Foreign Exchange in Libya: Circular No. 02/2024 Explained

In a significant step toward enhancing financial regulation in Libya, the Central Bank of Libya has issued Circular No. 02/2024, focusing on the critical regulation of foreign exchange transactions. This directive, building on previous circulars and rooted in Law No. 1 of 2005 on Banks, outlines essential controls that banks and financial institutions must follow when handling foreign exchange dealings. The new regulations aim to stabilise the Libyan financial system and ensure the proper management of the country’s foreign currency reserves, while promoting transparency and combating fraudulent activities in both commercial and personal transactions.

This article delves into the details of Circular No. 02/2024, offering a comprehensive analysis of its key provisions and their implications for the Libyan foreign exchange rate, foreign exchange market, and banking sector. With the growing importance of foreign currency transactions in Libya, these controls are not just a regulatory formality but a necessary framework for preserving economic stability. By understanding these new guidelines, banks, businesses, and individuals can navigate the complexities of the Libyan financial system more effectively.

Background: The Need for Foreign Exchange Regulation in Libya

Foreign exchange regulations in Libya have become increasingly important in light of the country’s economic challenges. The ongoing volatility in global markets, coupled with Libya’s heavy reliance on imports, necessitates robust foreign exchange controls to protect the country’s foreign reserves. These regulations also play a pivotal role in ensuring that foreign currency is allocated efficiently and used appropriately, whether for importing essential goods or supporting local businesses.

Historically, the Central Bank of Libya (CBL) has been at the forefront of efforts to maintain financial stability. Circular No. 23/2023, for instance, introduced guidelines related to pricing controls for banking services, establishing a foundation for transparent and equitable dealings between banks and customers. Building on that, Circular No. 02/2024 provides more granular regulations specifically targeting foreign exchange transactions, reinforcing the Central Bank of Libya’s role in preserving the country’s economic stability.

Key Provisions of Central Bank of Libya Circular No. 02/2024

The 2024 Circular sets out detailed controls governing documentary credits, foreign exchange for personal purposes, and general compliance measures. Each section is designed to ensure that the Libyan banking sector operates transparently, preventing abuses of foreign exchange mechanisms and promoting financial integrity.

1. Documentary Credits and Foreign Exchange Transactions

The Central Bank of Libya has placed strict guidelines on the issuance of documentary credits. Banks are now required to ensure that foreign currency purchases intended for opening documentary credits comply with the law and that these credits are opened for goods and services that are legally permissible. The circular also mandates that documentary credits be fully covered by the applicant’s balance at the time of the request.

Key aspects include:

• Approval of Documentary Credits: Banks are now authorised to decide on applications for documentary credits, but only after verifying the legitimacy of the requesting party. This includes checking that there are no legal barriers or discrepancies in the documentation.
• Limitations on Credit Amounts: The maximum value for service-related documentary credits is set at USD 2 million, USD 3 million for commercial goods, and USD 7 million for industrial goods. If a transaction exceeds these amounts, banks must seek prior approval from the Banking and Currency Control Department.
• Documentary Credit Documentation: The circular insists that proforma invoices must be issued directly by the exporting or manufacturing company and must include exhaustive details about the goods or services being imported. Banks are also prohibited from opening credits without sufficient foreign currency already being in the account. This is critical to preventing overextension of credit and misuse of the system.

2. Foreign Exchange for Personal Use

A significant portion of Circular No. 02/2024 is dedicated to personal foreign exchange transactions, which are subject to stringent limits. The goal here is to prevent hoarding and speculative trading of foreign currency, ensuring that it is used primarily for legitimate purposes.

Key provisions for personal transactions include:

• Foreign Exchange Limits for Individuals: Each Libyan citizen over the age of 18 is allowed to purchase up to USD 4,000 or its equivalent in other currencies per year. This measure ensures that foreign exchange transactions are capped to preserve the country’s limited foreign currency reserves.
• Transaction Methods: Banks are instructed to facilitate personal foreign exchange transactions using secure and traceable methods, including Visa and MasterCard or through foreign currency accounts. These measures are designed to prevent misuse and ensure that all transactions are fully documented.
• No Additional Commissions: The circular mandates that banks should not charge additional commissions on transfers through Western Union or MoneyGram, making it easier and more affordable for citizens to access foreign currency.

3. Sector-Specific Provisions

In addition to the broad regulations governing foreign exchange, the Central Bank of Libya has introduced sector-specific controls. These provisions are particularly important for industries that rely heavily on imported goods, such as pharmaceuticals and agriculture.

• Imports of Medicines and Medical Equipment: The circular requires prior approval from the Food and Drug Control Centre for the import of medicines, medical equipment, and laboratory supplies. This ensures that only high-quality, approved products enter the Libyan market, protecting public health and safety.
• Agriculture and Livestock Imports: Goods such as fertilised eggs, seeds, and livestock are subject to additional regulations. These products can be imported through designated land ports, such as Ras Jedir or Musaed, to ensure proper controls are in place. These provisions help safeguard Libya’s agricultural sector while supporting food security.

4. Anti-Money Laundering and Compliance

The Central Bank of Libya is committed to enforcing anti-money laundering (AML) and counter-terrorism financing (CTF) regulations. Banks are required to follow strict compliance protocols, ensuring that all foreign exchange transactions are legitimate and transparent.

• Compliance with AML Regulations: Banks must adhere to the AML regulations set out in Circular No. 05/2018, with a focus on due diligence. This includes verifying the authenticity of all shipping and customs documents for transactions over USD 500,000.
• Three-Tier Defence System: Banks are required to establish a three-line defence system, involving window officers, compliance units, and internal audits. This system is crucial for ensuring that all foreign exchange transactions meet regulatory requirements and that any suspicious activity is flagged promptly.

Implications for the Libyan Banking Sector

The 2024 Circular is poised to have far-reaching implications for the Libyan banking sector. By imposing stricter controls on foreign exchange transactions, the Central Bank of Libya aims to enhance the sector’s resilience, reduce the risk of financial crime, and protect the country’s foreign currency reserves. For banks, the new guidelines necessitate a higher level of scrutiny and compliance, ensuring that all transactions are lawful and in line with the country’s financial objectives.

For businesses, particularly those engaged in international trade, the circular provides a clear framework for engaging in foreign exchange transactions. The caps on documentary credits and the emphasis on due diligence will promote more responsible and transparent dealings between businesses and their foreign counterparts.

For individual citizens, the foreign currency limits will likely curb speculative trading while ensuring that access to foreign exchange is available for legitimate purposes, such as personal travel or remittances. By placing these limits, the Central Bank of Libya is actively safeguarding against potential misuse and protecting the value of the Libyan Dinar.

Conclusion: Ensuring Stability through Regulation

The issuance of Circular No. 02/2024 by the Central Bank of Libya marks a pivotal moment in the regulation of foreign exchange transactions within the country. With its focus on stringent controls, transparency, and anti-money laundering measures, the circular is designed to strengthen the financial integrity of the Libyan banking sector while protecting the nation’s foreign currency reserves.

Through these regulations, the Central Bank of Libya aims to foster a more stable and accountable financial environment, one that can better navigate the complexities of international trade and personal foreign exchange dealings. As banks, businesses, and individuals adjust to these new requirements, the long-term impact will likely be a more robust and transparent financial system capable of supporting Libya’s economic growth.