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.
Toward Climax: The September 2018 Financial Measures
The discrepancy in the commercial banks’ accounts with the two branches of the Central Bank worsened when the Tripoli government adopted an economic reform package it referred to as “financial measures” in September 2018 in an effort to liberalise access to letters of credit (which the Central Bank had capped since 2014), reduce black market transactions and improve liquidity in the banks.
The main component of these measures was the imposition of a hefty 183 per cent service fee on top of the official exchange rate for all foreign currency purchases involving commercial and personal transactions.
While the official exchange rate remained at 1.39 dinar to the dollar, the imposition of the fee in effect created a second official exchange rate of 3.90 dinars to the dollar. This measure came into effect in October 2018 when the Central Bank started authorising letters of credit requests.
The east-based authorities initially applauded the financial measures adopted by Tripoli, because they had long called for a more open system to award letters of credit and for devaluing the dinar to reduce the black market exchange rate, which had reached seven dinars to the dollar.
Prior to these reforms, most Libyans and small traders could only access foreign currency through the black market; for the east-based government it was the sole means to access foreign currency, since the Central Bank’s eastern branch did not hold any.
When eastern banks started sounding the alarm bells in early 2019, the Tripoli authorities did not pursue any preventive measure, and refused even to acknowledge the problem publicly.
However, these measures, but especially the new fee, accelerated the problems derived from the dual settlement system and triggered an unanticipated backlash: they put an immediate strain on commercial banks’ accounts with the Central Bank, the country’s only repository of foreign currency.
Even an east-based bank has to draw on its reserves with the Central Bank to acquire foreign currency. Commercial banks were affected to different degrees, but the National Commercial Bank and the Wahda Bank were hit hardest because of the volume of their transactions.
In Hibri’s words: “Had [Tripoli] kept the previous exchange rate for the purchase of foreign currency, the problem would have taken three years to surface. But with the financial measures introduced in October, the depletion of commercial banks’ reserves in Tripoli accelerated”.
The extra cost for letters of credit purchased between October and December 2018 caused a sudden reduction in these banks’ deposits (up to 50 per cent for some banks, according to the Central Bank’s Benghazi branch) placing them below or very close to the required minimum.
Normally, when commercial banks’ reserves go below the required minimum, the Central Bank can decide in the first instance to restrict their transactions, for example limiting foreign currency trading or reducing to a minimum the amount of funds that can be transferred; if funds are depleted completely, it could suspend all of the banks’ operations.
Should the Central Bank decide to help prevent a commercial bank from going bust, however, it could lend it funds to increase its reserves (similar to a bail-out), or reduce the required minimum deposits.
When eastern banks started sounding the alarm bells in early 2019, the Tripoli authorities did not pursue any preventive measure, and refused even to acknowledge the problem publicly. Instead, it allowed the commercial banks’ reserves to drop further.
The drain on reserves continued after January 2019, when the banks processed other authorised foreign currency transactions, whether letters of credit or family allowances and money allocated for personal use.
Exact figures for these transactions’ total costs are not available but are likely considerable. The Wahda Bank alone stated that it has received $500 million (almost 700 million dinars) worth of requests from its clients for family allowances.
Because of these and other transactions, the bank’s deposits with the Central Bank have declined further compared to the estimated figures at the end of 2018; as of mid-March 2019, they stood between one to two billion dinars, while its reserves with the Central Bank’s eastern branch increased to between five and six billion dinars in the same period.
The National Commercial Bank’s reserves with the Central Bank also dipped, but by how much is contested: according to the Central Bank’s Benghazi branch, they stood between two to three billion dinars in March 2019, while its reserves with the Benghazi branch remained high, approximately nine billion dinars.
For their part, National Commercial Bank managers in Tripoli claim that its reserves with the Central Bank were just over four billion dinars.
Despite the discrepancy, these figures suggest that the two banks are coming dangerously close to the legally required minimum, which could prompt the Central Bank to take action against them, likely in the form of limitations on foreign currency transactions or restrictions on wire transfers.
Central Bank and government officials in Tripoli either minimise the problem with the commercial banks and their reserves, or deny that there is one.
Yet, Central Bank-published data reflect the fact that there has been a sudden dive in the total volume of commercial banks’ reserves in Tripoli since the implementation of the financial measures in 2018.
In the three months between October and December 2018, commercial banks’ total actual deposits with the Central Bank dropped by over 10 per cent from 101 billion dinars in September to 93 billion dinars at year end.
The drop in dinar deposits is linked to an increase in the purchase of foreign currency and the transfer of funds abroad. (For every U.S. dollar a commercial bank purchases from the Central Bank, the latter debits the bank’s accounts the equivalent in Libyan dinars based on the exchange rate set by the Central Bank.)
This is not limited to banks in the east: banks in western Libya are also purchasing high volumes of foreign currency to cover imports of consumer goods and relocate capital abroad.
But the eastern banks are affected more because a higher proportion of their reserve deposits is held in the Central Bank’s Benghazi branch, which Tripoli does not recognise.
Data for the first three months of 2019 are not yet publicly available but, when and if released they are likely to show a further drop in overall reserve deposits with the Central Bank.
With the start of Ramadan in early May, the demand for letters of credit increased because people shop more during the festivities, putting a further strain on commercial banks’ accounts with the Central Bank.
In mid-March 2019, Marai al-Barasi, chairman of the Wahda Bank, began to ring the alarm bells:
We will face a real problem very soon. The demand for foreign currency is high and our reserves with the Central Bank are low. In about one month, the problem will become more apparent, and we will reach a point where we will not be able to cover any further requests [for allowances and letters of credit].
The depletion of our deposits in Tripoli might even affect salary payments. And what happens then, I really don’t know.