Al-Barghouthi: “A Drop in the Dollar Doesn’t Mean the Economy Is Improving”

Written by political economy professor Mohamed Al-Barghouthi: “A drop in the dollar doesn’t mean the economy is improving.

Many believe that a falling dollar or a stable exchange rate is a clear indicator of economic improvement. But simple economic reality shows that the exchange rate is a result, not a cause, and cannot be considered an accurate measure of economic health if other indicators are moving in the opposite direction.

In Libya, even if the exchange rate improves for weeks or months, this does not mean the economy has recovered. More often, it reflects temporary monetary intervention, not a real improvement in production, investment, or financial stability.

The economy is deteriorating even if the exchange rate improves

Any country that does not produce enough, does not export, and relies on a single source of income—such as oil—will remain vulnerable to crises even if the exchange rate is stable. The exchange rate may formally drop when the central bank injects dollars, but key indicators like unemployment, a weak private sector, lack of industry, and poor economic security remain unchanged. Improvement in the exchange rate does not mean job opportunities exist, income is diversified, or local production grows. It is only a temporary relief in prices that quickly disappears unless reinforced by real reforms. This is confirmed by IMF and World Bank studies on rentier states that rely on monetary intervention rather than comprehensive economic reform.

Uncontrolled government spending and deficit financing are a continuous disaster

Libya suffers from massive and uncontrolled government spending, most of which goes to the third chapter (development), the first chapter (salaries), and the fourth chapter (subsidies), rather than investment.
When oil revenues fail to cover expenditures, the government resorts to:

1. Creating dinars out of nothing (Monetary Expansion)
2. Financing the deficit by printing money or selling part of foreign currency reserves
3. Pressuring the central bank to provide liquidity

This simply means generating and printing dinars without increasing real economic output. According to monetary economics principles, increasing the money supply without increasing production leads to:

1. Inflation
2. Decline in purchasing power
3. Higher demand for dollars
4. Rising prices

Currency strength is not its price

There is a common confusion between a high currency price and a strong currency. A strong currency means:

1. A diversified economy
2. Strong exports (in vital sectors)
3. Local production
4. Trade surplus (exporting more than importing)
5. Stable reserves
6. Active private sector
7. Political and legislative stability

The currency price in Libya, however, is a direct result of dollar injections and not economic strength. It is fragile and can change quickly with any political or financial disturbance. Many countries have very stable currencies but weak economies because they rely on central bank intervention rather than real production.

The private sector remains the public sector

A real private sector produces, exports, creates jobs, innovates, and contributes to GDP. In Libya, the private sector depends on government spending, survives only through supply contracts, lacks legislative protection, has no competitive capacity, cannot compete with the black market, and is entirely affected by exchange rate changes. Therefore, even if the exchange rate improves, the private sector does not actually benefit because its stability depends on public spending, not improved production.

The absence of a real and independent private sector means the economy will remain fragile no matter how stable the dollar is.

Exchange rate improvement is not a sign of economic recovery

Exchange rate improvement is a short-term impression resulting from central bank monetary intervention. Real economic improvement only occurs when:

• Public spending is controlled
• Creating dinars out of nothing stops
• Public debt financing ends
• Income sources are diversified
• A real, productive, independent private sector is built
• Public finances are reformed and efficiency is increased
• Speculation stops
• Laws are enforced
• Real production begins (agriculture, industry, services, energy, logistics)

Without these steps, the exchange rate remains merely a nice-looking number on a fragile surface that can collapse at any moment.”