On 8 July the Central Bank of Libya (CBL) — split since 2014 between the main branch in Tripoli and the breakaway eastern branch — took delivery of a long-awaited audit in what is hoped will be a key step towards reunifying the organisation. Last year, Deloitte International was commissioned to auditing the bank’s two branches. The UN Special Envoy Ján Kubiš presented the audit to Prime MinisterAbdulhamid Dbeibah at a ceremony in Tripoli. The CBL’s controversial current governor Sadiq el-Kabir, and the eastern branch’s head, Ali al-Hebri — who will become el-Kabir’s deputy as the two bodies merge — were also present. The bank’s statement said that: ‘The CBL hopes, by completing this audit, to achieve the higher goal of unification [that it hopes] to protect the banking sector and support the exchange rate policy adopted by its board at the start of the year [and commit itself to] study and comment on the audit’ but did not set a timeline. Dbeibah said that ‘there is a need now to put aside our differences, and think about the next steps towards reunifying all the institutions of the country’. Progress on reunifying the banking sector is a critical part of an overall UN-led process.

CBL governor Sadiq el-Kabir (L), Prime Minister Abdulhamid Dbeibah (C) and Ali al-Hebri (R)

UNSMIL observed that one main conclusion of the review is that the central bank’s reunification is not only recommended but is essential. The report also provides a series of proposed measures to restore the CBL’s integrity and improve its transparency, including: the adoption of international financial reporting standards; an assessment of the impact of the devaluation of the Libyan Dinar; and the establishment of effective governance and internal controls.

On a positive note, UNSMIL said Libya has no foreign debt and its historic accumulation of foreign currency reserves through oil exports has been largely protected. The audit calculated that since the end of 2014 the country’s foreign exchange reserves have only fallen by 8%. Subsequently, however, there has been a significant increase in the total amount of currency in circulation because both branches of the central bank have been unilaterally printing Libyan Dinars in an uncoordinated way. Haftar largely financed his expensive and unsuccessful 2019-2020 military assault against Tripoli with Russian-printed Libyan Dinars. This, and his successive blockades of the country’s oil production and exports, and deficit spending by the parallel governments, have put severe pressure on the exchange rate. This ultimately resulted in the more than 300% devaluation of the Libyan Dinar — from LD1.34 to the US$ to LD4.48 — at the beginning of 2021.

Another of the report’s finding is that Libya remains virtually entirely dependent on oil exports as its primary source of foreign currency revenues. During the reporting period, income from hydrocarbon sales averaged 84% of total public revenues while tax and customs collection remained limited. Foreign currency revenues are primarily used to facilitate trade finance for public and private sector organisations and disburse funds through programmes such as the Family Allowance. The report highlights opportunities for reform including improving the process for issuing Letters of Credit.

The report’s handover completes the review process which is necessary to start the banks’ unification process which will begin with the implementation of the audit’s practical recommendations. The CBL governor and board of directors are confident that the relative stability achieved since the GNU assumed power provides the opportunity to deliver many more achievements. Looking ahead to the rest of the year, it has promised to launch a number of strategic projects to: enhance transparency and disclosure; strengthen regulatory and supervisory frameworks; develop electronic payment services; prepare proposals for cyber legislation; and provide liquidity to all parts of Libya. It will invest in capacity-building and other projects to enhance the bank’s ability to implement and deliver these desired results.

Despite this optimism, however, Khalifa Haftar, Aguila Saleh and many senior figures in eastern Libya are determined to replace the bank’s controversial governor, Sadiq el-Kabir. Besides the fact that he has over-stayed his official mandate — ironically, in the same way that the House of Representatives’ MPs have done so — he also has close links to some of the main Islamist militia leaders in Tripoli. The east claims that, as long as he remains governor, the central bank will continue funding the militias which, with essential support from Turkey, repelled Haftar’s siege of Tripoli.  

This excerpt is taken from Libya Politics & Security, our weekly intelligence report on Libya. Click here to receive a free sample copy.