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.
II- From Political to Financial Rift
The origin of the financial crisis lies in the September 2014 decision by the House of Representatives (HoR), which had installed itself in Tobruk in August after contested general elections two months earlier, to appoint the Central Bank’s former deputy governor, Ali al-Hibri, as interim governor, replacing Siddiq Elkebir.
In reality, Hibri became the head of the Central Bank’s branch in Benghazi, now operating autonomously, while Elkebir remained in office in Tripoli. Consequently, the competing governments in east and west began operating separate – and conflicting – monetary and fiscal policies.
The Central Bank retaliated in October 2014, disconnecting its eastern branch from its automated clearing system (Real-Time Gross Settlement, or RTGS), which all Libyan commercial banks use to manage their accounts with the Central Bank.
Prior to 2014, the Central Bank had three operating branches – in Tripoli, Benghazi and Sebha; of these, Tripoli and Benghazi were linked to the RTGS. This meant that the two branches could process and clear both government and private payments to ministries, companies and individual account holders with commercial banks.
The Central Bank took this step to prevent east-based authorities from accessing government accounts and funds (both reserves and oil revenues). The Tripoli-based parliament (General National Congress, GNC, elected in 2012) viewed the newly elected HoR as illegitimate.
The decision to cut Benghazi off from the RTGS predates the November 2014 ruling of the Tripoli-based Supreme Court, in effect declaring the June 2014 HoR election unconstitutional.
This subsequently gave the Central Bank cover to treat the HoR-backed government in the east as illegitimate and consider all HoR decisions related to banking, including its requests for budget disbursements, null and void.
The Central Bank’s decision was especially aimed at preventing the disbursement of funds to Haftar’s incipient LNA, which the HoR backed but the Tripoli authorities deemed illegal.
However, the Central Bank kept on its payroll all public-sector employees hired before the 2014 political crisis, including many in the east, and kept commercial banks, including those in the east, connected to the RTGS system.
The suspension of the Benghazi branch from the Central Bank’s automated clearing system continues until this day, giving rise to parallel yet overlapping financial systems in eastern and western Libya.
Despite being deprived of state financing and access to oil revenues, which accrued solely to the coffers of the internationally-recognised Central Bank in Tripoli, authorities in the east continued to operate with the HoR’s support and found other ways to fund themselves.
Initially, they were able to obtain loans from Libyan commercial banks, and later, in 2015, bonds (or Treasury bills) underwritten by the Interim Government’s ministry of finance and the Central Bank’s eastern branch.
East-based authorities offset some of this debt by printing and putting into circulation ten billion dinars ($7 billion) worth of banknotes throughout 2015-2018 independently from the Central Bank in Tripoli.
The funding stream to the east-based authorities continued even after the 2016 installation of the Government of National Accord (GNA) in Tripoli, which the UN Security Council, but not the HoR, recognised.
The suspension of the Benghazi branch from the Central Bank’s automated clearing system continues until this day, giving rise to parallel yet overlapping financial systems in eastern and western Libya (see Appendix B).
The aforementioned bonds and Treasury bills written out between 2015 and 2018 created an east-based public debt, not authorised by the Central Bank in Tripoli, amounting to 35 billion dinars ($25 billion), or almost nine billion dinars ($6 billion) a year.
The east-based government uses approximately 65 per cent of its funds to finance its operations, including the salaries of employees it hired after the 2014 political crisis (who are not included in the Tripoli budget) as well as employees hired before the crisis but cut off from the Tripoli payment system for technical and political reasons after 2014.
It uses another 30 per cent to cover the LNA’s operational costs and salaries (most of which are not covered by the Tripoli budget). The Central Bank’s Benghazi branch calculates the breakdown of its civilian versus military expenditures between 2015 and 2018.
Throughout this same period, the Tripoli-based government’s budget averaged 36 billion dinars (slightly over $25 billion) a year.
Oil revenues are the Tripoli government’s main source of income, but due to a shortfall in hydrocarbon production and exports, Tripoli has also faced a budget deficit, which has oscillated, averaging fifteen billion dinars ($10 billion) a year.
In early 2019, the Central Bank indicated that the Tripoli government’s total cumulative outstanding debt to it was 62 billion dinars ($44 billion).
The breakdown of the Tripoli government’s expenditures, which shows that over half of its disbursements go toward salary payments.
The Tripoli government’s budget covers most public-sector employees, including many civil servants and some LNA and other security officers in eastern Libya who were already on the public payroll prior to the 2014 crisis.
The government makes its salary payments by issuing electronic checks via the RTGS, which it processes through commercial banks across Libya.
These payments, like all other transactions through electronic payment systems, including wire transfers, are first transferred from the Tripoli government’s main account to the deposit accounts that commercial banks keep with the Central Bank.
This is not the case for the east-based government’s expenditures after 2014.
The Central Bank’s Benghazi branch, acting autonomously, writes out manual checks to government offices or companies, but they are cleared by commercial banks where customers have their accounts and pass through escrow (parallel) accounts that do not communicate with the automated electronic clearing system used in Tripoli.
The result is a parallel system to account for commercial bank credits and debits with the Central Bank’s eastern branch.
All Libyan commercial banks with branches in the east therefore operate two parallel systems: RTGS for “legal” transactions sanctioned by the Central Bank in Tripoli, and a manual one for other transactions (which Tripoli considers “rogue” operations) with the eastern branch.
According to Siddiq Elkebir, the Central Bank governor, referring to the December 2015 Libyan Political Agreement that brought to power the Government of National Accord, “All of this [the bonds underwritten by the eastern authorities] is illegal, because it was not envisaged in the Skhirat agreement”; moreover, he said, the Central Bank does not recognise the manual clearing procedure adopted in the east.
Bank managers say that according to Libyan banking law they cannot refuse to process the manually issued checks from the Central Bank’s eastern branch or from commercial banks.
Ali al-Hibri, the eastern branch’s governor, agrees. All commercial banks, including Libya’s largest bank, Jumhuriya Bank, headquartered in western Libya, have had to keep manual accounts with the Central Bank’s eastern branch.
However, two banks in particular – the state-owned National Commercial Wahda Banks – and a third, smaller private bank, the Commerce and Development Bank, have processed the bulk of the east-based government’s payments by virtue of being headquartered in the east and having the greatest number of branches and clients in that region.
This explains why these banks in particular are affected by the dual payment clearing system they must operate with the Central Bank and its eastern branch: using RTGS in Tripoli and manual in the east.
The processing of the east-based government’s payments and other commercial transactions has resulted over time in an accumulation of growing financial obligations by the Central Bank’s eastern branch to these commercial banks.
The key consequence of this is that these commercial banks have amassed reserves and deposits with the Central Bank’s eastern branch, while simultaneously carrying out other transactions through the Central Bank in Tripoli, where their reserves and deposits dwindled over time.
As a result of this dual payment clearing system, commercial banks maintained their primary deposit reserves with the Central Bank in Tripoli and carried out many transactions with it, while also doing business with the Central Bank’s eastern branch and accumulating other reserves (credit) with the latter.
These two sets of commercial bank credits and deposits appear to be very similar, with one critical difference: the government in Tripoli and, by extension, international institutions, recognise the Central Bank’s reserves but not the eastern branch’s.
This means that they also do not recognise the credits commercial banks have accumulated in the east.
In practice, the Tripoli government has no oversight of the eastern branch’s reserves, and those funds reflect the eastern government asserting its authority to sell Treasury bills and print currency without Tripoli’s permission.
Over time, commercial banks accumulated 21 billion dinars ($15 billion) worth of credit with the eastern branch, 65 per cent of it belonging to the three aforementioned banks. Table 1 shows the latter’s accounts in detail as these stood in August 2018.
The unusual dual clearing system reflects the complex side effects of Libya’s political crisis. But from a financial point of view it was not an immediate problem as long as the commercial banks were able to maintain the legally required minimum deposits (20 per cent of each bank’s total deposits) with the Central Bank, which they did (Table 1, required deposits table).
In fact, even as these banks accumulated reserves with the Central Bank’s eastern branch, their deposits with the Central Bank itself remained relatively stable between 2015 and 2018, staying above the 20 per cent threshold.
This suggests that the dual clearing system could have continued without affecting the commercial banks’ overall operations.