Libya Tribune

A renewed struggle this summer over Libya’s main oil export zone cut sales in half, squeezing hard currency supplies amid outcry about mismanagement of hydrocarbon revenues.

To build trust, Libyan and international actors should review public spending and move toward unifying divided financial institutions.

PART FOUR

IV. Avoiding Another Crisis

The current constellation of forces provides an opening for a sustained nationwide effort to address and perhaps even resolve the Libyan conflict’s financial challenges.

The Serraj government and its international backers, as well as authorities in the east, should heed calls by numerous Libyan stakeholders and the general public for more transparency and accountability.

One positive sign is NOC Chairman Mustafa Sanallah’s decision to meet with the executive director of the Extractive Industries Transparency Initiative (EITI) in late July 2018 and discuss the NOC’s possible adoption of the initiative’s governance principles.

International oil companies operating in Libya should support this project. Specific steps to open up the budgeting and spending processes could also serve as building blocks for addressing other economic problems and deciding on a security arrangement for the oil installations. Progress on these fronts, in turn, could open channels of communication between adversaries and pave the way for a broader political settlement.

Libyan stakeholders are likely to need an international push to move in this direction. The UN and member states should rally behind the call for an international review of the Central Bank and increase their engagement with eastern constituencies, including parallel institutions, to chart a reunification plan with their Tripoli counterparts.

They should also urge their Libyan interlocutors to prioritise discussing security for Libya’s oil and gas installations to prevent renewed fighting over these facilities.

A. The Need for an Independent International Audit

As a first step, rather than focusing on who controls economic institutions, the two parallel governments and Central Banks should follow up on Serraj’s request for an external review of the Central Bank under international supervision.

A better understanding of how the two banks have allocated money over these past four years is a precondition of any successful reform package and could be an important first step toward unifying the country’s finances.

A review must be carried out in a timely manner, and Libyan politicians should not use calls for the formation of an international committee as a way to “buy time”, as some of Serraj’s critics accuse him of doing.

Yet details of how this process should unfold are still lacking. Serraj himself did not have a clear model in mind when he made the request, and all options are still on the table.

The UN has an important role to play as a facilitator and overseer of the review. The UN Security Council has tasked Ghassan Salamé with presenting proposals for how it should take place.

But before he can do so, UNSMIL officials should engage in shuttle diplomacy between representatives of the two banks and the two Ministries of Finance to ensure a modicum of consensus on the path ahead; and they should consult with the World Bank and the International Monetary Fund (IMF) on the range of possibilities.

An overarching goal should be to use the review to establish a wider process for economic reconciliation, a fundamental element of any solution to Libya’s conflict. This will entail further consultations with other Libyan parties, such as the Presidency Council, the Audit Bureau and the House of Representatives.

Although the time necessary to carry out these consultations should not lessen the momentum of the review process, it is important for creating a longer-term negotiation track for addressing economic elements of the conflict.

Salamé should follow up these initial consultations with an invitation to the two bank presidents to meet face to face – something that has not happened before – to negotiate a more concrete and detailed agreement on the exact terms and procedures of such a review, who should receive the final report, and commitments about follow-up.

Only after these steps should Salamé submit a proposal to the Security Council, ideally pivoting as much as possible from the current stress on a narrow review on spending to the wider goal of having a forum in which Libyan actors can reduce institutional divides and build consensus on how to tackle the country’s economic challenge.

Most relevant Libyan and international bankers agree that a review, to be credible, should be undertaken by one of the four leading international auditing companies (KPMG, Ernst & Young, Price water house Coopers and Deloitte), which have the skills and resources to carry it out.

The World Bank, the IMF and UNSMIL can provide advice but none has the capacity to perform a review of government accounts itself. Some have expressed concern that an audit, or even a review, could be inflammatory if it uncovers shady financial dealings.

Different opinions exist as to whether the review should be a proper large-scale audit or, as Serraj’s request suggested, just a “review”. What precisely he meant is unclear but the term suggests a relatively quick look into the general flow of funds, not a detailed monitoring of individual transactions performed by the two banks.

A proper audit, with forensic accounting techniques to review past financial operations, will be labour- and time-intensive. A speedier process might help peace-building efforts by providing a vehicle for reunification without triggering a blame game about alleged corrupt practices.

At the same time, a thorough audit would serve Libya’s long-term interests by paving the way for greater transparency and oversight of financial transactions generally. UN-led consultations should define the most important and realistic objective to be achieved, and propose a format that strikes a balance between conflicting priorities.

As establishing a process through which the reconciliation of the Central Bank of Libya’s rival branches can be negotiated should be the overarching goal of the review, a shorter process aimed at this should be the initial focus, since a reunited bank can choose to carry out as more in-depth audit at a later point.

Some have expressed concern that an audit, or even a review, could be inflammatory if it uncovers shady financial dealings. The UN should make clear that the process is not aimed at incriminating anyone, but is a necessary first step toward fixing things ­– and encourage Libyan stakeholders to publicly endorse such an approach.

In order to address the potential backlash of being perceived as exclusionary and dismissive of the public’s demands for transparency and accountability, which risks making the UN seem complicit in covering up corruption, both international and Libyan stakeholders involved in the process should send a clear political message that the Central Bank’s reunification is the priority.

While an international audit (or review) is a necessary step toward sanitising the Libyan economy, it will not be a sufficient one. Relevant Libyan stakeholders should consider broader transparency measures as well, such as publishing the budget and greater scrutiny of disbursements.

All of these steps, coupled with deeper economic reforms, including a currency devaluation, will be needed to start tackling head on the feud over mismanagement of state funds.

B. The Need for the UN to Engage the East

The events in the oil crescent suggest that international stakeholders in Libya have neglected the country’s internal regional dynamics. To better understand eastern grievances, UNSMIL must establish a permanent physical presence there as soon as possible, and actively engage in public debates concerning the administration and distribution of public resources – if not to counter public narratives, then at least to be seen as addressing them.

Frustration over deteriorating living conditions, the breakdown in services and widespread corruption is not limited to eastern Libya, but these problems appear to have the greatest resonance there; moreover, in the east they can be more easily manipulated to deepen opposition to Tripoli’s influence.

Salamé has regularly raised the challenge of what he has termed the “economy of predation”, but he and his staff will need to step up efforts to translate rhetoric into action. He should put together a larger UNSMIL team for this purpose and seek outside expertise.

Salamé could then supplement the political action plan he launched in September 2017, which established steps needed to prepare the country for elections by the end of 2018, with a parallel economic analytical prism.

The UN should also reconsider its position with regard to engaging with the rival institutions. Over the past two and half years, the UN and diplomats in Libya have complied with successive UN Security Council resolutions calling on member states to stop contact with institutions not recognised by the Government of National Accord.

Yet ignoring these institutions has done no good. Engagement need not entail legal recognition; after all, most regional and international actors have talked to Haftar, even though the Libyan Political Agreement does not recognise the Libyan National Army.

UN Security Council members and the UN Department of Political Affairs should consider instructing UNSMIL to engage with officials in eastern Libya with the purpose of charting a path toward unification of parallel institutions.

C. The Need to Address the Security and Reconciliation Dimensions of the Crisis

The current crisis also has highlighted the need to tackle the Petroleum Facilities Guard issue in a more concerted manner by encouraging the Tripoli government and NOC to agree with the LNA on the guard’s responsibilities and chain of command and by including the guard in any negotiations on the restructuring of Libya’s security sector.

The rival claims as to who should command this force will only fuel conflict, as the events of June 2018 have shown. The guard’s internal hierarchy needs to be negotiated, since this matter has not been dealt with in any of the forums seeking to tackle security sector reorganisation.

There is a window of opportunity now, while UNSMIL is outlining a strategy for engagement with armed groups and the security sector. Including the guard in such efforts is essential to minimise chances of renewed fighting over control of the oil crescent.

The fact that anti-Haftar fighters from eastern Libya displaced in the west took part in the June 2018 offensive in the oil crescent highlights the grievances caused by the Libyan National Army’s alleged abuses.

Participants in the offensive included members of the Magharaba tribe angered by the LNA’s tactics, as well as former Benghazi-based fighters who fiercely oppose the LNA because it kicked them (and their families) out of the city and because they blame it for extrajudicial killings across eastern Libya over the past three years.

These fighters have sought to make their way back to Benghazi ever since, and see control of the oil crescent as one step in this direction. But as long as nothing is done to bridge Libya’s divides, especially in Benghazi, and put in place a more widely accepted security and management arrangement, including an officially recognised and agreed-upon Petroleum Facilities Guard, such attacks will likely recur.

V. Conclusion

Recent events in the oil crescent reveal three things. First, the institutional rift that has divided Libya since 2014 has reached a critical point and can no longer remain unaddressed.

There is a serious need for more direct UN engagement with Libya’s parallel economic and financial institutions to chart a concrete action plan to end these divisions.

Secondly, when the international community speaks loudly and clearly with one voice in Libya, it can influence the course of events. There is no doubt that the UN and key member states’ swift and concerted pressure on the Libyan National Army helped resolve the July standoff over control of oil and gas installations and revenues. The international community should maintain this unity.

Thirdly, concrete action on the economic front and follow-up measures to address reciprocal allegations of mismanagement of public funds can help defuse tensions and, likewise, change the course of events.

The request to review the Central Bank’s accounts is the most tangible point of consensus among rival Libyan actors. The international community and relevant Libyan stakeholders should ensure that it is implemented.

The oil crescent crisis serves as a reminder that the Libyan conflict is multifaceted.

The oil crescent crisis serves as a reminder that the Libyan conflict is multifaceted, with economic, military and political rifts feeding off one another, thus triggering further conflict, instability and grievance.

Without minimum progress on the economic and security fronts, attempts to forge a political deal – the international community’s primary focus – will remain stunted and may backfire.

For this reason, the focus of Libyan actors backed by international stakeholders should be to take pragmatic steps to address economic management and reunify divided institutions, and thus stabilise the country.

In turn, progress on this front could be the basis for a broader political agreement and create a better environment for elections.

_________________