Libya’s first free election in six decades is an important step to get the country’s economy moving again, attract investment, and unleash the true potential of the country’s oil wealth.

Although Libyan daily oil production is well on its way back to the pre-conflict level of 1.8 million barrels, infrastructure and other construction projects remain suspended across the country and repair work has barely started on damaged buildings.

The interim authority, the National Transitional Council, has needed to focus on kick-starting the political process and returning power supply and water to major cities, leaving big projects to a new government with a mandate to spend.

So the election in July of a 200-strong national assembly was a key moment. The assembly will appoint a prime minister and a cabinet that will govern until parliamentary elections are held in 2013, based on a new constitution.

The process is likely to be bumpy, given the competing tribal and regional interests in the country, and the very immediate challenge of disbanding militias and integrating former rebel fighters into the army and police.

But the new government, led by an alliance of liberal groups, will certainly want to give the economy a quick shot in the arm by resuscitating state-funded projects.

Libya’s GDP was growing at an average rate of five per cent since United Nations sanctions were lifted in 2003, but economic activity ground to a near halt during the conflict. Non-oil economic output dropped by half last year, adding to an already engrained unemployment problem – Libya’s youth unemployment rate stood at 35 per cent in 2010.

Even a little investment in infrastructure could go a long way to improving living conditions, and creating jobs. For example, Tripoli really needs to be completely replanned – its roads are riven by potholes, and the capital lacks a proper bus system.

On a larger scale, the country’s power system requires an overhaul, and investment in tourism infrastructure could create a lucrative new industry in the medium term.

The country’s stock market, worth over $2 billion in market capitalisation, has only 12 listed companies now, but could play an important role in funding growth.

State spending can have a very positive multiplier effect on the wider economy, but the government will need to ensure it does not overdo it.

Salary increases implemented in the final days of the Gadhafi regime will raise the civil service wage bill to 19 per cent of GDP this year, from nine per cent in 2010, the IMF estimates. Weaker global oil prices, and the rising cost of food subsidies are also adding fiscal pressures.

Private sector development is therefore vital, especially if Libya is to diversify away from oil, which accounts for about 70 per cent of GDP, and 95 per cent of exports. This will depend on Libya’s ability to develop and keep its skilled workforce and increased availability of private capital.

Positive signs are already emerging, with some evidence of a reverse brain drain, as Libyan expatriates return, partly because of a sense of opportunity and partly due to diminished opportunity in Europe.

A new generation of middle managers in their early 40s also appears to be stepping up into key positions.

However, many in the business community believe the new government should backtrack on the blacklisting of hundreds of people with links to the former regime, arguing the policy could hamstring the economy.

Banks – most of which are state-owned – may need capital injections before they begin to lend again.

They are facing depreciation in asset quality and an increase in bad loans as a result of last year’s economic disruption. So for now, lenders are happy to park deposits with the central bank, in return for 3.5 per cent rather than look for new business.

The country’s stock market, worth over $2 billion in market capitalisation, has only 12 listed companies now, but could play an important role in funding growth. Three initial public offerings are already in the pipeline, including the country’s main petrol station operator, and listings in coming years will include state-owned banks and possibly Libya’s airline. Development of the stock market will also be helped by planned legislation to introduce mutual funds to the country.

Meanwhile, foreign investors are starting to be drawn by Libya’s undoubted potential.

Qatar National Bank recently showed confidence by announcing that it plans to take a 49 per cent stake in Libya Bank of Commerce and Development.

And an indicator of possible future commitment was this year’s ‘Libya Build’ infrastructure and construction conference held in Tripoli in May that attracted more than 400 foreign companies.

Whether this interest turns into real capital flows will depend on the quality of governance that emerges after these elections, better coordination among state institutions, and a strong commitment to the rule of law.

* Sherif Salem is Invest AD Libya Opportunity Fund manager