8 October 2018

Libya's New Economic Measures Must Be Wedded to Deeper Reform

analysis

Reforms that seek to reduce the opportunities for diversion of state resources are welcome. But without addressing structural issues, their impact will be no more than temporary.

Last month, the leaders of Libya's Government of National Accord (GNA), the Central Bank of Libya (CBL) and the High State Council agreed a long-awaited package of economic reforms.

But, without accompanying structural reform they can at most offer a short-term fix. The recent fighting in Tripoli illustrates the inextricable links between control over the distribution of state revenues and conflict. A sustainable political settlement must therefore include economic components.

Long-anticipated reform

One of the principal goals of the reforms announced on 12 September is to curb profiteering from the state's resources by those who can access foreign currency at the official rate (1.38 LYD=1 USD) and sell at the black-market rate (currently 5.3 LYD=1 USD). The margin has provided the opportunity for a wide range of scams, most notably through documentary letters of credit opened for the import of goods.

In order to curb such schemes, a fee will be applied to foreign currency transactions - with some exceptions - to reduce the margin, so that the price paid for transactions at the official rate will effectively be nearer 4 LYD=1 USD.

This falls short of the currency devaluation that many economists have called for, with the collection of significant amounts of money in 'fees' potentially offering the opportunity for yet more diversion of funds. And the immediate impact on the market may be to increase prices if businesses pass on higher costs.

Subsidies - in particular those for fuel - are also set to be reviewed as part of the reforms. To offset what could be significant impact on people's budgets if subsidies are curtailed or removed, an extra $500 is to be provided to annual family allowances.

The influx of more dollars into the market is likely to lead to the dinar becoming strengthened against the dollar. But when this has happened previously the reduction has been short-lived.

So while these economic reforms may relieve some of Libya's economic woes, they do not offer the potential to resolve them, and may actually make things worse for some, if the changes lead to price increases. And the power of those who control Libya's illicit marketplace - both through violence and corruption - should not be underestimated.

A chance to increase transparency

News of the economic reforms has overshadowed another significant development. On 10 July, Prime Minister Fayez al-Serraj wrote to the UN Security Council to request a review of the 'revenues, expenditures and transactions' from both the Central Bank in Tripoli and its rival based in the east, an unprecedented move.

The terms of the review are yet to be made public. Current indications are that the process will take the form of a light-touch review, falling short of a full audit that would require the corroboration of the banks' accounts and disclosures. The review is seen as a political opportunity to promote reunification of the central bank, which has been split since 2014.

The governor of the central bank, Sadiq al-Kabir, met with Ali al-Hibry, the head of the eastern bank, in August for the first time in three years as a result of the push by the UN, fuelling rumours that reunification of the rival institutions may be a possibility. A reunified CBL would make economic management, budgeting and financial reform more effective both in terms of procedure and implementation across the country, as well as being a critical element of restoring functioning governance.

Yet, such political opportunities must not entirely obscure the potential to introduce a modicum of transparency into Libyan state expenditure. This is significant given that the distribution of Libyan state revenues is among the most opaque in the world. Greater transparency would at least make the diversion of state funds more difficult to hide.

Reform must address the distribution of resources

But short-term reforms and transparency have their limits.

The hyper-centralized nature of Libya's institutional framework means that to control state institutions in Tripoli is to control of the distribution of state revenues, as recent violence in Tripoli and Libya's oil crescent illustrate. Changes to the means of accessing funds in Tripoli does not resolve this underlying issue, which is a driver of conflict.

As I have argued previously, efforts to reduce the opportunities for those to profiteer from Libyan state resources and to reunify Libyan institutions are worthy endeavours. Nonetheless, the UN and its international partners must seek to wed short-term approaches with attempts to support more substantive reform.

Such reform is inherently political and therefore can only be achieved as part of a political settlement, rather than in the aftermath of one.

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