Libya’s Liquidity Crunch and the Dinar’s Demise: Psychological and Macroeconomic Dimensions of the Current Crisis
Jason Pack has published his first Insights and Analysis report as Executive Director of USLBA with the Libya Herald. The report contextualizes Libya’s ever-worsening currency and liquidity crisis and deepening distrust toward Libya’s public financial system as a whole, examines ongoing developments, and looks at how it affects the economy as well as the lives of ordinary Libyans.
Given the existing budgetary commitments and the psychological legacy of the past few years even if a political resolution to the post-2014 civil war was miraculously achieved, this cannot by itself solve the financial crisis. Confidence in banks will remain low and the currency crisis will persist unless a future political reconciliation is itself built on an agreement on key economic and fiscal rules that can help any successor government restructure the economy and incentivize the Central Bank of Libya (CBL) to undertake major structural decisions such as the official devaluation of the Libyan currency. Until this widespread public distrust of the country’s institutions is overcome with an agreement on overarching rules governing how oil money is distributed in the new political system and how the new economy operates, it will be impossible to solve the root causes of the liquidity crunch…
A blanket political resolution is necessary, but without this resolution being founded upon a new economic deal governing how oil revenues are managed by the redistributive banking sector, it will be insufficient to permanently rescue the economy no matter how much oil Libya has underneath the ground or how much reserves it has stashed away in Western banks. Prior to whole cloth re-writing the Libyan socio-economic contract, temporary fixes are required in the meantime to calm the psychological drivers of the current crisis. One such fix that is being argued by a range of Libyan actors, from the heads of various banks and business associations to the top ministers of the GNA, is gradual or a one-off devaluation of the Libyan dinar, coupled with a policy to provide dollars at the new rate. If this was done without restrictions to traders and personal consumers it would drive up the value of the Libyan dinar in parallel exchanges and bring back trust and liquidity into the banking system.
However, without the larger structural budgetary element, this step would still be unlikely to put a permanent stop to the dinar’s slide relative to the dollar. Another temporary fix would be to find ways to ensure that Libya’s oil production and revenues rebound, by addressing the ongoing civil war on the one hand and the budgetary problems which are currently standing in the way of utilizing more investment in necessary oil infrastructure to drive Libya’s recovery of crude production. It could also be argued that without a comprehensive economic and political deal, there will be no guarantees that oil keeps flowing as various social sectors have repeatedly demonstrated their willingness to shut off production if they feel they are not fully sharing in its gains.
Click here to read the full 29 page report.