By Hafed Al-Ghwell.
Washington DC, 13 May 2013:
One of the undisputed features of the oil-based Libyan economy over the past half a . . .[restrict]century or so, is the dominance of the State in all aspects of economic life. Oil dependency, and the resulting supremacy of State in the management and distribution of wealth, is, of course, unlikely to change any time soon. Economic diversification and allowing for a more private led economy however are now among the key goals of the new authorities and the public at large. In this context, improving access to inclusive financial services should certainly constitute one of the most important building blocks of such an economic strategy.
Despite a series of structural “reforms” attempted by the Central Bank of Libya (CBL) since 2005 and aiming at modernizing and liberalizing the financial sector, it remains far from being so, and the sector is still not in any position to contribute to a strong private sector-led economic growth, which is in turn is a key to creating the jobs that are desperately needed by Libya’s majority youth population and achieving the desired diversification of the economy.
Until now, the many wealth distribution programs that have been attempted by the previous regime and pursued by the interim governments since 2011, have maintained a relatively low poverty rate. However, this policy has, on the other hand, ended up stunting the financial sector, yielding a banking sector whose role is more geared toward salary distribution and short-term low risk trade finance activities, rather than allocating resources toward the most productive projects and sectors. It also undermined the Central Bank of Libya’s (CBL) ability to conduct any real monetary policy.
Libya, however, is now in an ideal position to establish the foundations of a world-class financial infrastructure, and peruse a comprehensive review of its regulatory framework, aligning it to best international practices. The political transition that Libya is going through at the moment can provide an ideal opportunity to achieve a clean break from the past and recognize all financial losses still embedded in the balance sheets of its financial institutions.
The Libyan Government should as a priority, therefore, revisit, not necessarily its wealth distribution policies, but the channels that are used to implement them. In particular, the roles of the Specialized Credit and lending Institutions and the wealth management funds have to be overhauled in order to restore a level playing field in the banking sector. In the medium to long term, the Government may consider how to finance public investments through sovereign and/or project bonds. Although more costly than a direct budget financing from oil receipts, a sovereign security market would pave the way for private sector bond financing (long-term financing) while allowing a real, efficient monetary policy.
In the short run, the monetary and financial authorities should continue their modernization effort by focusing on key enabling environment factors. In particular, there are some major roadblocks that remain to be lifted, including:
- To avoid conflict of interest and contribute to a level playing field, the CBL should divest from the public banks by transferring its share to the private sector or to a Government fund demonstrating strong corporate governance practices;
- Since the court system offers very little recovery prospects to creditors, lenders remain excessively risk averse at the expense of borrowers that have insufficient collateral, especially considering the thorny property rights due to the previous regime’s nationalization of all private rights, and which is yet to be addressed by the new authorities, Libya needs to develop a strong and fair insolvency and creditor’s right regime;
- Regulatory and supervisory standards: By raising the standards in banking, capital markets, insurance, and accounting and auditing, the regulatory agencies would spread best practices within the banking and the non-banking institutions and improve both financial efficiency and financial stability;
- Governance and risk management: Fundamental to any modernization of the financial sector will be improving sector-wide corporate governance. The recently issued circular on corporate governance was a needed first step, but the CBL must lead a more strategic governance transformation plan that reflects desired sector progress, for example, a clarification of roles for the state-owned or specialized banks. These new governance structures will drive successful financial sector transformation while at the same time representing Libya’s improved and more democratic political climate. These new governance structures will also support the growing role of the private sector and greater competition and so must be set up within appropriate risk management frameworks to ensure continued financial stability and a level playing field.
The new political dynamic in Libya also creates a great opportunity for encouraging the growth of Islamic financial products and services. Howeveras the CBL develops a framework for Islamic finance and micro-finance, there is still a need to address some of the missing pieces and the need to do this in a way that avoids further financial sector distortions, and ensuring that it is integrated with emerging global Islamic finance standards, and respects the diverse needs of the Libyan population. In addition to this, there seems also to be significant market development prospects for micro-finance in Libya. A specific regulatory and supervisory framework would help the micro-finance industry to emerge.
Given the nature and the number of the challenges facing the monetary and financial authorities, including low capacity levels and technical expertise, a comprehensive Financial Sector Development Plan should be considered, including monetary policy management issues (such as establishment of a money market, issuance of sovereign bonds, etc.).
In any event, since there is no entity in Libya with clear responsibility for reform of the overall financial sector as of now, the establishment of a National Steering Committee composed of the main financial sector stakeholders would seem to be appropriate to coordinate technical cooperation and to keep reform efforts on track and serve as a catalyst for rebuilding a sound national financial architecture, with the help of specialized global financial institutions, that can help lay the foundation for a long term economic growth and prosperity on the bases of the best international standards without having to reinvent the wheel or repeat mistakes that have been learned from around the world.
Hafed Al-Ghwell is an Advisor to the Dean of the Board of Executive Directors of the World Bank Group in Washington DC.
He can be reached via twitter @HafedAlGhwell or on his private email at [email protected]
The views expressed in this article do not necessarily reflect those of Libya Herald. [/restrict]