By: Eziddin Mustafa Elkour*
The future of Libyan Dinar exchange rate in front of the US Dollar
became one of the biggest fears Libyans face, as allowing the Dinar to decline against the Dollar will definitely increase inflation, which will in turn increase pressures on income and expenditure levels for Libyan families, and increase the minimum level of required revenues due to high inflation and fluctuations in the exchange rate.
All of this expose the growing uncertainty and thereby increase dangers offset by growing hedge, by increasing profit margins and pricing higher than Dollar rates at black markets, when the cost is calculated, all of that rocketed prices to unfair and imbalanced levels.
Floating exchange rate doesn’t fit at the moment with the Libyan economic structure, as all Libya’s exports are oil and gas products and usually priced in Dollar in the international markets, either immediate or future.
Moving towards flexible exchange rate requires quite economic atmosphere with positive growth, low inflation rates, positive balance of payments, low unemployment rates, the existence of deep and qualified foreign currency market that decrease volatility waves in the price, and coherent politics that control the Central Bank of Libya’s interference in foreign exchange market to influence the prices, it also requires effective procedures to asses and manage risks across both private and public sectors.
Beside that, companies benefiting from exchange rate flotation are export enterprises with competitive capability across global markets, or enterprises working in tourism, which don’t exist for now and will not be available in the short term, while companies with debt in Dollar are expected to face huge losses, as well as those of fixed incomes like state employees and pensioners, as a result of the erosion of their real incomes by inflation.
Furthermore, importers will face raise in import prices, consequently the effect is direct with no social benefit; that’s why currency floating won’t benefit the national economy
Moreover, the success of fixed Dollar peg or basket of currencies peg requires helping factors, like impose sales fees and added fees, so it would form high percentage of the total consumption. Also, fixed exchange rate fits countries with growing defection, which is mostly funded by capital flows from individuals and institutions.
Here we should confirm a truth stating that the government, if not able to effectively work and put balanced and credible financial and monetary policies, will not be able either to maintain exchange rates for local currency in the long term.
Beside that, production halt and weakened growth in Libya reflect the fact that there is no surplus to import, it is better to improve growth and find alternatives to activate local and foreign investments.
Imposing restrictions on dealings with foreign currency, or putting bureaucratic barriers to limit the demand on foreign currency, to keep the exchange rate steady at exaggerated levels, will further complicate matters, exchange rate is not sacred, as its movement measures exchange rate between local currency and other currencies, and used to accomplish various economic goals, just if this movement is limited and moderate that reflects relative stability.
Subsequently and at the meantime, and current complicated circumstances on all political, economic and social levels, decision makers have to take cautious and accurate decisions, adopt policies depend on balance and gradual reforms.
Following exchange rate policy that depends on fixation and flexibility, or directed flotation or Crawling Peg (Adjustable Peg) policy, might have some positive sides, and eliminates arbitrage.
The existence of non- gyroscopic official price and a parallel one increases gambling chances, through the pricing gab that attracts arbitrageurs followed by ethical practices that decrease local currency price. Sole gyroscopic price is the only factor that eliminate parallel exchange and commodities markets, which are smuggled to be brought back using the official non- gyroscopic prices, and ends accompanying corruption, then the demand on foreign currency becomes real and response to local needs.
Concerning citizens’ requirements of foreign currency for personal purposes, it should be available directly via their banking accounts within annual quotas specified by the Central Bank.
All of that requires, on the long term, monetary, trade and financial corrective policies, because monetary policies alone can’t provide deep resolution on the long run, but is undoubtedly effective on the short term from reducing governmental spending, control trade and credential accounts, keep inflation rates within safe limits, encourage local alternatives, provide investment atmosphere capable of attracting savings and excess liquidity to fund investments with rewarding revenues.
All of that should stabilize the exchange rate that reflects the balance in purchasing capabilities among currencies, beside actively seeking to achieve political and security stability, control abroad balances as guarantees to ensure stable exchange rates to accomplish social and economic goals.
*A Libyan economist and banks expert
Translated By LIBYAPROSPECT