Professor of Political Economy Mohamed Al-Barghouthi wrote: The Libyan Dinar Between Floating and Pegging
The economic debate in Libya continues to revolve around the future of the exchange rate and the options available to the Central Bank. Between those calling for full or managed floating and those preferring to maintain a fixed system, there is a clear need for a careful reading grounded in the local reality and the particular nature of the Libyan economy—rather than copying international models that do not necessarily apply to Libya’s context.
The Particular Nature of the Libyan Economy Cannot Be Ignored
The Libyan economy is purely rentier. Nearly 98% of foreign currency comes from a single source: crude oil exports and royalties from this sector, and at times natural gas exports. Meanwhile, society relies on imports to cover 95% of its basic commodity needs. The private sector, for its part, is mostly tied to government spending and lacks a productive or export base that generates independent foreign currency inflows.
These factors impose severe constraints on any exchange rate system. Full floating, for example, under a near-fixed supply of dollars and inelastic demand due to import dependence, would inevitably lead to sharp fluctuations and significant price hikes—undermining citizens’ purchasing power and threatening social stability.
Full and Managed Floating: Unsuitable Options for Libya
- Full floating may be viable in a diversified economy capable of generating foreign currency through a variety of industrial and service exports. In Libya, however, it would lead to imported inflation and leave the Central Bank unable to control the market, especially with limited monetary tools.
- Managed floating requires strong financial institutions, an organized and transparent currency market, and the ability to intervene effectively when needed. In Libya, the absence of these conditions means it would effectively become a de facto multiple exchange rate system, opening wide opportunities for corruption in foreign currency allocation.
Pegging: A Realistic Option in a Complex Environment
Given these constraints, a pegged exchange rate remains the most suitable option for Libya at this stage. The real problem is not normal government spending on wages and public services, but rather the creation of money out of nothing by financing government deficits with bonds and treasury bills. This practice has deviated from natural monetary cycles, causing an enormous surge in domestic liquidity without genuine backing from dollar revenues—placing unprecedented pressure on the currency market.
Thus, pegging the exchange rate at a fair, carefully studied level—while strictly controlling money issuance and linking it directly to actual revenue inflows—remains safer than sliding into uncalculated floating. Pegging does not mean rigidity; it can be developed through flexible mechanisms to manage dollar demand, such as diversifying open-market tools, rationalizing letters of credit, and improving oversight of capital flows.
Lessons from Oil-Dependent Economies
Neighboring oil economies and those in the region provide valuable lessons. Algeria, despite its large foreign reserves, maintained a managed quasi-fixed exchange rate to avoid volatility from relying on oil as its sole hard-currency source. Gulf states such as Saudi Arabia, the UAE, and Kuwait (which pegs its currency to a basket rather than the dollar alone) have favored fixed or dollar-linked systems, recognizing that currency stability is essential for attracting investment and ensuring price stability in economies heavily dependent on imports.
These examples reinforce the view that Libya, as a rentier economy reliant on oil, is not positioned to bear the burdens of floating. Pegging—while upgrading liquidity management tools and reserve policies—remains the most appropriate path to achieve balance and stability.
Beyond Exchange Rate Systems: The Bigger Picture
Ultimately, the future of the Libyan dinar depends not only on the choice of exchange rate regime, but also on the ability to reform public finances, rationalize spending, and improve institutional efficiency. The debate over floating versus pegging, if not embedded within a broader economic reform agenda, will remain of limited value. Still, in the current context, pegging stands out as the realistic and responsible option—providing monetary stability that creates a safer environment for broader reforms to come.
