Al-Amin: “Inflation in Libya Between Structural Imbalance and the Socialist Legacy”

Economics professor Anas Al-Amin wrote an analysis titled “Inflation in Libya Between Structural Imbalance and the Socialist Legacy.”

Although inflation is seen in most economies as a negative phenomenon that weakens purchasing power and disrupts markets, global experience has shown that moderate inflation can actually serve as a tool to stimulate growth—provided it is managed through disciplined monetary and fiscal policies.

However, in Libya, inflation does not reflect real growth. It is instead the product of institutional chaos and a lack of coordination between economic policies, fed by a socialist mindset that continues to shape both state and societal behavior. Adding to this is a more dangerous phenomenon: speculation on the U.S. dollar, which has turned the foreign exchange market into a source of quick profit rather than a driver of national production.

Between Theory and Practice

In major economies, inflation has been used as a means of stimulating recovery after crises.

• In the United States, the Federal Reserve injected liquidity into the banking system following the 2008 crisis through quantitative easing (QE), temporarily raising inflation but reviving economic activity.
• In Japan, the Abenomics policy targeted 2% inflation to break a long deflationary period.
• The European Union also adopted expansionary monetary policy after the COVID-19 pandemic to avoid recession.

These examples demonstrate that inflation is not always an economic disease—it can serve as a remedy, but only when there are strong institutions and sound economic governance.

Arab Experiences: Morocco and Jordan as Models

In the Arab world, some resource-limited countries have managed to control prices despite external challenges.

• In Morocco, the Central Bank successfully kept inflation within 2–3%, thanks to an inflation-targeting policy and coordination between monetary and fiscal policies.
• In Jordan, the stability of the dinar’s exchange rate and the government’s commitment to fiscal discipline helped protect the economy from imported inflationary shocks.

These two cases show that monetary stability doesn’t require oil wealth—it requires institutional credibility and coordinated decision-making in economic management.

The Libyan Case: Inflation Without Policy Tools

In contrast, the Libyan economy suffers from unproductive inflation, resulting from the absence of effective monetary policy tools.

The Central Bank of Libya lacks real control over money supply and interest rates, operating under a dual exchange rate system—official and parallel.

This environment has fostered speculation and corruption, eroding confidence in the Libyan dinar. As a result, Libya faces cost-push inflation driven by currency instability, not by an increase in production or demand.

Speculation on the Dollar: The Hidden Fuel of Inflation

One of the main causes of inflation in Libya is foreign currency speculation.
Those who possess foreign exchange—whether traders, powerful entities, or ordinary citizens seeking to protect their savings—buy and hoard dollars or resell them in the parallel market for quick profits.

These practices create artificial demand for dollars and continuously push its price upward.
This, in turn, raises the cost of imports, leading to higher prices for goods and services in the local market.

The gap between the official and parallel exchange rates has also created fertile ground for speculation.
Some importers and officials exploit this gap by diverting foreign currency from letters of credit into the black market.

Instead of channeling foreign exchange toward productive imports or real investment, it has become a tool for quick financial gain, turning Libyan inflation into both monetary and speculative inflation.

This type of inflation weakens the economy, as it generates no added value, fails to stimulate production, and deepens rentier dependency while worsening the fragility of the national currency.

Fiscal Dependence and the Persistence of Oil Rent

Libya’s public finances remain heavily dependent on oil revenues, amid a weak tax system and an inability to manage domestic demand.

Whenever oil prices fall, inflation and fiscal deficits re-emerge—exposing the structural fragility of an economy reliant on a single source of funding, with no productive alternatives.

The Socialist Legacy: A Mindset That Fuels Inflation

Inflation in Libya cannot be separated from the socialist legacy entrenched over decades.
The prevailing economic mentality still holds the state responsible for providing jobs, income, and subsidies, while viewing the private sector with suspicion.

This legacy has produced three major problems:

1. Overdependence on public sector employment.
2. Weak culture of production and entrepreneurship.
3. Resistance to price liberalization and competition.

As a result, every rise in prices is met with calls for increased subsidies, creating a vicious inflationary cycle that is difficult to break.

Consequences of Uncontrolled Inflation

• Erosion of citizens’ purchasing power.
• Expansion of the parallel market and decline of the formal economy.
• Capital flight and loss of confidence in the national currency.
• Rising poverty rates and social inequality.
• Decline in domestic production and long-term investment.

Reforming the Mindset Before the Numbers

Inflation in Libya is not merely a monetary imbalance—it is a crisis of economic culture and institutions.

Without genuine independence for the Central Bank, tax system reform, gradual exchange rate liberalization, and control over dollar speculation, inflation will remain an erosive, not stimulative, force.

The biggest challenge lies not only in policy but in changing the economic mindset: shifting from state dependence to building a productive economy driven by citizens and the private sector.

Ultimately, the strength of a currency is not measured by the amount of oil a country possesses—but by the trust, institutions, and modern economic thinking it upholds.