The Central Bank of Libya (CBL) is interesting insofar as such an institution resists to some extent the partitioning of the country. It and the Libyan Investment Authority (LIA), the holder of much of the state’s frozen assets, have tried to treat both governments equally while also ignoring their requests for termination of various staff. This independence held until the House of Representatives (HoR) in Tobruk opened their own office in the city of Bayda and decided two days ago to print their own currency. Not a separate currency, but instead decided to go ahead with the money printing the financial committee at HoR believes is needed. The UN-designated Presidential Council disapproved of the maneuver but then after meeting their competing partners in the HoR they reversed course.
Looking at the graph above, M2 percentage change is negative since 2015. One should note that the Economist Intelligence Unit, and for that matter most data sources I reviewed do not have reliable data on Libya since 2014 (the official start of the current crisis). From 2014 the data above is noted as an estimate by analysts but it does seem to match the internal estimates of the CBL here and here. Nonetheless, I think it’s crucial to see the precarious situation that the CBL, HoR and Presidential Council is placed in with regards to Libyan monetary affairs.
For one, culturally in Libya households have held on to money since depositing cash into commercial banks would limit spending since banks are limiting withdrawals due to cash shortage. This has been a way of life for most Libyans I know. In Tripoli, since 2015, cash withdrawals have been limited to varying degrees. As of recently at major commercial banks it is 500 dinars per customer. The driving factor is both poor economic performance and money hoarding in Libya. In particular, the money supply (generally across all measurements) has been ‘flat’ since 2014 but inflation has crept. Driven by turmoil in the country (likely a supply-side shock). This brings in to question, should the central bank print no matter the consequences to alleviate the cash shortage that effects every day lives or wait for a political solution to occur.
The reason I mention the political solution, is that a large amount of Libyans earn an income from the state, especially young people who traditionally in Libya got their first job working for the government (quick read on the post-revolution economic situation for youth here). However, public revenues have fallen considerably. This has dramatic effect on the aggregate demand of the economy. That and a fall in the productive capacity due to the fall in oil production and increased private sector rigidity really leave the central bank, and more importantly the government(s), in a variable situation.
In my opinion, I would bite the bullet and print the money. I don’t think Libya will have sky rocketing inflation due to general low exchange of hard currency due and it’s supply-side constraints that are tied up in politics and war. It is worth it only because it would breath life into the business sectors in Tripoli, Misrata and Benghzai, where idle businessmen can’t pullout their own funds to do work with.
This recommendation and much of the analysis is mired with poor data. Employment information is limited as most sources have the same unemployment rate for Libya over the last 5 years, ranging from 20-35% with not enough detail to compare with other indicators. But the public sector spending fall is clear. In a country that only went through limited privatization before 2011, there is a lot of dependence on the state (health, education, utilities). The current partition is the source of the majority of economic woes in Libya, be it the cash shortage, medical shortage, education delays, or miscellaneous subsidy delays. In the end, nothing can improve without proper institutions. This is a bit of a cop-out but it remains a true fact about Libya.