Despite the Central Bank of Libya officially controlling the exchange rate, the black market in the country plays a big role in the country's currency transactions. Until hard currency is available for all Libyans, not just businesses, the black market will continue to operate.
Like central banks everywhere, the Central Bank of Libya is officially in charge of the exchange rate for the country’s currency, the dinar, but that is not the full story in Libya’s case.
Immediately behind the remarkable art-deco headquarters of the Central Bank of Libya (CBL) on the edge of Tripoli’s Old City, another currency market operates — the powerful black market.
At the square behind the bank on any weekday, just before midday, are several hundred people buying and selling hard currency. With them there are suitcases — or plain black plastic bags — stuffed with thousands of dollars, dinars and other currencies. There is even the occasional gold bar.
Someone will hold up a fistful of dollars or euros, calling for bids. The buyers call out offers. When the seller feels the bidding is over, he cries out “tamm” (“done”) or “mabruk” (“congratulations”). The deal is done.
This has been Libya’s real foreign exchange market in recent times and they are the black marketers who have increasingly kept Libya’s import-based economy afloat.
Not that they are the big players. The multimillion-dollar exchange deals are done by a small handful of traders who stay in their shops, doing the business and setting the daily black-market rate by phone.
With the CBL massively restricting the supply of foreign currency, Libyans have turned to the black market or the dollars or euros or whatever currency they require — whether it is for medical treatment in Tunisia, a vacation in Turkey or payment for goods from abroad.
Such is the demand that it has created a massive gap between the official rate which has floated around 1.30 dinars to the dollar and the black market rate. At one point last year, the latter was some seven times the official rate, although it is now down to a little more than four times.
In a country torn apart by political, military, communal and ideological rivalries and the self-interest of key players, the difference between the two rates has added to Libyan citizens’ woes. It has made the cost of imports much more expensive and fuel inflation. It has also fuelled corruption.
One of the main scams has been that favoured applicants — including, supposedly militia leaders — are given letters of credit for non-existent imports. The letters of credit, usually in dollars, are paid for at the official rate. The money is credited to an account abroad, the dollars repatriated to Libya and exchanged for dinars at the black market rate.
Another scam concerns the $500 annual exchange allowance for every Libyan. With it based on the official dinar/dollar rate, crafty “entrepreneurs” — often bank employees — were paying people more than the official rate for their $500 allowance, which could be cashed in through specially issued credit cards, then taking the cards abroad to draw the cash, usually in dollars, and again taking it to Libya to exchange for dinars on the black market.
Hundreds of millions — possibly billions — of dinars are said to have been earned by the fraudsters, with the crippled Libyan state footing the bill.
That may be about to change.
For some time, the Tripoli-based Presidency Council and its government of National Accord have been looking to devalue the dinar. The aim is to give them more dinars to spend in Libya for the oil dollars but, also, supposedly, to narrow the gap between the official and black market rates.
This formula would require dollars being readily available in the banks when people want them. If not, the black market would continue to thrive and its rate remain much higher.
The moves were complicated by the fact that in Libya a decision to devalue is not the responsibility of the government or the management of the CBL, in this case bank Governor Sadik Elkabir. The decision must come from the CBL’s board of directors.
With the country split between east and west and CBL Deputy Governor Ali Hibri operating as governor of the parallel eastern-based CBL, no meeting to make such a decision has been possible.
Instead, an alternative was devised by Elkabir and PC head Fayez Sarraj, aided by experts from the UN support mission: a surcharge of 183% on purchases of foreign currency. It effectively devalues the dinar, taking it to around 3.90 dinars to the dollar, although with bank and other charges on top, it will now cost around 4 dinars for $1.
There are exceptions, such as the $500 personal exchange allowance, which is supposed to be increased to $1,000 this year, and certain subsidised imports.
The income generated will be used to help fill the government’s coffers, ostensibly paying for health care and other public services.
The move has not been without opposition. It is claimed that this is a tax and, as such, illegal since taxes cannot be introduced or changed without a vote in the House of Representatives. But Libyan businessman Husni Bey said it is most unlikely, if it went to court, that a judge would rule against the move. “It’s not a tax, it’s a surcharge and that’s not against the law,” he said.
In recent days, the system started to go into effect. Businesses applied for letters of credit, and, as of October 3, were being given such letters.
The country’s top dairy products manufacturer, Mohamed Raied, who also heads Libya’s union of chambers of commerce, said his company had been given two letters of credit to import much needed equipment and that it was applying for more. Under the new rules, the maximum for a letter of credit for industrial imports is $10 million, for commercial imports $5 million and for other goods $1 million but there is no limit to the number of letters of credit a business can apply for.
The fact that businesses can now legitimately acquire foreign currency, albeit at around 4 dinars to the dollar, will help stabilise the economic situation in Libya, Raied said. He predicted that it will end the dominance of the black market and that the official rate and the black market rate will quickly return to near parity.
That remains to be seen.
At the moment the black market rate is around 5.3 dinars to the dollar compared to the surcharged official rate of around 3.90 dinars and it has been slowly moving down since the surcharge announcement.
However, there are reports that businesses in eastern Libya were having difficulty obtaining letters of credit through banks in their region and were having to open accounts in Tripoli. Moreover, until hard currency is available for all Libyans requiring it, not just businesses, the black market will continue to operate.
Then there are the militias that still control much of Tripoli and that have allegedly earned millions through fraudulent letters of credit. They are not going to like this.
It should, though, help bring down prices in the shops.
For ordinary Libyans living in a bitterly divided country, with insecurity and crime ever present for so many, not to mention regular electricity cuts, an abysmal health service and so many other daily difficulties, that is at least one step in the right direction.