How Libya’s economic structures enrich the militias

Largely overlooked in international policymaking toward Libya’s current conflict is the role of corruption as a key driver of violence, as opposed to merely its byproduct. The high-level debate on Libya at the UN General Assembly (UNGA) in late September and the proposed follow-on international conference to be hosted by Germany in October or November are the perfect opportunities to correct this oversight.

While foreign nations providing money and weapons to the various Libyan warlords and militias have ideological, security, and economic motivations, it is not much of an oversimplification to state that the Libyan militias themselves are fighting primarily over money. Ultimately, accumulated oil revenue is the source of Libya’s wealth, but it is distributed in various ways, all of which are subject to abuses. There are three primary channels by which the post-Gadhafian structural inheritance has given rise to the militias: paying militiamen directly, letter of credit fraud, and the smuggling of subsidized goods. Each of these channels has its source in the capital of Tripoli. Oil revenue is paid to the Central Bank of Libya (CBL) in Tripoli, subsidies and salaries are determined and funded from Tripoli, and letters of credit are issued by the CBL.

The status quo promotes militia wealth

This centralization of economic power in Tripoli creates the preconditions for the current zero-sum dynamic of civil war for control of the capital. Others have cogently written about Tripoli’s militias as an economic cartel, and I believe the time has come to expand this characterization: all the major warlords and certain key officials with control over Libya’s inefficient macroeconomic policies should be thought of as “the status quo party.” Top UN officials have started referring to them publicly as such.

This “party” benefits from the conflict and abhors the thought of its resolution. Their lucrative patronage networks were nearly disrupted by the UN’s National Conference that was slated for mid-April 2019. General Khalifa Hifter launched his assault on Tripoli deliberately to sabotage that conference. Since the outbreak of fighting, the transformation of the conflict into a protracted stalemate has favored certain armed groups that have further cemented their dominance over specific sectors of the Libyan economy. For example, one of Tripoli’s most important commanders, Emad al-Trabelsi, has capitalized on the fighting to consolidate his stranglehold over the economically important western suburbs. Conversely, because Hifter’s assault failed to punch through southern Tripoli, and his forces have not been able to rectify their fiscal deficit by usurping their enemies’ existing networks of exploitation, Hifter has subcontracted much of the fight over Tripoli to his local allies — the Kani militia from Tarhuna. This group has its own diverse sources of financing and continues to fight alongside Hifter in order to protect them.

How the economic status quo works

Libya has long subsidized a range of goods and services. Sometimes both the inputs and the outputs are subsidized. Let us take the example of Libyan vegetables. Farmers receive a subsidy for their tomatoes, but the water, the electricity, and the petrol that farmers use in producing the tomatoes are each highly subsidized as well. The price of the Libyan tomato to the consumer may well be less than one-tenth what it costs to produce. The same is true with Libyan steel and aluminum, which benefit from subsidies on both their inputs and the electricity required to produce them. But since the Libyan economy ministry does not study matters in this way, the actual production costs of all goods in the Libyan marketplace are usually unknown.

What is known though is that Libya is likely the most subsidized country on earth (although it is not included in the World Bank’s data on the subject) and the subsidies are baked into the way in which Libya’s economic institutions relate to one another and hence cannot easily be quantified monetarily. These institutions receive pots of money from the CBL or have a right to receive subsidized or free goods. Libya’s institutions frequently lack transparent balance sheets and operate in a vacuum, outside of market pricing.

Libya’s level of subsidies could not work in a market-driven system, in which different economic bodies compete to turn a profit or produce public goods as efficiently as possible. Far from being a harmless idiosyncrasy, a socialist policy choice, a quirky legacy from the Gadhafi period, or mere inefficiency, the subsidy system is the crucial driver of violence and corruption in Libya.

The motherload of militia financing: Refined petrol smuggling

The National Oil Company (NOC) purchases refined petroleum abroad and uses subsidiaries to distribute it at vastly discounted prices inside Libya. This is all in conformity with Libyan laws from the Gadhafi period. Militias usually seize this petrol and smuggle it abroad to sell at a huge profit. Most Libyan petrol deliveries never arrive at a genuine filling station — this is termed the ghost petrol station phenomenon. It is the smuggling of refined fuels that currently provides a plurality of the militias’ smuggling income. They are addicted to it, and their pursuit of such smuggling opportunities increases their levels of violence.

Petrol, electricity, and food subsidies are only some of the examples of how subsidies affect Libyan economic life. The true extent of the problem remains unknown by even the most senior Libyan technocrats and external academics and experts.

Letter of credit fraud

Letter of credit fraud relies on the gap between black-market and official rates of exchange. Typically, an individual will apply to import goods, be allocated foreign exchange (usually dollars or euros) by the CBL at the official rate of 1.3 or 1.4 Libyan dinars per dollar, but will then exchange the foreign currency on the black market for the going rate of around 4-8 per dollar, doubling or tripling his money even after paying the bribes needed to secure the initial letter of credit. Other ways of engaging in letter of credit fraud involve getting a letter of credit conditional upon importing goods, actually commissioning the shipment of containers, but then importing containers filled with water or ballast and doctoring the customs documents.

Given the opportunities for enrichment offered by obtaining a letter of credit, the decision-making process at the CBL is structurally susceptible to bribery or coercion from the militias who physically control Tripoli. Such temptations to gain preferential access will exist so long as the black-market and the official rate of the dinar differ. In eastern Libya, those close to key commanders of the self-styled Libyan National Army (LNA) have been known to get preferential access to letters of credit and liquidity. These same influential commanders are also connected to human and petrol smuggling as well as illegal scrap metal exports. These activities are used not only to enrich prominent individuals, but also to cement crucial local alliances. The 2018 tax on letters of credit has only compounded complexities by creating three separate rates for the Libyan currency.

Upholding the status quo

The incentives for fraud can only be eliminated by a devaluation and floating of the dinar. The dinar cannot be devalued unless the CBL holds a board meeting, and it has not been able to do that for years because, it claims, the security situation makes bringing together its board members in one place nearly impossible. In reality, the dinar hasn’t been devalued because the heads of certain Libyan economic institutions as well as key militia, business, and political leaders constitute the aforementioned “status quo party.” These power players benefit from access to subsidized money at the official rate, just as they do from smuggling opportunities. It is ordinary Libyans who suffer as they have to make their purchases at the black-market rate, and it is their wealth that is being wasted on subsidies and propping up the currency.

How Libya’s real friends can help

Dramatic policy changes are required to eliminate the entrenched economic incentives to fight for control of Tripoli and to maintain the status quo of militia dominance. Germany’s proposed conference on Libya should focus not only on the familiar topic of the support that disruptive foreign patrons give to their local proxies in violation of the UN arms embargo, but also on the frequently overlooked fundamental economic drivers of the conflict.

The German conference and the preceding UNGA discussion of Libya should hone in on how internationals can help the CBL float the dinar and the government eliminate subsidies immediately. At present, the militias can always block change by raiding their offices or kidnapping their officials, deterring potential economic reformers. The international community has never provided effective assistance to facilitate economic reforms and protect reformers. The upcoming UNGA discussions and proposed international conference should formulate concrete plans on how to do both. Surely, the way forward requires empowering ordinary Libyans to demand change.

Although there are many ways smuggling can be tackled, experience from other countries suggests that only by eliminating the border price differential can it be truly stopped. For Libya, this means reducing or eliminating subsidies on petrol and diesel. But how can these reforms be sold to a public long accustomed to subsidized fuel? The information war cannot be won when no one knows how much refined product is imported and how much actually reaches Libyan consumers.

What we do know is that the petrol stations in western Libya frequently have multi-hour queues and Libyans are forced to pay far higher prices for fuel on the black market because the militias have sold all the subsidized fuel abroad. Similarly, the prices of household necessities have skyrocketed over the last few years due to letter of credit fraud. Regular Libyans are “mad as hell” and constitute the primary drivers of reform. They are the “anti-status quo party.” International policymakers should leapfrog the “status quo party” of entrenched politicians and warlords and make an alliance with the Libyan people. The upcoming UNGA is the perfect time to unveil this new approach.

For too long, international policymakers have thought: we can’t fix the Libyan subsidy system while there is fighting going on. That logic must be turned on its head: the fighting can’t be stopped while the subsidy system is going on.

Jason Pack is a Non-Resident Scholar at the Middle East Institute, the Founder of Libya-Analysis LLC, and the former Executive Director of the U.S.-Libya Business Association. The views expressed in this article are his own. 

Photo by MAHMUD TURKIA/AFP/Getty Images