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.
PART FOUR
IV. Staving Off an All-out Banking Crisis
Sharply restricting the two commercial banks’ foreign currency transactions could have grave repercussions. How the crisis will unfold is unclear, in part because no specialist has seriously looked into the problems affecting these banks, much less tried to tackle them.
Yet a consensus is emerging among the few who follow the looming banking crisis that it could worsen Libya’s already severe liquidity problems, again raise the black market foreign exchange rate and in turn spur inflation.
Service delivery is likely to be affected as well, because many state-owned companies (such as the electricity company or the east-based AGOCO oil company) and private companies that have accounts with these banks might be unable to process imports, including of spare parts, or fulfil payments of service contracts for the maintenance of their infrastructure.
Such a development would affect the entire banking sector, especially if there is a rush on banks across the country. An open question is whether this will also affect salary payments for government employees.
Speaking in mid-March, just weeks before Haftar-led forces launched their offensive on Tripoli, Hibri painted an apocalyptic picture of what might happen: “A state of panic is possible.
There could even be a second revolution here”, he said, referring to a possible uprising against Tripoli. He also warned that “if no solution is found for these banks, the LNA is likely to react”, suggesting that this could lead to another showdown at Libya’s oil terminals and oil fields or even accelerate an LNA advance toward Tripoli.
An official working with the Central Bank’s governor in Tripoli acknowledged that citizens might panic if the commercial banks’ operations were restricted.
A cut in the east’s funding streams would most likely force eastern authorities to seek external funding to bankroll the public sector.
If the banks fail, the political and military implications would be equally grave, as this would dramatically reduce the eastern government’s funding stream and by extension the LNA’s.
This could add to the confrontational narrative against the authorities in Tripoli, with Haftar supporters accusing it not only of funding Islamist armed groups but of intentionally bankrupting the east-based government, the LNA and private companies – actions they say would retroactively justify the assault on the capital.
In the short term, a cut in the east’s funding streams would most likely force eastern authorities to seek external funding to bankroll the public sector.
The most probable financiers would be Saudi Arabia and the United Arab Emirates (UAE). Riyadh appears to have already lent some financial support to the LNA to kick-start the offensive on Tripoli, but not for LNA or eastern government personnel salaries or operational costs, which the east-based government continues to pay.
But if the commercial banks that have helped bankroll the eastern government were to face restrictions as expected, the eastern authorities might call on their external backers to cover all public-sector expenditures.
Alternatively, they could opt to print more cash to increase the money supply, though this would accelerate inflationary pressures. But these are short-term solutions that would do little to address the banking crisis, nor reconcile the dual payment clearance system.
Local commercial banks would still be prevented from processing international payment orders as long as their reserves with the Central Bank remained under the legal threshold.
The LNA’s siege on Tripoli has also hardened positions in the capital, where officials increasingly are talking about taking all possible measures to curb the LNA’s financial resources, including by removing LNA military officers from the Tripoli payroll and even stopping paying the salaries of civil sector employees in the east.
Speaking in late April, the interior minister in Tripoli said: “We have the database of all public-sector employees, and we can suspend salary payments to all those based in the east. And we should. Let them understand the consequence of their actions”.
The immediate impact of such punitive measures would be to increase the east-based government’s disbursement requirements well beyond the current level of its expenditures – approximately $6 billion a year.
In the long term, if the deep military and political rift continues without a major shift on the ground, the east-based government may place its bets on seeking access to Libya’s oil revenues and connecting the east-based banks, including the Central Bank’s Benghazi branch, to the international banking system.
Whether it can do so is questionable, as both oil trading and access to Swift, the international wire transfer system used across the world, are highly dependent on U.S. approval.
Over the years, Washington has repeatedly reaffirmed the principle that Libya’s financial institutions should remain undivided and that its government should be reunified.
U.S. officials never legitimised the eastern government or the Central Bank’s Benghazi branch; the U.S. Treasury only has maintained contact with the Tripoli-based Central Bank governor.
In many respects, the U.S.’s firm stance on this matter has ensured that Libya’s oil revenues would solely accrue to the Central Bank in Tripoli, and thus to the UN-backed government, over the past years.
But with U.S. President Donald Trump signalling his support for Haftar in mid-April, thus aligning the U.S.’s position with that Saudi Arabia, the UAE and Egypt, a change of policy vis-à-vis Libya’s finances and oil sector has become conceivable.
Before the LNA’s offensive, two controversial approaches were floated to resolve the banking crisis.
The first, strongly backed by the east-based government, would be to persuade the Central Bank to recognise the credit commercial banks have accrued with its eastern branch.
This means that the Central Bank would absorb all or part of the east-based government’s debts (approximately 35 billion dinars) and possibly also reconnect the Central Bank’s eastern branch to the automated payment settlement system. Such a proposal would face fierce resistance in Tripoli.
The Central Bank’s governor, Siddiq Elkebir, is on record as stating: “No way! No amount of screaming will get it done”, referring to both recognising the east-based government’s debt and reconnecting the Benghazi branch to the Central Bank’s clearing system.
Elkebir is refusing to do so because he neither trusts the sources of funds in the east nor the accuracy with which they are being reported, given the Central Bank’s lack of oversight over the manual accounting system.
The launch of the assault on Tripoli can only have hardened his position.
Another alternative – extreme, and only vaguely mooted – approach would be to have the banks “face the consequences of their actions”: let them fail.
This remains a conjecture for now but could quickly turn into de facto policy if the Central Bank continues not to take action and the LNA military offensive continues, openly supported by the Central Bank’s Benghazi branch.
But all the parties concerned are aware that this could trigger serious social unrest and precipitate a profound economic crisis with political and even military repercussions for almost everyone, including in western Libya.
Prior to the offensive, the east-based government proposed a third, middle-ground solution. It consists of changing how to account for foreign currency transactions.
Rather than debiting the commercial banks’ reserves with the Central Bank for these transactions’ entire cost at the 3.90 dinars to the dollar exchange rate, they propose splitting this into two separate portions: one equivalent to the official 1.4 dinar to the dollar rate, to be debited to the commercial banks’ reserves with the Central Bank; and the other, with the fee added, to be debited to the credit these banks have accrued with the Central Bank’s eastern branch.
They argue that when the Tripoli authorities imposed the additional fee, they intended to use revenues accrued from it to cover the 63 billion dinar government debt with the Central Bank.
Now, they say, the Government of National Accord should use these funds to cover the eastern debt as well in order to slow the rate at which the commercial banks’ reserves with the Central Bank are depleting, while also drawing down on the reserves these banks have accrued with the Central Bank’s eastern branch.
So far the authorities in Tripoli have ignored such proposals. To the contrary, on 20 March 2019 (before the offensive), the Tripoli government decided to use fifteen billion dinars ($11 billion) generated from foreign currency fees to cover one third of its 2019 budget.
The same day it also ordered that another five billion dinars ($3.5 billion) generated from foreign currency fees be used to pay back a portion of its accumulated debt with the Central Bank, and yet another five billion dinars ($3.5 billion) to finance future development projects that the Tripoli-based Presidency Council will oversee.
There has been no mention of allocations for eastern debt repayment. Since the start of the military offensive in early April, the Central Bank has allocated a gargantuan two billion dinars ($1.4 billion) to support the war effort of Tripoli government-allied forces.
Although informed of the risks and implications of the problems affecting the commercial banks even prior to Haftar’s march on Tripoli, neither the Central Bank governor nor his advisers have offered a concrete proposal on how to prevent a full-fledged banking crisis.
International actors who track Libya’s economic woes have remained either largely oblivious to this specific problem or were unable to persuade the Central Bank and finance ministry in Tripoli to address it.
Yet without immediate steps to rectify the situation, the commercial banks are bound to fail and the dispute over the allocation of oil revenues will come back with a vengeance, prolonging the war.
With a decisive victory by either side unlikely, outside actors, especially the warring sides’ respective foreign backers, should persuade the two rival governments to accept a ceasefire in place and kick-start negotiations to settle their financial dispute as an immediate priority.
Currently there is strong opposition to this inside Libya: both sides view the fighting around Tripoli as an existential fight and have refused to even consider a cessation of hostilities or external mediation.
The LNA is adamant it wants to seize the capital and place the state’s financial institutions under its control. Likewise, Tripoli-aligned forces say they are determined to push the LNA back to eastern Libya and undermine the east’s financial standing.
These positions point to a possible protracted, expensive stalemate that could precipitate further external involvement and continued violence on multiple fronts across the country.
The two sides are taking a serious risk. Letting the crisis – the LNA’s military offensive and the Central Bank’s punitive measures – unfold in the current circumstances could redound negatively to both of them: it could devastate urban areas and severely harm the economy, increase liquidity problems, send prices skyrocketing and give a boost to black market trading.
The prime beneficiaries would be military actors and black market traders, while hardest hit will be ordinary Libyans across the country. In the long term, it could give way to a much broader financial and resource war.
Foreign capitals and the UN should press the parties toward a ceasefire. To this end, Haftar’s backers in the Gulf should make it clear they do not intend to bankroll the east-based government if its accounts run dry, as appears possible, let alone give further financial support to the offensive.
This could provide the necessary incentive for the LNA to halt its assault on Tripoli and agree to negotiate. Similarly, European capitals and regional backers of the Tripoli coalition need to pressure Serraj to agree to a ceasefire.
At the same time, the U.S. should exercise its leverage over the Central Bank in Tripoli, with which it has a preferential relation, to persuade it to resolve the banking problems affecting eastern Libya.
Without a nudge from Washington, authorities in Tripoli are unlikely voluntarily negotiate a financial compromise.
This would require Washington to return to a more even-handed approach to the Libyan conflict: rather than signalling military support for Haftar and (ambivalent) political recognition of Serraj, the Trump administration, with technical advice from the U.S. Treasury, should use its political capital and financial leverage to press the two sides toward a settlement of the banking crisis.
The UN and international financial institutions such as the World Bank and the International Monetary Fund (IMF) should also offer expert advice.
Clearly, such a financial negotiation cannot happen in isolation; it will have to go hand in hand with political and military talks aimed at bridging the rifts across the country. But the offer of a financial track would increase the chances of persuading the parties to accept a ceasefire.
Moreover, any future negotiations risk being pro forma if there is no attempt to also redress the financial imbalances that are a key driver of both the political and military conflict in Libya. To this end, several steps should be taken:
- The rival governors of the Central Bank and its Benghazi branch should reaffirm their commitment to an external audit of the Bank, as they had promised to the UN special envoy in August 2018. The UN should urgently work to overcome technical delays that have held up this process.
- In the meantime, the UN should convene a technical meeting of the rival governors, officials from the parallel finance ministries and Libyan financial experts. The goal would be for them to sketch out technical solutions to both the banking crisis and the host of problems that have accumulated since the 2014 split of the Central Bank, including how to standardise commercial banking operations in the east. This meeting should take place in the presence of specialists from the World Bank, the IMF and the U.S. Treasury, and possibly also of other European or regional financial institutions with relevant expertise. The UN should consider seeking the technical guidance of a senior and respected former Central Bank governor to help lead this process.
- Those negotiating a solution to the Libyan crisis also should establish a new procedure to select a consensual Central Bank governor to overcome the deadlock in the process envisioned in the Libyan Political Agreement. This point should be covered by any future political talks.
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