June 1, 2015 / 3:02 PM / 2 years ago

Libya edges closer to economic collapse as currency dives

5 Min Read

Children from the Libyan town of Tawergha sit in class at a makeshift school in a camp for internally displaced persons, a former naval academy on the outskirts of Tripoli February 13, 2013.Ismail Zitouny

TRIPOLI (Reuters) - Libya's public finances, wracked by a dramatic loss in oil revenue that has been exacerbated by a power struggle between rival governments, are foundering.

The crisis has prompted the authorities in Tripoli, who control much of western Libya, to plan cuts to petrol subsidies, to delay public salary payments and to ban on imports from cars to steel.

And it has already been forcing the central bank - which is treading a fine line between rival governments and funds the whole country - to burn through its foreign reserves. Libya needs $30 billion to fund imports annually and typically spends $40 billion on its budget.

"Libya is on the verge of economic and financial collapse," U.N. Special Envoy Bernadino Leon, who has been trying to end a power struggle between the two governments, said last week.

Since last year, the central bank has frozen year infrastructure projects, limited spending to basic public salaries and food and petrol subsidies.

This has led civil servants, the biggest workforce in Libya, now to say they have not been paid for at least two months and accuse the central bank if not providing local lenders with liquidity to issue paychecks.

"We don't have a budget," said Colonel Abu Breeda, deputy head of Libya's police unit combating illegal immigration. "I am the head of the department but what's the point? Salaries? Nothing. There are delays everywhere."

The economy is essentially being hit on two sides. The dinar currency has lost 35 percent of its value against the dollar since January alone. Oil production, meanwhile, has fallen to 400,000 barrels a day, or a quarter of what was the case before an uprising toppled Muammar Gaddafi in 2011.

Libya has earned only $5.5 billion so far in oil revenue fighting between the rival factions and Islamic State attacks have shut down major oilfields and ports, said Husni Bey, head of one of the biggest private firms and importers.

But the country needs $3.5 billion every month, he said.

Divide and Fail?

The internationally recognized government of Prime Minister Abdullah al-Thinni sits in the eastern town of Bayda while the parliament uses a naval base in Tobruk. Some 1,200 km (750 miles) to the west, a rival faction from Misrata and other western regions called Libya Dawn seized Tripoli in August, reinstating a previous assembly and setting up an alternative parliament.

This government recently banned the import of 32 goods for six months. The list includes anything from cars, carpets to construction materials such as cement and as well as fruit juices, energy drinks and even the national passion Harissa, a hot pepper paste.

But the ban has so far failed to halted a decline of the dinar which lost further ground this week on the black market as people ramped up food shopping ahead of the Muslim fasting month starting in mid-June. Libya imports most of its food.

A dollar now buys up to 2.17 dinars on the parallel market, compared with the official rate of 1.3.

Much of the country's import financing is conducted through Tripoli where banks have their headquarters - even for goods delivered to eastern ports. Banks in the main eastern city Benghazi offer only limited services and struggle with liquidity shortages due as the city is a war zone.

"A currency devaluation is a must sooner or later," said Husni Bey, head of one of the biggest private firms and importers. A rate of 2.5 would be more realistic.

The ban will save $2 billion annually in import funding but would paralyze the construction industry, which makes up 65 percent of the private business, he said.

Similarly there is a move to lift petrol and food subsidies while giving Libyans cash instead, touching a system launched by Gaddafi to buy loyalty.

Several governments have tried to change subsidies, which make up one third of the budget as much of the cheap fuel and food gets smuggled abroad, but have shied away in the end fearing pressure from armed factions.

"The fact that the Tripoli-based authorities are now contemplating subsidies reform is a sign of just how bad finances are getting, even by the standards of the past two years," said Alex Warren of advisory group Frontier, which runs The Libya Report website.

"But subsidies are arguably the last thing you'd want to cut in terms of social stability," he said.

Editing by Jeremy Gaunt

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