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Keeping a Libya Settlement on Track
Keeping a Libya Settlement on Track

Libya’s Economic Reforms Fall Short

While Libya’s first reform package since the fall of Gaddafi in 2011 has had positive initial effects, more must be done to improve the deteriorating economic situation in the country. In this excerpt from our Watch List 2018 annual early-warning update for European policy makers, Crisis Group urges the EU and its member states to address some of the packages’ core issues and press the government to create more thorough economic reforms.

This commentary is part of our Watch List 2018 – Third Update.

Libya has seen two major confrontations in recent months: a standoff between the east-based Libyan National Army and the west-based internationally-recognised government over the control of revenues from oil installations in the Gulf of Sirte in June-July, and recurrent attacks on Tripoli by militias from outside the capital since August. Both were sparked by conflict actors’ desire for greater control over economic institutions and the perception that a handful of militias and interest groups in the capital have disproportionate access to the country’s wealth. Though in September, the Government of National Accord[fn]The Government of National Accord is the sole internationally-recognised government of Libya, created by the December 2015 Libyan Political Agreement and based in Tripoli since March 2016. It is headed by the Presidency Council, which is led by Prime Minister Faiez Serraj.Hide Footnote  adopted the first economic reform package since the Qadhafi regime fell in 2011, the fight over resources will remain a central feature of the crisis. The package’s measures fall short of what is needed to improve deteriorating living conditions, prevent the defrauding of the state, discourage attempts to change the status quo through violence and create an environment more conducive to a negotiated solution to the disputes that have divided Libya since 2014.

With this background in mind, the European Union (EU) and its member states should consider the following:

  • Enhance monitoring of the implementation of economic reforms, press the Government of National Accord and the Central Bank of Libya to limit the allocation of funds on a preferential exchange rate, and prevent fraudulent letters of credit, which could easily allow the embezzlement of public funds, as in the past;
     
  • Persuade the Government of National Accord and the Central Bank of Libya to move forward with more comprehensive policies, including more substantive subsidy reform (particularly of refined fuel), the devaluation of the Libyan dinar and a strategic review of budget priorities, and in the interim undertake transparent oversight of the funds generated by any special exchange rate mechanism;
     
  • Encourage the Tripoli-based government and economic institutions as well as their counterparts in eastern Libya to take concrete steps to unify the Central Bank of Libya, and support an ongoing UN-led financial review of its rival branches in Tripoli and al-Bayda. The Palermo summit planned for 12-13 November, hosted by Italy, offers a chance to do so;
     
  • Prioritise the reunification of economic institutions, starting with the Central Bank of Libya.
     

Flawed Economic Reforms

Against the backdrop of renewed fighting in Tripoli, public anger over worsening living conditions and widespread accusations that militias were embezzling public funds in the capital, Prime Minister Faiez Serraj signed off on new economic measures on 12 September. The new policies suggest he is determined to address Libyans’ economic plight. Ordinary Libyans have suffered from a persistent cash liquidity crisis and falling purchasing power due to the drop in the dinar’s value; as a result, the price of consumer goods increased by a record 28 per cent in 2017 alone.

The proposed reforms’ main objectives are:

  • Reducing the gap between the official exchange rate, fixed at 1.3 Libyan dinars (LYD) to one U.S. dollar (USD) and the black market rate, which has fluctuated at around 6-7 LYD/USD throughout 2018. Militias and their political backers, especially in the capital where the main economic institutions are based, have taken advantage of their ability – often through coercion – to use the official exchange rate for personal gain and to consolidate power.
     
  • Ensuring easier access to foreign currency through the official banking system rather than the black market in order to import goods.
     

To achieve this end, the government imposed a hefty 184 per cent service fee on the official exchange rate for all foreign currency purchases required for commercial or personal transactions. It in effect created a second official exchange rate of 3.90 LYD/USD. The government modelled this measure on a similar policy from the Qadhafi era; its advocates believe it will help lower the black-market exchange rate and increase liquidity. Proposed by Central Bank of Libya Governor Siddiq al-Kebir and backed by several military and political actors outside of Tripoli – including those trying to break the principal Tripoli militias’ stranglehold over economic institutions – Serraj initially opposed it. He relented only following concerted pressure, including from Special Representative of the UN Secretary-General Ghassan Salamé, who saw the reforms as a means of de-escalating tensions in Tripoli and securing a ceasefire. A motivating factor for the militias that attacked Tripoli is the perception – widespread across the country – that dominant armed groups have abused their access to state institutions for personal and political gain.

 
To the government’s credit, the reforms have shown initial positive effects. Yet it remains too early to judge their long-term effectiveness

The reforms are a step toward addressing a deteriorating economic situation, but international experts had advocated a devaluation of the dinar instead and say the service fee model goes against international best practices. The government countered that devaluation is impossible while the Central Bank of Libya is split and state institutions deadlocked. It champions the service fee model as a means of providing greater flexibility, allowing for rapid exchange rate adjustments to identify the market value of the dinar. 

To the government’s credit, the reforms have shown initial positive effects. Their announcement contributed to a de-escalation of fighting in the capital and an almost 20 per cent drop in the black-market exchange rate. Yet it remains too early to judge their long-term effectiveness, especially since the new system for allocating letters of credit is still being rolled out, and external variables, such as oil revenues, remain highly unpredictable. One immediate downside of the government’s unilateral announcement of the measures is that it reduced international pressure on the Tripoli authorities to hold a meeting of the board of the Central Bank of Libya, a necessary step toward its reunification.

Many Libyans, moreover, are already concerned about possible abuses and uncertainties concerning the path ahead. The first concern is that interest groups, including militias and political actors, will circumvent the fee-based rate and use the official rate, thus continuing to profit from a de facto double exchange rate system. The decree announcing the reforms is vague on the matter, but ongoing discussions in Tripoli suggest that the government is considering exempting a number of companies and selected goods from the fee-based exchange rate. Such an exemption system should be avoided as much as possible, as it will create opportunities for abuse.

The second concern is how the government will allocate the funds the service fee generates, anticipated to reach 20 billion dinars. Most think that the money should be used to repay public debt and finance development projects. But the decree announcing the reforms states only that the government’s Presidency Council will determine how to allocate the funds. Some government officials are worried that Serraj and his entourage could use these funds to buy loyalty rather than finance sound development projects. Another question is whether these funds will go into the regular government budget, which auditors review, or will remain outside the budget line, which allows for less financial scrutiny. The state should establish careful oversight of these funds’ allocation.

Next Steps

The Libyan government should follow these initial measures with a gradual reduction of fuel subsidies, which encourage fuel smuggling (another feature of the illicit economy, estimated to cost the state as much as $6 billion annually), and provide adequate targeted cash transfers for poor households to compensate for the increased prices of goods and services. Currently, the only compensation scheme it offers is indirect and consists of awarding every citizen the right to purchase $1,000 at the official exchange rate, which is placed on personal debit cards. This scheme is risky because most people will likely turn to the black market to obtain needed dinars, which would provide black market traders with hundreds of million dollars in commissions. 

The EU should recognise the crucial task of addressing the underlying flaws in the economic policies proposed in September.

A proper devaluation of the dinar, replacing the service fee system, is the only way to get rid of the easily abused dual exchange rate. A necessary precondition is to unify the Central Bank of Libya and conduct a review of both of the bank’s branches, as agreed by Serraj and the bank’s rival heads in late August. Bank unification would halt the eastern government’s threats to sell oil through its own (internationally unrecognised) branch of the National Oil Corporation. It would also send a strong signal that stakeholders are serious about bridging the country’s divides and stabilising the country.

Reforms will not have an impact overnight, but the package introduced in September is a start. If it merely reproduces corruption and fails to address the needs of ordinary Libyans, violent challenges to the arrangement are likely. The EU and its member states should therefore recognise the crucial task of addressing the underlying flaws in the economic policies proposed in September and press Libya’s government and its economic institutions to continue work on more thorough reforms. Concretely, they should support efforts to reconcile economic institutions and reach consensus on economic reforms, and back the UN in developing the economic track of peace negotiations.

 

Keeping a Libya Settlement on Track

Keeping Libya’s fragile peace process on track requires redoubled efforts by external stakeholders eager to see the conflict end. In this excerpt from our Watch List 2021 for European policymakers, Crisis Group urges the EU and its member states to support the UN-led economic dialogue and the creation of a Ceasefire Monitoring Mechanism.

Ten years after Muammar Qadhafi’s regime fell, the Libyan civil war that ensued remains far from resolved. If there is reason for hope, it is that the year-long assault on the capital Tripoli by Field Marshal Khalifa Haftar’s forces ended with their withdrawal in June 2020. Haftar’s retreat prompted a realignment of factors that points to the possibility of a peaceful settlement. In September, the field marshal and his allies lifted a nine-month oil export blockade, providing temporary relief to the country’s oil-dependent economy. In October, officers of the two main military coalitions signed a ceasefire agreement. Then, in November, politicians from the two rival sides started a dialogue under UN auspices. Foreign backers of Libya’s warring factions, while still working to cement their influence in the country, have toned down their bellicose rhetoric.

Yet there is also much reason for concern. Implementation of the ceasefire terms is lagging, with each side accusing the other of continuing to receive foreign military support. In such a volatile environment, any mishap – such as one side moving weapons around, and the other side interpreting the activity as mobilisation for an assault – could spark renewed fighting. Another reason to worry is that the UN-backed political talks, which comprise 75 representatives from a broad array of political and tribal groups and which the EU is helping finance, have thus far produced no consensus behind a new interim unity government. The various factions agreed on a voting mechanism to appoint top officials, but while paying lip service to a transparent vote they remain dangerously divided on who they want to see lead the country. All, furthermore, have the means to spoil the process. On the economic front, although hydrocarbon exports resumed, a dispute over management of oil revenues has led to a temporary freeze of hydrocarbon income, impeding economic recovery. 

Keeping the peace process on track will be an uphill battle requiring redoubled efforts by those external stakeholders eager to see Libya’s conflict come to an end. Events are increasingly driven by those outside actors who are providing military assistance to one Libyan side or the other, in particular Turkey, the Tripoli-based government’s main backer, and Russia, the Haftar-led coalition’s chief ally. Rival Arab countries that for years helped turn Libya into a proxy battleground are still pursuing their agendas as well, but for now by non-military means. The easing of the Gulf crisis might, over time, have a positive knock-on effect in Libya. Europe, as a party concerned to make peace, can still do a great deal to advance that goal, notwithstanding its diminished leverage.

The EU and its member states should intensify their efforts along the following lines: 

  • Support the creation of a Libya Ceasefire Monitoring Mechanism, which Libyan military officers from both sides negotiated and which the UN secretary-general called on Security Council members to adopt; deploy to the UN Support Mission to Libya (UNSMIL) monitors from European states accepted by Libyan parties.
     
  • Extend the mandate of the EU’s maritime operation EUNAVFOR MED IRINI so that it can help uphold the ceasefire monitoring. Despite being unable, for legal and logistical reasons, to block the transfer of weapons to Libya, the operation’s vessels and satellites are helpful in monitoring the flow of arms to the country in violation of the UN embargo and in deterring some transfers. The operation can support the Ceasefire Monitoring Mechanism’s work by providing UN monitors with information about suspected violations and military movements. 
     
  • Support efforts to reach consensus among Libyan parties on the need to hold parliamentary elections, if delegates to the political dialogue do not reach agreement on an interim government. Europe should also provide funds and technical support to the institutions that will have to ensure elections are credible and inclusive, including of women. 
     
  • Support the UN-led Libyan economic dialogue and continue to engage with the UN, the U.S. and EU member states to find a lasting settlement to the economic and banking disputes, especially regarding the allocation of oil revenues, that continue to hinder economic recovery.

Steadying a Shaky Ceasefire

On 23 October, the Libyan National Army – led by Haftar and supported by Egypt, the United Arab Emirates and Russia – and the Turkey-backed Government of National Accord (GNA), led by Prime Minister Fayez al-Serraj, signed a ceasefire formally ending a battle that had been raging on the outskirts of Tripoli and elsewhere since April 2019. The fighting had killed some 3,000 people and displaced hundreds of thousands. Turkey’s direct military intervention to aid Serraj in early 2020 reversed what had been Haftar’s advantage and forced the withdrawal of Haftar’s forces to central Libya along a new front line. 

The ceasefire was an important step toward political talks but remains fragile, as efforts to fully implement several of its provisions are sputtering. Haftar and Serraj committed to withdrawing their troops from front lines, expelling foreign fighters and ending all foreign military training. Yet both sides have backtracked on the original agreement. Their forces remain deployed on the front lines; foreign military cargo planes continue to land at their respective air bases, suggesting that outside backers are still resupplying their allies; Turkish officers are training GNA forces in plain sight; and Russian private military contractors remain part of Haftar’s forces. 

To bolster the ceasefire and press the parties to honour their commitments, the UN is backing a Ceasefire Monitoring Mechanism to be established in central Libya, where the GNA and Haftar’s coalition continue to position their troops. Libya’s rival factions requested the mechanism, and UN officials are discussing what it will entail. Libyan officers from both sides appear to have greenlighted deployment of a small group of unarmed international civilians “under UNSMIL’s aegis”, in the relevant UN report’s words, to work alongside monitoring teams established by both sides. 

The EU should push the UN and Libyan military negotiators to negotiate an updated version of the October ceasefire agreement that reflects a more detailed consensus on controversial points

The EU should support this effort. It should push the UN and Libyan military negotiators to negotiate an updated version of the October ceasefire agreement that reflects a more detailed consensus on controversial points, such as the departure of foreign fighters and the repositioning of armed groups, that the original agreement referred to only in vague terms, and press for full UN Security Council backing of that new agreement. It should also support a scalable monitoring mechanism that the UN secretary-general presented to Council members in December 2020. European governments should consider providing monitors from those EU member states to which the Libyan parties signal they would not object, to be deployed within UNSMIL’s framework – the only one accepted by both parties. The EU can provide additional support to ceasefire monitoring by expanding the mandate of its maritime Operation IRINI to report any troop movement that may threaten the ceasefire and inform the UN monitors accordingly, in addition to reporting on detected violations of the UN arms embargo.

Toward Reunified Governance

The EU and member states could also assist in resolving Libya’s governance crisis. To do so, they will need to make tough, perhaps counterintuitive, decisions. European and other states face a conundrum: should they keep supporting the faltering UN-led dialogue aimed at naming an interim unity government, which would prepare the ground for elections at the end of 2021? Or, should there be no progress in the coming weeks, should they instead endorse calls to hold elections without waiting any longer for Libyans to form an interim government?

The chances of agreement on an interim government appear quite slim. And the threat of EU targeted sanctions, which some European officials appear to be considering, is unlikely to increase the odds. Since November, the 75 delegates, who comprise representatives of Libya’s two rival assemblies as well as several UN-selected independents, have been meeting in person and online. They agreed in general terms on the need for a new three-man Presidency Council to replace the one headed by Serraj and a separate prime minister. They also approved a voting mechanism to select these top officials. But despite this apparent progress, Libya’s numerous competing factions remain profoundly divided on who they want to see leading the country. Any one camp could easily trigger controversies or spoil the vote to prevent an outcome it perceives as unfavourable. 

With regard to elections, the delegates of the UN-backed political dialogue have succeeded in setting a date for elections but failed so far to decide on anything else. If Libya’s rival legislatures fail to draft a legal framework for elections by late February – little suggests they will be able to – then the 75 delegates are supposed to take over. But delegates remain divided on what they consider to be the best electoral roadmap, whether elections should be only parliamentary or also presidential, and whether a referendum on a draft constitution is also required. 

In these circumstances, Europe’s best course of action is 1) to encourage Libyans to hold only parliamentary elections in December 2021, even if the UN-backed dialogue fails to reach agreement on an interim unity government; and 2) to urge the 75 delegates to agree on a legal framework for elections as soon as possible, should Libya’s rival legislatures fail to produce one by late February. The EU and European capitals should communicate unequivocal support for this course of action and urge other powers, particularly Egypt and Turkey, to accept the elections’ outcome. It is obviously risky to hold elections in a highly polarised country – one camp controls the west and another the east – where weapons are abundant and corruption is ubiquitous. But absent a negotiated solution to reunify the country’s governing institutions, attempting to forge consensus on a new vote for a single parliament appears to be the best – albeit inevitably risky – way out of the untenable status quo of rival legislative institutions and governments.

Settling a Financial Feud

Europe should also keep supporting UN efforts to settle the squabble over the country’s financial institutions and continue to back the economic dialogue, alongside the political and military ones, as a pillar of the UN-led peace process. Over the years, the financial feud has manifested itself in different ways, ranging from division of Libya’s Central Bank into two rival branches to a national banking crisis to oil sector blockades. 

Europe should keep supporting UN efforts to settle the squabble over the country’s financial institutions and continue to back the economic dialogue.

The most recent iteration is a controversial arrangement proposed by the Tripoli-based National Oil Corporation and accepted by the Haftar camp to temporarily freeze oil export revenues, which constitute almost the totality of government income, until a new unity government is formed and the Central Bank of Libya unified. This arrangement, which enjoys U.S. and UN backing, was put in place in September as part of a deal aimed at ending Haftar’s nine-month oil sector blockade. Pursuant to the deal, the Tripoli government and National Oil Corporation modified how oil revenues were to be managed, ordering export receipts to be kept “temporarily” in a National Oil Corporation account from which they cannot be spent rather than being transferred automatically to the Central Bank, as used to be the case. This set-up was supposed to last only 120 days – the period that negotiators thought necessary to reach agreement on a new government that could revert to standard allocation procedures. 

Without such a government, the country will need alternative arrangements for oil revenue allocations. Freezing revenues is untenable in the medium to long term. The EU and its member states should make their collective voice heard on the matter, calling on all Libyan parties to reach a new agreement – one that strikes a balance between, on one hand, providing Haftar and his foreign backers guarantees that oil sales revenues will not fund their Tripoli rivals’ military build-up and, on the other, using oil revenues now to cover public expenditures throughout Libya.