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WorldMarch 1 2012

Will Libya's state-run financial institutions lead its revival?

After years of economic mismanagement, Libya's two key state financial institutions – the Libyan Foreign Bank and the country's sovereign wealth fund, the Libyan Investment Authority – are restructuring and carving out new strategies as the country wakes up to a new economic dawn.
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Will Libya's state-run financial institutions lead its revival?

Those who thought Libya’s new era began with the death of the deposed leader, Muammar Gaddafi in October 2011, will have to wait a little longer. As the UN secretary-general Ban Ki-Moon so aptly put it: “[Gaddafi’s death] is only the end of the beginning.”

The IMF has forecast that Libya’s gross domestic product (GDP) may have contracted by as much as 60% in 2011. Accessing the significant funds needed to help rebuild the country, to underpin stability and to ensure that Libyans can resume their normal lives is of paramount importance.

On December 16, 2011, the UN Security Council lifted the sanctions on the Central Bank of Libya and the state-owned Libyan Foreign Bank after both were put under the supervision of the interim government, the National Transitional Council (NTC). An estimated $168bn had been frozen by the UN. Of course, the bigger challenge is ensuring that the money does not fall prey to corruption, is prudently managed and directed solely towards the good of the country.

LFB's vital role

Established in 1972 as the country’s first offshore banking institution, the LFB has played a vital role as Libya’s long-time conduit for international trade. It was a key player in aiding the country in circumventing the nearly two decades-worth of international sanctions which ended in 2004.

“The bank was set up to act as the external arm for the regime but during the 1980s and 1990s, we had virtually no relationships with the US banks whatsoever which meant we had to jump through so many hoops and had no choice but to work with lesser banks,” says Sameh Krekshi, international relations and marketing manager of the LFB. “We are now starting to reintegrate into the mainstream international banking community, but there is still a stigma attached to Libya’s banking sector.”

LFB’s activities centre on providing trade finance services to both its own clientele and most of the local commercial banks. “We cover most of their overseas payments because we are the only bank that has a paid-up capital in US dollars. We have $8bn in capital – $3bn of which is already paid-up,” says Mr Krekshi.

[Libya is] now starting to reintegrate into the mainstream international banking community, but there is still a stigma attached to [the country's] banking sector

Sameh Krekshi

However, the bank is now looking to scale up its exposure to the retail market, and at the end of 2011 it acquired approval from the Central Bank of Libya to establish a Libyan dinar unit.

“This means we can receive funds in local currency and provide the service in the foreign currency which will open up many doors for us,” says Mr Krekshi. “We are also going through a structural change as we reshuffled the board of directors on February 2. People that were linked to the former regime have been replaced with technocrats and university professors and we hope they will help us establish a solid strategy as the bank needs a new direction.”

All change at the LIA

Another key state organisation that is trying to reorganise in the post-Gaddafi era is the country’s sovereign wealth fund, the Libyan Investment Authority (LIA), which holds estimated assets of $65bn.

On January 12, the NTC approved a new board of trustees for the fund but has yet to approve a new board of directors that would hire a new management team. The NTC is reportedly looking to appoint International Finance Corporation executive Ahmed Ali Attiga as head of the LIA to replace the former chairman Mohammed Layas, who was linked to the former regime.  

“We are currently running under the supervision of temporary management who don’t want to make any investment decisions, and this has damaged the LIA’s existing assets,” says Albudery Shariha, chairman of Dalia Advisory, the UK arm of the LIA. “The question that hasn’t been answered yet is what future role we want the LIA to play. Is it a development fund? Is it a future generation fund? Or is it a stability fund for picking up the slack when the oil and gas revenues fall? The type of fund we identify it as will determine both the strategy and who should control it.”

The question that hasn’t been answered yet is what future role we want the LIA to play. Is it a development fund? Is it a future generation fund? Or is it a stability fund for picking up the slack when the oil and gas revenues fall? The type of fund we identify it as will determine both the strategy and who should control it

Albudery Shariha

According to Mr Shariha, the LIA is also heavily overstaffed – it currently employs about 100 people but, he says, should be run by no more than 30 to 40. Nepotism, he claims, was also rife. “People weren’t properly vetted and the fund employed civil servants and those loyal to the regime as they were worried their corruption would be exposed,” he says. “The new LIA needs to focus on transparency and professional management and I don’t think it should make any investments in 2012.”

Economic potential

On paper Libya is an extremely wealthy country. Its high oil revenues – it is home to the ninth largest oil reserves in the world – and small population of 6.4 million means it boasts one of the highest GDP per capita ratios in north Africa, estimated at $14,884 in 2010. 

Of course the economic reality on the ground is very different. There is huge inequity in the distribution of wealth – many live under the poverty line – and the country's unemployment rate was estimated at 26% prior to the uprising. “Libya is a rich country but a lot of Libyans are poor, and that’s due to years of economic mismanagement,” says Mr Krekshi.

Today, Libya is at a critical juncture in its transition from decades of dictatorship to a newfound democracy, and there is a widespread feeling that its government needs to focus on enacting institutional reforms to stamp out corruption, open up the domestic financial system and enable the country to unlock the wealth of its own resources and the opportunities that it has been denied for so long.

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Read more about:  Africa , Libya