Foreign Relations & International Law

Libya's Monetary Crisis

Jalel Harchaoui
Wednesday, January 10, 2018, 9:00 AM

To many Libyan households, the top security threat plaguing their daily lives isn’t the risk of being caught in the crossfire between contending militias, falling victim to a jihadi group, or being kidnapped for ransom. A more unrelenting consequence of Libya’s dysfunctional politics is its monetary crisis. The principal manifestations—chronic shortage of dinar banknotes, along with a weak valuation of the Libyan currency in the black market—first emerged in 2014. Unlike the ongoing civil war, which also began in 2014, the monetary crisis has consistently intensified through the months.

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To many Libyan households, the top security threat plaguing their daily lives isn’t the risk of being caught in the crossfire between contending militias, falling victim to a jihadi group, or being kidnapped for ransom. A more unrelenting consequence of Libya’s dysfunctional politics is its monetary crisis. The principal manifestations—chronic shortage of dinar banknotes, along with a weak valuation of the Libyan currency in the black market—first emerged in 2014. Unlike the ongoing civil war, which also began in 2014, the monetary crisis has consistently intensified through the months.

In Tripoli—where the population has swollen by one-fourth since 2011, to almost three million with the arrival of displaced families from other Libyan cities—hundreds of people stand in line daily from 10 at night until the morning to withdraw their paycheck money from the bank. They often go home empty-handed. Similar scenes occur in Tobruk, Sirte, and elsewhere. The long waiting lines at banks sometimes degenerate into violent incidents, including shootings by the local militias that claim to “protect" the bank branch. Those armed groups portray themselves as committed to law and order, but often engage in embezzlement and arbitrarily influence the distribution of money. As many Libyans suffer, luxury stores in the capital city are reminders that a sliver of the population is thriving financially.

How did this happen? Lack of physical security, although real, is not the root cause behind Libya’s monetary crisis. Rather, it has been the byproduct of a large government bureaucracy, unsustainable levels of welfare spending, and polarized governance.

After 2011, A Bloated Public Sector

Libya’s first post-uprising year—2012—was a good year for the country’s hydrocarbon sector. That, coupled with the return of pent-up private demand in non-oil sectors, boosted the unadjusted gross domestic product for that year to $82 billion—more than double 2011’s figure and 9 percent above 2010’s. Importantly, Libya enjoyed access to over $100 billion of foreign-exchange reserves it had accumulated during the 2004-2010 period that had been frozen by Western powers in February 2011. After the 2011 war ended in October of that year, much of Qaddafi’s public-welfare system was kept. Deeply-ingrained reflexes of misappropriation, clientelism, and corruption remained, too. The interim government did not contemplate austerity measures. In fact, Qaddafi-style welfare expenditures were increased to new extremes. The post-2011 period, dominated by both complacency and a desire to “buy” calm and loyalty, saw government-payroll fraud, a practice that existed in Libya before, explode to over 300,000 duplicate salaries, almost a sixth of the country's entire labor force. Public-sector payroll went from $6.6 billion in 2010 to almost triple that, reaching $19 billion in 2014. Separate from the profligate spending on state salaries, $25 billion was spent between 2011 and 2014 on fuel and food subsidies. (Last year, Libya’s official wage bill, at $14 billion, and subsidies, at $4 billion, remained high.)

Oil Production, Interrupted

The summer of 2013 saw armed groups purposely block hydrocarbon infrastructure. Oil production fell from 1.45 million barrels per day (bpd) in May 2013 to 220,000 bpd in November 2013. It would recover to 900,000 bpd briefly, but an important precedent had been set. Not only had central state failed to stop the blockaders, parts of the political elite tolerated or backed them, thereby giving their operation the aura of an acceptable means of grievance. The practice soon spread across the country. Since 2016, the National Oil Corporation’s leadership has made progress minimizing the phenomenon, but, to this day, blockades still routinely dent oil production. During 2013-2016, the suppression of hydrocarbon revenues sent the nation’s balance-of-payment deficits soaring. To plug the gap, the Central Bank of Libya (CBL) burned through its foreign-exchange reserves. With the country’s sole wealth-producing sector choked, a large part of the Libyan economy became reliant on the consumption of savings from prior years. The nerve center of this dynamic has been the CBL, acting as Libya’s de-facto treasury department.

At the helm is Sadiq al-Kabir. The banker was born in 1951 to a western-Libyan family in Tunisia, and officially became the governor of the CBL in September 2011. During the uprisings, Kabir was close to Mustafa Abdul Jalil, the leader of the rebel National Transitional Council. Throughout the last six years, Kabir has been the only person in control of Libya’s foreign-exchange reserves. At different stages since 2011, he has been accused of being politically partial to the Muslim Brotherhood, Misrati business moguls, Prime Minister Ali Zeidan (2012-2014), the rump General National Congress in Tripoli (2014-2016), and—more recently—its rival anti-Islamist faction in eastern Libya. Since 2014, the Eastern-based government has tried on several occasions to remove Kabir. The central banker has managed to cling to his seat at every turn. Last month, however, the parliament in eastern Libya designated a new governor, Mohammed Shokri, a seasoned banker with credible experience. This time, a still-defiant Kabir may lose his job.

Scarcity of Dollars

Owing to the oil-facility blockades by militias on the one hand, and the fall in oil prices on the other, Libya’s revenues collapsed from $52 billion in 2012 to less than $5 billion in 2016. (Based on 2017’s first 10 months, oil revenues for all of last year will likely amount to $12 billion.) While government revenue fell by 90 percent between 2012 and 2015, public expenditures were reined in by only 40 percent. As a result of the disconnect between revenues and outlays, Libya’s foreign-exchange reserves dropped from $108 billion in 2013 to $57 billion by the end of 2015. The $51-billion fall in reserves over just 24 months engendered a general loss of confidence in the dinar.

Seeing the official exchange rate become increasingly unsustainable, speculators “front ran” the trend by selling dollars at a more expensive rate against the dinar on the black market. Traffickers used letters of credit to acquire hard currency cheaply, and illegally, from the state itself. In Libya, letters of credit are a form of state subsidy meant to let legitimate commercial-bank customers convert dinars into dollars at the official-exchange rate of about 1.40 in order to purchase goods abroad. Thanks to the willful or forced complicity of some bank managers, an enormous percentage of the letters of credit have been awarded to a handful of traffickers. These con artists do not import the announced goods; instead, with the assistance of corrupt customs officials, they produce fraudulent bills of lading to have the Libyan bank wire the letter’s dollar amount abroad and then import part of that dollar amount in the form of physical cash for the purpose of selling it in Libya’s parallel market at a much higher exchange rate than 1.40. Armed groups play a role of intimidation and retaliation in this process. The threat of the use of violence partly explains why some state officials have failed to take decisive action to ameliorate Libya’s monetary crisis. Others are corrupt and taking a cut. The U.N. Special Representative for Libya Ghassan Salameh summarized the complicity of government employees: “The main obstacle [to solving Libya’s economic crisis] is what I call the ‘status quo’ party. That is to say: politicians, armed-group leaders, traffickers and gangsters who in effect cooperate every day to plunder their own country.”

In a bid to limit access to the official exchange rate and slow down the depletion of its currency reserves, the CBL has reduced the overall supply of dollars in an arbitrary manner. To avoid hurting one illicit network as opposed to another, Kabir has stalled almost all letters of credit across the board, including legitimate ones. With the CBL’s stricter policy, it has become nearly impossible for ordinary requesters to convert dinars into hard currency through official channels. Only a small minority of well-connected actors can. The curbs have made dollars pricier in Libya’s black market. Today, the dollar changes hands in the parallel market at around 9.5 Libyan dinars, compared to around 1.45 in June 2014—which is to say, the dinar has lost 85 percent of its dollar value in the last three and a half years.

No Reason to Take Dinars to the Banks Anymore

The growing difficulty of obtaining hard currency through official channels sparked a run on the banks. Such a reaction is to be expected in an environment where access to dollars is vital. In Libya, virtually all goods are purchased overseas using hard currency. When the CBL restricted convertibility, shopkeepers and small-business owners—soon imitated by households—responded by taking their money out of the banking system altogether. Given that dollars are no longer made available through official channels, merchants and households now see no reason to take their dinars to the banks anymore. Instead, they keep a substantial amount of their money in the parallel market. Black-market traders hold dinars on informal deposit for them. Using a hawala-type network, they also perform transfers and other services. They even buy bank checks from end-users at a fraction of their face value.

The volume of goods changing hands in the black market has grown and, reflecting the dinar’s weakness against hard currency, nominal dinar prices there have soared. This has been exacerbated by the CBL’s decision to cut or suspend food subsidies in large parts of the country. Libyans I spoke to in November 2017 said they must now pay around 100 dinars for a 50-kilogram bag of flour on the black market, as compared to 2.50 dinars a little over three years ago. A Reach Initiative survey found that food prices rose by 11 percent from June through October 2017 alone.

The three phenomena—runaway inflation, the black market’s growing size, and reflexive hoarding by households—caused supplies of physical dinar banknotes to dry up in Libya. Today, in most cities, bank branches still open have imposed cash-withdrawal limits of about 700 dinars per month per account. Those in peripheral cities, like Derna or Ubari, have had no cash deliveries for many months at a time and shuttered their doors. Some daily transactions are now conducted in dollars, a phenomenon called informal dollarization, which will be difficult to roll back.

The political rivalry between the Central Bank in Tripoli and the Central Bank’s branch based in the eastern town of Bayda has only made the crisis more difficult to resolve. The two power centers have independently commissioned the production of billions of new dinars. While Tripoli used its traditional printer in England, Russia obliged the eastern faction’s request to manufacture similar banknotes. This lack of coordination between Kabir and his challenger in Bayda gave Libyans yet another reason to distrust their country’s banking system.

Meanwhile, the billions’ worth of new dinar banknotes injected have done nothing to alleviate the shortage. By increments, the authorities have added to the amount of physical cash in circulation outside of the banking system, taking it from LDn 8 billion as of late 2010 to LDn 25 billion as of late 2015. It currently stands at over LDn 30 billion. Irrespective of how many dinar banknotes commercial banks distribute to their customers, only a tiny percentage of it comes back into the system. Shopkeepers’ and consumers’ confidence in banks has collapsed across the country. One tool governments use in such circumstances to attract funds back to banks is to increase interest rates. However, in Libya, interest rates became prohibited in 2013 when political factions inspired by Sharia banking introduced Law Number One, which bans usury. (Several Islamic countries, such as Egypt, Kuwait, Algeria, and Jordan, do utilize interest rates.)

A Way Out of the Crisis?

Because it is uniform neither geographically nor across social classes, the dinar crisis deepens the fragmentation of Libyan society. The illicit networks feeding off of the dollar trafficking and the distribution of banknotes help sustain rogue actors. That, in turn, undermines efforts to build state capacity.

Some high-profile business owners in Libya have campaigned for a devaluation of the dinar in the country’s official banking system. Either piecemeal or in one step, the dinar’s official rate would be changed from 1.4 dinars to the dollar to about 4.5. On November 14th, the CBL said it envisaged setting the new official exchange rate between 3 dinars and 5.75 dinars to the dollar. Such a devaluation alone will not end the crisis. To revive liquidity and repair trust in the banking system, the CBL must also ensure an explicit and large amount of hard currency be made accessible at the new exchange rate to ordinary users, including small merchants and vulnerable citizens. Lack of actual access to the Central Bank’s official foreign-exchange facility has been a key problem.

Libya’s monetary crisis is a crisis of confidence and governance. This was vividly illustrated by the dinar’s continued slide against the dollar throughout 2017, despite the fact that public expenditures shrank and Libya’s National Oil Company (NOC) managed to double the amount of oil it produced between April and July last year. (The NOC funnels the dollar proceeds from all official sales of hydrocarbons into the CBL in Tripoli.) Irrespective of those fiscal improvements, the dinar has not rallied in the black market in 2017; instead, it has depreciated by 35 percent. Moreover, various electronic-payment applications have failed to make a dent into the banknote-shortage problem. Unity, in conjunction with clear communication and coordinated technocratic execution, are necessary to ameliorate the dinar crisis. Such measures are unlikely to be taken because of the politicized and fragmented nature of Libya’s Central Bank as it stands today. An even greater obstacle is corruption—in customs, law enforcement, politics, and across the banking system itself.

Unless genuine political dialogue is achieved, Libya’s monetary crisis is likely to persist through 2018, whether or not the CBL announces a devaluation of the official exchange rate. If its severity doesn’t recede, it may delay peace and fuel more predatory behavior from armed groups. The result will contribute to rendering entire swaths of the country even more ungovernable than they have already become.

Jalel Harchaoui is an analyst specializing in North Africa. He has written extensively on the Libyan crisis’ international dimension in Foreign Affairs, Politique Étrangère, Small Arms Survey, War on the Rocks, and other outlets.

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