Written by: Professor of Economics, Al-Mabrouk Derbash
From a purely monetary policy perspective—setting aside all other causes and factors—the painful truth is that the dinar is in danger. What we are witnessing today is the erosion of the dinar’s value before our eyes, and in a nearer future than we might expect. In general, an oil-based economy that finances its currency through reserves rather than production is a fragile economy—not only because it is rent-based, but because it carries deep structural risks. As long as reserves remain high, the currency appears stable; however, once they decline—whether due to hasty decisions such as injecting U.S. dollars into the market (i.e., depleting reserves) or a drop in oil prices—the situation turns into a monetary crisis. The pace of the local currency’s collapse then accelerates as both conditions worsen, as this signals to citizens that the central bank may not be able to sustain these reserves in the future.
When citizens realize that the government or the state is continuously selling foreign currency while the local economy produces little—or what it produces does not generate sufficient foreign currency—the logical behavior for both the market and individuals becomes buying dollars whenever available, since everyone knows the sole source is limited. Thus, the reserves themselves become a target for speculation.
Today, the Libyan dinar faces a new problem: a loss of public trust—among all citizens. This includes those who meet the central bank’s criteria for accessing foreign currency (i.e., letters of credit), as well as those who hide their dinars under their mattresses. These citizens have lost confidence in the dinar, which is now steadily declining and gradually being replaced by the dollar—not only in circulation but also in savings. This is what is known as a “low-credibility monetary equilibrium.” It leads to a reality of “popular dollarization.” This has indeed occurred repeatedly in Argentina, in Lebanon in 2019, and in Turkey as well.
This was expected when Libyans began storing their money at home instead of in banks, as an initial step toward treating the dollar as the local currency—what is known in economics as a “store of value.” Currency collapse typically begins in savings before it appears in daily transactions. Today, the currency stored under mattresses is the dollar, not the dinar—alongside an inflation rate that is closer to 30% than to the official figure. In fact, actual inflation driven by the parallel exchange rate is far higher than the official rate.
What is happening today in Libya, from a monetary perspective, is that the central bank has deviated from its natural role—assigned by law—as a regulator of interest, credit, and liquidity, and has instead become merely a manager of dollar reserves. This is why it appears to be seeking assistance and partnership with exchange shops. As a result, the central bank is shifting from being a maker of monetary policy to a social stabilizer of the exchange rate.
All of this is pushing the dinar into an unknown depth—no one knows how deep this rabbit hole goes. What concerns me in Libya, from a purely monetary policy standpoint, is the possibility that the economy may reach a point of “monetary no return,” even if the broader economic situation improves.
