Libya’s foreign-exchange challenge cannot be understood solely through the volume of dollars supplied by the Central Bank of Libya (CBL), the official exchange rate, or the size of the gap between official and parallel-market prices.
These indicators describe important aspects of the problem, but they do not fully explain its underlying causes. The more fundamental question is whether the country’s foreign-currency resources are being allocated, used and managed in ways that support economic stability, legitimate commercial activity and sustainable public finances.
Recent figures illustrate the scale of this challenge. Reported data for the first nine months of 2026 indicated a gap of approximately $4.7 billion between foreign-exchange use and relevant inflows. The CBL stated that this gap was covered by returns on its investments. Meanwhile, on 15 October, the official selling rate stood at approximately LYD 6.44 per US dollar, while parallel-market quotations were LYD 10.20 per US dollar today.
These figures must be interpreted carefully. A gap between foreign-exchange use and current inflows does not automatically represent an equivalent loss of reserves, just as a substantial supply of official foreign currency does not necessarily demonstrate that underlying market pressures have been resolved.
Taken together, however, these indicators raise a broader question of economic governance: why can substantial foreign-exchange provision coexist with persistent pressure on the dinar, and what does this reveal about the relationship between monetary intervention, fiscal discipline and institutional accountability?
1. Foreign-exchange provision is not the same as economic stability
Foreign-exchange policy is frequently assessed through the volume of currency made available to households and businesses. This is an important measure of access, particularly in an economy where import financing and permitted personal transactions depend heavily on foreign currency. Measures involving personal allocations, letters of credit, cash-dollar distribution through commercial banks and simplified arrangements for small traders can help address legitimate demand. They may reduce transaction barriers, improve access through regulated channels and support commercial activity. Yet the effectiveness of these interventions depends on what happens beyond the point of allocation.
Three distinct outcomes must be assessed:
Availability: the amount of foreign currency supplied through authorised channels.
Allocation efficiency: whether foreign currency reaches legitimate users for appropriate and verifiable purposes.
Economic effectiveness: whether the resulting transactions support productive activity, improve market functioning and reduce persistent imbalances.
These outcomes are related, but they are not interchangeable.
An increase in official foreign-exchange sales may improve access for some users without resolving unmet demand elsewhere. It may also redirect transactions from parallel channels to official ones without reducing the economy’s total requirement for imported goods and services. The relevant measure of success is therefore not the volume of dollars supplied in isolation. It is whether the intervention improves allocation, reduces distortions, supports legitimate economic activity and contributes to sustainable market conditions. A policy that increases supply without addressing the factors generating demand may provide temporary relief while leaving the underlying imbalance intact.
2. Following the dollar: From allocation to economic value
Foreign exchange passes through a sequence of institutional decisions and commercial transactions. Currency is allocated, payments are authorised, imports are financed, goods cross borders, and products eventually enter domestic markets or productive processes. Each stage represents a potential point of economic value creation, administrative failure or governance risk. The existence of an approved letter of credit, for example, establishes that a financing arrangement has been authorised. It does not, by itself, establish that the imported goods were delivered in the expected quantities, that their declared value was appropriate, or that the transaction generated the intended economic benefit. Likewise, an increase in recorded foreign-exchange use cannot automatically be interpreted as an increase in productive investment or improved consumer welfare.
A meaningful assessment must examine the relationship between the foreign currency allocated, the transactions completed, the goods delivered, the prices paid and the economic outcomes achieved. This distinction is particularly important when foreign currency is provided at an official rate that differs substantially from the parallel-market rate. Such a differential can create economic advantages for recipients with access to official allocations. Depending on the rules governing access and the integrity of their implementation, it can also create incentives for preferential access, arbitrage and rent-seeking.
The existence of these incentives does not prove that particular transactions are improper. It demonstrates why allocation decisions and transaction outcomes require effective verification. The central governance issue is whether public institutions can establish a sufficiently reliable relationship between the foreign currency they provide and the economic activity it is intended to support.
3. Foreign-exchange gaps and the sustainability of reserves
One of the most important distinctions in analysing Libya’s external position is the difference between a gap in current foreign-exchange flows and an actual depletion of reserve assets.
These concepts are related, but they are not identical.
A country’s foreign-currency position reflects several components, including hydrocarbon receipts, other foreign-currency inflows, payments for imports and other transactions, investment income, and changes in foreign assets and liabilities.
When foreign-exchange use exceeds relevant current inflows, the difference must be financed through another source. Depending on the accounting definition and the resources available, this may include investment returns, income generated by foreign assets or other financing arrangements.
The economic implications depend on the composition, reliability and sustainability of those resources. Investment income can legitimately support foreign-exchange requirements. However, reliance on investment returns must be evaluated against the performance of the underlying assets, future income expectations, liquidity requirements and the overall adequacy of external buffers. The reported $4.7 billion gap during the first nine months of 2026 should therefore be treated as an important indicator requiring further examination, rather than as direct evidence of an equivalent reserve loss. A complete assessment would require consistent data on foreign-exchange inflows and outflows, the CBL’s reserve position, investment income, relevant foreign assets and liabilities, and the accounting basis used to calculate the reported gap.
The International Monetary Fund’s April 2026 assessment provides an important macroeconomic context. Its concerns about Libya’s unsustainable fiscal trajectory highlight the connection between persistent fiscal imbalances, exchange-rate pressure, inflation risks and the potential for continued reserve losses under existing policies. This connection is fundamental. Foreign-exchange management cannot be separated from the fiscal conditions that generate demand for foreign currency.
The question is not whether every dollar sold represents a loss. The question is whether the overall pattern of foreign-exchange use is consistent with sustainable inflows, adequate reserves, and a credible medium-term economic framework.
4. Why does the parallel-market gap persist?
A persistent difference between official and parallel-market exchange rates indicates that official pricing and the conditions determining marginal foreign-exchange demand are not fully aligned. However, the size of the gap alone cannot establish the precise causes or the relative importance of each factor. Several mechanisms may operate simultaneously.
First, legitimate demand may exceed the amount available through official channels for particular users or transactions. Second, uncertainty about future access can encourage households and businesses to seek foreign currency outside the formal system. Third, domestic liquidity and fiscal expansion can increase demand for imported goods and foreign-currency holdings. Fourth, differences between official and parallel rates can create incentives for arbitrage when access is uneven or the rules governing allocations are difficult to verify.
Expectations also matter. If businesses and households anticipate further depreciation, they may seek to hold foreign currency as a precaution. This behaviour can reinforce demand even when official supply increases. These explanations should not be treated as mutually exclusive, nor should the entire parallel-market demand be classified as speculative. A substantial share may be connected to ordinary commercial requirements, precautionary behaviour or difficulties accessing official arrangements.
The analytical challenge is to distinguish between these sources of demand using credible transaction data and consistent economic indicators. Additional foreign-exchange channels may improve access for selected users, but their broader effect depends on whether they reduce unmet legitimate demand, improve confidence in official arrangements and address the fiscal and structural factors sustaining pressure. Without this distinction, policy may redistribute access to foreign currency without materially changing the forces driving the exchange-rate gap.
5. Dollarisation: A monetary solution or a change in the institutional problem?
The proposal to replace the Libyan dinar with the US dollar for a limited period of five to ten years raises a fundamental question about the relationship between monetary arrangements and institutional performance. The argument in favour of dollarisation rests on several potential advantages. By limiting the domestic authorities’ ability to create currency, a dollarised system could constrain certain forms of monetary financing and reduce some sources of exchange-rate uncertainty. It could also provide a more stable nominal reference for pricing and contracts if the transition were credible and the required dollar liquidity were available.
These potential benefits deserve serious consideration. However, they depend on the fiscal framework, banking-system resilience, the availability of foreign currency and the credibility of the institutional arrangements supporting the transition. Dollarisation does not eliminate the underlying economic constraints facing a country that depends heavily on hydrocarbon revenues. Nor does it automatically correct excessive public expenditure, inefficient allocation of public resources, weak financial oversight or institutional fragmentation. A government can still accumulate arrears, delay payments or face fiscal distress under a dollarised system.
The difference is that it would have less capacity to respond through domestic currency creation and would depend more directly on available dollar revenues, borrowing arrangements and other financing sources. This constraint may strengthen fiscal discipline, but it can also intensify adjustment pressures when revenues decline or external financing becomes unavailable. The implications for the banking system are equally important. Banks require adequate dollar liquidity to meet withdrawals, settle payments and maintain confidence.
A transition would therefore need to address the treatment of existing dinar deposits, cash holdings, salaries, debts, contracts and public obligations. The conversion rate would be particularly consequential. If the rate were inconsistent with underlying economic conditions, the transition could redistribute wealth between depositors, borrowers, creditors and holders of different forms of financial assets. A temporary dollarisation arrangement introduces a further complication. Returning to the dinar after five or ten years would not necessarily be straightforward.
Once contracts, pricing practices, savings and financial intermediation become dollar-based, reversing the arrangement could create new uncertainty. A credible proposal would therefore require a clearly defined legal framework, a realistic assessment of dollar availability, safeguards for financial stability, a fiscal adjustment plan and an explicit strategy for managing the transition or any eventual exit. There is also a strong counterargument against adopting a foreign currency. Retaining the dinar preserves monetary-policy instruments, the capacity to act as a domestic-currency lender of last resort and a degree of monetary sovereignty. These instruments can be valuable when they are supported by credible institutions and used within a disciplined macroeconomic framework.
However, retaining a national currency does not guarantee monetary stability. Where fiscal policy is inconsistent, institutional credibility is weak and expectations of depreciation persist, the nominal independence of monetary authorities may offer limited practical protection.
The comparison is therefore not between a flawless dinar and a flawless dollar. Neither option is sufficient on its own. The relevant question is which monetary framework, combined with which fiscal and institutional reforms, offers the most credible path towards price stability, financial resilience and sustainable economic management.
Dollarisation should be assessed against feasible alternatives, including stronger fiscal rules, more transparent foreign-exchange allocation, improved monetary-policy implementation and more effective financial supervision. The assessment should compare the costs, benefits, distributional consequences and implementation risks of each option. The debate must move beyond symbolic arguments about monetary sovereignty or the presumed stability of a foreign currency. The decisive issue is whether the proposed framework can address the conditions that generated the crisis in the first place.
6. Fiscal policy is part of the foreign-exchange problem
Libya’s dependence on hydrocarbon revenues creates a structural relationship between public expenditure and foreign-exchange availability. Oil and gas generate most of the country’s foreign-currency income, while a substantial share of domestic public expenditure is paid in dinars. When public spending expands without a sustainable revenue and expenditure framework, it can increase domestic demand, stimulate imports and intensify the demand for foreign currency.
This does not mean that every increase in public spending is economically harmful. Public expenditure can support essential services, infrastructure and productive capacity. Its consequences depend on its composition, efficiency, financing and broader economic conditions. The problem emerges when spending commitments consistently exceed sustainable fiscal capacity, or when expenditure decisions are disconnected from reliable information about revenues, obligations and economic priorities. In such circumstances, foreign-exchange interventions may address the immediate consequences of domestic imbalances without resolving their fiscal origins.
More credible budgeting, expenditure controls, cash management and transparent reporting are therefore not secondary administrative reforms. They are components of a wider framework for monetary and external stability. The key issue is coordination. Fiscal decisions affect domestic liquidity and import demand; monetary and foreign-exchange arrangements influence access to imports and the distribution of economic advantages; and institutional weaknesses can undermine the effectiveness of both. A sustainable response must recognise these interactions rather than treating fiscal policy, exchange-rate management and foreign-exchange allocation as separate policy domains.
7. From fragmented financial data to Governance Intelligence
The challenge facing Libya is not simply a shortage of economic data. It is also the difficulty of connecting information held by institutions responsible for different stages of the same financial and commercial processes. The CBL records foreign-exchange transactions and relevant banking activities. Commercial banks maintain information on customers, payments and letters of credit. Customs authorities record imports and border movements. Other institutions hold information relevant to public expenditure, trade, financial integrity and economic activity.
Each dataset provides only part of the picture. When these sources remain disconnected, decision-makers may be able to measure how much foreign currency was allocated without being able to assess systematically whether the associated transactions were completed, whether imports were delivered as declared, or whether the intended economic outcomes were achieved.
A more integrated analytical approach could help institutions investigate several important questions:
What proportion of foreign-exchange allocations corresponds to completed and verifiable transactions?
Do customs records, payment information and import documentation provide a consistent account of financed imports?
Which categories of legitimate demand remain persistently unmet, and why?
How do public expenditure patterns influence domestic liquidity, import demand and foreign-exchange requirements?
Are interventions reducing underlying market pressure, or mainly shifting transactions between channels?
Are changes in allocation producing measurable benefits for businesses, households and the wider economy?
Answering these questions would require more than technical data integration. It would depend on consistent data standards, clear institutional responsibilities, lawful information sharing, confidentiality safeguards, independent oversight and the capacity to convert analytical findings into coordinated decisions. The objective would not be to assume wrongdoing whenever records differ. Differences may arise from timing, classification, valuation, legitimate changes in transactions or weaknesses in reporting. The objective would be to identify material discrepancies, understand their causes and direct further examination towards evidence.
This is where financial data can become actionable financial intelligence. Governance Intelligence, in this context, refers to the institutional capacity to connect information, interpret relationships, identify emerging risks and support evidence-informed decisions across organisational boundaries.
The Financial Integrity and Spending Logic (FISL) framework offers a research-based approach for examining how governance information, financial integrity, institutional coordination and strategic oversight might be connected within a broader institutional system. FISL should not be presented as a tested intervention or a substitute for monetary, fiscal or regulatory reform. Its practical contribution would depend on further research, institutional engagement, appropriate access to data and empirical validation.
Its relevance lies in helping frame a critical question: can institutions move from reporting individual transactions towards understanding the relationships between financial decisions, institutional performance and economic outcomes?
8. What should determine the success of foreign-exchange policy?
Libya’s foreign-exchange debate is often reduced to three visible indicators: the official exchange rate, the volume of foreign-exchange sales and the difference between official and parallel-market prices. These indicators matter, but they do not provide a complete assessment of policy effectiveness. A more comprehensive evaluation would examine at least five dimensions:
First, allocation efficiency. Are foreign-currency resources reaching legitimate users through transparent and consistently applied rules?
Second, transaction integrity. Can the relationship between authorised payments, completed transactions and imported goods be verified?
Third, fiscal sustainability. Is foreign-exchange demand consistent with credible public expenditure plans and sustainable revenue expectations?
Fourth, market outcomes. Are unmet legitimate demand, distortions and the official–parallel exchange-rate gap declining in a sustained and measurable way?
Fifth, institutional accountability. Can the responsible institutions explain their decisions, disclose appropriate information and demonstrate how identified weaknesses are being addressed?
These dimensions would help distinguish short-term relief from structural improvement. They would also provide a stronger basis for comparing policy alternatives, including different approaches to exchange-rate management and the possibility of dollarisation.
No single indicator can establish success. Nor can the effectiveness of a monetary intervention be judged independently of the fiscal and institutional environment in which it operates.
The objective should be to establish whether policy changes improve the overall functioning of the economy rather than simply changing the channels Through which existing pressures are expressed.
Conclusion: The pressure must be understood, not merely absorbed
Libya’s foreign-exchange challenge is ultimately a question of how economic resources, public expenditure and institutional decisions interact. Increasing the supply of dollars may be necessary to meet legitimate demand. Retaining the dinar may preserve valuable monetary instruments. Dollarisation may offer certain forms of constraint under specific conditions. None of these propositions, however, addresses the need to understand the sources of foreign-exchange demand, the sustainability of available resources and the institutional mechanisms governing their use. The reported gap between foreign-exchange use and current inflows, the persistence of a substantial parallel-market premium and the wider concerns about fiscal sustainability all point towards the need for a more comprehensive assessment.
Before changing the currency framework, Libya needs to establish which problems arise from fiscal imbalances, which reflect weaknesses in allocation and oversight, which are driven by market expectations, and which require broader structural reform. The same principle applies to foreign-exchange interventions. Their success should be judged not only by the volume of currency supplied, but by the quality of allocation, the integrity of transactions, the sustainability of financing and the Economic value generated.
The central challenge is therefore not simply to provide more dollars, defend the dinar or adopt another currency. It is to build the institutional capacity to explain where foreign-currency resources go, why pressure persists and which reforms can address its underlying causes.
Sustainable foreign-exchange management begins when monetary intervention is supported by fiscal discipline, verifiable information and institutions capable of turning financial data into accountable economic decisions.
Dr Najat Altorjman is a Corporate Governance Researcher, founder of Financial Integrity and Public Spending Logic (FISL) and Banking Governance & Financial Integrity in Libya, of the Sunderland Business School at the University of Sunderland, England.
Analyzing Drivers of Libya’s Foreign-Exchange Pressure
Libya's Persistent Exchange Rate Gap: Symptoms and Root Causes
Strengthening the Libyan Dinar: Beyond Exchange Rate Intervention