In March, the establishment of a new administration parallel with Abdelhamid Dbeibah’s United Nations-backed Government of National Unity (GNU) caught global attention, as Libya slipped back to an era of explicit political divisions. However, the timeline and fault lines of this crisis predate the appointment of Fathi Bashagha’s parallel Government of National Stability (GNS), which is supported by the House of Representatives (HoR, Libya’s parliament). Instead, the roots can be traced to the battle to control Libya’s budget throughout the last eighteen months.
Libya’s economy is in tatters. Since the 2011 revolution, two separate civil wars sparked by warlord Khalifa Haftar’s self-styled Libyan Arab Armed Forces’ (LAAF) ended up in power grabs and oil blockades. Such conflicts have not only destroyed much of the country but costed over USD 576 billion. Crucially, repeated and politically motivated oil blockades have choked the state coffers, with the country spending without being able to save.
Living standards fare even worse. Following Haftar’s 2019 attack against on Tripoli, day-to-day life has been described as “apocalyptic” in the capital. Libya’s socio-economic infrastructure lays in ruins while the state is not capable of delivering electricity, providing liquidity for banks or, at times, even water.
The GNU’s establishment through an UN-brokered political dialogue in March 2021 was meant to change this. Initially celebrated as a unifying moment, a parliamentary vote of confidence ushered its activity.
A new peaceful vision seemed on the horizon as Dbeibah pledged to end wars, reconstruct the country, and deliver on ‘living standards and services’ across Libya. However, the promises were short-lived, as the battle over the GNU’s budget set a new crisis in motion, bringing old problems to light.
The battle over the budget
Libya’s current economic crisis is a perfect storm unleashed by both new political ventures as well as a legacy of unresolved power struggles. Despite enormous spending, Libya has not had a unified parliamentary-approved budget since the 2014 civil war. Nevertheless, money continues to flow from Libya’s central bank into the government’s ministries outside of a parliamentary-approved budget. The GNU has resorted to using a temporary finance mechanism – ‘the rule of 1/12th ‘– designed to allow the current government to act in line with the previous government’s budgetary spending until they receive parliamentary approval.
Libya’s last budget in 2019 stood at 48 billion Libyan dinars (LYD) — valued at around USD34 billion, — meaning the GNU is allowed to spend around 4 billion dinars a month until its new budget is approved.
However, Libya’s economic realities are now radically different. At the end of 2020, the central bank formally devalued the Libyan dinar from $1 to 1.3 LYD to a new rate of $1 to 4.48 LYD. The net result is that Libya’s dinars are worth far less and the country’s purchasing power has decreased by three and a half times.
Dinars’ depreciation has not only hiked the costs of imported materials to ministries tasked with reconstructing the country, but also the cost of mostly imported consumer goods to citizens. This has led the GNU to allegedly employing short-term tactics to extract cash from outside the central bank’s temporary financing mechanism. According to businessmen in the capital, the GNU may have been liquidating cash-rich, state-owned companies — such as the Libyan national telecom providers Libyana and Madar — in order to boost its spending power.
Whilst short-term short cuts help ease the crisis, they are no replacement for a formal budget. The government’s cash flows still fall massively short of the budgets needed to repair Libya’s infrastructure to revive the country. Moreover, the government desperately needs cash to kickstart a productive economy, where investments in infrastructure and repairs would generate long-term income. This is most felt in the oil sector, where drilling and exploration have stopped this year as a result of the GNU’s inability to secure a budget from the House of Representatives.
New crisis, old players
On the surface, Libya’s parliament rejected Dbeibah’s budget due to its opacity and mammoth projected spending of 96 billion dinars (USD19.79 billion) for a 9-month term in office.
Yet, behind the scenes, HoR’s leadership had begun bargaining over a separate allocation of money and ministries within the GNU to support Haftar as a precondition to approve the budget. Between April and August 2021, Aguila Saleh, the parliament’s Chief Speaker and one of Haftar’s allies, appointed financial, budgetary, and planning committees during deliberations over the GNU’s budgetary framework. His goal was to negotiate a shadow cabinet of deputy ministries and save a lump sum of cash for Haftar’s LAAF (which has faced crippling debt since his failure to capture Tripoli). The negotiations, however, failed. In retaliation, Saleh held a parliamentary session to withdraw confidence from the GNU and oust Dbeibah.
Despite failing to reach the adequate quorum of 120 votes to sanction a vote of no confidence, Saleh maintained the vote was legitimate and began strategizing to appoint a new government to give Haftar control of key ministries and access to cash following the failure to hold elections. After the demise of the December 2021 elections, in March 2022 HoR appointed Fathi Bashagha to lead the GNS, a government formally fronted by Bashagha but selected and backed militarily by Haftar, following a deal to give his family the financial backing and political power they were unable to acquire from Dbeibah.
Who is behind the oil blockades?
This month, tensions have been mounting as the crisis has entered a new uncertain phase, which is not entirely in Libya’s hands and will have consequences for Europe, too.
Despite failing to reach the parliamentary quorum, the GNS announced it had received unanimous parliamentary approval for a LYD89.6 billion budget, further compounding the legal disputes surrounding the economic crisis.
The GNU remain undeterred as Bashagha and Haftar’s failure has rendered the GNS a “paper government” with ministries yet no money to spend. That is why they have turned their attention to Libya’s recently unified central bank.
In April, a complex web of tribes, militias, and mercenaries shut down Libya’s oil facilities demanding that Dbeibah cede power to Bashagha in Tripoli.
The US has proposed lifting the blockade whilst freezing Libya’s oil revenues until a revenue sharing mechanism can be struck by the rivals. First, Bashagha and Haftar’s strategy is designed to starve Libya’s central bank of liquidity from oil sales to compound the economic crisis until they release cash to the GNS.
Second, it is aimed at starving Europe during a global energy crisis until they can be coerced into recognising the GNS as Libya loses over 60 million dollars a day in opportunity costs.
Haftar employed the same strategy in January 2020 ahead of the Berlin Conference, claiming Libya’s tribes had blockaded the oil to force international players into offering Haftar a favourable political deal during negotiations.
However, this time around, the situation in Libya and overseas is radically different: Haftar doesn’t control the oil blockade: his mercenaries do and their loyalties are unclear. Haftar’s overreliance on Russian Wagner Group mercenaries during the last civil war backfired after they fled the capital and occupied Haftar’s military bases and Libyan oil facilities in the summer of 2020 (many of which they continue to occupy to this day during the current ‘tribal’-led blockade). The Russian mercenaries are funded by the United Arab Emirates but are often referred to as Putin’s Shadow Army, further complicating the question about who yields command and control over the force to determine when the oil blockade is over.
The last negotiations aimed at lifting the blockade took place in Moscow in August 2020, demonstrating the Kremlin’s behind-the-scenes influence. However, those dialogues took place in a different geopolitical context. Now, even if Bashagha were to secure a budget from the Central Bank or a deal with Dbeibah, it would not be in the Kremlin’s strategic interests to allow Libya to supply energy to Europe.
Whilst the US has proposed lifting the blockade and freezing cash receipts from oil sales until a revenue sharing mechanism can be agreed to by the political rivals, the political deadlock continues dragging on and Libya’s elite may not have the final word.