By Alastair Macdonald
TRIPOLI, Nov 10 (Reuters) - As Libya's new prime minister tries to build a government this month, he can take heart from a faster-than-expected resumption of oil and gas exports but faces tougher economic challenges, a leading ally said on Thursday.
Oil output by June should be back close to levels seen before the February uprising against Muammar Gaddafi, said Ali Tarhouni, who has run oil and financial affairs in the outgoing interim administration now being replaced by a transitional government under prime minister-designate Abdurrahim El-Keib.
"Things are going very well in the oil sector," Tarhouni told journalists in Tripoli. "We are way ahead of our own expectations, of anybody's expectations."
Though a report on Thursday by the International Energy Agency saw a full restoration of output only in 2013, Tarhouni noted that in any case Libya had no shortage of funds. He saw the near-term challenges as building security and managing expectations among citizens hoping for more state benefits.
"The most important challenge ... is the security issue, the rebuilding of the national army, the Interior Ministry ... and justice system," he said. "Also meeting the high expectations of people about basic things -- services, healthcare, education."
Tarhouni, an economics professor in the United States before he headed home to join the revolt against Gaddafi, also outlined longer-term strategies he would push for. These included diversifying the economy away from oil and gas into financial services, tourism and alternative energies like solar power, as well as reducing state subsidies and promoting private business.
However, Tarhouni, who is running the outgoing government following the departure of wartime prime minister Mahmoud Jibril, said he was still considering whether to be part of Keib's cabinet. Tarhouni had been tipped as a successor to Jibril, but Keib won widespread backing among other leaders.
"KEEP FUNDS FROZEN"
Keib, who on Wednesday said he was anxious for Western governments to unfreeze Gaddafi-era accounts in order for him to pay former rebels demanding salaries, told reporters on Thursday that he needed another "10 days, two weeks" to announce his cabinet -- within what he called a "soft constraint" set by a timetable agreed by the National Transitional Council.
Tarhouni said he saw no difficulty in covering whatever budget was drawn up by the incoming government for next year, given the tens of billions of dollars Libya has in foreign accounts frozen as part of sanctions against Gaddafi.
But he cautioned that Libya should not seek to unblock more than it required for immediate use, since it lacked the means to monitor assets which, under the ousted administration, had been routinely pillaged by a corrupt leadership.
"We don't want this wholesale unblocking or unfreezing of assets," he said. "We cannot control and monitor these assets. These are huge assets. So, what we want to do is to have a targeted type of unblocking based on the identified needs that we have. So that's what we have been talking about.
"I don't think we'll have a problem of accessing funds, based on what we've been told so far."
Many major decisions, including on infrastructure spending and granting new oil concessions, may wait until after elections produce a government with a popular mandate, he said. That would also probably go for any possible currency peg for the dinar.
Tarhouni's influence over future economic policy remains to be seen but he said he would be strongly recommending a move away from an economy in which, he said, he had been surprised to find on his return home how many Libyans received state funds.
Since many of the six million population now seemed to expect their oil-rich government to increase, rather than reduce, the level of subsidies and welfare payments, the new leadership faced a challenge of managing those expectations.
"The private sector should be the engine for the future economic development of Libya," he said.
"The challenges will be to decrease the size of government and to give the private sector more room ... What makes it challenging is that right now the level of expectations of the people are very high -- and that the government will deliver more rather than less ... So it's a challenge. But Gaddafi's dead, so everything else can be managed."
OIL PRODUCTION
On oil output, Tarhouni put current output now at "about 570,000" barrels per day (bpd), somewhat higher than the IAE estimate of 530,000 bpd.
"My expectation is that we will soon pass about 700,000 (by the end of this year, easily. So I think we're on target to get back closer to the previous levels by June of next year," he said, referring to pre-war production of 1.6 million bpd.
The IAE estimated that by the end of 2012 Libyan output would be around 1.2 million bpd.
Existing contracts with foreign firms would be honoured, he said -- though those found to have been awarded corruptly might be reviewed. But major new concessions were unlikely to be given until the incoming transitional government had given way to an elected administration, scheduled to take place in eight months.
"I don't anticipate that this transitional government will make major decisions," Tarhouni said. "It's a short time, it's eight months. And most of these infrastructure projects most likely will be delayed until you have a constitution and you have an elected government.
"I don't expect, for example, that this transitional government will give concessions, new concessions, for oil." (Editing by Susan Fenton)
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