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Economic transparency and structural reform remain Libya’s last hope

For a range of reasons, 21st century civil wars have tended to be more protracted and multiparty than those of the 20th century. One is that the 21st century’s international system is more fractured and therefore promotes proxy intervention while consistently hampering mediation efforts.

Another is the decreasing importance of territorial control to the outcome of civil wars. Globalization, the internet, and the withdrawal of American hegemonic power all reduce the relative importance of controlling strategic pieces of territory. Of course, airports, roads, oil installations, military barracks, and ethnic heartlands still retain military importance, but over the last decades institutions, economic structures, and media narratives have gained increasing strategic weight. As a result, many 21st century conflicts are no longer fought primarily over territory or even rival national visions, but for more obscure and hybrid logics whereby control of territory is merely one dimension of a multidimensional, multiplayer chess game.

In such multifaceted wars, it is impossible to bring peace to a war-torn nation without addressing the complex root causes of the violence. Merely returning the combatants to their antebellum territorial locations will not suffice in instances where territory was militarily contested only to provide leverage over an economic institution or grant one side an optic of victory.

Nowhere are these complexities on starker display than in Libya, where since 2011 the country’s seemingly endless Wars of Post-Gadhafi Succession have not fundamentally been fought over the control of territory, but rather over the control of economic institutions, patronage networks, and the amorphous optics of legitimacy and international support.

Over the course of the spring of 2020, Libya’s most recent round of civil war — the “War for Tripoli” — was militarily won by the defenders, a loose amalgam of forces affiliated with the U.N.-backed Government of National Accord. But pushing back the troops of Gen. Khalifa Hifter and those aligned to his self-styled Libyan National Army (LNA) — such as various tribal forces in eastern Libya or the Kaniyat militia from Tarhuna in western Libya — has not fundamentally addressed the underlying causes of conflict. Hifter’s April 2019 assault on Tripoli was brutal, illegal, driven by megalomania, and cunningly designed to upend the U.N.-mediated National Conference process, yet it did cleverly play upon certain communities’ genuine grievances about how the country’s oil wealth is distributed and how its various economic institutions are constructed.

In the wake of the War for Tripoli, as a new stalemate set in around Sirte and Jufra over the summer of 2020, the real causes of the conflict remain totally unaddressed. Supporters of the LNA project throughout Libya wished to take over Tripoli, not primarily to leverage military dominance to kill their opponents or carry out forced deportations of defeated populations, but to change the heads of Tripoli’s semi-sovereign economic institutions and to muscle in on corrupt patronage networks. As such, the 2019-20 War for Tripoli, as well as its antecedents — the 2018 “Southern Tripoli Late-Summer War,” spearheaded by the aforementioned Kaniyat militia, and the 2014 “Tripoli Airport War,” led by the Libyan Dawn faction — were never fundamentally about territorial, military, or even conventional political demands. They were about gaining access to the fonts of both legitimate and corrupt enrichment: letters of credit, smuggling networks, subsidized petrol, and control of those myriad institutions to which Libya’s sui generis economic system grants the ability to exert de facto fiscal, financial, and legal power.

Therefore, although Hifter and his allies have been wholesale evicted from western Libya, the grievances they highlighted, preyed upon, and took advantage of remain unchanged. Now that the threat from a common enemy has been removed, the anti-LNA coalition is rapidly fraying. There are anti-corruption protests in the streets and cabinet-level positions have been reshuffled to inhibit popular officials from executing long-overdue reforms. Moreover, the economic and humanitarian situation in Tripoli is literally worse than ever. Power and internet outages affect whole neighborhoods, prices of essentials have skyrocketed, and internecine feuding among Tripoli’s militias and political factions is the order of the day.

Amid this chaos, the international community, led by Germany, the U.N., and the U.S., supposedly achieved a political breakthrough in August 2020 by encouraging a cease-fire declaration from a new matrix of political interlocutors. They have done an admirable job triangulating the international proxy political dimensions of Libya’s civil war by getting Egypt, Turkey, Russia, and the UAE to agree to certain frameworks, while largely sidestepping the real economic issues that represent the underlying causes of violence. Bizarrely, even where incremental progress has been made on economic issues, it has been relegated to the shadows. The forensic audit of the eastern and western branches of the Central Bank of Libya (CBL), conducted by Deloitte, is finally underway, yet it is being carried out amid far too much secrecy for my taste. Nonetheless, it can still be a useful steppingstone. It is set to run for six months and then to be handed over to the Libyan National Audit Bureau (AB) for follow up. The AB is the body that has a legal mandate to inspect the books of Libya’s semi-sovereign economic institutions.

Nonetheless, the AB is also very much a part of Libya’s current system of semi-sovereign institutions. It is beyond doubt that, over the years, it has prevented many instances of corruption, but it has also blocked many legitimate projects from going forward, especially in the health care and electricity sectors. More critically, the AB is deeply entrenched in the Libyan status quo and has perverse incentives to uphold the current structures. It cannot and should not be tasked by internationals like the U.N. with further safeguarding Libya’s wealth or holding officials and institutions accountable. Doing so would only create more structural barriers to systemic reforms and a genuine transparency agenda.

An International Financial Commission

Following on my earlier proposals encapsulated in this re-released draft, I call on Deloitte, the CBL, and U.N. Support Mission in Libya to complete the contracted audit now underway. Then, rather than handing things over to a newly empowered AB, I call on those three entities to use the ongoing audit and the newly-launched multi-round Morocco talks as the basis for having the main Libyan institutions and political players (including the CBL and the AB) request the International Financial Commission (IFC) that I describe in this re-released paper. This step cannot wait for a peace deal between east and west — it must either proceed it or be an integral part of it.

The recent plenary discussions being held in early September 2020 in Morocco between the eastern-based House of Representatives (HoR) and the western-based High State Council (HSC) present the perfect opportunity to merge the discussions about reforming Libya’s semi-sovereign institutions into the mainstream of international peace mediation efforts. Working together the HSC and HoR have the legal ability to replace the heads of the main Libyan economic institutions and they have now publicly committed themselves to exploring ways to do so. To make their choices more palatable to Libyans fed up with corruption and politics as usual, they should announce that their newly appointed institutional heads will only take up their position in exchange for calling for the IFC.

Once the IFC has been set up, it can convene the top international experts on Libya’s economy and give them a formal role in providing background information and certifying the neutrality, thoroughness, and accuracy of the follow-up transparency and reform initiatives described in this paper. These subsequent auditing processes should be expert-led (rather than just by professional forensic auditors, who may lack Libya knowledge). After the first Deloitte/CBL phase of the audit is complete, new terms of reference should be issued including all of Libya’s ministries and semi-sovereign institutions, such as the National Oil Company (NOC), the Libyan Investment Authority (LIA), the Organization for the Development of Administrative Centers (ODAC), the General Electric Company of Libya (GECOL), and all of Libya’s lesser-known semi-sovereign institutions like the Economic and Social Development Fund and the AB itself. All of Libya’s economic institutions should be forensically audited by a team of international technocrats, neutral international expert observers, and knowledgeable diaspora Libyan intellectuals, and the details of the exact process and the results should be published online in both Arabic and English. Only the disinfecting light of transparency can clean out the cobwebs and corruption that hide in dark corners. There can be no successful mediation between a new set of eastern or western political figures so long as the real economic interests of the status quo players remain hidden in the shadows.

As past experience has made all too clear, international bureaucrats and interested multinational corporations (like the “Big Four” accountancies) paradoxically lack the relevant expertise and connections to Libyan civil society to get the real job done. The Big Four are profit-driven corporations while international institutions are constrained by various hierarchies and bureaucratic procedures. Neither should be blamed for conforming to their essential nature and lacking the political prerogatives necessary for a task such as this. Given their unique experience and institutional knowhow, they should be involved in such an audit but should be directed by real Libya hands like knowledgeable retired ambassadors and special envoys operating in a conclave with the top think-tank and business experts on Libya’s economy. Heretofore, what we have witnessed from the major powers in the mediation of Libya’s civil war and audit of its financial system is a business-as-usual approach, with U.N. committees, international working groups, and major corporations playing their standard roles. Some of the diplomacy has been tactful, and the proposed compromises ingenious, but despite the skill and good intentions of certain players, we still know where this will lead, which is likely nowhere useful. A new approach is needed, and it can build on the groundwork being laid between eastern and western political figures via the Morocco dialogues.

A new approach is needed

For it to be successful any audit process must not be conducted as business as usual and delegated to giant corporations and regular functionaries at international institutions like the U.N., World Bank, or IMF. For those interested in the details of how I would assemble a “Libya dream team,” please consult my previous report It’s the Economy Stupid: How Libya’s Civil War Is Rooted in Its Economic Structures, published with IAI in Rome. Briefly put, only if led by real Libya experts, brought on exclusively for this mission, and conducted truly comprehensively do these audits stand a fighting chance of promoting genuine transparency and real structural reforms. Otherwise the status quo powers will simply do what they have done to previous attempts: throw wrenches in the works and prevent progress by using the bureaucratic procedures and structures of those institutions against the genuine goal of the mission. Simultaneously to expert-led audits, Libya’s oil must be gotten flowing and the proceeds used to reform how wealth is distributed and how the entire economy is structured.

An American-led attempt to restart Libya’s oil production by arranging a mechanism whereby oil revenues could remain frozen (or more precisely “unreconciled”) in the NOC’s Libyan Foreign Bank account certainly represents a step toward addressing superficial technical aspects of Libya’s economic difficulties, but these discussions have not yet proposed genuine solutions to the root causes of conflict. Similarly, pushing for reforms of the Presidential Council and a reshuffling of which political figures get to represent eastern or western Libya will amount to nothing if reforms of the CBL, the dinar rate, subsidies, and salaries are not fundamentally tied to any political deal. From experience, I know that it is extremely unlikely that any of these suggestions will be implemented, but patriotic Libyans and those qualified experts passionately interested in Libya’s future should still demand them.

We should all unite in a push for “economic transparency and structural reform” to be the clarion call for civic, international, and humanitarian engagement in Libya’s conflict. Libya’s civil war is extremely complex but only economic transparency followed by fundamental reforms to the opaque, counterproductive, and corrupt structures of the economy can yield genuine results in removing the causes of fighting and militia recruitment.

Some forward-looking statesmen at the U.N. and various Western countries have taken this issue to heart and pushed for an economic track to go alongside the disarmament and political tracks of the 2020 Berlin process. Nonetheless, the economic track is still treated like an unwanted stepchild. It is not publicly lauded, nor are its workings and findings shared transparently. However, now is the time to move the economic track to the foreground and give potential reformers the limelight and kudos they deserve.

One possible way to do so is presented in my January 2020 report, “An International Financial Commission is Libya’s Last Hope,” now being re-released in Arabic translation alongside this new preface. Libya’s macroeconomic position and overall infrastructure is the worst it has been since the end of the sanctions period of the 1990s. Libyans of all political persuasions are ready to unite behind genuine reforms even if they impose short-term pain, potential medium-term uncertainties, and even long-term economic externalities for certain sectors or communities.

Back in January 2020, I called for the main heads of Libya’s political bodies and semi-sovereign economic institutions to request international help in convening a technocratic commission to: Firstly, make transparent to the Libyan people where their money is being spent, where their subsidized products are being transported, and where the billions are actually kept; and then secondly, rewrite the rules of Libya’s economy in a transparent way, taking into consideration genuine expert advice and the will of the Libyan people. This can now be done as a follow up to the Deloitte audit of the CBL.

Also in this now re-released paper originally published in January 2020, I explained that enforcing the arms embargo and boxing out international spoilers was crucial, but only the first step to achieving a mutually hurting stalemate. This has now largely been achieved. The current military stalemate is partially useful as it ends needless suffering and allows improvements in the security situation so civilians, technocrats, and businesspeople can return to Tripoli and communities across the country. Yet on its own, the military stalemate will not end Libya’s Wars of Post-Gadhafi Succession. No lasting political deal can emerge if the underlying causes of violence remain unaddressed — the semi-sovereign prerogatives of Libya’s new breed of oligarchs who have overstayed their legitimate mandates, the unfettered access to secret funds, and the corrupt distortions of the market mechanism that are embedded in Libya’s current economic institutions.

No matter how many power plants and mobile electricity generation units are added to the Libyan power grid, load-shedding will still be necessary every summer if electricity remains subsidized and demand growth is unchecked by the functioning of a rational market. No matter how much oil revenue flows into Libya, fights to control key institutions in Tripoli will continue until transparency mechanisms are created to showcase how funds flow to and from Libya’s communities and institutions. No matter how peaceful Libya becomes, there will always be an incentive to join a militia if doing so can provide preferential access to subsidized goods (including foreign exchange).

Intelligent and civically-minded Libyan patriots, especially those of the younger generation, are willing to put the past behind them and forget old grievances about whose cousin, and which tribe, started which war. They need the help of their genuine allies abroad to provide the protection, technocratic expertise, and political cover to actualize their visions of reform and renewal. The plan contained in “An International Financial Commission is Libya’s Last Hope” is one way forward. Hopefully, it will be enough to start a discussion and spur policymakers to consider bolder actions than the business-as-usual, 20th century approach to mediating civil wars that has remained dominant

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