The Libyan leader Moammar Qadhafi has cast Libya in a new international role. He sees the country’s future to be defined by positive engagement with the international community, especially with his Anglo- American allies. This has led to some bold actions that have surprised the West and revived relations – especially after about 15 years of Libya being a pariah state to Western governments. Libya’s perception of its external security has been profoundly affected by world events over the past few years.

The UN embargo on Libya was lifted in 2003 following an agreement to compensate Lockerbie victims.

The lifting of the US and UK economic sanctions followed and major deals were struck with Western oil companies. These actions were duly noted within the arms trade and political arenas. European defence companies have begun to establish themselves in what could emerge as a very lucrative Libyan defence market.

The vast bulk of Libya’s military equipment was sourced from the Soviet Union, and it is now very much in need of modernisation. Libya’s arms production capacity is negligible, and there has been no multinational involvement in the defence industry for years. Now, however, several arms companies are undertaking feasibility studies into the possibility of developing relationships with the regime. The best example is the UK firm BAE Systems.

Overall, we remain optimistic about the growth potential of Libya’s defence industry. As Libya updates and replaces its ageing Soviet equipment, import figures will rise substantially over the coming years – although this will depend on Libya’s economy in the face of the global financial crisis, and on the extent to which oil prices recover.

Qadhafi's hints about nationalising foreign oil company assets have naturally been a disincentive to foreign investors. He has been inconsistent in his attitude toward foreign investment and economic policy.

Yet, Libya is unlikely to seize foreign assets.

Libya’s economy is currently impaired by lower oil prices and OPEC-mandated production cuts, as well as by the global financial crisis. Oil revenues make up the vast bulk of export earnings and about onequarter of GDP. Lower oil prices will reduce liquidity substantially in Libya throughout 2009, although the government will continue to spend the surplus of previous years. This will mask the impact of the economic slowdown, although sticking to OPEC-mandated oil production cuts will push Libya perilously close to recession.

A drop in oil production will slash Libyan real GDP growth to 0.7% in 2009. Ongoing construction work and government infrastructure investment should keep the economy growing. Public sector investment in key infrastructure projects should leave the economy in better shape by diversifying away from oil over the longer term. Looking further ahead, a pick-up in energy production, combined with higher global oil prices, increased private sector investment in hydrocarbons and other industries, and increased consumer wealth, will all support robust economic growth.

In June, Qadhafi made a historic trip to Italy – Libya’s former colonial ruler – for the first time since he seized power in 1969. The three-day trip was aimed at boosting bilateral relations between the two countries. In July, Qadhafi attended the G8 summit in Italy, where he met US President Barack Obama, and held a private meeting with UK Prime Minister Gordon Brown regarding the ‘Lockerbie bomber’, Abdel Basset al-Meghrahi.

At the African Union conference in February, Qadhafi was sworn in as African Union chairman for the coming year. At the time, he made a number of controversial statements, including his intention to mount a project of creating a ‘United States of Africa,’ which is unwanted by most major states in Africa.

Qadhafi’s succession remains an issue of concern to Libya’s internal security. Qadhafi has ruled Libya dictatorially since 1969, with almost no checks on his power. It is likely that power would pass to one of his children, but this process in itself has the potential to cause instability.