Restoring confidence in the banking system
Download PDF: Libya’s liquidity crisis
In our November policy paper Time is Money, we anticipated the Central Bank of Libya’s most pressing near term issue would be currency stabilization; that is, deciding what foreign exchange mechanism to adopt for the new Libyan dinar. This issue, we argued, would arise as soon as new currency had to be printed to pay for accrued public sector salaries.
In addressing this, our November forecast called for the adoption of a managed float system against a basket of world currencies. This would support an orderly revaluation of the Libyan dinar (whose value had been subject to a systematic devaluation by the Libyan regime, presumably to achieve the Socialist ideal of an autarkic state) and allow for policy flexibility in setting interest rates that reflect economic fundamentals.
Since our publication, the Deputy Governor of the Central Bank, Ali Mohammed Salem, has announced (in a late-December interview to Reuters) that the new Libyan dinar would continue to be linked to the IMF’s Special Drawing Rights (XDR) currency for a period of “up to three years”. We would argue that this is not the ideal long-term policy solution but will recognize that what it does achieve, in an uncertain transition stage, is it instills a sense of continuity and predictability in the marketplace. We welcome the move, with the caveat that in what is likely to be 18-24 months’ time, the Central Bank will have to revaluate this policy that we don’t predict will last for the maximum announced three-year term.
This will be particularly true if an oil-price shock takes place (perhaps due to the escalation of tensions between the US and Iran, further Shi’a unrest in Saudi Arabia’s oil-producing Eastern province or further trade union strikes in Nigeria’s oil sector during 2012). A sustained oil price increase and a US/EU accommodating monetary policy response (in the form of interest rate cuts or stimulus), against the backdrop of a recovering, surplus-producing, Libyan economy (our 2013 forecast), would escalate the need for greater monetary policy flexibility and a quicker revaluation of the Dinar. We maintain at this stage that the managed-float system would be the desirable longer-term policy option.
In the near term, the Central Bank has turned its attention to restoring liquidity in the banking system. Central Bank Governor Sadeq Omar ElKaber has stated that 96% of available money (equivalent to 15 billion Dinars) is held outside the banks.
A plan for withdrawal of the Gaddafi-depicting banknotes is underway with the 50-Dinar denomination first in line to be withdrawn by March. The Central Bank has also announced the printing of 6 billion new Dinars to restore liquidity. While the current policy response is sensible and the phased approach prudent, what will restore confidence in the banking system (and thus promote liquidity, as citizens return their cash holdings to the banks) will be the payment of accrued 2011 public-sector salaries, the timely payment of 2012 salaries and the removal of withdrawal limits on current accounts. The former two must be solved by printing new currency and ensuring accuracy in stipend records are kept by the state; the NTC cannot afford payroll mismanagement, nor street demonstrations by struggling state employees (who make up the majority of the workforce). Either would not restore confidence in the banking system, nor would it encourage disenfranchised militias to join state-paid police and military jobs – an outstanding key security threat. Once salaries can be consistently and credibly paid, this being achieved by removing the limitations on current account withdrawals in a move that should restore broader confidence in the interim cabinet.
Interestingly, the ex-Central Bank Governor Gassem Azzoz, who led a weak short term as Governor for the latter months of the war, had declared the liquidity crisis “solved” in September when a shipment of banknotes arrived from the UK. What is crucial now and will continue to be crucial for the foreseeable future is to avoid this kind of sensationalism. The Central Bank must progress prudently, communicate with a united voice and leverage the technical assistance of international partners like the IMF, while remaining – crucially – free of domestic political interference. The restoration of confidence in Libya’s unsophisticated banking system rests importantly on the credible and independent management of the Central Bank.
Fayruz Abdulhadi
Fayruz.Abdulhadi@sadeqinstitute.org
January 2012
London, UK
Dear Mrs Abdulhad:
Facts that no one is talking about:
1-Civil sevants wages in 2010 ( 800 Million LDs/Month) in 2011-2 ( 1.2 Billion/mont)
2-Unemployed 2010 (30% ) 2012 ( over 50% +) as there is no program to kickstart the economy)
3-The NET private sector share of GDP is at most 15% , so the max cash handled was 1.2 Billions/month is today at most 600 Million LDs a month.
4-Subsidies of energy and food (not education+ Health) amount to 1.4 Billions/month……………………sold by the government at max 250 Millions in the market.
5-40% of the subsidized goods are smuggled by criminals out of Libya a market of 5-6 Billion LDs/year.
6-The smuggled goods represented 30% of the whole private sector in 2010 , today is represent 50% or more.
7-40% of Libyan live under the poverty line and have no cars nor moeny to buy the subsidized energy or food.
8-The government per family expenditure is over 2,500 LDs a month , so HOW COMES WE HAVE THE POOR???? Answer to be found with the smugglers today many have created small armies of 50-60 to protect themselves and their criminality.
7-The 2,500 LDs per family are higher than the indexed poverty Line Threshold of Italy set at about 1,400-00 EUROS………………………….Do we Libyans live the same standards of the Italians?? This I read on the Italian Paper il Messaggero Anno 134 Nr 25 of January 26th 2012.
8-A managed float of the LDs and the unpegging at 1.90 Vrs the SDR will be a wise idea , but at todays pegging the LD value is quite realistic , but may be further devalued for the increased Public Sector speending and high Civil Servants wage bill .
9-With the announced incorporation of the revolutionaries in the army and police , the Civil Sevant wage bill will top the 2 Billions a month or 24 Billions a year. This will represent 75% of all oil revenues which with the subsidies will RUIN LIBYA. The LD will be at 2-00 to the USD or more. INFLATION will be 30% + per year.
WE WILL NOT SOLVE ANY PROBLEMS BY GOING ABOUT THE ROOT CAUSES OF OUR PROBLEMS:
-High Government spending on unproductive centres
-Subsidies in goods that are smuggled , instead of cash subsidies so that all equitably will sspend wisely
-Communication between the Government and the Private Sector to identify and address the critical paths.
Husni Bey
Dear Mr. Bey,
Thank you for your comment and for following the work of Sadeq Institute.
At the root of your comment is the very structural issue that underlies many an oil producing economy: the creation of a rentier state: Libya (like many a Gulf nation and contrary to its Tunisian and Egyptian neighbors) sources the vast majority of its national income from the “rents” of it’s oil producing regions to IOCs, which encourages the state to use those rents and surpluses to hire workers into uncompetitive public sector jobs. On top of this, the Libyan uniqueness lies in the Socialist Third Way of the Gaddafi regime which has for the most part resisted for his 42 year tenure and continues in the transitional stage to persist: in addition to wiping out the Libyan entrepreneurial bourgeoisie, the autarky and command planning of the state has meant a disproportionately-high number of Libyans work in government or government-related jobs. You are right in that the NTC has not yet addressed this issue and it can be argued, is in fact exacerbating it by promising widespread handouts to families of martyrs (a morally and politically important imperative) and to disenfranchised militias in an effort to encourage them to drop arms and join the police, military and civil society (crucial for security). These handouts, while currently necessary for stability, cannot sustainably persist.
One way to address the ballooning public sector spend in the Libyan economy, as argued in my November paper “Time is Money” is in fact the orderly revaluation of the Libyan dinar. What this would achieve is to make domestic goods, produced by uncompetitive domestic industries, too expensive, encouraging their demise in favor of cheaper imports and also, by corollary, the proliferation of competitive domestic industries. The government would also not be able to sustain the level of spending on public sector salaries (it would earn in cheap dollars and pay in expensive dinars) which would accelerate the need to develop a thriving private sector. Currency revaluation would also address your concern over inflation as a more flexibly monetary policy can provide counter-cyclical output stabilization (higher interest rates in times of higher growth).
However the solution does not lie only in currency revaluation as the risk it carries is an increased specialization in oil and oil-related services only (the cheapest domestic industry and Libya’s competitive advantage). The enablers of increased diversification of the Libyan economy are multifold: the phasing out of government subsidies on basic goods (a necessary step that I expect will not be addressed until at least the 2nd Libyan elections as no political party is likely to win favors with this policy agenda), the introduction of a “Libyanization” policy (akin to the Saudi, Qatari and Emirati policies) whereby private sector firms are required to hire a minimum of x% domestic workers and provide for their training, the availability of private commercial credit and small business loans to encourage entrepreneurship (aided by “incubator”-like institutions to help small entrepreneurs with business planning and financial management expertise) and crucially a change of mentality among Libyans who feel entitled to plush white-collar government jobs (allowing a growth in Tunisian, Egyptian and other foreign national employment in private sector jobs not accepted by Libyans as well as the presence of an increasing number of expats who hold the higher-paid, more technically-demanding, private sector positions). In part, this is an issue for our education system to address: Libya holds a disproportionately-high number of medical professionals (culturally a “respectable” sought-after job) and not enough engineers, businessmen, bankers, technicians and the like; a more direct link between the economic gaps and school curricula is urgently required or Libya will continue to import expertise in exchange for oil rents. The Emaratization program for instance has yet to be successful as the UAE private sector expanded rapidly on the back of a large expat population and the local population is now playing catch-up.
In a related matter, Saudi Arabia’s oil minister recently announced that the Kingdom deems a “fair price” for oil at $100, up from the $75 target of the late 2000s. This was in direct response to a ballooning domestic budget, attributable to the King’s new concessions post-Arab Spring unrest. What this is a testament to is the obstacle created by the rentier system to the process of democratization: increasing handouts and public sector spending can buy votes and acquiescence. The first step is in recognizing this danger and for Libyans to recognize that handouts in return for 40 years of subjugation is not the long term desirable policy in encouraging a prosperous Libya.
Happy to continue to engage you in this conversation with us as a prominent private sector representative.
Fayruz Abdulhadi
Chief Contributor, Business, Finance and Economics for Saqeq Institute