Farhat Bengdara, Libya's central bank governor

The governor of the Central Bank of Libya tells Stephen Timewell how a major overhaul of the national bank is playing a critical role in driving government plans to improve the efficiency of Libya's economy and promote the private sector.

Q: Libya appears to be making significant reforms to improve its economy. How do you see the changes taking place and what is the role of the Central Bank of Libya (CBL) in those changes?

A: Libya has been implementing a comprehensive reform programme since 2006. This was the result of a decision taken by the government to move away from an ownership role in the economy to that of a prudent regulator. The entire economy is currently undergoing restructuring to improve its efficiency, diversify it away from oil and promote the role of the private sector. Reflecting the shift in policy, a private investment boom is evident and the private sector's share in the economy is growing.

To accelerate the transformation, 22 new laws were passed by the General People's Congress this year. These include an overhaul of legislation governing foreign direct investment, a simplified tax system and lower tax rates. The mandate of the Libyan Investment Authority has been to introduce a focused flexibility into the labour market and to significantly simplify customs procedures. The new laws aim to develop standards that are in line with international best practices.

Looking at the banking system, the past three years have witnessed a major transformation. Banks have been privatised, merged, their shares sold to the private sector through initial public offerings and the system opened up to foreign banks.

Of the 16 commercial banks licensed in the country, six have strategic foreign partners. In addition, 19 foreign banks have representative offices in Libya. Also, this summer the CBL will issue licences to foreign banks that would have an ownership of up to 49% in the new banks with full management control. The remaining 51% would be owned by domestic investors.

The CBL's remaining shares in the three domestic commercial banks - Gumhouria, National Commercial Bank and the North Africa Bank - will be sold gradually to the private sector. I want to see Libya's banking system in private hands by 2011 and more foreign banks operating in the country. The entry of foreign banks will lead to more competition and an influx of new products in the market. There are excellent opportunities for foreign banks in Libya.

As foreign banks are expanding in the domestic market, one of the key priorities for the CBL has been to strengthen banking supervision. This is being enhanced by improving regulations in line with international standards, strengthening bank reporting and skills, and both on- and off-site procedures. To that end, the banking supervision department has embarked on a three-year reform strategy from 2009. The aim is to align supervision with international best practices and Basel requirements.

Q: Given the CBL's leading role in Libya's reform process, how is the central bank restructuring itself and what changes can be expected?

A: To support the development of the financial sector, the central bank is moving to a new structure. This will reinforce the monetary policy framework and banking supervision, and establish a functional-based organisational structure.

The new structure has been approved by the CBL board, and monetary and investment policy committees at the bank are also being strengthened.

Monetary policy is being bolstered through the establishment of additional instruments. The central bank currently issues CDs [certificates of deposits] with two maturities of 91 days and 28 days. Plans are under way to issue additional longer-term maturities and to move to an auction system in the CD market. An overnight deposit facility has also been established at the CBL.

The new central bank structure involves hiring new staff and taking a fresh approach to human resource (HR) policies. A new HR department has been established and supporting policies dealing with recruitment of staff, performance management and compensation systems are being developed. To bring in new expertise and talent, an early retirement programme has been implemented. More than 200 staff have applied for the programme, which will be completed by the end of the year.

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Branching out: Libya's central bank is spearheading the government's growth plans

Q: What advantages does Libya have in achieving its structural reforms?

A: The economic transformation is taking place in a stable macroeconomic environment. Economic growth has been strong overall, with non-oil growth averaging about 9% annually since 2005, inflation is under control, external and fiscal accounts are in surplus and external assets are increasing, reaching $138bn at the end of last year.

This is a unique performance for a country going through a transition from a planned economy to a mixed one. Most countries that have gone through a similar transition experienced periods of high inflation, a jump in unemployment rates and social unrest.

Two factors underline Libya's stability - implementation of prudent fiscal and monetary policies and the implementation of government programmes designed to minimise the impact of the transition on the population. As a result, there is a widespread support for the government's efforts to restructure and open the economy.

Q: How do you see the momentum of reforms in the period ahead?

A: We are committed to proceeding with the planned reforms. We know the road ahead will not be easy, given the absence of strong human capital in the country.

We intend to continue to work with the international financial institutions and private consulting firms to reform our institutions and strengthen policy implementation. We believe the stable macroeconomic environment and ample oil revenue provide us with the opportunity to accelerate and broaden the reform programme.

I expect more progress to be made at the CBL in 2010 and 2011 towards building a solid and efficient banking system and an effective monetary policy.

Q: Libyan Foreign Bank (LFB), established in 1972 as an offshore entity, played an important role in the sanctions era, but what is the role for the institution now that era has passed?

A: A complete restructuring of LFB is now taking place. The paid-up capital of the bank was increased to $3bn earlier in the year and reforms of the bank are taking place to allow it to function in the domestic market where it was previously not operating. LFB has 28 participations abroad, including a stake in the London-based British Arab Commercial Bank.

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