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Liquidity crisis, where is the solution?

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By: Suliman S. Al-Shahomy*

Through the previous article, we reviewed responsibility shared

Suliman S. Al-Shahomy
Suliman S. Al-Shahomy

by different parties for lack of liquidity of which citizens suffer, despite puffy promises by the Central Bank of Libya (CBL) to nearly resolve such crisis, which has exhausted everyone. But matters still out of control, Libyan banks are still spinning in an emptied circle of the bickering of troubled political reality and economic crisis, besides the lack of strategic visions to address the situation.

By reviewing some statements issued by the CBL, all data released until the end of 2015 proves that all signs of the crisis were apparent since 2014, as cash outside banks increased, despite the stabilized cash supply during 2013 and 2014. Banks deposit liabilities considerably decreased at the end of 2015 despite the growing money supply and leakage outside the banking frame. The following table explains the change in cash outside banks, money supply, and deposit liabilities for Libyan banks during the last four years.

Cash outside banks

Money supply

Deposit liabilities

year

13371

63731

68346

2012

13420

69005

83562

2013

17169

69351

79099

2014

23007

78606

71257

2015

The above data indicates that there is a clear direction from depositors to withdraw savings since 2014, which left banks unable to meet commitments towards current accounts owners, especially monthly salaries. And despite the CBL decision to return to documentary credits, confusion accompanied the process by ratifying strict rules to open credits, that decision retracted as politically directed decisions bend the CBL. The CBL also tried to expand usage of electronic payments to ease money usage, but such policy was halted due to weak infrastructure and implementation, and the inability to switch citizens’ behaviors and attitudes as quickly as required. Al-Jumhoria bank, one of Libya’s leading banks, was unable to reactivate but the limited amount of points of sale, subsequently fell the available alternative in preserving liquidity outside banks. At the same time, opening credits policy wasn’t useful in raising the required cash, not mentioning that merchants will probably price their goods following black markets Dollar prices, in the case of things turn worse.

It seems that the CBL has little few options left, in the light of the sharp decline in foreign currency reserves, which has to be booked as long as possible to protect the national currency from collapse. Some, supported by the Presidential Council (PC), suggest that the CBL might sell part of gold reserves to raise cash, which I regard inappropriate, as such assets will immediately find its way out of the country and won’t benefit the Libyan economy, unless stock market was involved in organizing gold circulating that based on rules that ensure the preservation of such wealth and flourishing of the gold industry. Also, such suggestion is not a practical solution and only viable maximum for three months undoubtedly will be accompanied by chaos and corruption. The only available solution now is to work aggressively to restore oil production from western area, improve production in the eastern area, and modify cash exchange rates.

Now, all economic policies failed as most ministries and entities stopped working, besides the failure of some governmental institutions like taxes and customs, also efforts by the Presidential Council to unite both the CBLs under one command, to unite efforts and address the surrounding crisis, are not effective as required. Both CBLs now print their versions of currency, racing for delivery to solve the suffocating crisis felt by citizens. But unfortunately, they make things harder for the citizens by increasing inflation and the collapse of the national currency, unless monetary tools are used within clear economic policies implemented by a government capable of getting the country out of its mess.

Results of Tunisia meetings between both CBLs brokered by the PC reveal an agreement about ratifying Al-Baida printed currency in exchange for withdrawing the same amount from circulation later, which is a good suggestion but may not solve the problem and might only act as a tranquilizer. Withdrawing cash outside banks will continue unless economic and financial mechanisms are developed to attract money to banks, restore confidence in the Libyan banking system. Hence, I think raising cash by selling bonds to citizens and private sector, only within the eastern region, because of prohibiting dealings with interests in the West, will hit legal and instrumental procedures. Stock markets, as an example, need technical and electronic primary preparations, but we have other alternatives to using that could combine different views and help banks raise money.

In my personal assessment, achieving real unity between both CBLs in inevitable, not just virtual, as rumored about freezing governor and vice governor posts, which violates banks laws. The PC should hasten to resolve all the conflict and controversy. There should be real measures on the ground. There is no doubt that we have deep structural issues that cast shadows over the monetary situation and living standards of citizens who are dying for all news waiting for any good ones that might give them some relief, we have to swallow the bitter medicine to prevent the outbreak.

*A Libyan Finance Expert and The Founder of Libyan Financial Market

Translated By LIBYAPROSPECT