US crackdown puts Libya’s economic future in jeopardy

Reuters/Ayman Sahley

Following a December meeting in Tunis, the Federal Reserve Bank of New York, supported by the US Treasury, announced the suspension of all dealings with the Central Bank of Libya (CBL) and the Libyan Foreign Bank unless an independent auditing firm is appointed. 

This third-party auditor would be responsible for reviewing all US dollar-denominated transactions conducted by these two major Libyan banks, which are the sole entities in the country with access to US dollars.

This decision was conveyed in an official letter from the newly appointed CBL governor Naji Issa to Khalid Shakshak, head of the Libyan Audit Bureau, the body tasked with monitoring public funds in Libya. 

The Fed’s actions were prompted by significant lapses in governance, accountability and auditing within Libya’s financial institutions.

Ambiguities surrounding Libya’s foreign currency and gold reserves have raised serious questions, while allegations of suspicious barter transactions under the National Oil Corporation and mismanagement of oil revenues have further undermined trust. 

These issues are believed to have contributed to the recent resignation of the National Oil Corporation’s head, Farhat Bengdara.

The US Treasury also wants to protect the Fed’s reputation, as previous transactions posed high risks. It remains unclear if the auditing firm, potentially Pragma Corp, will retroactively review past activities.

The Fed has already implemented stricter compliance measures, including Know Your Customer protocols and enhanced due diligence for letters of credit and beneficiaries.

Governance crisis and delays

Libya’s financial oversight is further complicated by political instability. In December the Libyan Audit Bureau’s Tripoli headquarters was forcibly relocated, and its head, Khalid Shakshak, was suspended by a decree from the Supreme Judicial Council. 

This sparked an authority dispute, with the House of Representatives and High State Council issuing counter-decrees demanding Shakshak remain in his position.

During this confusion it was agreed to delay any final decision until the end of February. This delay undermines governance and accountability, postpones the appointment of the third-party auditor and risks plunging Libya into further financial and economic chaos.

The CBL’s recent actions have fuelled concerns. For example, letters of credit totalling more than $800 million were opened without adhering to the Fed’s anti-money laundering, terrorism financing and fund verification procedures. 

Banking sources report that only small letters of credit are being processed using the limited euros available at the CBL. The Fed and US Treasury insist that no funds will be released until Libya establishes a unified budget and government.

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International concerns

The suspension of activities reflects a lack of transparency and disclosure within Libya’s banking sector, a situation classified as “de-risking”. This practice leads financial institutions to restrict or terminate banking relationships to avoid risks, rather than manage them according to Financial Action Task Force (FATF) standards.

Financial observers, including the International Monetary Fund, have raised concerns for years about inaccuracy and misleading data in the CBL’s financial statements. 

Former governor Sadiq Al-Kabir’s claim that Libya’s foreign currency reserves stood at $29 billion instead of $84 billion exemplifies these issues. Al-Kabir, often criticised for running CBL single-handedly, controlled SWIFT codes and other critical banking functions without board oversight.

Economic consequences

The Fed’s measures will complicate essential financial operations, such as collecting oil revenues and facilitating food imports. 

This will erode trust in Libya’s economic system, hinder international relationships and strain the country’s ability to meet external obligations. The Libyan dinar is likely to depreciate further, fuelling hyperinflation and worsening local market conditions.

Libya must urgently address these challenges by appointing an independent auditing firm to ensure transparency and accountability. 

It must also comply with international financial standards to restore trust with correspondent institutions and stabilise governance to avoid further delays in reform.

Failure to act swiftly risks economic collapse and Libya’s descent into a pariah state, which would isolate it further from the global financial system. Libya’s future depends on decisive and immediate reforms.

Salem Maiar is a consultant in Libyan natural resources, finances and geopolitics