Last week, Libya’s president of the General National Congress (GNC) and acting head of state Mohamad al-Magarief submitted his resignation. His decision ensued from the GNC’s approval of a Political Isolation Law earlier in May. This law bans officials who worked under the Qadhafi regime from public office for ten years. Mr Magarief himself functioned as an ambassador in 1980, before joining the opposition. The vote on this contentious law, which was also criticized by Human Rights Watch, took place after armed militias blockaded a number of ministries in order to force the vote by putting pressure on the GNC. During the past months, different cities in the country were also hit by car bombs, reflecting continuing security problems. Meanwhile, it was reported that commercial banks are increasingly reluctant to provide commercial loans to individuals since the GNC voted earlier this year to ban interest, which is assumed to be forbidden under Sharia rules. Under this law, the ban on interest will be applied to companies and state entities as from 2015.

Impact on country risk

The events of the past months indicate that Libya’s political transition is becoming increasingly more chaotic. Almost two years after the fall of the Qadhafi regime, the continued presence of armed militias remains worrying. While the Libyan government is backed by a majority in the GNC, it seems that this democratic legitimacy does not suffice to deal with the power of the militias. Crucial features of a functioning state are still missing as the Libyan government is still lacking a monopoly on the use of legitimate violence and a permanent constitution is not yet in place The Political Isolation Law is also affecting the positions of members of the cabinet and the GNC. Depending on the further implementation of the law, continuity in the public sector (which is important in Libya’s vital oil sector) could also become at risk and a power vacuum could even arise. As a consequence, legal and operational risks are again increasing.
The country continues to benefit from a strong liquidity position, vast energy reserves and high oil prices. However, in the current environment it will be challenging to attract (foreign) investment, which will be needed to maintain oil production or even increase it in the future. Investments will also be required to diversify the economy and reduce high (youth) unemployment, but economic activity is likely to become hampered by the recently adopted law banning interest in the absence of a developed sharia compliant banking sector.

Analyst: The Risk Management Team, r.cecchi@credendogroup.com