Libya's economic crisis starts to bite

28 July 2015

As UN-mediated peace talks between Libya’s rival governments break down, the country’s finances look increasingly precarious

  • A financial crisis that has been a long time brewing is now starting to bite in Libya
  • The dinar has seen significant declines over the past year on the black market, something that has made the price of imports more expensive
  • Oil revenues have seen a steep decline due to the collapse in global oil prices and consistently low domestic production

The collapse in global oil prices coupled with a decline in the value of the Libyan dinar and shrinking foreign reserves means a financial crisis that has been a long time brewing is now starting to bite in Libya.

Emergency action has included delays to public salary payments, a freeze on capital projects, as well as a ban on imports in order to slow the decline in foreign reserves and defend the value of the local currency.

The dinar has seen significant declines over the past year on the black market, something that has made the price of imports more expensive at a time when the country can little afford extra outlay.

A dollar was worth 1.4 dinars in June 2014 and 2.17 dinars in early June 2015, according to Reuters, which tracks Libya’s black market exchange rate. This is putting pressure on Libya’s official exchange rate of 1.3 dinars to the dollar and may force the country’s central bank to devalue the currency, according to analysts.

At the same time, oil revenues have seen a steep decline due to the collapse in global oil prices and consistently low domestic production. Output currently stands at about 400,000 barrels a day (b/d), less than a quarter of the 1.6 million b/d that was produced before the 2011 uprising.

Import ban

Under the import ban that was introduced on 13 May by Libya’s elected government, which is based in the eastern city of Tobruk, 32 goods have been prohibited for six months.

The ban will be enforced by outlawing letters of credit (LCs) for the listed goods, which range from pasta, fruit juice and chocolate bars to steel, concrete and cars. 

Libya banned imports

  • Cars and vehicles - old or new
  • Motorbikes and bicycles
  • Powered boats
  • Cosmetics
  • Entertainment products
  • Toys, and sports goods
  • Paper tissues, napkins
  • Car accessories
  • Leather products
  • Hunting guns and fireworks
  • Cement and wooden poles
  • Sanitary (bathroom fixtures) products, marble, tiles and ceramics
  • Wood - raw material
  • Carpets, curtains and accessories
  • Leather and non-leader bags (except school bags)
  • Reinforced iron bars
  • Mobile phones and accessories
  • Office and domestic furniture
  • Workshop tools
  • Artificial drinks/juices
  • Chocolates, biscuits (except raw material chocolate for manufacturing)
  • Artificial fruit drink powders
  • Canned, preserved, dried vegetables and pickles
  • Crisps and corn flakes
  • Fizzy and mineral water
  • Chlorine and liquid soaps
  • Pastas
  • Nuts (edible)
  • Olive oil
  • Harissa (spicy chilli sauce/paste)
  • Energy drinks
  • Caviar and seafoods

Although the ban has not been recognised in the west of the country, where a rival government holds sway, the move has caused concerns about negative economic repercussions.

The block on imports is likely to have a crippling impact on many private sector businesses, including those in the construction sector, and it has yet to have a tangible impact on the value of the dinar, which continues to weaken.

Depleting reserves

The ban comes as Libya’s financial reserves are shrinking fast and institutions including the Washington-based World Bank, the UN and Libya’s own central bank warn of a worsening economic crisis that may turn into a humanitarian crisis with severe ramifications for the region.

If [Libya] continues to spend its reserves at the same pace or faster, it will run out of reserves in three years or less

Last year, Libya burnt through reserves worth $27bn. In February 2015, its foreign reserves stood at $81bn, according to the Washington-based IMF.

If the country continues to spend its reserves at the same pace or faster, which analysts say is likely, then it will run out of reserves entirely in three years or less.

This will have huge implications for the country due to its reliance on the state for jobs and fuel and food subsidies.

Libya’s private sector has shrivelled since the 2011 revolution, while the public sector wage bill has ballooned by 250 per cent due to efforts by the government to quell unrest and build up the country’s institutions.

It has been estimated that government wages account for 97 per cent of all salaries paid in Libya and subsidies mean a car can be filled with fuel for the equivalent of $5.

Humanitarian disaster

Its neighbours are being burdened by an exodus of refugees fleeing from Libya, which includes both locals and migrants who were living in the country.

In October 2014, the UN reported that a spike in militia violence had driven an estimated 287,000 people from their homes.

Tens of thousands more were displaced in the first two months of 2015 and analysts fear the exodus could pick up pace as the militia wars worsen and the economic crisis leaves millions of public sector workers unable to obtain their salaries.

Migrants to Europe

Libya’s political instability and growing economic crisis are also contributing to issues that are of global concern, such as the problem of migrants attempting to cross North Africa and using smuggling routes to enter Europe.

At the start of June, it was reported that the Libya’s police unit that combats illegal immigration had been stripped of its budget and its officers were not being paid.

The chaos in Libya has led to increasingly professional people-smuggling operations, which have thrived as the state has become more and more ineffective.

In one weekend in May alone, more than 5,800 migrants were rescued offshore of Libya, according to a statement by the Italian coastguard. At least 1,750 have died trying to make the crossing so far this year.

The rising number of people looking to make the dangerous journey has prompted a series of responses by the EU, including a decision in May to launch military operations to target smugglers, which could include surgical strikes to destroy their empty boats.

UN talks

Economic and migrant issues are escalating as UN-mediated talks between Libya’s two rival governments stall. A draft political agreement was presented by the UN on 29 April and talks had resumed last month. But in early July, discussions broke down after the Tripoli-based government rejected the latest proposal for a peace deal.

The original draft agreement called for a two-year transitional period and for all parties to respect the results of new parliamentary elections.

“The cooperation by elements of the two governments is not sincere,” says one Libya-based journalist, who requested anonymity due to safety fears.

“Both sides are only taking part in the plans in order to be seen to take positive action and to buy some time while they look for ways of accessing new sources of funding and new sources of military hardware.”

Due to the failure of Libya’s political leaders to make progress towards meaningful cooperation, the chances of effective policies being implemented to address the economic crisis are slim.

The combination of the drop in global oil prices, declining crude production and the ongoing battle with the jihadist group Islamic State in Iraq and Syria is a huge challenge that even a fully functioning government would struggle to deal with.

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