December 3, 2013 / 3:22 PM / 6 years ago

EXCLUSIVE-Libya spends $7 billion from reserves to cover loss of oil revenues

TRIPOLI, Dec 3 (Reuters) - Libya has burned through $7 billion from its foreign currency reserves to offset the impact of oil strikes, and will have to spend up to $6 billion more this month to keep the country running, the deputy central bank governor said.

If the strikes by armed militia members and tribesmen continue to prevent exports, the central bank will restrict access to dollars next year to safeguard the Libyan dinar, and may consider a devaluation, Ali Mohamed Salem told Reuters.

Militia members and tribesmen have seized oil fields and ports, blocking a large portion of oil exports since July. While Salem said Libya still has a cushion of $119 billion in reserves, it could be eroded rapidly.

“We are in a dangerous situation for the future,” Salem said in an interview. “The foreign reserves will be affected hard by the current situation. We are spending from the reserves.”

The North African country, which relies almost exclusively on sales of oil to feed its six million people, is grappling with turmoil as Prime Minister Ali Zeidan struggles to impose order and curb militias which have kept their weapons since helping to overthrow Muammar Gaddafi in 2011.

Libya’s difficulties are also awkward for the West: Gaddafi was brought down in a civil war by rebels aided by U.S., British and French air strikes, the only one of the “Arab Spring” revolts to attract significant Western military intervention.

The armed men blocking oil exports are demanding regional autonomy for the east of the country and protections for minorities in the west, demands that are difficult to consider for a prime minister with little real power.

Oil is not only the main source for the budget but also accounts for 97 percent of the inflow of hard currency needed to pay for imports from fuel and basic food to machinery, cars and consumer goods.

Salem said reserves had fallen by $7 billion since the strikes escalated in the summer, and would fall by another $5 billion to $6 billion this month.

Oil revenues would reach just 63 billion Libyan dinars ($51 billion) by the end of the year, a 10 percent shortfall from the budget target of 70 billion dinars, Salem said. By the end of November 57 billion dinars had flowed into central bank coffers.

Adding further woes, the economy is expected to contract by 5 percent next year if protests continue, he said.

“The government needs to find real solutions to solve the problem as soon as possible,” Salem said. “The reserve is not only there to solve the problems of deficit. The reserve is to keep the stability of the economy.”


Salem also suggested the government could have to seek foreign loans - a dark scenario for Libyan officials used to a never-ending flow of oil - if the strikes are not resolved.

“Libya always resisted (borrowing),” he said. “We hope we will not (borrow). The service of debt will affect the GDP, it will affect future of the economy, the future of the young generation.”

So far the central bank is confident it can ease any pressure on the Libyan dinar, which is pegged to major currencies in a trading band. But it could have to limit dollar supplies for the local market if the port blockades continue.

“Up to now everything is moving normal. We hope until the end of this year they will find a solution (for the strikes),” he said. “If there is none, we are going to impose some restrictions for next reduce the cash outflow of hard currency.”

Libya needs to import much of its needs as it has only a small non-oil industrial sector. The government keeps prices of bread and other goods at low prices to ease social tensions - a system that only works as long as oil is flowing.

Salem said any dollar restrictions for import traders would be only for non-essential needs while there would be no limits for purchase of wheat or other basic goods.

In a worst-case scenario with protracted strikes dragging on until next year, the central bank might even consider devaluing the dinar. But the bank is wary of fueling public anger with even thinking about such a measure.

“The people would not accept it,” Salem said. “If you told them you are going to devalue the currency to meet the (dollar shortage) problem, they will shout at you.”

With spending muted due to the oil crisis, the annual inflation rate will be stable at around 3 percent this and next year, he said. “It will be stable at maximum of three percent or maybe even go down,” Salem said.

$1 = 1.2360 Libyan dinars Reporting by Ulf Laessing; Editing by Peter Graff

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