Economic expert Ali Al-Sharif wrote a post stating that in economic circles, the issue of fixing or floating the Libyan dinar is being debated. This matter is linked to monetary policies and their impact on the macroeconomy. It is well known that the purpose of adjusting the exchange rate of any currency is to address balance of payments imbalances, by encouraging exports and reducing imports. However, this goal can only be achieved if the state has a flexible production system capable of increasing and diversifying exports, with imports that can be substituted by local products—meaning there is a tangible effect from the elasticity of demand for exports and imports.
Al-Sharif continued: In the case of developing countries—including Libya—the weak and limited production base often makes the effects of currency devaluation negative. Libyan exports are mostly limited to oil, a commodity whose price is determined in global markets by external factors such as supply, demand, and OPEC policies, and therefore does not benefit from currency devaluation. On the other hand, Libya relies heavily on imports to meet local demand for most essential and intermediate goods, meaning that any devaluation of the currency will directly increase import prices, and consequently, inflation levels. Unfortunately, the state has repeatedly resorted to this policy as a means to cover budget deficits instead of addressing structural imbalances.
Al-Sharif concluded his post: The option of floating the dinar is considered more dangerous for the Libyan economy. Floating means leaving the currency to supply and demand forces in the exchange market without effective intervention from the Central Bank to determine the rate. In the absence of a solid production base and diversified exports, this will lead to a loss of monetary stability, increased exchange rate volatility, and rapidly rising inflation. Weak confidence in the national currency and high speculative activity will result in a drain on foreign reserves and a sharp erosion of citizens’ purchasing power. Therefore, floating does not address imbalances; it exacerbates them in an economy that relies almost entirely on oil revenues to finance imports and public spending.
