As the mandate of the UN-backed government in Tripoli approaches its expiration date at the end of the year, pressure is building for Prime Minister Fayez al-Sarraj and the GNA to negotiate a political truce with the rival administration in Tobruk that clears the way to hold elections for a unified national government next year. However, the significant territorial gains achieved over the last few months by Khalifa Haftar, a former general whose Libyan National Army (LNA) has served as the armed forces of the Tobruk-based administration since 2015, creates an obstacle to bringing the two sides together.

Talks have at least temporarily broken down due to disagreement over the method for selecting members of the Presidency Council and the powers wielded by the body, which will oversee the political transition. In the meantime, Haftar is conducting a charm offensive with leaders of the international community, while simultaneously pursuing separate truces, and possible alliances, with various militias currently aligned with the GNA.

As things currently stand, Haftar is holding all of the most valuable cards, and figures to play a central role in any interim power-sharing government and in a unified national administration formed after an election. But his presence in a position of power will pose an obstacle to the achievement of a full cessation of armed hostilities, at least in the near term, and the persistence of violent conflict within Libya may heighten tensions between Qatar (which is backing anti-Haftar militias) and its regional antagonists, contributing to heightened instability in the Persian Gulf.

In early July 2017, oil production hit 1 million bpd, the highest figure in four years, reflecting the LNA’s success at gaining control over oil facilities from various armed groups. However, the potential for localized conflict to adversely affect the production and export of oil is still present, and the Central Bank of Libya reported that disruptions to production held oil revenues to $8.83 billion as of the end of the third quarter of 2017, compared to a projected total of $11.9 billion. The shortfall is threatening the government’s ability to pay state-sector salaries and finance the delivery of services, creating the potential for rising discontent that could embolden Haftar to take matters into his own hands if the negotiations in Tunis fail to make headway.

Despite the fall in production from the peak reached in July, output is still running above the levels reached in 2016. On that basis, the economy is forecast to expand by 23% in real terms this year, a misleading figure given that it reflects a very favorable base effect created by four consecutive years of deep economic contractions. Comparative gains in exports will contribute to a narrowing of the current account deficit to 4.3% of GDP, but the shortfall in oil income will ensure another very large budget deficit amounting to close to 15% of GDP in 2017.