By Dr Barah Mikaïl & Simon Engelkes
Despite limited improvements, the Libyan economy still lingers well below its potential, obstructed by continuing violent conflict and political uncertainty.
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PART TWO
Stabilize the banking sector, overcome divisions of the internal market, and rebuild trust in institutions
In economic terms, the true decision maker in Libya is the Libyan Central Bank (LCB). However, even the LCB hardly provides official and reliable data and statistics on the country’s economy.
The most recent information available dates back to 2016, and even then, not all the data available was necessarily reliable. Nevertheless, there are some indications that can help understand where the country stands economically.
From a financial point of view, the Libyan economy is divided into three main sectors: banking (83 percent), insurance (16 percent), and investment (1 percent). While inflation is said to have stood officially at 26,3 percent for the month of February 2018, in reality, inflation goes as much as five times higher.
This situation comes mostly as a consequence of the activity of the black market, but also because the entire country tends to align virtually to the rates practiced in Tripoli.
Businessmen and their activities also contribute to the increasing inflation, since many of them – while they keep working in their original businesses – also find interest in currency trading.
Besides, Libya has a low industrial and manufacturing activity, which explains why the market is flooded by Turkish (in the West) and Egyptian (in the East) products.
With its heavy dependency on oil revenues, the economic situation in Libya was better placed before 2011. In the 2000-2010 period, agreements signed between Libya, the International Monetary Fund (IMF) and the World Bank (WB) had allowed Libya to benefit from a positive conjuncture.
But since 2011, the worsening of the political and security situation had a deep impact on the country’s economy.
After the revolution in 2011, public funds were spent unwisely in numerous state institutions due to major expectations by the population and the budget deficit widened into the revenues from taxes and customs.
In 2015, 36 percent of the central bank’s reserves were used to pay for the national budget. A year later, 70 percent of the budget was drawn from the reserves.
The country’s currency reserves of $120-130 billion were burned at a rate of $20 billion a year, to the effect that now, only an estimated $20-30 billion are left. Bank runs and large cash outs lead to the liquidity crisis at hand today.
Experts confirmed that more than $40 billion, the “real money,” are outside the banking system and about 60 percent of state expenditures go to ‘officials’ on its payroll.
The mistrust that citizens feel towards their institutions adds to this uncertainty and results in the population squirrelling away their foreign or local printed money reserves rather than handing it over to the banks.
Representatives of the banking sector present at the roundtable accentuated the need to rebuild this trust in financial structures and the Libyan dinar.
All of this led to a catastrophic economic situation fixable only though a coherent economic strategy and a set of measures coordinated amongst central and local government officials as well as stakeholders in the banking sector.
Remedies to this situation exist, but they require serious political reforms and a revolution in habits. Solutions can only be straightforward, and some consider that they can only come through dispositions that would include the backing of families with giving them an additional financial aid, restricting the importation of selected products in order to increase prospects for national production, issuing a new currency so that the crisis of liquidities is limited, reducing the state control over the economy, having better state management and good governance, more effectively controlling the currency rates, unifying financial and economic institutions, starting with the LCB, and putting an end to subventions on oil products.
A stable Libyan currency adequately managed by a united LCB is crucial for the future of the country.
Include local governance structures in economic negotiation and implementation processes
Notwithstanding, there are some existing institutions that are able to define common priorities for the Libyan economy: local governance structures.
One example with regards to infrastructure is the Committee for the Transfer of Competences of the Local Administration which has started several initiatives that nevertheless need backing by a stronger and a more determined political actor.
Given that the Tripoli-based Ministry of Local Governance is, according to its own employees, not concerned about the tensions between Libya’s East and West, this might be a window of opportunity that should be exploited.
As effectively governing municipalities can stabilize the country not only in terms of providing and maintaining sustainable infrastructure, local structures need to be supported, state institutions need to be rebuild, and the economic and governance systems within Libya need to be decentralized.
In light of municipalities being at the heart of Libyan society and economic aspects composing the core of instability in the country, local governance should not only be on the priority list for the central government, but be enabled to bear the main responsibility in service provision.
Decentralization requires a gradual delegation of powers on the basis of municipality performance. The establishment of a Ministry of Local Governance by the GNA is thus a crucial step in supporting local sources of revenue as an alternative to the resources of the central government.
Not only due to the large geographical distances between the municipalities, the local coordination of administrations is not an easy endeavor.
In fact, some of the main issues prevailing in Libya are those related to the lack of proximity, both at the level of the relation between the central authorities and the municipalities, and between political/executive structures and the society at large.
Neglecting this side will only make it more difficult for Libyans to benefit from improvements in the health sector, sanitation, Foreign Direct Investments, and issues such as the future of IDPs and the impact of migration movements on the country.
This is where “changing habits” and promoting a deep, revolutionary reform of local management and governance is crucial.
Thus, Libya is clearly in need of clear regulatory frameworks and policies for local governance as well as a long-term vision of how municipalities can foster local investments in infrastructure to ensure service provision, guarantee state accountability, and bring an end to corruption.
Dismantle criminal networks fueling a ‘shadow economy’ and cut economic links to militias
The black market has evolved into the controlling element behind the prices in the whole Libyan economy. Lifting this headlock necessitates a clear strategy on how to deal with the parallel markets and an action plan in order to narrow the gaping difference between the official and unofficial currency exchange rates.
Many experts agree that the only unified and most active economy in Libya today is the parallel market, which is less impacted by political disputes and conflict than the divided formal economy.
Any attempt for a solution must account for the fact that there is a network of interests intertwined with all kinds of criminal activities, ranging from the smuggling of oil and other subsidized goods to weaponry and human beings, and ingrained into the socioeconomic fabric of numerous local communities.
The Libyan regime under Gaddafi exerted a certain level of control over the smuggling business. Since then, open competition has taken over and provoked local conflict.
The absence of stable statehood and dominant security actors led to a professionalization of the smuggling economy and – following the spread of armed groups – required smugglers to hire personnel for armed protection which again gave rise to an informal protection market.
All throughout the country and empowered by Libya’s hybrid security sector, militias are fighting over control of smuggling routes; oil, gas, and transportation infrastructure; the control over borderland territory; state bodies; economic and trade nodes along the coast; and the predation of state revenues in what has been termed a war economy that depends on the dispensation of violence.
Given the fact that a lot of the liquidity in Libya is consumed by armed groups and local militias, these economic links must be interrupted by efforts to reintegrate members of armed groups into the economy and find alternatives to the central distribution of public wealth in order to preserve stability.
The wealth of the militias exceeds billions of dinars and any solution requires the inclusion of the local governance level.
Conclusion
Libya lacks the presence of a long-term vision for its economy and this will not change until it becomes clear who exactly is taking decisions.
Infrastructure and basic social services, such as health and education, are deficient, but reverting this situation needs time, money, and foreign investors.
Oil reserves are important and exploring them accurately could help overcoming the crisis of liquidity and the budgetary problems that Libya is facing.
Nevertheless, while having a regular and efficient oil production is critical for the country, positive achievements also need Libyans to clearly set the responsibilities for their core institutional bodies, such as the NOC and the LCB.
An often raised question in this regard is on what basis oil benefits will have to be distributed.
Libya desperately needs to adopt extensive economic reforms before the situation totally slips out of the hands of those still executing some influence.
Accurate reforms, however, need to be based on a good assessment and a correct understanding of the current situation in the country.
In order to achieve that, Libya requires effective leadership under a government perceived as legitimate by the majority of its population.
While all eyes are on Libya’s – possible – upcoming elections, going to the polls might not necessarily contribute to solving the issues at hand, at least for the time being.
This is where Libya will most probably need the few truly influential leaders to agree on feasible power-sharing before they develop accurate economic policies that would benefit the country.
This, however, still sounds like wishful thinking for now.
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Barah Mikaïl is Founding Director of Stractegia and Associate Professor at Saint Louis University in Madrid. He is a Senior Fellow at the Foundation for International Relations and External Dialogue (FRIDE) and a Senior Researcher on geopolitics and security-related issues. He worked before as a senior researcher on Middle East and North Africa and on water issues at the Paris-based Institut de Relations Internationales et Stratégiques.
Simon Engelkes is Libya Project Coordinator at the KAS Regional Program South Mediterranean/Tunis.
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