Helmi Al-Gmati: “The Decline of the Dollar… Real Stability or a Fleeting Illusion Deceiving the Markets?”

Economics Professor at the University of Benghazi, Helmi Al-Gmati, writes:

The fall in the dollar’s exchange rate on the parallel market does not automatically or immediately translate into a similar drop in prices.
The relationship exists, but it is constrained by several factors: the sustainability of the decline, the extent to which import needs are practically covered, traders’ behavior (asymmetric flexibility), the degree of market integration, and underlying inflationary pressures.

1. Transmission Mechanism

a) Exchange rate affects import costs → replacement and production costs → final selling prices.
b) The time horizon matters: the initial impact shifts expected costs, while the full effect appears gradually as inventories are renewed and contracts updated.

2. The Pass-through Concept

We define (βSR) as the short-term pass-through coefficient, and (βLR) as the long-term one.

• In economies suffering from market distortions and lack of confidence (as with exchange rate instability), expected values are typically:
  βSR = 0.1–0.3 and βLR = 0.4–0.7.
• This means: a temporary drop in the exchange rate reduces prices only slightly and after some delay, whereas a sustained decline produces a larger and longer-lasting effect.

3. Temporary vs. Sustained Decline

a) Temporary: Caused by short-term injections (opening letters of credit/short allocations). This affects the parallel market briefly; traders maintain high profit margins and refrain from lowering prices, anticipating a rebound. Result: minimal and unsustainable impact on consumer prices.
b) Sustained: Requires continuity of foreign currency supply (regular credit schedules, stable dollar liquidity in banks, and market confidence). In this case, inventories are renewed at lower costs, leading to tangible declines in import prices and, indirectly, a deflationary impact on overall inflation.

4. Market Players’ Behavior

• Traders: Quickly reflect dollar increases but reduce prices slowly — the “asymmetric pricing” phenomenon.
• Consumers: Slow to perceive improvements unless there is a clear and sustained decline in key goods.
• Speculators/Parallel market brokers: Treat short-term injections as temporary price dips, restoring demand to push rates back up once coverage fades.

5. Key Indicators to Monitor

a) Frequency and volume of import credits opened.
b) Banks’ reserves of usable foreign currency (import inflows vs. withdrawal outflows).
c) Parallel market trading volumes and price volatility (daily standard deviation).
d) Merchants’ inventory renewal (days of coverage) and their latest purchase prices.
e) Inflation expectations index (via surveys or bond yields, if available).

Simplified Scenarios (Qualitative Illustration)

• Scenario A — Short-term drop: One-off or limited dollar injections. Parallel market declines temporarily → weak short-term pass-through → consumer prices barely change.
• Scenario B — Sustained decline: Regular credits covering real needs over several months → permanent parallel market decline → traders replenish stocks at new lower prices → noticeable drop in imported goods’ prices and gradual inflation slowdown.

Policy Recommendations & Practical Measures

1. Sustainability over shock: Credit policy must be regular and predictable.
2. Communication and transparency: Regular data on credit allocations and import volumes help reduce speculation.
3. Short-term solidarity measures: Incentives to lower prices (e.g., price arbitration mechanisms or reduced tariffs on essential goods when costs fall).
4. Monitoring indicators: Develop a “dashboard” tracking reserves, parallel market volumes, and merchants’ inventory levels.

Conclusion

The point is that the recent fall in the dollar on the parallel market may be good news, but citizens will not feel it directly unless the decline is structured and sustainable through clear institutional and coverage policies.

The real solution is not a one-time price shock but building continuous trust in the currency market and in transparent, regular import and supply mechanisms. Only then can a lower dollar exchange rate truly translate into lower daily consumer prices.