July 25, 2019 / 4:37 PM / 4 months ago

INTERVIEW-Libya central bank head says conflict upset reform steps

* Eastern-based forces attacked Tripoli in April

* Sadiq al-Kabir says cash deliveries impeded

* Says CBL does not intend to let banks fail

By Aidan Lewis

LONDON, July 25 (Reuters) - An offensive by eastern-based forces to take control of Libya’s capital has thrown tentative economic reforms into doubt and revived liquidity problems, Tripoli’s central bank governor said.

The governor, Sadiq al-Kabir, also said he had no contact currently with the head of a parallel branch of the central bank in the east of the country, and that the rupture was entrenched by Libya’s political divide.

Since 2014, Libya has been split between competing governments and military alliances based in Tripoli and the east, a division that has been reflected in key institutions including the central bank and the National Oil Corporation.

However, receipts from oil sales, Libya’s main source of revenue, have continued to be processed by the central bank (CBL) in Tripoli, home to the internationally-recognised government.

As oil output fluctuated over the past five years, a large black market for foreign exchange developed, banks ran short of cash, and living standards dropped sharply.

Most spending is absorbed by an inflated state salary bill and subsidies, though Kabir said five billion dinars ($3.58 billion) had been allocated earlier this year for development spending frozen since 2010, including on schools, universities and roads.

Those spending plans were disrupted when forces led by Khalifa Haftar and aligned with the eastern-based government advanced on the capital in early April just as the United Nations was preparing to hold a national dialogue in a push to reunify the country.

“There was a ray of hope in April, the end of March,” Kabir told Reuters in an interview on a visit to London. “Frankly, we were surprised. We did not expect Mr Haftar’s military attack on Tripoli.”

Haftar’s forces swept up rapidly from the south but have been unable to advance beyond Tripoli’s outskirts.

The fighting has impeded cash deliveries to some banks beyond the capital, Kabir said, increasing a strain on liquidity that had eased after the introduction last year of a surcharge on foreign currency transactions made at the official rate - though queues at banks did not go away.

“Last Eid, we were unable to deliver liquidity 60 km (37 miles) from Tripoli,” he added, referring to the Muslim holiday that fell in early June.

“Liquidity is transported by helicopter and naturally, we are afraid of the aircraft being downed.”

CASH “SEIZED”

One recent shipment of 11 million dinars to the western town of Jadu was taken by Haftar’s forces, who kept five million and handed over the rest, he said.

Haftar’s Libyan National Army could not immediately reached for comment.

Efforts led by the international community to reunify Libya’s institutions and prevent an escalating conflict over oil wealth have stalled. Kabir said the last time he had seen eastern central bank head Ali al-Hibri was last year at meetings to arrange an outside audit of the operations of both central banks.

A tender for the audit has just been reissued after it failed to attract any bidders, Kabir said.

“The problem is not unifying the two central banks … first you solve the political problem,” he said.

The eastern government has built up large debts through a parallel accounting system partly through drawing deposits from commercial banks. The Tripoli central bank has imposed extra checks on requests for foreign currency from four banks, including three based in the east, citing suspicious transactions.

Several banks have struggled to keep the required 20% of customers’ deposits at the Tripoli central bank. If they breach that requirement, the CBL could take measures including “providing a credit line, a loan, setting up a temporary management committee, or other options”, said Kabir.

“The CBL does not intend to let Libyan banks go bankrupt – in the current context, there is an acute national and public need to prevent that from happening.”

Further steps to tackle the foreign currency black market have also been delayed, Kabir said. The Tripoli government, which has struggled to assert itself since it was set up in 2016, has failed to act on fuel subsidy reform, as agreed when the foreign exchange fees were introduced last September, he added.

“But we’re still working on it … we have our plans ready, we have different scenarios, we did our stress tests, but you know, when is the right time to take the action?” ($1 = 1.3983 Libyan dinars) (Editing by William Maclean)

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