Libya’s financial crisis has brought the Libyan Dinar to its lowest levels. Banks are suffering liquidity problems and the Central Bank is heading towards the deepest period of political polarization. To learn more about the issue, Correspondents spoke to Dr. Suliman Al-Shahomy, founder and the chairman of the former Libyan stock exchange.

Libya’s financial crisis has brought the Libyan Dinar to its lowest levels. Banks are suffering liquidity problems and the Central Bank is heading towards the deepest period of political polarization. To learn more about the issue, Correspondents spoke to Dr. Suliman Al-Shahomy, founder and the chairman of the former Libyan stock exchange.

Dr. Al-Shahomy, there has been a major controversy surrounding the latest currency printed by Al-Bayda Central Bank – there were complaints about how it was different from the circulated currency and had a different governor’s signature.

The currency print is sound and flawless, it is Libyan currency issued by an official entity. The board of directors of the Central Bank consists of seven people, four of whom are in Al-Bayda city and they are the ones who decided to print. Since they consitute the majority of the board members, their decision is official and legally binding, and all talk about forgery is incorrect and unacceptable.

In 2011, the governor of the temporary Central Bank in Benghazi issued currency with his own signature, not with the signature of the former governor, and this currency has been circulated until today, without any objection. Moreover, this currency was printed in France rather that the United Kingdom where it used to be printed. Anyway, currency printing is a technical issue, and it is done through a host of financial and economic decisions and not arbitrarily.

As far as I know, this has never been done before in history. The only unified country that has done this is Libya. However, as long as the issuing entity accepts payments in a currency then the currency is official, regardless of the sort of paper on which it was printed. The bank has the right to print currency and the flow of this currency in the banks is under its financial and administrative control. As long as the bank states on the currency that it is “Valid for payment and repayment”, the signature on this currency or even its shape does not matter.

In early 2011, we had two Dinars and then a third Dinar was printed, and the three of them were valid regardless of the political regime, because they were issued by a monetary power. This is why the world is now moving towards a separate and independent monetary power. Currently, the Libyan central bank holds both the monetary power and the power of monitoring banks. To ensure the independence of the monetary system, these powers must be separated.

Observers accuse the administrations of the Central Bank in Tripoli and Al-Bayda of creating this crisis, how do you view these accusations?

Libya is suffering an economic crisis that has yielded a financial crisis, and the administrative divide has amplified the problem. We now have two institutions with conflicting or at least different policies, and the political factor has widened the divide in the Libyan institutions like the Central Bank, the National Oil Corporation and the Libyan Investment Authority. 

Despite the attempts of the presidential office to bring these parties together, each party is clutching to its legitimacy and policies; and when trying to solve any problem, they all present arguments but no one has presented any solution to the crisis yet.

I see that solving these problems begins with unifying the institution.

In your opinion, which of the two centers has the best policies?

To be realistic, Al-Bayda center has not presented anything yet, except for the currency print, which solved a crisis on the popular level. Other than that, it does not have any control over more than two-thirds of the Libyan banking sector, for it only controls the banks in the eastern region with the western and southern regions out of its control. Therefore, all of its decisions have yet been meaningless, except for the currency print decision that only complicated the situation. 

On the other side, the Central Bank in Tripoli is the qualified bank, yet it lacks legitimacy since the bank in Al-Bayda draws its legitimacy from the parliament. Al-though the bank in Al-Bayda is illegitimate, it is the most affective since it has control over the international reserves and the currency stock off shore.

To give an example of this confusion, Al-Wahda Bank has one director, yet part of the bank follows the rules of Tripoli’s Central Bank and the other part follows the rules of Al-Bayda’s Central Bank, and that creates a great deal of confusion in the bank. Under these circumstances, processes like censorship, settlement and accountability are completely paralyzed between east and west, and the only focus of the banks today are liquidity, bringing money back into the bank and opening credits. The banking system today is facing a serious problem that can compromise its safety and soundness in the future.

In these grave circumstances, people in Libya are in desperate need, and the average citizen does not fully realize the economic and financial aspects to the issue of printing currency. For example, after these four million Dinars are printed, they will soon be withdrawn from the bank and we will go back to the same problem.
Every central bank knows that the continuous currency print shall bring down the Libyan Dinar due to hyperinflation. However, the new currency that was printed in Russia was finally admitted and the Central Bank in Tripoli agreed to circulate in the whole country. This is good news, yet we are waiting for the more important procedure, unifying the bank.

How does excessive currency printing cause hyperinflation?

People think that inflation is the increase of the printed money units, while what it actually means is a general increase in prices. When we have a large amount of currency and limited amount of goods, the demand on these goods will drive the prices up. Since most of the goods are imported from outside the country and paid for in foreign currency, and since the economy is paralyzed and productivity is almost non-existent, increasing the supply of currency is the major cause of inflation.

One of the tasks of the Central Bank is to contain inflation using different methods like increasing or decreasing currency supply by controlling interest rates and investment bonds and other tools. I believe that the currency that entered the market must be used to replace old currency papers. However, the old currency cannot be taken out of the market, since it is a temporary solution during Ramadan. Nonetheless, there are procedures that I believe the Central Bank in Al-Bayda is capable of taking to contain this problem.

The Central Bank in Tripoli has now accepted the currency and it will print 8 billion Dinars (US $5.8 million). After that, this currency can be withdrawn from the market and used as a reserve or it can be omitted. The problem can be solved with wisdom, rather than the current antagonism.

Who has the power today to implement a real solution for the crisis? 

The Central Banks of both Tripoli and Al-Bayda accepted the invitation of the presidential office and they held meetings in Tripoli and in Tunisia; therefore, the presidential office is the only entity that can change the situation. The problem can be solved by unifying the banking institution in Libya, reforming the board of directors for the Libyan Central Bank, and unifying the administration, so that we can start over. This unification must also be followed by a host of practical, long-term procedures that can actually solve the problems, rather than temporary arbitrary procedures.

After its international success in getting United Nations and Security Council resolutions, the presidential office is capable of forming a new board of directors, and it can support this board both nationally and internationally. Hence, the presidential office will be the only entity that controls Libyan offshore reserves. However, the only concern is that the presidential office might get caught in the midst of political polarizations between parties that do not care about the national economy, and prioritize their political interests that might conflict with interests of the country and the average citizen.

What happens after the institution is unified?

After the unification, the Central Bank will work according to clear and specific policies, rather than the conflicting policies of today. Today, the Central Bank in Tripoli is using bond credits to bring back liquidity to the Libyan commercial banks, whereas the Central Bank in Al-Bayda is printing currency and issuing treasury bonds to cover the government expenses. These are two conflicting policies followed by our two Central Banks, because each of them is working within the limits of their means.

There must also be a political solution by unifying the economic institutions and resuming the oil export through its official channels. Libya needs a new economic system in which financial and economic institutions along with the Central Bank, the industry and the business sector combine their efforts to reform the Libyan economy. This system must coordinate the production of oil, transit, private sector, fishing, and tourism, and it must set targets for each of these sectors and develop the necessary plans and programs to achieve these targets and stimulate local and foreign investments.

This system requires a national program that reshapes the Libyan economy. After that, the economic situation will improve gradually. However, this takes a long time, and the oil export industry needs at least three years to be active again, and the reserves in the Central Bank are running out. The reserves today amount to less than 50 billion dollars (US $36.7 billion), while in 2010 it reached 110 billion. Unfortunately, the situation is getting worse and we could lose what is left of our funds in one year; therefore, we need a serious stance to solve the problem.

After 2017, Libya will have lost all its monetary reserves, but the state will not declare bankruptcy. There are ways and mechanisms to prevent this, like international borrowing, liquidating gold assets and issuing bonds in case the currency loses its cover. The 50 billion dollar reserve now covers the currency, and if we lose it, the currency will collapse and the US dollar will be worth 20 Dinars or more.

Can the frozen accounts play a role in solving the crises?

Unless we have a unified system and coordinated effort between governments, we cannot bring these funds and invest it in Libya. Libya today is not a suitable environment for investment, and we fear that these funds are wasted when they come here the way 200 billion dollars were wasted in the past few years.

A number of directors of large banks suggested selling gold assets. How do you view these suggestions?

The entire gold reserves in Libya cannot cover the government payroll for more than three months, and if we sell it, it will leave Libya on a plain the next day, because we do not have a real economy that can make economic use of it. If we sell the gold, we would only be replacing it with paper, and the problem will return in three months.

Has the introduction of electronic bank cards reduced the liquidity problem?

Yes, the electronic card is an important tool in replacing the traditional paying methods and keeping cash in the banks. However, it requires an electronic infrastructure like fiber optic cables and protection systems among other things. This infrastructure is scarce in Libya and it barely exists in some parts of some Libyan cities, and there are numerous Libyan cities that do not have medium electronic infrastructures. In addition, the whole communication sector in Libya is experiencing difficulties, so this alternative is not ready to take effect in the country. Therefore, it is not a viable solution for the liquidity problem in Libya.