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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In the meantime, opposition to the change in command at the Central Bank also spread. On 3 September, the Court of Appeals in Benghazi, which operates in eastern Libya where the parliament and the Haftar-led forces are based, ruled in Elkebir’s favour, declaring that the Presidential Council had acted illegally in appointing a new governor.
Soon after, the mood in western Libya also began to sour. Leading traders in the capital voiced concerns that stores of food would run out within three weeks if imports did not resume; and in Prime Minister Dabaiba’s hometown of Misrata, armed groups announced that they would mobilise against the government for its decision to replace the governor should the economy go into freefall.
But the Tripoli-based government continued trying to reassure people. On 22 September, Economy Minister Mohammed al-Hweij stated that the country had a stockpile of essential foodstuffs that would last three months; he also promised that banks would resume issuing letters of credits for imports within a week.
For the first time since the feud’s outbreak, some good news emerged on 26 September. Under the aegis of the UN, representatives of the House of Representatives and of the rival Tripoli-based High State Council, meeting at the UN headquarters in Tripoli, signed a preliminary agreement to resolve the crisis. The deal stated that the two assemblies had agreed to appoint Naji Issa, a veteran Central Bank manager, as the new governor, and Maraai al-Baraasi as his deputy.
Besides these appointments, the two sides also established a number of conditions for the deal to move ahead. They stipulated first, that the House must ratify the appointments within a week; secondly, that after consultations with the House, the governor must appoint a board of directors within two weeks; and thirdly, that any decision about Central Bank administration that was not taken in compliance with the Libyan Political Agreement should be declared null and void.
Whether the Presidential Council, the institution that triggered the feud in the first place, has signed on to this agreement is unclear. A member of the Council was present at the signing ceremony as a witness, but he was not a signatory, and nor has he explicitly stated that the Council will revoke its August appointment. Neither the Council’s president, Mohamed Mnefi, nor Prime Minister Dabaiba has issued a statement.
How the situation will unfold is uncertain. Libyans informed of the deal suggest that there is a strong possibility that the Presidential Council will bless it and eventually retract its appointment of a new governor in August. If it does, ties to the circuits of international finance could be reinstated rapidly.
But much might still go wrong. Libyan politicians have a well-established record of signing preliminary agreements only to backtrack at the last minute. The looming question is now whether the House will ratify the deal. If it does not, or if any other impediment gets in the way of the deal, economic conditions could deteriorate fast.
Libya is a country that depends heavily on its foreign currency revenues to cover government expenditures such as subsidies, funds for oil-sector development, scholarships and payments for medical treatment abroad, as well as commercial imports (see Appendix A). Should citizens see that shops are becoming empty due to a lack of fresh supplies (which is not yet the case), public discontent would likely surge.
The possibility of this outcome has receded in recent days, as the two sides look to a compromise solution. Even without a deal in place, in the short run, the Central Bank can still disburse the Libyan dinars it has or eventually print more in order to pay public-sector salaries.
As long as the new Central Bank managers can tap foreign funds via subsidiaries of the Libyan Foreign Bank or other foreign banks, bankers and economists say, the immediate effects of the crisis can be contained. Still, if the new deal stutters and the dispute over the Central Bank persists for many more weeks, oil exports will remain low, and the Central Bank will be unable to draw on reserves on deposit in U.S. and most European banks, or issue letters of credit for imports. In such a scenario, the risks become far greater. One Libyan banker said:
Since the economy depends entirely on oil sales, the bank must sell $2 billion every month to create the liquidity to pay [among other things] for monthly salaries. If there are no salaries, there is no liquidity in the market and the foreign exchange will go through the roof.
If there are no imports, prices will go through the roof. If people are not paid their salaries, they will protest. Violence could ensue, especially on the part of the militias that are not being paid. Commenting on what could happen if there were no resolution of the Central Bank crisis, a U.S. official said:
There will be a breaking point when people decide to revolt, when you start to see real shortages and people push back on the ground. It could be a week; it could be a month; it could be three months. We just don’t know.
If this moment were to come, the likely target of popular ire would be the Tripoli government, which people would hold responsible for the meltdown. “One cannot rule out the toppling of the Dabaiba-led government and a war”, the Libyan banker speculated.
The Presidential Council’s move elicited criticism from outside Libya, with key figures reproaching its unilateral nature and highlighting its potentially destabilising impact on the Libyan economy. On 26 August, the UN Support Mission to Libya (UNSMIL) stated:
The Mission believes that continuing with unilateral actions will come at a high cost for the Libyan people … and risks precipitating the country’s financial and economic collapse.
On 28 August, UN Security Council members echoed concern about the mounting crisis around the Central Bank, calling on “all Libyan political, economic and security leaders and institutions to de-escalate tensions, refrain from use of force or threat of use of force or any economic measures designed to exert pressure”.
The critical stance taken by the U.S., given its importance to global financial markets, has been particularly significant. Washington’s reaction is all the more important to Libya because the country’s oil revenues are in U.S. dollars and most of its reserves are held in U.S. banks. On 27 August, the U.S. embassy in Tripoli warned of the consequences of “undermining confidence in Libya’s economic and financial stability in the eyes of Libyan citizens and the international community”. On 31 August, the State Department weighed in, too:
The uncertainty created by recent unilateral actions has led U.S. and international banks to reassess their relationships with the [Central Bank of Libya] and, in some cases, pause financial transactions until there is more clarity on [its] legitimate governance. We are concerned that further disruptions with international correspondent banks could damage the Libyan economy and well-being of Libyan households.
While the U.S. did not rule out the possibility of recognising the Bank’s new management, officials said they would not condone the new setup without consensus in Libya itself.
The U.S. Treasury, which historically has had close ties with the Central Bank of Libya and is the go-to institution for Western banks seeking guidance on when to resume operations with Libya, has not taken a position in favour of one governor or the other. Nor has it signalled intent to freeze the Central Bank’s assets. But it has made clear that it wants to see rival factions settle the dispute as a first step toward unlocking international transactions with the Bank.
Settling the dispute would mean getting all the parties to approve an interim governor with the experience to manage a Central Bank, pending a permanent resolution, said a U.S. government representative who follows the matter closely.
As to whether this deal should stick to the letter of the Libyan Political Agreement that envisages consultations between Libya’s rival assemblies, he underscored that besides the requirements for such an agreement, the Presidential Council should also sign off. The important thing is “ending the dispute between all parties”.
France and the UK have joined the U.S. in calling on everyone concerned to reach a compromise. On 26 September, the UN greeted news of the preliminary agreement signed by representatives of the House of Representatives and the High State Council as “positive and promising”.
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