The dinar’s devaluation continued over the course of the coming decades, falling to 0.5175 SDR by 2003. Its most recent devaluation occurred on 1 January 2021, when its value became 0.1555 SDR.
During the first decade of the 21st century, the value of the Libyan dinar remained fairly stable. This was not due to prudent state economic policy, but rather to the high prices of crude oil on international markets, when a barrel of oil would fetch in excess of $100 at certain times. When oil prices then fell in 2013, arbitrary policies were adopted by the central bank and the government in tandem, with negative ramifications for the Libyan economy. In addition to the decline in oil prices, another factor which brought further problems and complications was the division at the political and economic levels. In late 2014, the government was split into two; one government in the west, and another in the east. The central bank did the same, and so there are now two central banks; both called the Central Bank of Libya; in two different governorates, under two different administrations. This bifurcation has led to the emergence of new problems, the most important of which are the further devaluation of the dinar against the dollar and other foreign currencies; the inability of banks to provide cash to cover their current accounts; the emergence of a black market for foreign currency; and increased public spending; inter alia. On the black market, the value of the US dollar has risen to more than five times its official rate, while inflation has skyrocketed to unprecedented levels; exceeding 28% in some years.
Whether on the part of the government, or the Central Bank of Libya, the Libyan financial crisis lies in the conflation between the various objectives of economic policies. These policies do not take into account the existence of a specific aim for each economic policy, be it monetary, financial, or trade-related. For example, the dinar is devalued for the purpose of increasing the public budget, and public expenditure grows with no consideration for the effect of such growth on the balance of payments. Moreover, each relevant institution works without coordination with others, whether the central bank, the Ministry of Finance, or the Ministry of the Economy. This leads to the negative impacts of such measures and mechanisms on other sectors being disregarded. There has been no clear or sound vision on the part of either the government or the central bank to address issues that could be solved in the short term, nor other protracted issues requiring a longer timeframe and sober policies, such as Libya’s rampant unemployment. The central bank and government have adopted arbitrary policies, packaged as the so-called “Economic Reform Program” in 2018, consisting of the following measures adopted:
First, the central bank would sell US $500 annually to each citizen of any age, at the official exchange rate of approximately 1.4 dinars to the dollar, in an arrangement known as the head of household grant. Later, in 2019, the grant amount was raised to $1,000 per person. The central bank maintains that this is compensation enabling citizens to counter the effects of inflation. The grant allowed citizens to sell the dollars they purchased on the black market at about four times the value they paid for them, which effectively fed the growth of the black market which the measure was supposed to be combating.
Secondly, in October 2018, the government imposed a tax on the sale of foreign currency by the central bank amounting to 183% of the official rate. This renders the real price of a dollar for those wishing to buy approximately 3.85 dinars, compared to the official rate of just 1.4 dinars. In July 2019, the government reduced this tax to 163%, and the dollar began to be sold at around 3.65 dinars. However, as a result of widespread corruption in state institutions, this tax was not applied to everyone, and exemptions have been made for certain persons and entities to whom sales have been made at the official exchange rate without adding the tax.
On 3 January 2021, the central bank launched an arbitrary measure to further devalue the official exchange rate of the dinar by about 70%, taking the value of one dinar from 0.5175 SDR to 0.1555 SDR. The implication of this measure was to raise the value of the dollar against the dinar from 1.4 to 4.48—an increase of nearly 320%.
The impact of this measure on citizens with fixed incomes—whose real incomes would decrease in the same proportion as the dinar’s devaluation—has not been studied. This measure would also lead to an increase in the smuggling of commodities, especially gasoline and certain other goods. It is true that the measure may provide a boost to cash liquidity in the short term. However, it will also lead concurrently to an abundance of funds in the public treasury, due to the increase in the value of US dollars that the government receives by exporting oil. This may be the true, unspoken reason for the recent devaluation.
What the government and central bank have not yet considered is that devaluation must be accompanied by a comprehensive reform program to activate the mechanisms of monetary and financial policies; control spending in both local and foreign currencies; control the money supply; combat corruption in state agencies; prevent monopolies; encourage local and foreign investment; undergo privatization in the public sector; and other necessary reforms. The cumulative effect of such policies could lead to the diversification of revenue sources; avert overdependence on crude oil exports; stabilize the prices of goods and commodities; and reduce the high rate of unemployment. Only then will the value of the dinar stabilize, and the black market and other distortions in the economy be eliminated. All of this requires effective government to manage the country’s economy, which is unfortunately the very thing Libya currently lacks.
Prof. Atiyah al-Mahdi al-Faytouri and Professor of Economics at Benghazi University
Share your ideas with our team!