Libya’s current electricity, security and black-market foreign exchange crisis has accelerated the debate on why, despite being an oil producing and exporting nation, Libya has failed to govern itself to better security and economic stability.
Debate continues as to what are the real reasons of Libya’s failures. What are the fundamental causes and what are the symptoms?
In this opinion piece, leading Libyan businessman Husni Bey offers a detailed prognosis of Libya's economic problems and offers solutions to the fundamental causes rather than the symptoms.
‘‘Speculation, smuggling and the parallel market are not the disease. They are symptoms of an economic system that rewards arbitrage more than work, investment and production.
Much of Libya’s economic debate is framed around three familiar targets: currency speculators, fuel smugglers and the parallel foreign-exchange market.
They are blamed for the decline of the dinar, rising prices, shortages and the erosion of purchasing power. But this diagnosis is incomplete.
The more important question is not who is speculating, who is smuggling or who is trading dollars outside the banking system.
It is: What economic policies made speculation, smuggling and rent-seeking more profitable than production, employment and investment?
That is where Libya’s economic debate should begin and must end. Libya does not simply have a dollar problem. Libya earns the overwhelming majority of its public revenues from oil and gas in foreign currency (93%), principally US dollars. Yet the government spends domestically 100% in Libyan dinars.
This creates a fundamental relationship between fiscal policy, monetary policy and the exchange rate.
The relevant question is therefore not simply how many dollars Libya earns or holds in reserves. It is also how many dinars the state injects into the domestic economy and how many of those dinars it subsequently absorbs through the sale of its foreign-currency revenues.
When public expenditure and money supply expand significantly faster than real production, while insufficient dinar liquidity is withdrawn from circulation, the excess money must go somewhere. It seeks goods, property, gold and, above all, foreign currency deposits at home or in foreign banks.
In that environment, pressure on the dinar is not surprising. It is the predictable result of the monetary imbalance.
The problem becomes more acute when the same dollar is given two substantially different prices. Two exchange rates create an industry of arbitrage.
Consider the personal foreign-exchange allowance. If approximately four million Libyans are potentially entitled to purchase $2,000 each at an official rate of around LYD 6.35 to the dollar, the theoretical demand generated by that policy alone may reach $8 billion.
If those dollars can then be sold in the parallel market at a premium of 30% or more, the policy has created something extraordinary: an asset that can generate a large return almost immediately and with limited commercial risk.
Depending on the actual parallel-market rate, the implied rent can run into many billions of dinars.
Why should anyone be surprised that citizens take advantage of such an opportunity?
If an asset can be bought for 100 and resold shortly afterwards for 130, basic economic behaviour predicts that demand for that asset will surge.
The citizen did not create the price distortion. The policy did. Libya experienced an even more extreme version of this phenomenon between 2016 and 2019, when the gap between the official and parallel exchange rates became extraordinarily wide to over 1000%. The CBL Governor at the time, Saddik El-Kabir, effectively turned the total society into foreign-exchange arbitrageurs.
The appropriate question is therefore not whether Libyans became speculators. It is why public policy created an environment in which speculation could produce returns that legitimate production rarely could. This is also why I find calls to recreate similar exchange-rate distortions in 2026 particularly troubling.
The same distortion exists beyond personal allowances. The principle applies equally to letters of credit, preferential access to foreign currency and every mechanism through which one economic actor acquires dollars below their effective market value. The dollar is ultimately a commodity.
If the same commodity has two prices, access to the lower price becomes valuable in itself.
The beneficiary no longer needs to generate economic value through production, logistics, technology or entrepreneurship. Merely securing access to the cheaper dollar can generate substantial profit. Under high-spread scenarios, the total economic rent arising from preferential foreign-currency access could amount to tens of billions of dinars annually, potentially approaching LYD 48 billion depending on the volume of foreign-exchange sales and the gap between official and market rates.
That does not represent new wealth. It represents a transfer of wealth from the masses to the lucky stars. Someone receives the benefit of the cheaper asset; someone else ultimately pays for it.
In practice, that cost is borne by society through prices, inflation, lost public revenue, distorted competition and declining purchasing power.
Fuel subsidies reproduce the same economic logic.
The same principle operates in Libya’s energy sector. When petrol, diesel or electricity are sold at only a fraction of their economic value, the subsidy creates an enormous price differential. That differential becomes a rent. The larger the gap between the domestic subsidised price and the value of the commodity across the border, the stronger the incentive to divert, waste or smuggle it.
We can increase security at borders, prosecute smugglers and tighten distribution controls. Those measures may be necessary. But as long as the economic reward from smuggling remains extraordinary, the system will continuously generate new participants willing to take the risk.
The problem is therefore not solved by asking why someone smuggles subsidised fuel. We should ask why our pricing policy makes smuggling fuel dramatically more profitable than producing goods, employing people or running legitimate businesses.
That is why subsidy reform should shift from subsidising the commodity price to supporting the citizen directly in cash. The objective should be to protect household income without maintaining a price structure that rewards waste, diversion and smuggling. The dollar has become a measure of confidence
There is also an important distinction between speculation and saving.
Citizens holding dollars are not necessarily speculators. Money has three fundamental functions: it is a medium of exchange, a unit of account and a store of value. When people believe that the dinar will continue losing purchasing power, they rationally minimise their long-term exposure to it. They retain dinars for salaries, bills and everyday transactions while moving savings into dollars, gold, real estate or other assets.
A continuous vote of no confidence in the dinar
That behaviour is more than speculation. It is effectively a continuous vote of confidence in the currency. And confidence cannot be restored by administrative declarations about what the dollar should be worth. It must be earned through credible fiscal discipline, control over money creation, predictable economic policy and a narrowing of the gap between official and market exchange rates.
Why prices do not immediately fall when the dollar falls?
The parallel-market exchange rate inevitably influences domestic pricing, but the relationship is not mechanical. A merchant unable to obtain official foreign currency must acquire dollars at the market rate and incorporate that cost into the selling price. But a merchant who obtains foreign currency at a preferential rate is holding an asset whose economic value is greater than its accounting cost.
In a highly competitive market, some of that advantage should theoretically pass to consumers. But where competition is limited, the exchange-rate advantage may instead become additional profit.
This helps explain why consumer prices may rise quickly when the dollar appreciates but fall much more slowly when it declines. Businesses price not only according to yesterday’s exchange rate, but according to replacement cost, risk, expectations, financing, transport, energy, storage and uncertainty about obtaining future foreign currency.
The durable solution is therefore not administrative price controls " fixed price exchange rate ". It is removing the distortion at the source. The spectacular progresses in digital banking have not yet turned from financial into intermediation, Libya has made substantial progress in electronic payments and digital banking services. That is a genuine achievement. But digitalising payments should not be confused with building a functioning financial system.
Banks should do much more than transfer money between accounts. Their essential economic role is to mobilise savings, assess credit risk and finance factories, housing, businesses, infrastructure and productive investment.
Much of Libya’s economy remains outside that formal financial cycle. Large segments of property remain inadequately registered. Businesses operate partly informally. Labour and remittance flows remain outside the banking system. Self-financing dominates many commercial activities. The challenge is therefore no longer simply to bring technology into Libyan banks. It is to bring the Libyan economy into the banking system.
A truly inclusive financial system is one in which income, property, businesses and investments are documented, financeable and measurable. Libya’s greatest opportunity is to stop wasting existing wealth.
Libya does not lack resources. The greater problem is how efficiently those resources are converted into economic and social value. The major sources of waste are well known: inefficient energy subsidies, excessive public-sector employment relative to productivity, unfinished projects, weak evaluation of government expenditure, smuggling and exchange-rate rents.
These all share a common characteristic. They reward access more than productivity. Access to the right foreign-exchange window, subsidised fuel, to a public payroll, to state contracts. An economy organised around access inevitably becomes rent-seeking. A productive economy, by contrast, rewards innovation, efficiency, investment and risk-taking.
That distinction is crucial to Libya’s future.
Fiscal policy and monetary policy cannot remain disconnected. Perhaps the deepest structural problem lies in the relationship between government spending and monetary stability.
Fiscal policy injects dinars into the economy.
The central bank is then expected to defend the value of those dinars, satisfy demand for foreign exchange, contain inflation and preserve reserves. There is a limit to how long this can work.
If government spending persistently expands faster than sustainable revenues and real economic output, the imbalance must eventually surface somewhere.
It may appear as inflation. It may appear as demand for dollars.
It may appear as depreciation of the dinar. It may appear as falling reserves. Usually, it appears as a combination of all four.
No central bank can permanently neutralise an undisciplined fiscal system. For that reason, Libya’s fragmented budgets, competing spending authorities and weak fiscal coordination are not merely political problems.
They are monetary problems. A unified budget, unified revenues and effective expenditure control are prerequisites for sustainable currency stability.
The real oil risk is not depletion. Libya’s greatest oil-related threat is not that the country will suddenly run out of hydrocarbons.
It is that permanent government obligations will grow faster than oil revenues can finance them.
Public-sector wages, subsidies and recurrent expenditures are difficult to reverse once introduced.
Oil income, however, is volatile. Prices can fall. Production can decline. Exports can be interrupted. Global demand can change.
If oil revenues decline by 20% or 30% while expenditure continues rising, the fiscal adjustment becomes unavoidable. Government must then choose among spending cuts, new taxes or revenues, exchange-rate adjustment, reserve depletion, borrowing or monetary financing.
The longer reform is delayed, the harsher those choices become.
Oil should therefore finance the transition away from rent dependence. It should build an economy capable of producing, exporting, employing people, paying taxes and attracting bank financing.
Oil wealth should finance the creation of a productive economy — not the permanent expansion of a distributive state.
A better measure of Libya’s economic health the dollar exchange rate is important, but it is a thermometer. It is not the disease. Libya should judge economic progress through a broader set of indicators: real non-oil GDP per capita, purchasing power, inflation, fiscal deficits and how they are financed, money-supply growth, the balance of payments, foreign reserves, private-sector credit, productivity, employment and the gradual formalisation of the informal economy.
But perhaps one indicator captures Libya’s structural challenge better than all the others: How much income is generated by creating economic value, and how much is generated merely by capturing rent? When obtaining a $2,000 allocation, a letter of credit or a litre of subsidised fuel offers a better return than establishing a factory, employing workers or investing capital, economic policy is sending exactly the wrong signal.
That is the core of Libya’s problem. The speculator is not the root cause. The smuggler is not the root cause. The parallel market is not the root cause. They are, to a considerable extent, rational responses to incentives created by policy.
Give millions of people access to an almost guaranteed arbitrage profit and millions will seek it.
Create an enormous difference between the domestic and international price of fuel and smuggling will follow. Give the same dollar two different prices and a market will inevitably emerge between them.
Libya therefore needs to change the question. Instead of asking: Who is speculating? Who is smuggling? Who is raising prices?
We should ask: What policies made speculation, smuggling and rent-seeking more profitable than production, work and investment?
Correct those incentives, remove the major price distortions and restore coherence between fiscal and monetary policy — and many of the behaviours we currently spend so much effort fighting will begin to lose their economic rationale.
That is where real reform starts.''