Libya Tribune

By Claudia Gazzini

Economic conditions and armed conflict in Libya are worsening rapidly as rival authorities in Tripoli and Tobruk compete control of a shrinking pot of national wealth.

.PART (II)

In the absence of a resolution to the political conflict that has divided Libya, this current set of problems is likely to worsen and further complicate recovery. Just how long Libya can survive these severe pressures on its finances is an open question.

Estimates range from one to three years. Many Libyan politicians lean towards the less dire end of the spectrum, while foreign diplomats briefed by Libyans paint a more alarming trend.

The depletion of the country’s foreign-currency reserves would have devastating consequences for average Libyans: public-sector salaries will remain unpaid, the Libyan dinar, and thereby average Libyans’ savings, will suffer a catastrophic devaluation, and basic imported products, including food, medical supplies and fuel, will become increasingly scarce.

The prospect of refugee flows to Europe or neighbouring Egypt or Tunisia (with the difference that, compared to 2011, these will be flows of impoverished people) is real.

It would be prudent to take the threat to Libya’s economic stability seriously. The conflict has done great damage to Libya’s oil as well as its non-oil economy, and recovery will take time.

he CBL’s decision to freeze funding for development and infrastructural projects has left many local firms without work, limiting the circulation of money, which in turn is dampening retail. The tug-of-war over the LIA and its subsidiaries has worsened pre-existing mismanagement of Libya-owned foreign assets, at the expense of future generations.

The rival claims for legitimacy in the NOC, coupled with deteriorating security conditions, have limited the NOC’s ability to carry out essential maintenance of oil and gas infrastructure, reducing its overall production capacity over time.

How to deal with the collapsing economy in the absence of a united and effective government?

The past year has seen occasional calls for the UN Security Council to impose a freeze on Libyan assets abroad or an embargo on Libyan oil sales. Those advocating these proposals argue they could both be a means to exert pressure on local actors to reach a political agreement and ensure that revenues will not flow to unlawful or dangerous armed groups.

U.S. officials considered the possibility of setting up an escrow account or a trusteeship through which all income from oil sales would be channelled, in essence placing Libya’s public finances under international supervision.

But for now such interventionist measures appear to have been shelved. The main reason for this is the belief that the negative consequences of their implementation could far outweigh their benefits.

Domestically, they could cause inflation to spiral, triggering a run on the dinar that would raise the cost of imports and accelerate the drain on foreign-currency reserves.

At the international level, an asset freeze or even the creation of an escrow account would put the international community in charge of Libya’s public finances, something that many foreign diplomats view as an impossible task.

Some EU countries where Libyan funds are invested also oppose any move that would have consequences on European companies in which Libya’s financial institutions have a stake.

Moreover, very few states appear to have an appetite for repeating the experience of the Iraq oil-for-food program, which left deeps scars on the UN.

International efforts to bring the current conflict to an end have focused on the UN-led negotiations that, over 2015, culminated in the Libyan Political Dialogue draft agreement proposed by UN Secretary General Special Representative Bernardino León in July 2015.

This agreement entailed the formation of a government of national accord, the prolongation of the HoR’s mandate and the incorporation of GNC members into a new State Council. Together, these three bodies would, among other priorities, decide on the leadership of the CBL, NOC and LIA and an economic policy.

By November 2015, however, chances of a final agreement appeared slim as fragmentation in both camps increased and the terms of the agreement were increasingly disputed. Even in the most optimistic of scenarios, an agreement will take time to be implemented and the new government will face a number of tough hurdles.

In the interim, the question of how to better manage, secure and distribute Libya’s resources and wealth need not wait. Some issues can be addressed within the UN negotiations, or parallel initiatives, pending a more formal review by a future unity government.

Such a move could amount to confidence-building measures. The incentives all sides have are two-fold: if they do not act quickly to stem the bleeding, ordinary Libyans’ living conditions will continue to deteriorate and the current leadership on both sides will lose support.

Furthermore, should militia members’ salaries stop being paid, mutiny and chaotic, predatory behaviour is likely to ensue.

Libya’s alarming economic horizon and the risk that a duplication of financial institutions and oil sales outside existing channels could lead to permanent political partition and increased fighting over resources are real.

A short-term requirement to stabilise Libya’s finances would be an agreement by the rival camps on two broad issues: what measuresbe taken to increase oil and gas production in order to state coffers, and how to maintain a coherent, unified financial system.

Ideally, this would be delivered by the of National Accord envisaged by the Libyan Political Dialogue negotiations. But, even short of a GNA, there is still room for a more limited agreement.

Steps to take in this direction would include:

Finding an interim arrangement between the rival governments and their militia backers for the independent functioning of the CBL, NOC and LIA – with current or mutually agreed-upon new management. Efforts to create parallel institutions to the official ones in Tripoli should cease.

This could provide an opportunity to take other steps, for instance having CBL officials (on both sides) engage in high-level consultations with the IMF to carry out an assessment of the country’s finances (paving the way for a unity government to call for a Chapter IV consultation by the IMF, a more formal review), focusing on how to avert an economic crisis and establish policy priorities.

In those areas where crucial infrastructure has not been damaged but production has stopped Libyan, regional and international actors should make a greater effort to broker local ceasefires between militias that would enable the reopening of the oilfields. Mediating local deals would go some way toward increasing export revenues.

For instance, at the Sharara and al-Fil oilfields in the deep southwest there has been no damage, as the field was taken offline when its pipeline to the coast was closed further north in Jabel Nefusa in November 2014. Both the fields and the pipelines would need to be reopened under such an accord.

In areas where there has been substantial damage, such as the port of Sidra in the Gulf of Sirte where Operation Libya Sunrise destroyed three major storage tanks at the loading facility in December 2014, security guarantees should be negotiated to allow for the repair of damaged infrastructure to return the facility to its full export capacity.

The fate of the Petroleum Facilities Guard (PFG) and other armed groups guarding oil facilities should be a priority subject of discussion in the security-track part of the UN negotiations. Securing a lasting peace between armed groups is not merely a question of achieving an agreement between the major “moderate” groups on either side or resolving the challenge that “hardliners” pose.

Independent actors, such as the PFG, control key territory, have accumulated considerable arsenals and have allies across Libya. They cannot be ignored. In the longer term, only a unity government can begin to tackle fundamental underlying issues that could become triggers for new conflicts. These include:

Investigating past corruption allegations and putting in place better management practices at upstream and downstream facilities as well as financial and regulatory institutions. This could be done by adopting industry wide practices, such as installing metering systems where they are missing. Greater transparency (notably on oil sales) would discourage the politicisation of the hydrocarbon sector.

Reassessing regional imbalances in the distribution of wealth and services and considering alternatives to the hydrocarbon sector’s centralised Qaddafi-era governance model. Libya here could learn from the wealth management models implemented elsewhere, such as Norway or Alaska.

As part of a comprehensive policy for the demobilisation, disarmament and reintegration of militia fighters and security-sector reform, clearly defining the mandate and mission of units in charge of protecting oil and gas infrastructures. Where local-level groups have provided such services informally, ways to integrate them into the formal security sector should be considered.

In many respects, the battle for control of Libya’s hydrocarbon infrastructure and the institutions that manage its wealth speak to the myriad challenges that have presented themselves in the post-Qaddafi era.

They illustrate the difficulty the transitional government has faced in demobilising and integrating rebel militias into a national security structure, and the poisonous legacy of decades of corruption, incompetence and over-centralisation in both the sector and the management of public finances.

These issues resonate particularly among the many constituencies that felt sidelined in the post-Qaddafi political order.

An immediate priority is for Libyans themselves, including parties to the current conflict, to take note of the alarming deterioration of the country’s economy and act to address it.

Interim solutions can be found even in the absence of an end to the overall political conflict that has divided the country; this might be an excellent way to build goodwill between the belligerents.

Outsiders, especially Libya’s neighbours and the P3+5 (UK, U.S. and France, plus Italy, Spain, Germany, the EU and the UN) that have been most involved in the conflict, have few options available.

Still, both they and the parties to the conflict could take steps to mitigate its impact and make piecemeal agreements while pursuing a more comprehensive peace deal.

Supporting parallel tracks to the main negotiations in the Libyan Political Dialogue, particularly on security issues and economic governance, would be an effective way to build the minimum baseline of understanding necessary for a unity government to function.

In other words, the international community can at least staunch the bleeding as it tends to the wound.

The ultimate goal, though, must remain establishing an effective unity government. This is a prerequisite to tackling the complex issues around both security and the management of Libya’s hydrocarbon economy.

It is also crucial to avoid a worsening of the current conflict and the rise of regionalist sentiment as the country continues to be effectively partitioned.

Without a unified government able to exert its authority, both the armed conflict and the battle for control of financial institutions are likely to continue. The parties to the conflict must come to be persuaded of the fact that the prize for which they are fighting is a rapidly dwindling asset, and as it disappears, all will suffer – most of all ordinary Libyans.

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Claudia Gazzini – International Crisis Group’s senior analyst for Libya. Her academic work on current-day Libya issues has been published in many media and academic publications, including the Middle East Report and the Arab Media and Society journal. Her analysis on MENA current affairs has also appeared in publications such as Limes, the Italian Review of Geopolitics and Quaderni Storici.

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Source: CRiSSMA working paper n. 23 – 2016