Helmi Al-Gmati: “These Are the Reasons Behind the Cash Shortage Crisis in Banks”

Economics professor Helmi Al-Gmati wrote: The quarterly data issued by the Central Bank of Libya up to June 30, 2025, indicate that the cash shortage crisis in commercial banks is not due to a scarcity in the total money supply, but rather to a structural imbalance in the components of the monetary base (Currency with Public + Bank Reserves) — meaning in the distribution of liquidity between the public, banks, and the Central Bank.

Since 2014, there has been a continuous decline in the ratio of currency in circulation to total bank reserves at the Central Bank (C/R), dropping from levels above (1.4:1) to below (0.8:1) during 2025. This decline coincided with:
• Raising the legal reserve ratio from 20% to 30%.
• Increasing the volume of additional deposits held at the Central Bank, bringing their total to nearly 50% of bank deposits.

These developments led to an effective contraction of liquidity available within the banking system, despite the overall monetary base remaining almost unchanged, as a large portion of liquidity shifted from circulation to frozen accounts within the Central Bank.

Practically speaking, the withdrawal of currency denominations (1, 5, 20, and 50 dinars) and the reissuance of a smaller-value currency (25 billion compared to 47 billion withdrawn) reduced the monetary base by about 22 billion dinars. According to calculations of the money multiplier, the money supply decreased by approximately 23.3 billion dinars as a result of the contraction in B and the rise in rr.

Based on these indicators, the liquidity shortage in banks is due to:

1. The increase in both legal and additional reserve requirements (cash held at the Central Bank).
2. The drop in the ratio of currency in circulation to reserves to below (1.1), restricting cash flow into the market.
3. Mismanagement of the withdrawal and reissuance of currency, lacking balance between amounts withdrawn and injected.

It is expected that injecting an additional 14 billion dinars before the end of 2025, and 21 billion during the first quarter of 2026, will raise the ratio to around (1.6:1), which is likely to restore balance to the monetary base and gradually ease the liquidity crisis.

In conclusion, Libya’s liquidity crisis is the result of a structural imbalance in the distribution of the monetary base, not its total size. The accumulation of reserves at the Central Bank alongside the decline in currency circulation has reduced the effective liquidity available to the public. Therefore, restructuring the components of the monetary base and adjusting the legal and optional reserve ratios represent the key steps to restoring monetary stability and improving the efficiency of monetary policy.