Brokering a solution to the Libyan Central Bank crisis

The ongoing effort by various factions in Libya to gain control of the Central Bank of Libya (CBL) poses a clear and present danger for the entire country, threatening its safety and security as well as its economy. Already, the crisis over the control of the CBL has resulted in the closure of 60% of Libya’s oil production, whose revenues are supposed to flow through the bank, with some 700,000 barrels a day of production halted and further shutdowns imminent, leading to an immediate spike of 7% in global oil prices.

If the conflict is not resolved, millions of Libyans who rely on the CBL to ensure the payment of their salaries and the letters of credit essential to providing them billions of dollars a year in imported fuel, cooking oil, and food will face immediate shortages, as already reflected in reports of seven-mile-long lines at some Libyan gas stations. Indeed, the United Nations Support Mission in Libya (UNSMIL) is warning that the situation “risks precipitating the country's financial and economic collapse.”

The CBL’s central role in Libyan life

Throughout the chaotic period and dysfunctional politics that have characterized Libya since the 2011 uprising against Moammar Gadhafi, the CBL has been one of two institutions central to maintaining the country’s economy, the other being Libya’s National Oil Corporation (NOC). The NOC provides some 97% of Libya’s export earnings, through pumping roughly 1.2 million barrels a day of oil to generate $20 billion-25 billion in recent years, despite recurrent politically driven production shutdowns. Under Libyan law, these revenues are supposed to be deposited into the CBL for distribution under government-approved budgets in four major categories: salaries, grants, operating expenses, and development projects. Salaries for government employees, including members of Libya’s array of military forces, have been the biggest item in the budget for years, constituting about two-thirds of the CBL’s total transfers.

Thus, for Libya, oil revenues remain the lifeblood of the economy, with the CBL acting as the heart that keeps this lifeblood flowing. To follow the metaphor, attacks on the CBL, and its ability to keep the money flowing, are for Libya’s economy the equivalent of heart attacks — dangerous and potentially crippling or worse.

The CBL and its governor, Sadiq al-Kabir, have faced their share of troubles over the 12 years he has remained in place. During that time, he has survived divided governments, the breaking away of the bank’s Benghazi offices to create a parallel institution for funding eastern political and military groups, and recurrent efforts by various Libyan factions to replace him with people who could be more easily controlled. But throughout these stresses, Kabir managed to preserve the CBL’s quasi-independence from Libyan politics, and he kept Libya’s sovereign wealth safe from some of the efforts to raid its budget, even as critics spoke darkly of corruption — especially alleged abuses of letters of credit by favored importers and government contractors.

Dueling charges of corruption and abuse

Kabir’s independence has played a primary role in the current effort to remove him. In February, the CBL governor made public his differences with Libyan Prime Minister Abdul Hamid Dbeibeh over spending. In a letter, he criticized Dbeibeh for promising salary increases and other public spending that would exceed the country’s income; moreover, he pointed to the continued loss of value of the Libyan dinar against other currencies. In response, Dbeibeh accused Kabir of dishonesty and corruption, opening the door for the further politicization of the CBL and leading to the current fight for control.

The smell of blood in the water attracted additional Libyan sharks. These included Libya’s Presidential Council (PC), operating in concert with the Dbeibeh government; the Tobruk-based House of Representatives; the Tripoli-based High State Council; the Benghazi-based Libyan warlord Khalifa Hifter and his sons; as well as Tripoli militias and ministries with the power to determine which would be in physical possession of the CBL’s offices. At various times, each of these groups have played politics over the CBL, either to grab more of its resources or to prevent them from going to anyone else.

Warring governmental bodies and increasing violence

Efforts to take over the bank from Kabir came to a boil this month. In mid-August, armed men tried to take over the CBL’s Tripoli offices. On Aug. 16, an unidentified group entered the home of a key CBL official who possessed the passwords needed to access its payment systems and kidnapped him. In response, Kabir shut down the CBL on Aug. 17, which secured the official’s release the following day. In response, the head of Libya’s PC, Mohammed Menfi, appointed a new board to the CBL and announced that Kabir had been fired and replaced. This decision was swiftly followed by physical raids on the CBL offices by unidentified armed men and then placed under the control of the Ministry of Interior, whose head was appointed by Dbeibeh.

The effort to grab control of the central bank by Menfi and the PC and their unilateral effort to appoint an entirely new CBL board of directors was promptly rejected by the two parts of Libya’s legislative branch, the House of Representatives and its High State Council. Their leaders stated that they alone had the right to appoint a new head of the CBL. As the fight over the CBL intensified, forces in Libya’s oil crescent, supported by the president of Libya’s internationally unrecognized eastern government, closed oilfields, essentially shutting down Libyan petroleum production. Simultaneously, the CBL itself reportedly curtailed its operations, preventing some Libyan banks from conducting routine banking activities. According to one report, Western Union consequently suspended its international payment operations in Libya.

Amid additional kidnappings of CBL staff, Kabir reportedly left Libya for Turkey, taking with him critical personnel who hold the keys to the central bank’s operations, thereby getting them out of harm’s way. Meanwhile, a new acting governor, Abdul Fattah Ghafaar, who had just been appointed to be a deputy governor, announced that he was now in charge of the bank. In response, Kabir referred to his successor as an illegitimate “usurper,” declared his decisions to be “void,” and ordered CBL personnel to leave their offices and not come back until the “criminal” takeover was rectified. Notably, the person who was appointed to be the governor by Menfi and the PC to replace Kabir, Muhammed al-Shukri, announced that he would not accept the position so long as there were disputes about who had the right to appoint him to the job, saying that preventing bloodshed was worth more to him than any government position.

The current impasse

As of late August, Kabir continues to control access to the CBL’s information and payment systems, but he can no longer enter the CBL without the risk of being immediately arrested. The new acting Central Bank head and the new CBL board have no control over the bank’s systems — only its physical offices — nor, it appears, even much of its staff. The situation threatens domestic as well as international payments. Given Libya’s dependence on imports for basic daily needs such as food, as well as the payment of people’s salaries, this risks a rapid descent of an entire country into a maelstrom of instability and potential collapse.

With rumors swirling that various militia groups are preparing to engage to retake the Central Bank offices by force, the UNSMIL called for an emergency meeting of all involved parties to reach a consensus on a solution. Moreover, it demanded the suspension of all “unilateral actions” relating to the CBL, the reopening of oilfields, a halt to military escalation and the use of force regarding the CBL, and guarantees of the safety of CBL employees to protect them from arbitrary arrest. The statement was immediately backed by the United States Embassy in Libya.

Finding a path forward

All of Libya’s political institutions are at this point jerry-rigged. Neither of the two internationally recognized interim governments based in Tripoli that came into existence, since 2015, through flawed UN-brokered processes have ever had unitary control of Libya's territory. Control in the eastern coastal region, and much of the south, has been exerted instead by Hifter and his sons, with military and political backing from Russia, Egypt, the United Arab Emirates, Jordan, and, from time to time, France. The various eastern governments, not recognized internationally, have also had the economic backing of Russia in the form of billions of counterfeit dinars. While Kabir is being blamed for higher prices and a decreased value of the dinar, an obvious factor in helping to devalue the dinar and reduce its purchasing power for ordinary Libyans has been the introduction and use of these currency notes over an eight-year period by the Hifter-controlled parallel Central Bank in Benghazi, without disclosure or controls. In recent months, domestic counterfeiting — allegedly undertaken by members of the Hifter family — has further undermined Libya’s currency.

Kabir still has a few cards to play. In addition to physically holding the keys to the kingdom and the recognition of his role by other governments (including the United States) and other central banks, he retains apparent protection by the Turkish government generally and by Turkish President Recep Tayyip Erdoğan in particular. Keeping Kabir in place has been in Turkey’s economic as well as political interests, as reflected in unconfirmed allegations that the CBL has been holding billions in gold in Turkey’s Central Bank and has placed substantial deposits there. It is difficult to imagine Turkey readily giving up that kind of relationship.

The situation is fluid, and there is a real threat that the economic crisis will evolve into a worsening political and security crisis. But one can imagine solutions that take the country beyond the use of local military forces to grab valuable governmental institutions as the spoils of war.

Some might involve Kabir making power-sharing concessions to his political enemies, dividing the authority of the Central Bank governor in some way that brings aboard currently competing factions and assuring each side that the other does not get more than its “fair share.” For instance, Kabir and Shukri might share authority on a transitional basis, pending national elections, under a new temporary CBL board of directors whose members represent a wide range of Libyan political constituencies, with the total governance structure designed to checkmate anyone undertaking a power grab.

Resolving the crisis is clearly in the interest of most international actors active in Libya. On Aug. 29, the UN Security Council issued a statement reiterating UNSMIL’s call to Libyans to reach “a consensus-based solution to the current crisis regarding the Central Bank.” Notably, about 85% of Libyan oil exports go to Europe, including Italy, Germany, France, and Spain, making resolution of the crisis strongly in their immediate economic interests as well. Russia, which has from time-to-time secured its own separate off-the-books deals for Libyan oil, also has strong interests in maintaining relations with the Hifter family, which for now is on Kabir’s side and opposed to what is seen as a grab by Dbeibeh and his allies.

Eventual compromise is familiar in post-Gadhafi Libya, as reflected in the CBL’s reunification with its Benghazi branch in August of last year, after a decade of division. Behind that agreement was a reported arrangement according to which Kabir agreed to bail out banks in Libya’s east that had previously been pillaged by Hifter and his associates, essentially recapitalizing the eastern part of the country and enabling its banks to lend once again for commercial development — including to businesses controlled by Hifter’s family members.

In Libya, sharing the wealth can patch over even the most serious differences among well-positioned and properly motivated stakeholders, especially to stave off even more difficult things, like elections.

 

Jonathan M. Winer, a Non-Resident Scholar at the Middle East Institute, was the US Special Envoy and Special Coordinator for Libya from 2014 to 2016 as well as the Deputy Assistant Secretary of State for International Law Enforcement.

Photo by Weisserstier via Flickr, licensed under the terms of Creative Commons 2.0