“Helmi Al-Gmati”: The Central Bank’s statement is welcome—but are restricted deposits a solution or just postponing the crisis?

Written by economist Dr. Helmi Al-Gmati:

In a move that reflects a notable shift in monetary policy tools, the Central Bank of Libya has announced the adoption of a “restricted deposit” product in Libyan dinars, in exchange for granting future priority access to foreign currency.

Despite its technical framing, the essence of this decision goes beyond being a banking instrument—it represents an attempt to reshape the relationship between domestic liquidity and the foreign exchange market in an economy suffering from deep structural imbalances.

Simply put, this product involves freezing funds in dinars for twelve months in exchange for a future right to purchase foreign currency at the official rate, at a value reaching 50–60% of the deposit.

This design reveals a clear economic logic: absorbing excess liquidity today in exchange for postponing demand for dollars to tomorrow.

It can be described as a time-shifting tool for exchange rate pressure, or as an implicit deferred contract on foreign currency managed administratively by the monetary authority.

There is no doubt that this approach carries some tactical advantages. In light of the expansion of the money supply and the heavy reliance on cash outside the banking system, such a tool could help absorb part of the liquidity and redirect it into banks. This may ease immediate pressure on the foreign exchange market and temporarily curb activity in the parallel market.

It also grants the Central Bank a time margin to manage monetary balances—something crucial in an environment marked by uncertainty.

However, a deeper economic assessment reveals fundamental challenges that may outweigh its short-term gains. The most serious issue lies in creating a large deferred demand for foreign currency. Every dinar frozen today will translate into real demand for dollars after a year. This means the Central Bank is not eliminating pressure on the exchange rate, but merely rescheduling it over time.

If participation in this product is significant, it could generate a future wave of demand exceeding the absorption capacity of oil revenues, thereby placing severe pressure on foreign reserves.

In addition, this product opens the door to quasi-guaranteed speculative behavior, given the gap between the official exchange rate and the parallel market rate.

Beneficiaries could profit by purchasing dollars at the official rate later and reselling them in the market. This would turn the tool from a stabilization mechanism into a driver of speculation, undermining its primary objective.

More importantly, this step implicitly reflects the limited effectiveness of traditional monetary policy tools in the Libyan context. Instead of addressing the root causes of the crisis—such as structural imbalances in the rentier economy, inflated public spending, and excessive reliance on imports—the approach focuses solely on managing liquidity and monetary demand.

This means the core problem remains, while only its symptoms are being handled temporarily.

Moreover, this product shifts the Central Bank toward a role resembling that of a “foreign exchange contractor,” as it effectively commits to providing foreign currency in the future. This creates an uncomfortable overlap between monetary policy and quasi-fiscal obligations, increasing the institution’s exposure to confidence risks.

The success of this tool depends entirely on public trust in the Central Bank’s ability to meet its commitments. Any erosion of this trust could lead to adverse outcomes.

This instrument may achieve short-term tactical success by calming the market and absorbing liquidity. However, it carries significant strategic risks if not accompanied by deeper reforms in public finance and the economic structure.

True monetary stability is not achieved by postponing demand for foreign currency, but by building a productive economy capable of generating sustainable foreign currency resources.

What the Central Bank of Libya is proposing today is not a final solution to the exchange rate crisis, but an attempt to redistribute it over time. This may be understandable in crisis management, but its success depends on whether policymakers can use this “purchased time” to implement real reforms. Otherwise, temporary stability may turn into even greater pressure in the future.