{"id":255056,"date":"2025-10-02T16:14:21","date_gmt":"2025-10-02T14:14:21","guid":{"rendered":"https:\/\/sada.ly\/en\/?p=255056"},"modified":"2025-10-02T16:14:21","modified_gmt":"2025-10-02T14:14:21","slug":"al-amin-writes-monetary-policy-in-libya-and-the-exchange-rate-dilemma","status":"publish","type":"post","link":"https:\/\/sada.ly\/en\/al-amin-writes-monetary-policy-in-libya-and-the-exchange-rate-dilemma\/","title":{"rendered":"Al-Amin writes: “Monetary Policy in Libya and the Exchange Rate Dilemma”"},"content":{"rendered":"\n

Professor of Economics Anas Al-Amin<\/em> writes about monetary policy in Libya and the exchange rate dilemma.<\/p>\n\n\n\n

The Libyan situation today represents a complex case<\/strong> where economic factors intertwine with political fragility and institutional division. Political instability and dual authority have created a turbulent monetary and financial environment, making it difficult for monetary policy to play its traditional roles in inflation control, liquidity management, and achieving macroeconomic stability.<\/p>\n\n\n\n

The exchange rate regime<\/strong> emerges as one of the most complicated challenges for decision-makers, oscillating between a full float\u2014where market forces alone determine the rate\u2014and a managed float, which balances market flexibility with central bank intervention to contain volatility.<\/p>\n\n\n\n

Unlike international experiences that have seen relative success, such as Morocco\u2019s gradual managed float or Egypt\u2019s quasi-full float, Libya lacks essential foundations: a modern banking system, effective regulatory institutions, a productive private sector, and a diversified financial system. Even though Morocco faces social unrest today, this does not erase its achievements in infrastructure development and economic diversification through tourism, manufacturing, automotive, and renewable energy\u2014factors reflecting institutional stability that supported its monetary success.<\/p>\n\n\n\n

Thus, exploring the possibility of adopting a managed float is not merely an academic option but a pragmatic approach<\/strong> tailored to Libya\u2019s economic specificity, despite the structural challenges it carries.<\/p>\n\n\n\n

I. Features of the Libyan Economic Crisis<\/h3>\n\n\n\n

The Libyan economy relies almost entirely on oil revenues (over 95% of government income) as a source of foreign currency. However, these revenues are volatile due to production disruptions caused by armed conflict, port closures, and geopolitical factors. Meanwhile, the two rival governments face high spending commitments, including wages and subsidies, making it unsustainable to cover expenditures.<\/p>\n\n\n\n

Other problems include:<\/p>\n\n\n\n

    \n
  1. Ongoing smuggling of hard currency and subsidized goods to neighboring countries.<\/li>\n\n\n\n
  2. A weak private sector due to decaying infrastructure and lack of an attractive investment climate.<\/li>\n\n\n\n
  3. Low productivity and efficiency across most non-oil sectors.<\/li>\n\n\n\n
  4. Disguised unemployment, with thousands of employees relying on unproductive government jobs.<\/li>\n\n\n\n
  5. Untaxed foreign labor benefiting from subsidy systems, which in essence waste public resources.<\/li>\n<\/ol>\n\n\n\n

    II. Assessment of Libya\u2019s Banking Framework<\/h3>\n\n\n\n

    The Libyan banking system suffers from multiple weaknesses:<\/p>\n\n\n\n

      \n
    • Interest rates<\/strong> are almost frozen and do not perform their natural role in absorbing liquidity or directing savings.<\/li>\n\n\n\n
    • Libyan banks are neither true Islamic banks by international standards nor fully functional conventional banks. This deprives them of institutional expertise in managing money market instruments or developing modern financial products.<\/li>\n\n\n\n
    • The Central Bank of Libya directly engages in commercial banking and holds shares in some of the largest commercial banks. This undermines its independence, turning it from a neutral regulator into a direct market participant\u2014raising conflict-of-interest risks and limiting monetary policy effectiveness.<\/li>\n<\/ul>\n\n\n\n

      These features place Libya far from advanced models such as Jordan or Bahrain, where banking systems are marked by transparency, financial diversity, and central bank independence.<\/p>\n\n\n\n

      III. Comparisons with International Experiences<\/h3>\n\n\n\n

      Egypt (2016):<\/strong>
      Adopted a quasi-full float of the Egyptian pound. While it reduced the parallel market and boosted foreign reserves, it triggered high inflation and a sharp decline in purchasing power. This shows the risks of a full float in a fragile economy like Libya.<\/p>\n\n\n\n

      Morocco (2018):<\/strong>
      Applied a gradual managed float, expanding the dirham\u2019s trading band without shocking the market. Its success was tied to strong banking institutions, infrastructure stability, and clear policies for diversification.<\/p>\n\n\n\n

      Jordan:<\/strong>
      Maintains a successful pegged exchange rate against the dollar, supported by central bank independence, a strong banking system, and an active private sector. This model is currently unfeasible in Libya due to weak institutions and political division.<\/p>\n\n\n\n

      Bahrain:<\/strong>
      Preserved its peg to the dollar with a sophisticated, multi-product banking sector and strong foreign capital inflows, positioning itself as a financial hub. Libya lacks the institutional capacity for such a model.<\/p>\n\n\n\n

      IV. Managed Float as a Realistic Option for Libya<\/h3>\n\n\n\n

      Given Libya\u2019s complex crisis<\/strong> combining political fragility, institutional weakness, and near-total oil dependency, a managed float<\/strong> emerges as more suitable than other alternatives.<\/p>\n\n\n\n

        \n
      1. Why is a managed float better than a full float or fixed peg?<\/strong>\n
          \n
        • A full float would lead to price instability, hyperinflation risks, and catastrophic declines in purchasing power.<\/li>\n\n\n\n
        • A strict peg would deplete reserves and fuel the black market.<\/li>\n\n\n\n
        • A managed float offers a middle ground: market-driven pricing with central bank intervention to limit excessive volatility.<\/li>\n<\/ul>\n<\/li>\n\n\n\n
        • Direct advantages of a managed float:<\/strong>\n
            \n
          • Reduces the gap between official and parallel market rates.<\/li>\n\n\n\n
          • Eases pressure on foreign reserves.<\/li>\n\n\n\n
          • Enhances market confidence if paired with transparency.<\/li>\n\n\n\n
          • Provides greater flexibility in absorbing external shocks.<\/li>\n<\/ul>\n<\/li>\n\n\n\n
          • The necessity of a social safety net:<\/strong>
            Any exchange rate reform will increase prices, particularly for imported goods. A successful managed float requires an effective safety net including:\n
              \n
            • Direct cash transfers to vulnerable households.<\/li>\n\n\n\n
            • Targeted subsidies for essential goods.<\/li>\n\n\n\n
            • Expanded health and social insurance programs.<\/li>\n\n\n\n
            • Active labor market policies to create real income alternatives.<\/li>\n<\/ul>\n<\/li>\n<\/ol>\n\n\n\n

              In this sense, a managed float is not merely a technical monetary option but part of an integrated reform plan<\/strong> linking monetary, fiscal, and social policies.<\/p>\n\n\n\n

              Conclusion<\/h3>\n\n\n\n

              Libya\u2019s situation is a complex case<\/strong> where the economic crisis cannot be separated from political division and institutional weakness. A full float risks hyperinflation and collapse of purchasing power, while a strict peg is unrealistic under limited reserves and high spending obligations.<\/p>\n\n\n\n

              A managed float stands out as a more pragmatic and realistic option, balancing monetary stability with market flexibility.<\/p>\n\n\n\n

              But success depends on two core conditions:<\/p>\n\n\n\n

                \n
              1. Gradual structural reforms to rebuild trust in banking institutions and enhance central bank independence.<\/li>\n\n\n\n
              2. Establishing a robust social safety net to ensure that the costs of monetary reform are not borne solely by the poor, but distributed fairly to protect social peace and strengthen public acceptance of reforms.<\/li>\n<\/ol>\n\n\n\n

                Without combining managed float with social protection, Libya\u2019s monetary policy will remain limited in effectiveness and unable to address the roots of its complex crisis.<\/p>\n","protected":false},"excerpt":{"rendered":"

                Professor of Economics Anas Al-Amin writes about monetary policy in Libya and the exchange rate dilemma. The Libyan situation today represents a complex case where economic factors intertwine with political fragility and institutional division. Political instability and dual authority have created a turbulent monetary and financial environment, making it difficult for monetary policy to play […]<\/p>\n","protected":false},"author":13,"featured_media":255057,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[2],"tags":[636,658,613],"class_list":["post-255056","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-news","tag-economy","tag-exchange-rate","tag-libya"],"acf":[],"_links":{"self":[{"href":"https:\/\/sada.ly\/en\/wp-json\/wp\/v2\/posts\/255056","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/sada.ly\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/sada.ly\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/sada.ly\/en\/wp-json\/wp\/v2\/users\/13"}],"replies":[{"embeddable":true,"href":"https:\/\/sada.ly\/en\/wp-json\/wp\/v2\/comments?post=255056"}],"version-history":[{"count":2,"href":"https:\/\/sada.ly\/en\/wp-json\/wp\/v2\/posts\/255056\/revisions"}],"predecessor-version":[{"id":255059,"href":"https:\/\/sada.ly\/en\/wp-json\/wp\/v2\/posts\/255056\/revisions\/255059"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/sada.ly\/en\/wp-json\/wp\/v2\/media\/255057"}],"wp:attachment":[{"href":"https:\/\/sada.ly\/en\/wp-json\/wp\/v2\/media?parent=255056"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/sada.ly\/en\/wp-json\/wp\/v2\/categories?post=255056"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/sada.ly\/en\/wp-json\/wp\/v2\/tags?post=255056"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}