Libya’s banking woes escalate with conflict

The Libyan public debt exceeded 100 billion dinars ($71.4 billion), which is more than annual GDP.
Sunday 09/02/2020
People sign up at a bank for a $500 annual allowance that provides a lifeline for many Libyan families struggling to make ends meet in Tripoli.         (Reuters)
Confidence crisis. People sign up at a bank for a $500 annual allowance that provides a lifeline for many Libyan families struggling to make ends meet in Tripoli. (Reuters)

TUNIS - Banks in Libya have been foundering for years under the weight of worsening chaos and UN Envoy Ghassan Salame warned of an economic collapse because of increasing debts and the banking system deficit.

Salame told the UN Security Council that “the dispersion of the institutions and the inability to enact a unified economic policy exacerbate existing challenges and create new challenges.”

He said Libyan banks are finding it increasingly difficult to operate under the supervision of two competing central banks and some face an interruption of cash supplies.

Libya has been divided since 2014 between two competing governments and military alliances, one in the east and the other in Tripoli. This has affected major institutions, such as the Central Bank of Libya and the National Oil Corporation.

The banking sector is going through a confidence crisis as Libyan citizens become weary of unmet promises of better services and solutions for the liquidity crisis.

The Libyan House of Representatives in Tobruk accused Central Bank Governor Sadiq al-Kabir and National Oil Corporation Chairman Mustafa Sanallah of unilaterally allocating and disposing of oil revenues without consulting legislators.

Libyan sources said many commercial banks, especially in eastern Libya, are no longer able to fulfill their obligations.

“The banking crisis due to the lack of liquidity has affected most Libyan families and this reality is complicating people’s lives,” said Sami Ashour, a Libyan living in Germany, referring to the increased difficulty for people and businesses to obtain cash from banks. Crowds gather daily in front of banks in most parts of the country and sometimes people wait weeks before they’re allowed to withdraw funds.

Ashour said cash transfers to and from Libya had also been affected, a situation also mentioned by Libyans residing in Tunisia.

There had been signs of the worsening crisis for years. In September 2018, the Central Bank of Tripoli imposed severe restrictions on the sale of hard currency for personal, therapeutic and educational purposes. The bank set a ceiling of 14,000 Libyan dinars (about $10,000) per individual per year, generally considered insufficient to meet the cost of living in some countries to which Libyans had fled.

The Union of Arab Banks Union said the Libyan banking system includes 16 local banks, including the Libyan Foreign Bank and Al-Wahda Bank; 14 Arab banks, including the Bahrain Arab Banking Corporation and the Egyptian Piraeus Bank; and eight foreign banks, notably the British HSBC.

Because of the unsettled situation in Libya, it is difficult to determine the volume of the annual transactions for the banks. There are no official data about movement of funds in the banks or about their profits.

Suleiman al-Shehoumi, a Libyan financial expert in London, recently posted on Facebook that “the economic situation (in Libya) is getting more complicated by the day in the absence of a clear will to impose a comprehensive solution instead of making arrangements that are driving the economy under.”

He said the banking situation in Libya was “similar to the situation in Lebanon in the speed with which it is deteriorating and being exposed because of the economy’s total dependence on the dollar.”

He pointed out that, because the monetary situation is “separated from the economic situation,” there were divisions in the Central Bank management and that caused “serious damage” to the Libyan monetary system.

Because the interbank clearing system, under the control of the Central Bank, has been suspended, there was a decrease in the balances of various banks with the Central Bank in Tripoli, which affected their ability to meet requests for dollars.

Shehoumi said the chaos threatened to restrict foreign exchange operations at some banks at the expense of the others. He said the situation was worsened by the race to print more paper money by both Libyan governments without regulation or coordination and without keeping accurate records of amounts dispensed.

Official estimates indicate that the Libyan public debt exceeded 100 billion dinars ($71.4 billion), which is more than annual GDP. Analysts said they expect the upturn to continue.

The Central Bank in Tripoli has had to withdraw from its cash reserves, which have fallen rapidly, to cover import bills, pay salaries and maintain subsidies. Figures indicate that nearly $80 billion of the country’s reserves of hard currency had been used in recent years. Before the crisis, Libya had $130 billion in reserves.

Both Libyan governments have tried to placate their grass-roots bases by increasing salaries and government support, both known allocations and hidden ones.

World financial institutions and international rating agencies pointed out that the political turmoil in Libya was reflected in competition between both governments to reduce fees and taxes and that had narrowed the government’s revenue base. That led to the state’s almost complete dependence on oil exports, which suffer from frequent interruptions.

In addition to the fluctuations in oil production and the fall in oil prices since 2014, the banking sector situation was exacerbated by the widening gap between the official exchange rate for the dinar and rates on the black market.

The prices of foreign currencies vary widely by region depending on political and security conditions. In Tripoli, for example, the US dollar is exchanged at the rate of about 4.38 dinars, while it is around 5 dinars in other regions.

Ports and oil fields in Libya are exposed to attacks and uncontrolled protests to pressure on authorities in Tripoli, which decreases production.

The World Bank has revealed a 3-year plan to save the Libyan economy and overcome obstacles of divisions between East and West and the decline in oil exports. The strategy focuses on restoring basic services, enhancing capabilities of sovereign institutions in Tripoli to manage public funds and restructuring the financial system.

It includes a plan to start reconstruction of devastated areas, develop the private sector and support its partnerships with the public sector, in addition to providing financial support for small and medium-sized enterprises.

“We want regular electricity supplies and quality services in education and health care and to accelerate the recovery of the economy by strengthening the management of public funds, as well as developing the financial sector,” said Marie Francoise, director of the Bank for the Middle East and North Africa.

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