Libyan banking crisis looms says International Crisis Group, suggests connection with LNA’s Tripoli move – Al Marsad

Libya, 20 May 2019 – There is an imminent banking crisis in Libya as a result of moves by the Central Bank of Libya (CBL) to starve eastern banks of funds that, if not dealt with immediately, could result in massive incremental financial pain throughout Libya and the current war dragging on.

The stark warning has come from the International Crisis Group (CG). A CG report published today predicts that if nothing is done, there could be major restrictions on foreign currency availability, an inability to process imports, a return to dependence on the black market and extortionate exchange rates, rampant inflation, a rush withdrawal of bank deposits across the country and a number of banks collapsing.

Tripoli’s FX Tax as a mechanism to force eastern commercial banks to run down their reserves with CBL West may have appeared to make sense to the powers there as a means to bring the east, including the LNA, to its knees , but as the report says “the risks to the country are grave.”

The economic fallout from such sanctions “could increase liquidity problems, send prices skyrocketing, give a boost to black market trading and possibly give way to a protracted resource war”.

It also warns that the LNA may respond to the moves to stop funds being transferred to eastern banks to pay salaries by stopping oil production and exports.

“Failing to resolve the banking crisis could provoke Haftar to use his control of oil fields and terminals to starve Tripoli of oil income. This would deepen the de facto split between east and west and possibly become a prelude to partition.”

Warning that the imminent crisis is being ignored, it also says that “without immediate steps to rectify the situation, commercial banks are bound to fail and the dispute over the allocation of oil revenues will come back with a vengeance, prolonging the war”.

There have already been consequences, the GC believes.

CG documents that by March 2019 decision-makers in the east appear to have realised their error of having “initially applauded the financial measures [the FX tax] adopted by Tripoli”. The report notes that when the tax was announced, the east “acknowledged that the fee-based system was a step in the right direction” despite the fact that  international experts had called for the dinar to be devalued and noted that the tax  went “against international best practices”.   Equally, by 4 April , when Field Marshal Hafter launched his offensive against Tripoli, the inevitable medium-term consequences of the FX tax on the continuing viability of the east’s commercial banks would have been broadly realized at the highest level in the east. It would have been clear that the need to have cash to pay for LNA salaries and other military costs demanded resolute action.

“Haftar’s desire to seize control of the Central Bank and state assets possibly contributed to the timing of his offensive,” it says.

It quotes Ali Hibri, the government of the parallel, eastern-based CBL, speaking in mid-March, predicting that the LNA might have to move.

The Eastern CBL

“Speaking in mid-March, just weeks before Haftar-led forces launched their offensive on Tripoli, Hibri painted an apocalyptic picture of what might happen [if the banking crisis were not resolved]: ‘A state of panic is possible. There could even be a second revolution here”, he said, referring to a possible uprising against Tripoli. He also warned that ‘if no solution is found for these banks, the LNA is likely to react’.”

Despite the fact that the whole country could suffer, CG notes that there is still a determination in Tripoli to squeeze the east financially.

Officials in Tripoli, it says, “increasingly are talking about taking all possible measures to curb the LNA’s financial resources, including by removing LNA military officers from the Tripoli payroll and even stopping paying the salaries of civil sector employees in the east. Speaking in late April, the interior minister in Tripoli said: ‘We have the database of all public sector employees, and we can suspend salary payments to all those based in the east. And we should. Let them understand the consequence of their actions’.”

Moves taken late last month by the Tripoli CBL could worsen the situation, CG says.  “In April, a four-year split between the Central Bank in Tripoli and its eastern branch came to a head as Tripoli started enforcing restrictions on several eastern state-owned commercial banks. If continued, the measures could compromise the east-based government’s ability to pay employees and Haftar’s forces.”

The GC’s analysis of the situation and warnings of an imminent possible banking failure and economic agony ahead, not just in the east, plus its view that the LNA’s offensive may have been in part a reaction to what was being done financially have raised questions as to why this was allowed to happen.

While it might have outwardly appeared to make political sense to the authorities in Tripoli to sanction the east financially, the wider consequences appear not to have been foreseen by the decision-makers in the west of Libya, or alternatively were ignored by Libya’s bankers and economic experts as well as by their international partners.

If, as the report suggests, the LNA took action at the beginning of April in part because of fears of an imminent cut-off in salary payments to many of its members, then the war – and the deaths of over 400 people can be said to be the result of the failure to foresee the consequences.

Which then begs the question: why were the domestic and the international experts such as the US Treasury, The World Bank and the IMF, all of them in possession of, or enjoying access to the sophisticated models drawn up for the Libyan Country Engagement note drafted soon after the Fourth Libyan Expert Meeting in January 2018 in Tunis, so remiss?

The CG full report is here.

Related Posts