While Libya’s intensifying civil war and the coronavirus crisis occupy the few headlines the country garners, coverage is scant on the country’s economy, which is in increasing peril, Libya’s Prime Minister Fayez al-Serraj plays a prominent role in the country’s complicated schism, stated War on the Rocks, a a platform for analysis, commentary, debate and multimedia content on foreign policy and national security issues.
Meanwhile, the economic situation in the east — the seat of the rival “interim government” and leading elements of the parliament — is even more dire and will likely be exacerbated by attempts to install military rule.
The latter may force the Government of National Accord into tough decisions over whether it can continue to send funds to the east — funds that may go directly into the coffers of the forces it is fighting in Tripoli. The issues that the bankers and the politicians are fighting over are complex, representing the extent of dysfunction in Libya’s bifurcated system of governance, but they may well play a decisive role in the trajectory of the conflict.
The current economic trajectory is not sustainable for either of the warring coalitions, and there is infighting among both of them over how to respond. Fragmentation is perhaps the best single-word description of the situation in Libya, where defining groups and interests in overarching terms is increasingly difficult in the midst of the third bout of civil war since 2011, and since rival governments emerged in 2014.
The UN-backed Government of National Accord, formed in 2016 in the wake of an internationally mediated political deal, is based in Tripoli. But it is an amalgam of individuals rather than a coherent actor capable of collective action.
The Government of National Accord has failed to become the unity government it was envisaged to be when it was formed in 2016. Now it must contend with the conflict, craft a response to the novel coronavirus, and deal with a mounting economic crisis.
The Libyan Arab Armed Forces (citing grievances of eastern tribes) imposed an oil blockade of the eastern oil ports in January that has starved Libya’s state revenues, costing over $4.35 billion according to National Oil Corporation numbers. This has led the governor of the Central Bank of Libya in Tripoli, Sadiq al-Kabir, to call for austerity measures and the devaluation of the Libyan dinar to limit the impact upon the state’s financial reserves.
Kabir refuses to clarify the size of Libya’s reserves; however, the Audit Bureau has assessed reserves at just over $60 billion and has forecasted that they may be reduced by $10 billion this year as a result of the 2020 fiscal deficit. The Government of National Accord’s Prime Minister Fayez al-Serraj has taken the opposite approach, announcing 575 million dinars (roughly $410 million) in combined funding for the coronavirus response without describing a coherent strategy as to what the funding was for, and who would get what.
Serraj also called for a board meeting of the Central Bank to be arranged in order to push through necessary reforms, which he accuses Kabir of blocking. This was a shot across the bow. A meeting of the Central Bank board — which has not met since the government split in 2014 — has the potential to unseat Kabir, but also to allow for an open competition over who should succeed him.
The Central Bank has long been a key battleground, and the Government of National Accord could lose its privileged access if the new governor was more amenable to the eastern-based authorities, who have sought to remove Kabir in the past.
In response to the threat of a board meeting (and potential unseating), Kabir has backed down and opened up a limited number of letters of credit to allow for imports for food and medical purchases without a change in the exchange rate from Libyan dinars to dollars.
But the market does not appear convinced by the moves agreed on by Serraj and Kabir thus far: Speculators are anticipating a worsening of the monetary crisis. A steep increase in the exchange rate for the dollar on the black market indicates that there is insufficient access to foreign currency, even though some banks may have been resorting to the black market anyway.
To insulate himself from criticism, Serraj has escalated his demands by requesting that Libyans over the age of 18 be able to purchase up to $5,000 at a reduced exchange rate. This would cost as much as $20 billion at a time when the demands on the Central Bank’s hard currency reserves are already extensive and there is no foreign exchange income from oil.
The ongoing role played by armed groups in the capital further complicates the rift between the Government of National Accord and the Central Bank.
Minister of Interior Fathi Bashagha’s attempts to rein in and reform the capital’s armed groups have exacerbated mutual enmity.
The report stated also that the economy in the east is struggling, and this may also prove a factor down the line as it becomes more difficult for the Libyan Arab Armed Forces to fund its operations. The head of the Central Bank branch in the eastern city of al-Bayda, Ali al-Hibri, warned in a letter on March 9 that he was unable to extend further credit to the Interim Government.
Until now, the Interim Government has fused revenues from an annual budget settlement with Tripoli with the issuance of over 32 billion dinars (roughly $23 billion) of debt in the form of bonds to pay salaries and finance its spending.
The bonds were initially sold directly to three banks headquartered in the eastern region. However, when the Interim Government was unable to repay the banks, the Central Bank Bayda bought the bonds off the banks and restructured the loans with the Interim Government.
As far as the Central Bank Bayda is concerned, it has capitalized its bonds by creating credit lines for the three banks headquartered in the eastern region. This allows those banks to issue checks against the credit lines. Yet, there are two problems that have emerged: First, these accounts only work for Libyan dinars and cannot be used to access foreign currency through the Central Bank in Tripoli. This is critical because access to foreign currency is necessary for the import of goods from external markets, upon which Libya is heavily dependent.
To navigate the foreign exchange issue, the eastern banks have been cross-lending with other banks. But this approach has now run aground as other banks are becoming more protective. This means that the funds held by eastern banks from checks drawn on Central Bank Bayda accounts are increasingly a burden. Moreover, the need for commercial customers to shift their deposits to the west of the country in order to access foreign exchange risks creating a liquidity shortage in the east.
To date, the Central Bank East has printed as much as 14.5 billion dinars (roughly $10 billion) of currency in Russia to cover its shortage of banknotes in order to pay wages and interest on the debt it is accruing. The Central Bank in Bayda will have to print more unless something changes. Given these developments, Hibri appears reluctant to issue more credit to the eastern banks, hence his announcement that the eastern-based authorities cannot expect further funds to be mobilized beyond those required for salaries.
