Fayez al-Serraj’s administration faces credibility crisis over row with central bank on how to revive the economy

The government of near-bankrupt Libya faces the threat of a forced devaluation of the country’s currency and an end to fuel subsidies, in a move that could spark a wave of popular anger and the fall of the teetering UN-backed administration in Tripoli.

The credibility of Fayez al-Serraj’s government of national accord (GNA) is waning despite the support of the US, France, Italy and the UK, and its leadership has been unable to unite the country.

Over the weekend the Libyan dinar collapsed 7% against the US dollar and for the first time was trading at six to the dollar on the black market. The official rate is 1.4 dinars to the dollar (1.74 to the pound).

Libya crisis talks held in London as economy 'nears collapse' Read more

Western leaders and financial institutions including the World Bank intervened directlyintervene directly in Libyan economic decision-making this month, bringing politicians and technocrats to meetings in Europe to hammer out an agreement.

As a result of meetings in Rome and London, it was agreed that a Libyan economic plan for 2017 would be published by 1 December. It is likely to include as yet unspecified measures on the currency and the lifting of fuel subsidies.

Serraj has been trying to oust the central bank governor, Saddek al-Kabir, who has resisted Serraj’s demands to release funds to help fund his government and public services. The Tripoli-based central bank has derided Serraj for having no policy to fix the economy, and defended its duty to protect the currency.

Kabir argues for the restoration of oil production and exports, the source of 95% of the government’s revenues.

Western pressure forced the central bank to release $6bn (£4.9bn) to the government to pay salaries, and to fund electricity credits and the national oil corporation. A flow chart has been agreed setting out the steps the government has to take to receive funds and where they will be spent.

Bank queues, lack of medical supplies and electricity blackouts have become daily features of life in Libya. Three years ago, foreign exchange reserves were above $100bn, but they are expected to be $43bn by the end of this year.

Oil production has crept up to 600,000 barrels a day, but the ongoing civil war and competition to control pipelines, production facilities and terminals mean plans to raise production to 1.1m barrels next year are fragile.

Facebook Twitter Pinterest Smoke billows from the al-Sidra oil terminal on Libya’s northern coast following a rebel attack in January. Photograph: AFP/Getty Images

Libya’s cumulative GDP losses since 2011 are at calculated to have been more than $200bn, arguably making the country the worst-hit from the political upheavals caused by the Arab spring.

Serraj has said a devaluation of the dinar is inevitable and argued it is necessary to reduce the deficit, increase the value of oil reserves and ensure a much needed flow of funds into the banks.

He understands, however, that the measure would be unpopular because it would raise the cost of imports, and that he may not have the political capital to force it through.

In the wake of his arrival in Tripoli in March 2016, Serraj’s authority, never strong outside the capital, has dwindled.

“Trying to get the economy to move more smoothly is an absolute requirement in terms of the credibility of this government,” said one western diplomat who has been working for months to persuade Libya’s house of representatives to endorse Serraj’s leadership team.

Powerful factions in the east of the country, led by the Egyptian-backed general Khalifa Haftar, commander of the self-styled Libyan National Army, have resisted working with the Serraj government. He has won control of the Libyan oil crescent and driven out islamists from Benghazi, suggesting his claim to be a major player is strengthening.

The UK remains committed to Serraj. “He is a good man trying to do a very difficult job,” said one British source. “He is an architect thrust into one of the most difficult political jobs in the world.

“A fundamental obstacle in Libya is there is very little sense of national identity. The concept of negotiating and compromising for the greater good of the country is not something that comes naturally to people. The majority of the Libyans want the GNA to work.”

The source said the state of the Libyan economy and the political impasse were feeding off each other.

Kabir, a classic central bank governor, is reluctant to release funds to the government because of its lack of an economic plan. Until last week it had no finance minister.

Given that the elected parliament has also refused to endorse the government, the central bank has argued it would be technically illegal under Libyan law to provide it with funds.

The infighting has direct implications for the west. An estimated 4,600 refugees have died this year trying to reach Europe across the Mediterranean. More than 340 died last week when boats capsized after leaving Libya. The EU mission in Libya, EUBAM, has not been given access to Libyan coastal waters, and is instead training a coastguard.

Western diplomats say tens of thousands of refugees are being incarcerated in both government and smuggler camps, largely in desperate conditions to which diplomats have no real access.

Islamic State fighters have largely been driven out of the coastal town of Sirte, but western sources say the complete absence of a Libyan intelligence service means no one has a clear idea of their current whereabouts.