Hosni Bey: “In Libya, the Exchange Rate Has Been Treated as a Sovereign Decision Independent of the Rest of the Economy”

Libyan businessman Hosni Bey wrote on his official Facebook page:

Why Has the Administrative Exchange Rate Failed in Libya?
(The officially announced exchange rates have repeatedly failed since 1982: 0.330 LYD/USD, 1.400 LYD/USD, 3.850 LYD/USD, 4.500 LYD/USD, 5.400 LYD/USD, and now 6.400 LYD/USD.)

In Libya, the exchange rate has been treated as a sovereign decision separate from the rest of the economy. However, the value of the Libyan dinar is not determined by political will, but by the level of production, revenues, foreign reserves, fiscal discipline in public spending, and citizens’ confidence in their currency.

I can confidently say that the administrative exchange rate in Libya has failed for the following reasons:

• Deficit-financed public spending creates dinars at a pace that exceeds the growth of available foreign currency revenues.
• The economy depends almost entirely on imports due to subsidy policies and the state’s intervention in competing with the private sector across nearly all areas of the economy. As a result, most domestic demand generated by deficit-financed government budgets quickly turns into demand for U.S. dollars.
• Official dollars are not consistently available to all legitimate applicants under the same conditions or at the same time.
• Deficit financing expands the money supply, widening the gap between the official and parallel exchange rates. This creates opportunities for speculators and guarantees profits for those with access to subsidized foreign currency.
• Multiple exchange mechanisms, rates, fees, and restrictions have weakened the unity of the foreign exchange market.
• Political division, the absence of a unified national budget, and weak oversight of public spending limit the Central Bank’s ability to anticipate and manage demand.
• Persistent expectations of a weaker dinar encourage individuals and businesses to buy dollars as a hedge, even before they have any actual import needs.

The International Monetary Fund (IMF) also noted in its assessment of Libya that the gap between the official and parallel exchange rates remained substantial despite the devaluation of the dinar and the sale of significant amounts of foreign currency. According to the IMF, the main reason is the continued excess demand driven by fiscal pressures and high public spending.

As of 30 July 2026, the average official exchange rate stood at approximately 6.4002 LYD per U.S. dollar, while the market demand rate exceeded 8.500 LYD. One major reason may be the government’s reduction of the annual personal foreign exchange allocation from $10,000 in 2021 and 2022 to just $2,000—an 80% cut. This reduction has left part of the demand unmet at the official rate, meaning that the official figure alone is not sufficient evidence that the market is in equilibrium.

So, when does an administrative (official) exchange rate succeed, and when does it fail?

An administrative (official) exchange rate succeeds when the announced rate is close to the market-clearing rate that balances supply and demand, when the Central Bank can sell foreign currency at that rate without arbitrary quotas, when fiscal policy is disciplined and does not generate budget deficits, when foreign reserves are sufficient to absorb economic shocks, and when public confidence among citizens and residents remains strong.

An administrative (official) exchange rate fails when budget deficits are financed through money creation. In such cases, the official rate falls below the true equilibrium rate, and the Central Bank cannot supply the required amount of foreign currency. It is then forced to ration, prioritize, and delay allocations. At that point, the real exchange rate does not disappear—it simply shifts to the parallel market.

Simply put:

Many ask: “Why have Saudi Arabia, the UAE, Qatar, and Jordan succeeded while Libya has not? Is it because they simply ordered the market to respect the official exchange rate?”

The answer is no. They succeeded because they built economic systems capable of defending their exchange rates by avoiding deficit financing. Even when they resorted to deficit spending during economic shocks, they quickly restored fiscal balance.

Libya, on the other hand, did not fail merely because the market lacks discipline. It failed because the official exchange rate has not consistently reflected the volume of dinars in circulation, largely due to deficit financing through money creation. This fuels demand for imported goods and services while leaving the state unable to provide dollars to everyone at the official rate, trapping Libya in a cycle of inflation and economic deterioration.

What is the alternative to allocating foreign currency administratively?

The solution is to establish a unified and transparent foreign exchange market that allows all legitimate demand to be met under standardized compliance rules at a publicly announced equilibrium exchange rate that can be adjusted when necessary. This should be accompanied by eliminating privileges, distortions, and restrictions that create a parallel market, while strengthening post-transaction oversight to combat money laundering, invoice manipulation, and illicit financial transfers.

Oversight should focus on:

• The source of funds.
• The legality of the transaction.
• The authenticity of imported goods and services.
• The identity of the ultimate beneficiary.
• Money laundering, smuggling, and invoice inflation.

However, oversight should not become a bureaucratic body that administratively decides who deserves access to dollars and who does not, nor should it sell dollars below their market value and then attempt to prevent them from being resold.