Banking expert Noman Al-Bouri wrote in an article:
If the state is spending more than the economy can bear, a full float will not solve the problem; it will simply make the exchange rate reflect the imbalance more quickly.
At the same time, maintaining an artificial exchange rate while demand for dollars exceeds supply leads to gaps, speculation, distortions, and incentives for rent-seeking.
Therefore, perhaps the solution for Libya today is not to “float the dinar,” but rather to “liberalize the exchange rate as part of comprehensive fiscal reform.” This requires a single package of measures:
– Unify the budget and public spending.
– Stop financing the deficit through expansionary policies.
– Gradually control the wage bill and subsidies.
– Manage the exchange rate on an economic rather than political basis.
– Reduce the gap between the official and parallel exchange rates.
– Direct spending toward investment and production rather than government consumption.
– Protect low-income groups during the transition.
– Give the private sector greater capacity for production and financing.
The difference between exchange-rate liberalization and floating is essentially small, but they are not necessarily the same thing, and this distinction is very important in Libya’s case.
Exchange-rate liberalization means reducing the monetary authority’s intervention in determining the exchange rate and allowing the dinar to move more freely according to supply and demand. This can be gradual and managed.
Floating is an exchange-rate system in which the value of the currency is primarily determined by market forces, with limited or non-targeted intervention by the central bank.
In other words:
Every float is a form of exchange-rate liberalization, but not every exchange-rate liberalization is a full float.
For example:
If the Central Bank of Libya says:
“We will not set a fixed exchange rate for the dollar, but we will allow the dinar to move gradually according to supply and demand, and we will intervene when there are sharp fluctuations.”
This is generally referred to as a flexible or managed exchange rate, rather than a completely free float.
But if it says:
“We will not set the dollar exchange rate, nor target a specific level for the dinar; the market will determine the rate.”
Then we are closer to a free float.
