Written by member of the Central Bank Monetary Policy Committee, “Ayoub Al-Farsi,” who discusses the expected impact of cash substitution on monetary policy under the structure of the public budget.
Subsidy reform in a country like Libya
With more than 2.6 million government employees (whose salaries already consume a huge portion of the budget), and a poverty rate exceeding 40%, calculating the cost of a “direct cash alternative” places decision-makers before a frightening equation that could overturn the country’s financial balances rather than reform them—if it is not designed with extreme precision.
Monetary risks associated with this policy
1. The problem of liquidity and monetary inflation (Monetary Inflation)
Transforming in-kind fuel subsidies (which the central bank effectively pays for in foreign currency to import fuel, or deducts from crude oil revenues) into cash liquidity distributed monthly to millions of citizens would cause a monetary disaster:
(Expansion of money supply): The Libyan economy already suffers from persistent inflation. Injecting billions of dinars monthly as a cash substitute would increase the volume of currency circulating outside the banking sector.
(Pressure on exchange rates): Citizens will not keep the dinars received as compensation; instead, they will immediately convert them into imported goods or foreign currency (USD) to preserve value. This would create severe pressure on central bank reserves and lead to a further collapse in the dinar’s value in the parallel market.
2. Calculating the cost of the alternative: does the budget cover it?
The state does not only subsidize fuel; it indirectly subsidizes all aspects of economic life, including even bread, while lacking a proper social safety net. This subsidy represents the last protective layer against the collapse of living standards.
If the state hypothetically decides to provide a universal cash compensation for every Libyan family to offset the general rise in prices, and assuming a population of around 7 million (about 1.2 to 1.5 million households), the cost would be significant.
If a “fair” cash substitute is allocated to absorb the inflationary impact on fuel, transport, electricity, and goods, it would not be less than 3,000 dinars per household per month. Half would cover fuel subsidies and the other half would absorb inflation caused by the reform itself.
This scenario would cost the state around 43 billion dinars annually, added to the subsidy substitution item instead of the fuel subsidy item.
If this is added to the wage bill exceeding 70 billion dinars annually, the operational budget (salaries + cash substitute) would consume the entire oil revenue, leaving nothing for development. It would only rename the item from “fuel subsidy” to “cash subsidy.”
Conclusion
Cash compensation is only economically viable when the proportion of high-income excluded groups is significant—not when applied universally to the entire population.
