alleyways that would normally be buzzing with people selling and buying gold were shut down. Row upon row of shops are shuttered; those that are open only displayed silver wares. In one shop, women pulled out gold bracelets and necklaces, hoping to make a sale.

"The shops are closed because of there is worry about the future," said a bookstore owner. "They are worried about being robbed, and I don't feel like things will calm down for a long time."

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El-Tablawy contributed from Cairo.