The long-running feud between Libya’s competing authorities over the Central Bank has flared up again, threatening an economic crisis that could lead to unrest. The parties should press ahead with UN-backed mediation to achieve a resolution.
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What’s new?
In August, a dangerous dispute erupted between Libya’s rival authorities – the internationally recognised government in Tripoli and the parliament based in the east – over control of the Central Bank, after the former unilaterally appointed a new governor. It is part of a feud that has divided the country since 2014.
Why does it matter?
The standoff could paralyse the economy and prompt armed groups to mobilise. It has already stopped imports and led most foreign financial institutions to suspend dealings with the Central Bank. The cost of being disconnected from the world financial system would be enormous for Libyan authorities and citizens alike.
What should be done?
To prevent economic collapse, the Tripoli-based government and the parliament should follow through with a preliminary agreement sponsored by the UN to end the dispute. The UN should also integrate economic negotiations into its efforts to resolve the country’s overall crisis.
A standoff over control of Libya’s Central Bank threatens the relative calm prevailing in the divided country over the past two years. In August, the rival east- and west-based authorities stepped up their fight for the Bank, the sole legal repository of tens of billions of dollars in oil revenue. The dispute has already precipitated a partial shutdown of oil production and prompted most foreign financial institutions that normally do business with the Central Bank and Libyan commercial banks to suspend all transactions with them.
Denied access to a large portion of its oil revenues and cash reserves held abroad that are essential for covering state expenditures and importing goods, Libya could plummet into economic collapse, resulting in severe food shortages and possibly popular protest and an outbreak of militia violence. To avert those risks, the two sides should press ahead with UN-backed mediation to end the confrontation and revive multi-track negotiations aimed at reunifying the country and its governing institutions.
The feud over the Central Bank is a by-product of broader competition between authorities based in western and eastern Libya. The former include the internationally recognised government of Prime Minister Abdelhamid Dabaiba and its associated Presidential Council in Tripoli, supported by a military coalition made up of various armed groups; the second comprise the parliament based in the east of the country, which does not recognise the Dabaiba-led government, and an administration headed by Osama Hamad, backed by the Libyan National Army under Field Marshal Khalifa Haftar.
These rival authorities have been around in various incarnations since 2014, three years after the fall of Muammar Qadhafi’s regime; the Central Bank has been the focus of repeated disputes throughout this time, with the two sides vying for supremacy over it.
The stakes are high.
Unlike in most countries, where a central bank’s role is to carry out monetary policy, Libya’s Central Bank also serves as the government’s fiscal implementing partner: it holds the government’s bank accounts and disburses operating funds to state entities and salaries to public-sector employees. Although oil money remains under Tripoli’s official authority, ad hoc arrangements over the past two years have allowed the eastern authorities as well to tap into the state funds that the Central Bank holds.
These are sizeable. Libya has Africa’s largest crude oil reserves, and its hydrocarbon revenues of some $20-25 billion a year account for almost the entirety of government income. It also has some $80 billion in reserves deposited in accounts held by the Central Bank at foreign financial institutions. Oil export revenues are Libya’s main source of foreign currency, used to pay for the imported goods on which its people depend heavily in the absence of significant domestic industrial or agricultural production.
The battle over the Central Bank broke out against the backdrop of deadlocked UN-sponsored negotiations between the parliament based in the east and another Tripoli-based assembly, called the High State Council, which is itself divided between supporters of the Dabaiba government and those calling for the prime minister to be replaced.
Despite the lack of progress on political reunification, in 2022 the two leading figures in the respective camps – Haftar in the east and Dabaiba in Tripoli – hashed out an informal revenue-sharing arrangement that had been working for two years. Few expected the dispute that flared up in August.
The latest disagreement concerns the question of who is, or should be, the bank’s governor. The east-based authorities support Siddiq Elkebir, who has held the post since Qadhafi fell, but in August the Presidential Council in Tripoli unilaterally appointed a new board and replaced Elkebir with an interim governor, Abdel Fattah Ghaffar.
The Council justified the move as a step toward better governance and financial transparency. A more plausible explanation is that the Tripoli government wanted access to more funds to shore up its political and economic standing, which has been eroding to its rivals’ benefit.
So far, the two sides have steered clear of violence, but the east-based authorities have retaliated for Elkebir’s sacking by shutting off about half of the hydrocarbon production in areas under their control. Unnerved by the discord, which pits two people who each claim to be the legitimate Central Bank governor against each other, most foreign financial institutions have suspended transactions with the Bank.
According to foreign and Libyan officials, the freeze extends to its offshore arm, the Libyan Foreign Bank and subsidiaries, through which oil sales revenues pass before being deposited in accounts belonging to the Central Bank, though some of the Europe-based subsidiaries have reportedly continued processing transactions.
For now, foreign governments say they will not impose more drastic measures, such as freezing Libyan assets abroad, but a prolonged disconnection of Libyan banks from the global financial system could upend Libya’s oil-dependent economy. With limited access to its foreign reserves, the Bank could have trouble paying government expenses, many of which require hard currency, or handling payment requests for imports.
If the suspension lasts, it could cause severe food shortages, dramatic rises in prices for basic goods and a rapid deterioration in living conditions. These, in turn, could snowball into social unrest or even prompt the rival camps’ militias to mobilise.
To mitigate these risks, the two sides should resolve the dispute over the Central Bank’s head by appointing a new leadership with the consent of all parties. UN-backed talks led on 26 September to the signing of a preliminary deal between emissaries of the House of Representatives in Benghazi and the High State Council in Tripoli that would see Naji Issa, a veteran Central Bank manager, appointed as the new governor.
The deal is a good first step, but much could still go wrong. The House must ratify the agreement, the Presidential Council must revoke its choice of interim governor in August and a board of directors must be appointed. Most importantly, powers over the Central Bank must be handed over to the new management without disputes flaring up.
These steps need to be taken before foreign financial institutions that have halted transactions with their Libyan counterparts can be persuaded to resume business. The UN should also give ailing political negotiations a stronger economic dimension, which would help revive them, putting Libya on a path toward a reunified and more stable governing framework.
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