By Julio Alonso
Following the revolution, the Libyan dinar’s value has closely mirrored the nation’s security situation: when there’s conflict, inflation spikes; when there’s stability, the gap between the parallel and official exchange rates narrows. Only recently, despite stability, the parallel rate against the dollar has jumped to over 6, showing a surprising 24% divergence.
Yesterday, the Central Bank of Libya (CBL) announced a major move with regulation (02/2024), one of the most significant decisions affecting the dinar’s value on the parallel market in the last few years. As the dinar steps into unchartered waters, the big question is: what will happen to its value now?
Table of Contents
What Changes with the New Central Bank Regulation?
This regulation sharply restricts foreign currency access; reducing not just its availability, but more importantly its equitability. Key changes include:
- Documentary Credits for Imports: Reductions in caps for Letters of Credits (LCs) for companies are pronounced: The cap for Service LCs drops by 33% (from USD 3 million to USD 2 million), for Commercial LCs by 40% (from USD 5 million to USD 3 million), and for Industrial LCs by 30% (from USD 10 million to USD 7 million).
- Personal Annual Quota of Foreign Currency: The annual foreign currency purchase quota for libyan citizens through means like debit cards and money transfers (e.g., Western Union) sees an 80% cut (from USD 20,000 per person per year to USD 4,000).
Equally crucial, though not explicitly stated in the regulation, is the significant change concerning:
- Electronic Cards for Companies: Despite acceptance of applications, the USD 100,000 foreign currency quota has remained un-rechargeable since January 2024, effectively nullifying it.
What Does This Entail?
- LCs Access Adjustments: Although the possibility to override caps through approval from the CBL’s Control Department is still on place, considering LCs represented nearly 60% of Libya’s total bank foreign exchange usage in 2023, the ripple effects could be substantial. The exact magnitude, however, hinges on regulatory approval practices.
- Personal Annual Quota of Foreign Currency Impact: In contrast, the effect on personal foreign currency access is more predictable. With Libyans utilizing USD 8.2 billion for personal foreign exchange in 2023, a basic projection under the new restrictions predicts a sharp USD 6.5 billion reduction.
- Merchant Card Inoperability: Lastly, the discontinuation of merchant card operations is anticipated to result in a USD 3.1 billion reduction.
Considering overlooked foreign currency mechanisms such as transfers, alongside expected growth and stable regulations, we foresee a 10.6% drop in foreign currency access in 2024 from new measures. With projected 4.6% inflation, the adjusted real decrease in access is estimated at 14.54% for the year.
Politics > Economics
While one could delve into mathematical models to predict the parallel exchange rate’s trajectory, their relevance is extremely limited given the following fact: the prevailing political context in Libya significantly impacts the Central Bank of Libya’s independence.
Current rumours from within Libyan political circles suggests that the CBL’s recent shift in monetary regulation has been mainly driven by pressures from international actors. This influence manifests as part of a calculated strategy unfolding over recent months, starting with the contraction in the issuance of “monetary arbitrage” Letters of Credit and tighten access to foreign currency quotas.
This orchestrated effort is reportedly aimed at leveraging economic mechanisms to instigate public unrest, with the ultimate objective of compelling the Libyan government to take a more proactive stance in UN-mediated negotiation processes.
Moreover, a detailed analysis of the Central Bank’s latest publication reveals a legally viable method to enhance personal foreign currency allowances above the current USD 4,000 cap without requiring any changes to existing legislation.
This flexibility lends support to the idea that personal currency quotas will be strategically employed as a negotiation tool. Consequently, the dominant theory among political circles gains traction: social unrest is expected to coerce the current administration into negotiations. Subsequently, as a common consensus among all parties involved is progressively reached, tensions might be eased by gradually increasing personal currency quotas.
Given the pivotal influence of under-the-table negotiations on the Libyan Dinar’s parallel market value, what expectations can be formed regarding its future movement?
Where is the LYD Heading? Short-Term Projections
Based on our mathematical monetary model and the current trajectory of informal negotiations among national and international power factions, we probabilistically forecast the following behaviours for the Libyan Dinar (up to 1 month since publication):
| LYD Against the Dollar | Probability | Analysis |
|---|---|---|
| LYD > 6.5 | Highly-Probable | This outcome would emerge from modest positive progress in negotiations or in situations where negotiations reach an impasse or confrontations intensify. A minimal increase in foreign currency quotas is expected to have negligible impact, keeping the currency above this level. |
| LYD 6.0-6.5 | Probable | Achievable in the absence of significant conflict and with gentle progress in negotiations, leading to a phased re-introduction of access to foreign currency. Requires both a notable increase in the Personal Foreign Currency cap and an escalation in the issuance of “monetary arbitrage” Letters of Credit. |
| LYD 5.5-6.0 | Low Probability | Contingent on the avoidance of major conflicts and a rapid enhancement in foreign currency accessibility, such as restoring the Personal Foreign Currency cap to levels before regulation and an unlikely immediate release of “monetary arbitrage” Letters of Credit currently on hold. |
| LYD < 5.5 | Improbable | Predicated on the absence of large-scale conflict and would necessitate both the swift repeal of recent CBL regulations and an unlikely immediate release of “monetary arbitrage” Letters of Credit currently on hold. |
Uncertain Waters, Cloudy Horizon
Underscoring the knotted interplay of Libya’s economic and political spheres, this new regulation positions the dinar’s fate at a critical juncture: potentially exceeding 7-to-the-dollar in the next month, it represents not just economic volatility but impending socio-political challenges.
Caught in the middle of these power struggles, it’s the ordinary people, those earning their dinars day by day, who suffer the most. The horizon foresees unrest, instability, and rising prices, all harming the public walfare once again.
