Stronger Dinar generates optimism for Libya’s business climate

Libya

Published on Tuesday, 30 January 2018 Back to articles

The unofficial exchange rate of the Libyan Dinar strengthened for the second successive week, and halved from a high of around LD9.50 to the US$ to LD4.55. It has been suggested that this was due to several temporary variables: popular expectations of the Tripoli government’s one-time infusion of US dollars via the annual dollar allowance; and possible black market manipulation of the exchange rate to capture such dollars. The latter argument has been made by Libyans, but the behaviour of black market traders in Tripoli — who have been refusing to buy dollars until the price stabilises — undermines this hypothesis.

There are other factors that could lead to a more permanent strengthening of the local currency to the benefit of Libyans who are paid in Dinars and the government, which holds many of its assets using the Dinar.

Increased oil production and oil revenues have provided the central bank with greater access to US dollars which has enabled the government to purchase more imports. Secondly, the central bank recently eased the restrictions on currency transfers which have reduced the public’s dependence on black market traders for such services. Because these two variables offer more than one-off benefits, the impact of such positive changes raises the expectation that the exchange rate crisis will continue to improve.

The impact of this improvement has been immediate. Calls for the central bank to devalue the Dinar — which had been mounting in recent months — have begun to dwindle, and faith in the stubbornness of the embattled Tripoli-based central bank governor, Sadiq el-Kabir, has increased. Public faith in the central bank is obviously critical for the institution’s ability to set sound monetary policy. There is also an expectation that consumer purchasing power will rise and that this will lead to an improving standard of living.

The increased number of Letters of Credit (LCs) that are being issued, and rising government revenues, both raise the expectation that foreign companies can expect to receive payment when trading with Libya. Several international firms have begun to receive payment for completed projects in Libya. Increased investor confidence in doing business in Libya will beget more business. Because the country’s economic fate is so closely dependent on its security — and vice versa — increased foreign investment could have a positive effect on the security situation and lead to an even more favourable business climate.

There are, however, significant barriers to this eventuality, including: weak and opaque governance; poor official security and justice institutions; and continued insecurity. But if new, unified political and security institutions with significant public confidence emerge this year, then 2019 could bring more good news for the Dinar and increased accessibility to the Libyan market for foreign firms.

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