In economic reforms, a chance for Libya to move forward

Claudia Gazzini

Senior Analyst for Libya at International Crisis Group, an independent conflict prevention organisation

Despite the obvious tie between the economy and Libya’s general decline, efforts to address the conflict’s economic aspects have often taken a back seat to political and security measures.

Without minimum progress on the economy, attempts to forge a political deal that will stop the fighting in Libya cannot succeed. An international gathering next week in Italy, featuring Libya’s four main competing leaders, offers a rare chance for united progress on the economic front that must be taken.

Libya’s deepening economic crisis sparked two major armed confrontations this summer: a stand-off over control of oil revenues in the Gulf of Sirte on the northeastern coast in June and July, and recurrent militia attacks on the capital, Tripoli, since August.

The flare-ups took place hundreds of miles apart, but in both cases armed actors exploited public discontent over financial hardship and the widespread belief that a handful of armed groups are looting the country’s wealth to justify their own ambitions to control Libya’s economic institutions though force, killing and forcing thousands of civilians to flee their homes in the process.

The violent clashes made headlines outside of Libya, but internally they forced economic issues onto the front burner – where they should be. Every Libyan has been impacted by the steady deterioration of Libya’s economy since 2014, and accusations that the militias controlling Tripoli have embezzled public funds have prompted widespread anger.

Without minimum progress on the economy, attempts to forge a political deal that will stop the fighting in Libya cannot succeed.

As a result of poor economic governance, the Libyan dinar has plummeted (7 dinars to the US dollar on the black market, compared with the official rate of 1.3 dinars to the dollar). This means Libyans have a persistent cash liquidity crisis – taking more than 500 Libyan dinars a month (less than $90) out of the bank is nearly impossible – at the same time as their ability to buy basic goods has fallen. The price of consumer goods like food and clothing rocketed by a record 28 per cent in 2017 alone. In a bakery in downtown Tripoli in October, people complained that the price of bread, which is Libya’s main staple food, had almost doubled over the past two years.

There is some hope: new economic reforms now being rolled out by Prime Minister Fayez al-Serraj, head of the UN-backed government in Tripoli (Libya has several bodies vying for power), are not only the first such measures since the fall of Muammar Gaddafi and his regime since 2011. They are also a key step in the right direction for Libya. But they do not go far enough.

The reforms have two main objectives: to reduce the gap between the official and black market exchange rates, from which militias and political actors have profited, and to ensure easier access to foreign currency through the official banking system.

So will the reforms make a much-needed difference in the lives of average Libyans? Officials say these are the best they can implement in the current circumstances, but I was in the country when the government rolled out the new measures in early October, and people had strikingly contrasting views about them.

Shopkeepers were optimistic that the reforms would improve business, particularly as the black market rate dropped by 20 percent after they were introduced. A major importer was beaming when I met him soon after his bank had processed a $10 million letter of credit: “This would have been impossible before the introduction of these new procedures,” he said.

Many others sounded more sceptical. Young entrepreneurs complained that any positive impact would likely be short-lived. A senior official and mother of three called the measures “an outright lie,” arguing that the problems that affect ordinary Libyans – mainly limits imposed on cash withdrawals and high prices – will persist.

The reform package’s most controversial aspect is a 184 percent service fee imposed on all purchases of foreign currency for commercial or personal transactions. This measure, which in effect creates two official exchange rates, is a gamble.

International experts advised against the service fee, warning that it holds great potential for abuse, particularly since the government can create exemptions to the fee. These could provide powerful militias yet another opportunity to benefit from privileged access to the lower, fee-free exchange rate and deplete state coffers. Moreover, there is too much uncertainty about how the government will spend this revenue, an estimated $15 billion per year.

Overall, the measures fall short of preventing armed groups and powerful actors from defrauding the state. They do little to discourage attempts to change the status quo through violence or create a conducive environment to negotiate solutions to the disputes dividing Libya since 2014. They have also reduced external pressure to make progress on the reunification of the Central Bank of Libya, split since 2014 into two rival branches, or to adopt a sounder long-term policy, including preparing for a proper devaluation of the dinar.

In short, the reforms are not perfect, but with some adjustments, they offer the best hope Libya has to move forward. The next international meeting on Libya in Palermo, Italy, on 12-13 November offers a prime opportunity for Italian convenors and Libyan and international participants build on the reforms’ benefits, a move that will require both transparency from Libyan stakeholders and a concerted message from external actors.

Libya’s international backers should pursue three measures. First, they should ensure that the Tripoli government limits exemptions to the service fee and is transparent about how it will use this income. Second, they should persuade the government to pursue more comprehensive policies like subsidy reform and devaluing the dinar. And finally, they should press Libyan stakeholders to take concrete steps to unify the Central Bank of Libya, starting with convening its board and resolving a longstanding dispute over its leadership.

Emphasising the unification of Libya’s economic institutions would send a strong signal that international partners are serious about bridging divides and enacting long-term reforms. Short of this, half measures could backfire.

While the details are about exchange rates and banking, it’s important to remember what’s at stake for Libya’s 6.5 million people is much broader: Renewed grievances over persistent poor living conditions, cash shortages and widespread corruption will stunt progress on the political transition and make future violent confrontations more likely.

(TOP PHOTO: An internally displaced Libyan man sits at a warehouse where WFP food rations are being distributed in Tripoli. CREDIT: Mohamaed Ben Khalif/WFP)