Jason Pack & Stefano Marcuzzi
Part 4) Heading Forward: Can the Narrative War be Stopped? Can the Libyan Banking Sector be Reformed?
A final assessment of the situation and some policy recommendations. Most Western policymakers we spoke to cited the reunification of the CBL as a paramount concern, yet among the businesspeople interviewed for this report the security situation and the lack of trusted contacts, not the lack of structural reforms or reunification, remains the main impediment to doing business in Libya.
The narrative war and Enduring Disorder has obscured for most that transparency is the fundamental underlying issue for the banking sector, not reunification. Reunification appears to require that a complete political transition to a unified and constitutional governance occur. Reforms, however, can be implemented even as the period of seemingly endless interim governance continues. Therefore, the focus on reunification rather than reforms seems destined to fail just as the focus on elections prior to economic reforms did.
For too long, international policymakers have thought: We can’t incentivize the reform of Libyan banking procedures while the sector is bifurcated, so the international community should focus on unification. But that logic needs to be turned on its head: Reunification cannot proceed while the CBL’s actions remain so opaque, inefficient, and shrouded in a narrative war. Only once transparency is achieved and the narrative war disentangled from policymaking can reunification be achieved.
All groups we spoke to in our research, especially in the private sector, also considered that some improvements are desirable and possible even in the current state of political unrest. Below are some policy recommendations that our interlocutors mentioned that could be implemented in the short, medium, and long term, to promote sector efficiency and improve the prospect of economic and financial development.
These recommendations are calculated to mitigate the ongoing narrative war that makes progress so difficult in Libya, despite its fundamentally enviable underlying financial situation. In fact, progress on reform could be made in certain instances with the stroke of a pen, the convening of a task force, the mustering of political will, or the embedding of empowered experts.
Short-term measures to be taken by the CBL:
- Increase oversight. Cooperate and share information with regulatory institutions. The CBL must share its internal accounts with the AB and ACA to increase overall oversight of commercial banks, including through more frequent inspections. This will decrease the likelihood of bank failures, reduce the spread of misinformation, and diffuse allegations of corruption.
- Improve reliability of payments. This is a serious concern for international companies. The CBL could produce streamlined “how to” information about letters of credit and backpayments, and send representatives to major international firms interested in Libya to foster better cooperation and rapid reaction in case of emergencies. Most bureaucratic payment delays over letters of credit have now been resolved, but those rooted in politics tend to become protracted as sitting down and finding compromises is difficult due to the lack of mediation channels.
- Improve governance, accessibility, and transparency. This is arguably the domain in which the narrative war most obscures the functioning of the banking sector. We propose the following quick wins to disentangle technical matters from media optics while better informing Libyans and Libya-watchers about the actual state of affairs, hence blunting the potential impact of misinformation:
* Create a system to transparently monitor financial transfers into and out of the CBL and ministries. Results should be published online in Arabic and English.
* Update and publish organization charts and contact details of the CBL and related institutions to improve access and specify a clearer demarcation of roles.
* Publish details about CBL, subsidiary, and corresponding banks’ liquidity.
* The CBL should adopt the International Monetary Fund’s (IMF) International Financial Reporting Standards (IFRS) for Central Banks. This would not only facilitate investment and economic activity, but it would also fight the politicization and spread of misinformation and conspiracy theories about the CBL.
* Announce in advance the CBL’s schedule for a stated number of regular board and committee meetings each year, whose decisions would be published.
* Promote Libya’s adherence to the Extractive Industries Transparency Initiative (EITI).
* Make sure that the numbers in the published revenues of the NOC tally exactly with CBL’s incomings and outgoings, and that care is taken to show exactly what foreign currency exchange gains and losses occur at each point.
* Make sure that letter of credit allocations are decided on the basis of published criteria, with the meetings deciding those allocations being recorded and published.
Medium-term measures to be taken by the CBL and the Libyan authorities in coordination with international partners:
• Strengthen technical competence. Improving the efficiency of Libyan commercial banks and the government’s financial bureaucracy will be critical to raising standards in the sector. The CBL needs to strengthen its capacity to absorb, manage, and distribute capital/deposits, as well as its delivery of basic services.
This could be done through training modules established in partnership with international banks and corporations, including the IMF and World Bank, thus expanding the USAID initiative. In parallel, the CBL could improve its capacity to attract skilled personnel from abroad (including foreign professionals, embedded experts, and educated Libyan expats), through incentives and more transparent hiring procedures. This step will also reduce the attractiveness of conspiracy theories.
• Improve legislation. An adequate legal framework is key to promoting non-corrupt business practices. Libyan authorities should consider updating banking regulations, including through joint Libyan-international forums on technical and legal adjustments to the regulatory framework. Libya’s private and online banking sectors lack sufficient modern legal frameworks to govern them.
As a result, most businesses operating in the IT and Fintech space are not only entirely unregulated and untransparent, they cannot achieve global competitiveness, despite strong Libyan human capital in these fields.
• Embed experts. We strongly suggest that Libyan government officials request embedded experts from allied governments — British and American experts tend to be unable to embed in Libya institutions for security and bureaucratic reasons, but experts from Italy and smaller European countries are keen to deploy for the task. They should be given more than just advisory and training functions, and should be harnessed to help create the structures of transparency.
• Delineate and then narrow the CBL’s role. Produce a study explaining the exact legal powers of the CBL relative to other Libyan entities. Once such a study is carried out, a consortium of Libyan and international stakeholders could consider narrowing the CBL’s mandate to one more akin to that of other central banks through a range of modifications to Libyan laws and international agreements. Important questions need to be asked like: Should the CBL monopolize all FX transactions? Is there an economic logic for preserving the CBL as the central node through which all flows of money into and out of Libya must pass?
Long-term measures for international players:
• Continue to pursue the unification of the western and eastern banks, but only as part of a long-term culmination of more immediate reforms. Despite the narrative war over CBL unification, international stakeholders should not give up promoting sector reunification. Rather they should conceptualize it as the culmination of prior reform and transparency processes.
Relaunching that process after transparency reforms are already implemented would be crucial both for political purposes and to encourage greater efficiency. It would also serve to reject further intrusions by Russia and undercut its misinformation narrative. Failing to encourage transparency and subsequent reunification could allow Russia to exploit the eastern CBL’s need for money to gain greater leverage with eastern economic and political authorities.
• The United States undoubtedly has an interest in securing the transparent management of oil revenues and budgets in Libya — both as a way to secure greater stability in North Africa and to ensure Russia is not benefitting from the Libyan oil sector. The Biden administration has recently taken steps indicating that it will redouble its efforts to bring transparency and accountability to Libya’s finances while simultaneously confining itself to the margins of the Libyan elections debate and allowing the U.N. to call the shots and generate political will on that file.
We applaud this approach and advocate for American policymakers to continue to use carrots and serious sticks in their push for transparency and accountability in Libya’s banking sector.
Part 5) Conclusion:
Central Banking and the Global Enduring Disorder We zoom out to show how the situation with the Libya banking sector is a key case study in how contested institutions and controversial financial flows play out in our newly disordered global system and give rise to narrative wars.
This report has showcased that rather than Libya becoming financially more unified in the wake of the defeat of Hifter’s attempt to take Tripoli, parallel and bifurcated institutions have actually taken further hold. In this fraught environment, rather than pursuing unification, reforming itself, and adopting genuine transparency, the CBL has pursued business as usual combined with a dose of window dressing transparency.
This does not imply corruption or malfeasance, but it allows for a growing narrative that the bank has emerged once again as a partisan political actor connected to Turkish and factional Libyan interests. These trends of fragmentation, regional penetration of ungoverned conflict spaces, and conspiracy theories are indicative of the Global Enduring Disorder.
We firmly believe that reforming Libya’s economy to make its financial flows more genuinely transparent is the key to preventing its disordered economic landscape from keeping the country from being permanently dysfunctional and spreading disorder elsewhere. The CBL cannot achieve this alone; it needs buy-in from other stakeholders and pressure from international players to hold everyone accountable.
In fact, Libya’s banking sector could be used as a key case study of how opaque financial flows work in our newly disordered global system and give rise to conspiracy theories and contagion. There are key lessons that can be drawn for understanding issues like corporate financing of political campaigns, financial flows from specific Russian oligarchs, and transnational crime networks.
Transparency is required to disentangle actual from alleged malfeasance. Many status quo actors globally are threatened by transparency and reforms, preferring narrative wars and conspiracy theories that obscure real causation chains. Financial transparency is useful in most contested political spaces, inasmuch as money, power, and control of the narrative are highly linked. That said, transparency initiatives alone have few success stories; they need to be paired with sticks and carrots from international policymakers to incentivize follow-up reforms.
This is something that the Libya context is uniquely well suited for, as the international community acting in concert has much structural leverage. Furthermore, this paper refers to transparency as the first step to gaining structural momentum and social trust for initiatives like bank reunification and then later elections. Unless reforms of the Libyan banking sector are undertaken, the Western policymakers we spoke to are concerned that the political and financial division of the country may become an established fact. This eventuality would further crystallize if eastern institutions were able to smuggle crude oil or implant stooges inside the CBL board who will facilitate illicit expenditures. We counsel a “follow the money” approach:
Western officials should not get lost in the media debates about the constitutional basis for elections or new interim governments, the root causes of all the status quo attempts to block political progress are financial opacity. The high-ranking officials and businesspeople we spoke to claim the current state of affairs cannot be prolonged indefinitely.
According to one of them, “a system in which the printing of illegal banknotes by the eastern CBL continues, while the western CBL has no supervisory role over eastern commercial banks, and the GNU is unable to pursue a national financial and economic policy, will lead to a collapse, sooner or later. Not in a month’s time, probably not in two years’ time, but in four or five years.”
Hence, international policymakers still seem to believe in the importance of U.N.-mediated Libyan national elections, stating that “even though they did not take place in December 2021 and can be postponed and held through other legal frameworks, they cannot indefinitely be postponed or Libya will cease to exist as a functional entity.”
Finally, our research suggested that many embedded financial players in Libya do not wish elections to take place as they risk losing their fiefdoms. They are willing to put forth a media song and dance about new electoral mechanisms or interim governments, but they are not willing to have genuine oversight of Libya’s finances.
They are aware that thorough reform of economic structures requires electoral legitimacy to happen, and thus are impeding such legitimacy through obfuscation, foot dragging, spoiler proposals, and narrative wars. We propose an initial focus on incremental economic reform and transparency that will allow subsequent bank reunification and then finally elections to be undertaken, rather than the approach that most U.N. and Western countries have proposed of elections first and economic reform later. We believe the tried and tested approach of elections first, all other reforms second, has failed. Genuine elections resulting in a transfer of power to constitutional governance appear impossible in Libya so long as the opaque “war economy” and destructive narrative war over Libya’s finances persist.
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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.
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