CBL devalues Libyan Dinar

On 16 December, the Central Bank of Libya (CBL) announced a devaluation of the Libyan Dinar from the official rate of ~1.4 LYD to 1 USD to 4.48 LYD to 1 USD. The new rate will come into effect on 3 January. Economists and outside experts on Libya have been calling for this reform since 2014, when the black market and official rates began to diverge widely and fluctuate rapidly. Libya's system of a fixed exchange rate against a basket of currencies and indices was adopted in the early Qadhafi period. When oil production was weak in the 1990s (when Libya was under international sanctions), devaluation was implemented in a phased approach by then-CBL Governor Taher al-Juhaimi (now Minister of Planning in the internationally-recognized Government of National Accord).Announcing the reform approximately two weeks before it takes effect will cause much frantic trading and anxiety on behalf of various market participants and will allow for intense corruption and gaming the system during the waiting period. CBL Governor Sadiq al-Kabir – whose rivals have been angling to remove him -- likely engaged in this reform so as to maintain the support of foreign governments, the Libyan Panel of Economic Experts and the UN Support Mission in Libya (UNSMIL). It is now difficult to imagine his being replaced until a new legitimate government is installed.It is difficult to overstate the importance of this reform. If implemented smoothly, it will have a significant impact on the fundamental structure of the Libyan economy, as it will allow many more official and proper Letters of Credit to be issued while decreasing the desirability of fraudulent Letters of Credit. It will also decrease (though not eliminate) incentives to smuggle subsidized petrol. Most crucially, it should stabilize Libyan currency provisions for the vast majority of Libyans. Libyans may experience some short-term price hikes for daily essentials (particularly during the two-week period from the decree until its implementation), but if implemented swiftly and without anyone having destabilizing access to the old rate, prices for consumables should stabilize at slightly lower rates than present. This decision may however elicit violent antagonism from those who benefit from the current system, such as black market traders in Khoms and Misrata and those involved in the import/export trade who have preferential access to Letters of Credit.