By: Suliman S. Al-Shahomy*
What does it mean to adjust Dinar exchange rate in front of other currencies?
The struggles and enticements increase on adjusting the exchange rate for the Dinar under the deterioration of its value in black markets and the inability of the Central Bank of Libya (CBL) to face the demand. I would like to review the issue from different sides:
The modification from the CBL point of view:
Adjusting exchange rate means the need to modify the balance of payments, which comes in negative and means that the value of imports is over exports, that deficit is accumulated for many years. Then, the exchange rate is adjusted; so, the number of Dinars that used to measure the US Dollar exceeds the previous. The collapse of the exchange rate in black markets and the inability of the CBL to meet the high demand for foreign currency lead us to think of adjusting the exchange rate in the normal circumstances. It also means that the CBL would ask for more Dinars to sell Dollar, which would affect the general government budget, by increasing the cost of public imports, thus increasing government spending.
From another side, it would also mean the increase in non-governmental imports, which would reflect in increased prices. Therefore, increasing the inflation rates, in particular with the new decision to increase customs fees 100%, a decision that hadn’t taken into consideration the local industries nor the international conventions or laws that guarantee some exemptions, it may prove not applicable.
That’s why the CBL is asking the government to ratify the economic programs like removing subsidies or replacing it with direct monetary aids, rationalize public spending to lower prices and inflation rates accompanying the rocketing unemployment rates, especially that the CBL is unable to control money supply via the inoperative interest rates. Thus, restoring to the only available option; withdrawal of local currency via Dollar selling to restore part of the cash circulated outside the banking system.
The high government public expenditures mean the general budget deficit, which, given Libyan case, have no other solution but for the CBL to interfere and fund that deficit, which means it must spend some of its foreign currency reserves and turn it into Dinars for the government, or print new currencies which offer bigger problem. The general revenues mostly come from oil, in Dollar, the CBL puts oil revenues in the government accounts with the current Dinar exchange rate and keeps Dollar for sale for those who want to save the required Dinars to cover the government account eventually.
Adjusting exchange rate means that the CBL is to provide Dollars for those who want with the new prices, which is mostly near to that amount of the parallel markets, which depicts, given the current cash crisis, high turnout for Dollar sale and transfer. In this case, the CBL will need to pump large quantities to meet demands and thus to withdraw from foreign reserves, which is ever weaker than before.
Subsequently, adjusting exchange rates for the CBL will be difficult, without restrictions on purchase, saying that this could solve the liquidity crisis in inaccurate. The more Dollars you offer, the more Dinars will enter banks, but Dinars would be recycled again in the form of the general expenses to the renewed demand on Dollar. Demand for Dollar will continue forever unless the economic situations are stabilized, with workable market mechanisms.
Adjusting exchange rates from traders point of view:
Adjusting exchange rate for traders means meeting their demands of foreign currency and ending any governmental programs to subsist commodities and then ending the monopoly of the public sector. It would open the door wide to import whatever they without fearing the competition of the general sector. It would even end the productive and serving public sector, which has a big number of employees.
Also it uncovers the capabilities of the quasi-government productive sector, makes it unable to compete with the private sector and get it out of production cycle to sales, with no stable economic rules or clear economic policies that clearly draw the relations among the different parties, or putting into consideration the resulting consequences of the severe changes with no mechanisms for social protection or justice.
A large spectrum of traders suggests transferring the subsidies into direct monetary aid either for food, commodities, fuel, or even electricity, which is good. But unless we have a stable system to supply goods and privatization programs for the governmental and quasi-government sectors, there would be significant challenges, and it will cost the country a lot to cover the deficit of industrial, services, the commercial governmental, and quasi-government sectors. The consumer protection mechanisms and the competition rules for the private sector need to be reorganized to ensure justice and state rights. The government decision to abandon such activities to the private sector require reorganizing and developing tax and customs system and local fees systems locally and over the country. Exemptions and tax memorization policies to prompt investments won’t be useful for the current situation.
There is no doubt that the prevailed corruption, within the government financial, economic, and judiciary institutions weakness adds new burdens on the ability to keep the current Dinar rate unchanged.
The important question remains, should adjusting exchange rates comes before rebalancing the economy through one government that capable of imposing the authority of the state? Or is it the only possible trajectory under the inability of the government to carry out any broad reforms to stimulate the broken economy?
*A Libyan Finance Expert and The Founder of Libyan Financial Market