Adding to the chaos and crisis in current Libya, the economy is yet another concern of ordinary Libyans who thought they might look forward to a better life due to the country’s abundant natural resources and its young labor force – supposedly main drivers for progress and development.

Dean of Faculty of Economics and Political Science at the University of Tripoli Dr. Ahmad Abulseen explains major problems of the Libyan economy and the best solution.

Adding to the chaos and crisis in current Libya, the economy is yet another concern of ordinary Libyans who thought they might look forward to a better life due to the country’s abundant natural resources and its young labor force – supposedly main drivers for progress and development.

Dean of Faculty of Economics and Political Science at the University of Tripoli Dr. Ahmad Abulseen explains major problems of the Libyan economy and the best solution.

Dr. Abulseen, where is Libya heading economically? What does the devaluation of the Libyan dinar relative to the dollar mean and how far can this devaluation go? What is the real exchange rate of the Libyan dinar?

Answering these questions depends on the future of the security situation in Libya. While there might be hope in the long run, I do not believe that there could be any effective solutions in the short- and medium-term due to the instable financial and economic situation.

Indicators predict even further aggravated economic instability in spite of improved security. Having a stable economy is not an automatic process, but it is linked to the size of the informal economy that has dramatically expanded. Moreover, the patterns of the conflict economy have increased, not to mention the extravagant rise in public spending. That money supply has become thrice as much as the economy can take, which has led to the devaluation of the dinar. This has disrupted relative prices, especially real wages, the standard of living, and has caused stagflation. Addressing these issues will take many years and requires proper and effective policies.

Is the value of the dinar in the black market now its real value?

The real value of the dinar is higher than the black market value. This is simply because Libya’s economy only depends on net imports. So, the exchange rate of the dinar against the dollar should be weighed against a unit of imports, and this value might not be shown in the simple transactions in restricted markets; rather, it is reflected in the prices of imported goods.

Has Libya fallen into a liquidity trap? And why is it even a trap?

The Libyan economy has undoubtedly fallen into the liquidity trap. This means keeping cash as a hoard of money and not pumping it into the banking system as savings and then investments. It basically means making money a support system to create money by following a policy of overdrafts.

People are concerned about their delayed salaries, while state institutions say there are no financial allocations to carry out their functions. What is the real reason behind the lack of liquidity?

There are many reasons, most importantly from an economic perspective, the fact that following an expansionary economic policy was from the beginning a grave mistake, in addition to a mixing of fiscal and monetary policies, a failure to comply with minimum wages and mistrust of the dinar and the banking system of the country.

Can the reserves of commercial banks meet the needs of individuals and markets? And for how long?

It may work for a short period of time, but banks will no longer be banks should they lose their reserves. Accordingly, our banking system is at risk and might be blown away completely.

Can the Central Bank of Libya, which is divided into eastern and western banks, offer any solutions?

I do not think we have many options. The monetary and fiscal policies that represent the tools of the financial institutions in Libya can only adopt a three-year increasing budget, largely reduce spending in hard currencies and fix the exchange rate at an effective level for a period that brings stability. In addition, minimum wages should be adhered to.

How do you view the newly released bank notes?

From an economic perspective, releasing new currency notes is nothing more than increasing money supply and spending, which aggravates the already deteriorating situation. From an administrative procedural perspective, it may be an attempt to ease the burden on the state towards the inside, i.e. showing the ability to settle certain obligations.

Do you consider replacing in-kind subsidy with monetary subsidy to be a useful government policy? Has this been a good time to apply it?

Certainly not, but this does not mean I support in-kind subsidy. I believe the problem is who is targeted by subsidy. I mean monetary support under instability is going to cost more than in-kind support do because the former requires firm and strong managements and complicated foundations, tools and methods. Furthermore, this shift would increase the prices of production inputs, causing skyrocketing prices, which would in turn lead to decreased real wages and incomes and consequently increased poverty and unemployment. This is not a solution for the rising cost of subsidy, which is actually high due to the complicated chain of support delivery, such as handling, storage, distribution, etc.

Economists are pessimists by nature. What are your expectations for the future of the country according to the current data? Do you expect Libya to go bankrupt and join the group of countries in debt to the World Bank? Will we witness another oil-for-Food Programme?

Economists are not always pessimists; rather, they rely on indicators and figures. No economist should be afraid of dealing with numbers and statistics. This is why economists are said to be pessimists when the data is shocking or not optimistic. However, in my point of view as an economist, I think that it was possible for the Libyan economy not to fall into the trap of a rentier economy, but it unfortunately did and deeply. Getting out of there requires many years of sacrifice and will. International institutions like the International Monetary Fund and the WB only lend according to conditions in line with the so-called Washington Consciences, and I believe we may find ourselves within these consciences.