Libyans Weigh Biggest Devaluation Since 2002, Official Says

  • Weaker dinar needed to tackle black market as economy slumps
  • Move part of a plan to support the new unity government

Libyan authorities are weighing the largest currency devaluation in more than a decade in an attempt to repair finances battered by conflict and the plunge in crude prices.

Ali Jihani, a senior central bank official told Bloomberg News that policy makers may devalue the dinar by more than 50 percent to between 2.2 and 2.3 a dollar and are also looking into raising funds through domestic bond sales. He said the timing of the move, which would narrow the gap with the black market exchange rate of about 4 dinars per dollar, hasn’t been decided.

In the five years of chaos that followed the ouster of Muammar Qaddafi, analysts have viewed the central bank as an institution trying to preserve a semblance of unity in a country where rival parliaments, governments and militias have vied for oil and power. While the bank also has two administrations -- one in the east and another in the west, much like the other state agencies -- the two boards have been largely coordinating actions to prevent an economic meltdown in the holder of Africa’s largest oil reserves.

Tunisia Meeting

Jihani, who is based in eastern Libya, said the devaluation was discussed this month in a meeting in Tunisia attended by central bank board members, lawmakers and members of the country’s presidential council. If approved, the plan would represent the first major step to overhaul the economy since United Nations-backed Prime Minister Fayez Al Sarraj took office in March with a mission to unify the country and defeating radical groups including Islamic State.

The current official value of the dinar “doesn’t suit the current value of the state’s revenues and spending,” Jihani said. The majority of government revenue comes from oil sales in U.S. dollars, and a devaluation means higher local-currency receipts.

The war that slashed Libya’s oil production left the state struggling with one of the world’s largest budget deficits. The shortfall will widen to almost 60 percent of gross domestic product this year, according to International Monetary Fund data. Between 2000 and 2012, rising oil prices generated an average surplus of 13 percent of GDP, helping Qaddafi’s autocratic government to accumulate tens of billions of dollars.

Inflation Threat

The authorities’ problems are exacerbated by the black market -- an estimated 24 billion dinars circulate outside the system -- which has driven up the cost of goods and further drained state coffers.

It also risks boosting inflation, which the IMF estimates will be 9.2 percent this year -- the second-highest among Middle East oil exporters after Yemen.

Libyan businesses need dollars to pay for imports, though most ordinary citizens aren’t allowed to exchange their dinars. The central bank barred official foreign exchange to protect dwindling currency reserves, which have fallen to $68 billion from $110 billion in 2013.

The OPEC member devalued the currency in January 2002 by 51 percent as part of a move toward unification of a multi-tier foreign-exchange system. The motivation then was to increase the competitiveness of Libyan companies and to help attract foreign investment, according to the U.S. Energy Information Administration.

Fourteen years later, the country joins other oil producers from Nigeria to Kazakhstan in a struggle to maintain exchange-rates coming under pressure as revenue from crude exports tumble.

Libyan officials who met in Tunis also discussed lifting restrictions imposed in 2014 to make it easier for legitimate importers to obtain letters of credit to bring in essential goods, according to Jihani.

Invoice Scams

Some Libyans take advantage of the system and use false invoices to buy dollars at the official rate. Instead of using the money to pay for imports, they sell the currency to the black market at a higher rate.

To curb such false invoicing scams, Jihani called for more “integrated coordination between financial, security and judicial sectors.” Libya will also discuss seeking the help of foreign monitoring companies at the next central bank meeting in June.

“Tighter monitoring is the top priority,” Jihani said. “Such procedures will be an expensive bill for the state to pay to restore people’s trust.”

He denied reports Libya will soon have competing banknotes in the east and west, effectively cementing a political divide. Two strands of the bank have always worked together and are working to unite, he said.

“Claims about conflicting currencies aren’t logical," he said. Cash will be distributed nationwide “according to demand.”

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