Between Dual Government Spending and Revenue Shortfalls… The Full Story Behind the Exchange Rate Adjustment and the Imposition of Taxes

In an economic scene fraught with danger, the two governments continue a policy of dual spending with no ceiling, while public revenues are eroding at an alarming pace. Data from the Central Bank of Libya reveal that oil and cash revenues have not exceeded USD 482 million to date.

At a time when billions are being drained through open-ended spending without a unified budget or effective oversight, this deep imbalance between inflated expenditure and meager income has pushed the Libyan economy to the brink, forcing the monetary authorities to take harsh decisions whose cost is borne directly by citizens—ranging from adjusting the exchange rate, abolishing a tax, to imposing a new package of fees and taxes on goods and services—in an attempt to contain a crisis created by financial chaos and the persistence of division.

The Central Bank of Libya exclusively disclosed to Sada Economic Newspaper that the official exchange rate against the US dollar has been set at approximately 6.36 dinars per dollar. The maximum selling margin for exchange companies was set at 4% added to this rate, with a 4% margin for cash sales and 2.5% for sales via checks and transfers—meaning that sales through checks and transfers are priced lower than cash sales.

The Central Bank announced today the official adjustment of the exchange rate along with the abolition of the tax, citing the economic and financial developments facing the economy, the decline in oil prices, and the drop in oil revenues.

Meanwhile, Parliament decided to officially impose taxes on a number of goods and raw materials, as well as a 15% tax on personal items, as follows:

First: Production Tax

• Soft wheat: 2%
• Durum wheat: 2%
• Animal feed (soybean, corn): 2%
• Raw materials for food industries: 2%
• Operating materials for food industries: 2%
• Sugar for food industries: 7%
• Raw materials for agricultural purposes: 7%
• Iron and steel plants: 7%
• Mixed oil: 2%
• Tomato paste: 2%
• Short-grain rice: 2%
• Tuna and sardines: 2%
• Legumes: 2%
• Condensed milk: 2%
• Cheese: 2%
• Butter: 2%
• Ghee: 2%
• Milk and other dairy products: 2%
• Live livestock: 2%
• Frozen meat: 2%
• Fertilized eggs: 2%

Second: Consumption Tax

• Corn and sunflower oil: 7%
• Tea: 7%
• Coffee: 7%
• Cocoa: 7%
• Spices: 7%
• Premium rice: 7%
• Fruits and vegetables: 7%
• Sugar for consumption: 7%
• Cleaning materials: 12%
• Soaps, bleaches, and disinfectants of all kinds: 12%
• Baby diapers: 12%
• Medicines: 2%
• Medical preparations and laboratory supplies: 2%
• Stationery and school supplies: 12%
• Paper for all purposes: 12%
• Car spare parts, tires, and tables: 12%
• Vehicle accessories, oils, greases, paints, and fuel additives: 12%
• Nuts and chocolate: 25%
• Live marine fish: 25%
• Clothing, footwear, and textiles: 25%
• Furniture: 25%
• Aviation sector: 25%
• Services sector: 25%
• Household appliances: 25%
• Construction and building materials: 25%
• Pet food: 35%
• Electronic devices: 30%
• Cars under 20 horsepower: 25%
• Cars from 20 to 30 horsepower: 30%
• Cars over 30 horsepower: 35%
• Jewelry, gold, and precious metals: 35%
• Tobacco, cigarettes, and related products: 35%

The proposal was submitted by the Ministry of Economy of the Government of National Unity, headed by Mohamed Al-Huwaij.

Banker Nouman Al-Bouri said that today’s exchange rate adjustment was expected amid continued excessive spending and low state income with the presence of two governments. He warned that using the exchange rate to finance the budget is extremely dangerous and could lead the country into a dark tunnel that is difficult to exit.

Al-Bouri added that the problem must be addressed at its roots by issuing a single budget that does not exceed revenues and by curbing excessive spending, warning that without radical solutions, another exchange rate adjustment could occur within months. He also raised the key question of whether the Central Bank can meet demand at this rate or whether constraints will be imposed, leading to growth in the parallel market and higher prices.

An economic analyst told Sada Economic Newspaper that the House of Representatives’ decision is a step in the right direction and long overdue. Imposing the tax will close corruption files related to letters of credit and currency smuggling, end the black market, and reduce the depletion of dollars. The tax targets luxury goods that were being smuggled abroad due to their low cost; under the new measures, imports will align with the actual needs of the Libyan market, reducing unfair competition with neighboring countries.

He added that this will reduce demand and lower the dollar’s price in the parallel market. While an initial wave of speculation may push prices up, the market will not hold and the dollar will eventually fall.

Economics professor Ali Al-Sharif told Sada Economic Newspaper that high government spending and declining oil revenues are the true roots of the crisis, warning that without serious treatment of these two factors, another exchange rate devaluation will occur next year.

Banking expert Imran Al-Shaibi also predicted the introduction of another tax on foreign currency before the end of the current year if no economic reforms are implemented.