An under-reported banking crisis threatens to exacerbate deadly fighting in Tripoli, ignite a protracted resource war and deepen the country’s east-west divide.
A way out requires agreeing to a ceasefire in Tripoli and ending the four-year split between the Central Bank’s rival branches.
Finding a solution to Libya’s looming banking crisis is necessary and urgent.
Today’s predicament is the product of the 2014 political crisis and the increasingly polarised relations between west and east that flowed from it, which have soured and deepened since then.
It is also the direct consequence of policy decisions that further entrenched political, military and financial divides.
The Central Bank’s 2014 decision to cut off its Benghazi branch from the automated payment settlement system was aimed at preventing authorities in eastern Libya from tapping into the country’s financial assets.
Tripoli achieved its objective, but in doing so it triggered a profound split inside the Central Bank and unleashed a powerful sense of disenfranchisement in the east.
It also prompted Tripoli’s rivals to find other means through which to bankroll themselves and to expand their claims of sovereignty.
This polarised the political scene further, deepened the military rift between east and west, exacerbated Libya’s economic crisis and contributed to the current war in the capital.
Similarly, attempts to address liquidity problems and the black market’s distortionary effects prompted the 2018 financial measures, especially the imposition of a hefty fee on foreign exchange transactions.
This financially sensible move had unintended and unanticipated consequences: the rapid depletion of reserve deposits that banks headquartered in eastern Libya hold with the Central Bank in Tripoli.
The primary victims of the banking crisis would be account holders, but also the broader economy.
Remedial steps are both possible and necessary. But this would require that the warring parties, with the active support of international partners, agree to a ceasefire. This in turn would make negotiations on a financial settlement possible.
Yet a ceasefire is less likely if, alongside necessary political and military talks, foreign stakeholders in the Libyan crisis fail to propose and pledge support for a solution to the financial crisis.
Failing to address the banking crisis would not only likely prolong the war; it also would have severe repercussions for Libya as a whole.
The primary victims of the banking crisis would be account holders, meaning ordinary citizens, but also the broader economy, which had started to emerge slowly from a six-year downturn only earlier this year.
Moreover, the warring parties’ foreign supporters might find that they would be asked to bankroll their proxies, especially in the east, allowing the fight to drag on without a decisive winner.
This, of course, would have disastrous implications for Libya’s ability to finally extricate itself from its post-2011 upheaval.
The International Crisis Group is an independent organisation working to prevent wars and shape policies that will build a more peaceful world.
Crisis Group sounds the alarm to prevent deadly conflict. We build support for the good governance and inclusive politics that enable societies to flourish. We engage directly with a range of conflict actors to seek and share information, and to encourage intelligent action for peace.