Saber Al-Wahsh writes: “Can Mandatory Pricing Succeed in Controlling Commodity Prices in the Libyan Market?”

Economic expert Saber Al-Wahsh wrote an article in which he stated:

Is mandatory pricing an effective tool of trade policy in Libya under the current economic conditions and political situation?

And can it be relied upon to curb the continuous rise in prices of basic commodities?

Before assessing the impact of this tool, a fundamental question arises: are the prices currently prevailing in the Libyan market the result of the interaction of supply and demand forces, or are they prices imposed by monopolistic traders?

The tone of statements and measures issued by actors within the Ministry of Economy suggests that current prices—from their perspective—are not the outcome of a competitive market, but rather the result of monopolistic behavior by a number of traders who control the import and distribution of certain essential goods. Based on this diagnosis, the ministry seeks to impose prices it considers “fair,” relying on factors that include the global price of the commodity, the exchange rate, transportation and insurance costs, and a “reasonable” profit margin for traders.

Mandatory Pricing in Light of Economic Theory

Under normal conditions, when a reasonable degree of competition prevails, the equilibrium price in the market is determined at the point where quantity demanded equals quantity supplied, without pressures pushing prices upward or downward.

In this case, prices remain in a state of relative stability (not absolute rigidity), moving within a narrow range around the equilibrium price.

In the Libyan case, however, and according to the Ministry of Economy’s statements, the prevailing price is higher than the “fair price.” Consequently, the price the ministry seeks to impose is lower than the market price.

Here, according to economic theory, imposing a mandatory price below the equilibrium price leads to market distortions manifested in:

• An increase in quantity demanded as a result of the lower price (the inverse relationship between price and demand).
• A decrease in quantity supplied due to reduced price incentives for producers or importers (the direct relationship between price and supply).

The Specificity of the Libyan Market: Three Categories of Traders

What is happening in the Libyan market is more complex than the theoretical model, as traders can be divided into three main categories:

1. Traders who rely entirely on the parallel market to obtain foreign currency.
   This group will exit the market immediately once mandatory pricing is imposed, because the new price does not cover their costs, leading to an immediate reduction in the quantity supplied.
2. Traders who rely partly on the parallel market and partly on letters of credit.
   Their continued presence in the market depends on the degree of reliance on the parallel market; the higher this reliance, the greater the likelihood of a rapid exit from the market.
3. Traders who rely entirely on bank letters of credit.
   This group will not exit the market, but its selling behavior will change. In cases of scarcity and rising demand, they will formally adhere to the mandatory price for part of the quantities, while disposing of the remaining portion through informal channels at higher prices, away from the eyes of regulatory authorities.

The Expected Outcome

In light of this reality, the final outcome of imposing mandatory pricing may not be lower prices, but rather:

A shortage of supply in the formal market, the emergence or expansion of a parallel market for goods, and the sale of commodities at prices that may be higher than those prevailing before the pricing decision took effect.

The solution does not lie in controlling prices alone, but in reforming the import system, unifying the exchange rate, enhancing competition, and improving transparency and oversight. It should also be noted that the core problem lies in unchecked spending and manipulation of state revenues—both sovereign and oil-related. Unless this problem is resolved, we will continue to revolve in a vicious cycle of incomplete solutions.