Libya’s Decision to Abandon Oil-for-Fuel Swap Deepens Financial Crisis

SEATTLE (Oil Monster): Libya’s decision to halt its oil-for-fuel swap system, on which it relied to secure fuel imports in exchange for crude oil exports, has worsened the country’s financial challenges and intensified pressure on its dwindling foreign currency reserves.

Since suspending the swap earlier this year, the National Oil Corporation (NOC) has accrued debts exceeding one billion dollars due to deferred payments for fuel imports, with no clear financial framework in place to manage repayments.

Reports warn that the NOC’s inability to settle these debts risks disrupting refined fuel supplies, potentially sparking a domestic fuel shortage that would severely impact daily life and critical sectors such as transport and electricity.

While the swap system was not without flaws, observers note it was a practical mechanism allowing fuel imports against crude oil exports without immediate cash payments, a vital lifeline amid ongoing liquidity constraints.

Despite allegations of corruption, experts argue the solution lay in reforming the swap arrangement, eliminating unofficial intermediaries and enhancing oversight, rather than scrapping it entirely.

The 2023 financial audit revealed that the crude oil-for-fuel swaps amounted to over eight billion dollars, much of which was not properly documented in the ministry of finance’s accounts, distorting Libya’s official fiscal data.

In a constructive move, a confidential meeting convened in June between Libya’s attorney general, central bank governor and NOC chairman to address the fallout from suspending the swap system.

Analysts regard this gathering as a key opportunity to relaunch a reformed and transparent swap mechanism, free from previous political interference.

They emphasise that establishing clear records, accredited suppliers and independent external audits will be essential to restoring trust, ensuring reliable fuel supplies and reducing the burgeoning debts that followed the system’s suspension.

While international partners like the World Bank could offer technical assistance, the primary responsibility rests with Libyan institutions to collaborate and thoughtfully reinstate the programme.

The swap system, introduced in 2021, involved settling fuel costs through a clearing account balancing payments with countries importing Libya’s crude, which reciprocally supplied fuel.

This account underwent audits by the Audit Bureau and the NOC’s internal review, with an independent global firm verifying the process and certifying no irregularities, according to former NOC chief Farhat Ben Qadara.

In January, the NOC announced plans to discontinue the swap system starting March, responding to the Audit Bureau’s call for proper budgeting of fuel procurement.

Despite Libya’s vast proven oil reserves, the largest in Africa, the country remains heavily dependent on imported refined fuel due to damaged or idle local refineries, a consequence of conflict and chronic infrastructure neglect.

Observers warn that the persistent local refining deficit is a fundamental vulnerability; without boosting refinery capacity, Libya will remain reliant on external sources.

Moreover, reforming the fuel subsidy system is urgent, as the current model is unsustainable amid rising global prices driven by regional tensions.

A Bloomberg report last year estimated Libya’s fuel smuggling industry at some five billion dollars annually, noting the country has become the largest importer of fuel and petroleum products from Russia since the Ukraine war erupted.

Courtesy: www.thearabweekly.com