Jason Pack & Stefano Marcuzzi
Part 1) Setting the Stage for a Story of Banking Dysfunction: The Inscrutability and Semi-sovereignty of Libya’s Banking Sector
This section seeks to provide a brief summary, drawing on previous work,1 of how the conditions of the Global Enduring Disorder and the post-Gadhafi transition facilitated the CBL becoming Libya’s most powerful semi-sovereign institution and why it is a “black box” beyond governmental scrutiny/ regulation. The Gadhafi regime was toppled as the Global Enduring Disorder came into full swing.
This had various implications:
1) Allied countries’ policies towards post-Gadhafi Libya were poorly coordinated — France and Italy taking opposite sides in the post-2014 Wars for Post-Gadhafi Succession is a case in point;
2) non-transparent financial transactions and misinformation flowed seamlessly in and out of Libya;
3) rival actors that nonetheless could have cultivated certain shared interests in Libya — such as Turkey/Egypt, Russia/the U.S., Qatar/the UAE — chose to extend their global struggles into the new post-conflict vacuum rather than coordinating on shared interests;
4) another less known dynamic is the extent to which post-Gadhafian Libyan leaders as well as international actors prioritized political state-building over economic reform, misunderstanding Libya’s conflict economy as a symptom of its state-implosion rather than one of its driving factors.
The Libyan economy remains the most poorly understood aspect of the country and its ongoing civil war. It is also highly dissimilar to other Middle Eastern oil states.
Gadhafian economic structures, similar to those of the Soviet Union or Omar al-Bashir’s Sudan, were not “inefficient” when judged against their actual goals.
They were not created to produce profit and avoid loss. They were constructed to maintain political control, avoid scrutiny, facilitate the flow of corrupt money into and out of the international financial system, and convert their counterparties into advocates for the status quo — tasks in which they performed admirably.
These perverse structures were bequeathed en masse to the post-Gadhafian state without meaningful reform. Only global collective action to adjudicate competing claimants could ever have succeeded in improving the situation, yet the Enduring Disorder inhibits that form of coherent collective action from getting started.
As a result, Libya remains trapped with its Gadhafian legacy institutions and the ensuing proxy conflict, because major corporations, governments, and international institutions lack the coordination mechanisms to work with pioneering Libyan reformers to devise and implement something better.
During the 2011 Uprisings, no consensus existed among either the fighters or the political leaders as to the economic system that should be implemented post-Gadhafi.
It should therefore come as no surprise that when Tripoli fell in August of that year and the Temporary Constitutional Declaration was issued earlier that same month, it did not directly address Libya’s economic institutions.
Similarly, the topic was not extensively discussed or legislated by post-Gadhafi Libya’s first authority, the unelected National Transitional Council (NTC), or by its first elected body, the General National Congress (GNC).
This behavior was justified at the time by the fact that first the NTC, then the GNC, and later the elected HoR and U.N.-appointed Government of National Accord (GNA) understood themselves as transitional governance authorities and lacked either unfettered sovereignty or domestic legitimacy.
Amidst this vacuum of legitimacy, they wished to remain in the good graces of the populace who had shed blood allowing them to come to power.
Therefore, the new authorities resorted to appeasement: putting militias on the government payroll, more than doubling state salaries, increasing subsidies on consumer goods, and creating new semi-independent institutions, such as the Warriors Affairs Commission, to dispense billions of dollars in an attempt to purchase the loyalty of the most potentially disruptive segments of the population.
These payments were routed through the Central Bank and required many Libyan men to be added to its payrolls. Hence, for many Libyans after the fall of Gadhafi, the Libyan social contract entails the state providing their economic livelihood in exchange for political quiescence via an indirect rentier model.
Given that vision of a social contract, pre-existing economic institutions — such as the CBL, the General Electric Company of Libya (GECOL), and the National Oil Company (NOC) — whose ostensible roles were to help the Libyan populace by wiring money, generating electricity, or producing oil, had a greater degree of legitimacy than the new political bodies, which were not overseen by a constitution and whose electoral legitimacy or governance mandate was frequently challenged.
As a result of the political vacuum, the alphabet soup of Libya’s economic institutions saw their degrees of sovereignty and independence increase over the course of the post-Gadhafi period. Libya’s political class has neither the authority nor the competence to police, or sometimes even understand, their activities.
In effect, these institutions have had no genuine domestic oversight and no effective way for government to control or even monitor their actions, or replace their leaderships. This is a situation in which Libya’s Central Bank is its most powerful institution, able to hold and move money in whatever ways it sees fit.
It is illegal to wire dinars outside of Libya and forbidden to pay employees inside Libya in non-dinar currencies. Internally, salaries cannot be paid and government budgets doled out except through Central Bank lump-sum transfers. All money that flows through the Libyan economy passes through the Central Bank.
This raises the interlocked questions:
- Who regulates and supervises the CBL?
- What governmental entities define its policy objectives?
- Who sees that its technical competencies improve or that it adopts international best practices or that it polices suspect transactions?
The CBL’s extensive legal mandate grants it a de facto monopoly over foreign exchange.
As such, money cannot flow in and out of Libya without passing through the Central Bank.
This point was vividly illustrated by a Libyan legal expert we spoke with: “There is no unified procedure for repatriating profits from Libya from joint venture companies or branch offices of foreign firms. Contracts and payments, yes … but there is total opacity about how to handle things like moving your local company’s profits out of Libya, so the only way to do it is through cultivating a close relationship with the management of the Central Bank.”
The bank’s wide remit and perception of vast discretionary powers is part of the reason it is fought over so extensively. Clearly, future reforms to the bank’s mandate and discretionary powers could help alleviate some of the drivers of the narrative and physical wars over the bank.
The CBL is thought of by many interviewed for this report as an omnipotent black box, Libya’s most powerful, yet most opaque institution. Paradoxically, international law has combined with the prevailing conditions of the Enduring Disorder to further this situation and this perception.
The semi-sovereignty of Libya’s institutions was not much affected by the 2014-15 First War for Post-Gadhafi Succession. In fact, international community actions ring-fenced Libya’s institutions, particularly the Central Bank and NOC, from the fighting, further increasing their semi-sovereignty even though the leaderships of those institutions were contested as Libya’s governance bifurcated into rival eastern and western claimants (associated with the HoR and the GNC/GNA, respectively).
The Dec. 17, 2015 Skhirat Agreement refers to the CBL as a sovereign institution. The central banks of other countries are not traditionally thought of as possessing sovereignty even if they are legally independent. This conception might be because the CBL owns the vast majority of the banking sector and as such its influence over finance and banking in Libya is potentially greater than that of any other central bank.
Annex 5 of the treaty reads, “Libya’s sovereign institutions play an essential role in upholding the long-term interests of the Libyan people. The Government of National Accord will safeguard the Central Bank of Libya … and other independent institutions and will ensure that these institutions are permitted to fulfil their recognized role of safeguarding Libya’s resources for the benefit of all Libyans.”
Rather than appointing the government to supervise the bank, the treaty calls upon the government to protect it from political oversight or interference. The bank’s “recognized role” is not further spelled out in the document; therefore, the agreement appears to simply enshrine Gadhafian legal precedents about various economic institutions as permanent and immutable for both the international community and Libya.
Jason Pack is a former non-resident scholar at MEI, author of Libya and the Global Enduring Disorder, and the president of LibyaAnalysis LLC. He is the Director of the NATO & THE GLOBAL ENDURING DISORDER Project and a Senior Analyst for Emerging Challenges at the NATO Defense College Foundation.
Stefano Marcuzzi is a Research Fellow at the Center for Higher Defense Studies (CASD), Rome, a Senior Analyst at Libya Analysis LLC, an Adjunct Fellow at University College Dublin (UCD) and Boston University (BU), and an Emerging Challenges Analyst at the NATO Defense College Foundation (NDFC), Rome. He is the author of The EU, NATO and the Libya Conflict. Anatomy of a Failure.