Exchange Rate Policy
- During the past decades, the national economy has witnessed several economic and financial difficulties that necessitated the adoption of a set of economic policies and measures aimed at addressing the imbalances that have occurred. One of these measures is the exchange rate policy.
- The following summarizes the evolution of the exchange rate policy implemented by the Central Bank of Libya (CBL) since its inception up to now, The Exchange rate (the equilibrium value of the Libyan Dinars) The Libyan Dinar (LD) has been issued as the national currency for the first time (under the name of the pound) in early 1952. Its value was equal to the Sterling pound or USD 2.8 (equivalent to 2.48828 grams of gold) each. In 1967, the sterling pound was devaluated by about 14.3% to USD 2.4. Despite the fact that the Libya Dinar was still pegged to the Sterling pound, the LD was not devaluated. In August 1971, the United States announced that it will no longer back the USD with gold. In November of the same year, the USD was devaluated against the SDR by about 7.9%, to SDR 1 = USD 1.0857, instead of the old rate of SDR 1 = USD 1. This has led to an appreciation of the LD against the USD which LD 1 = USD3.04, instead of LD 1 =USD 2.8. In February 1973, the USD was devaluated for the second time by 10% against the SDR to an exchange rate of 1 SDR=USD 1.2063, instead of 1 SDR=USD 1.0857.
- This resulted in an appreciation of LD against the USD by about 11% to LD 1 = USD 3.3776, instead of LD 1 = USD 3.04. In February 1973, the LD was pegged to USD at a fixed exchange rate of USD1 = LD0.29679. As a result of this peg, the value of LD against other currencies varied as USD varied against those currencies. Until 1986, the LD maintained its value against the USD and other major foreign currencies because of the relative availability of foreign currency. Until 1982, administrative or quantitative restrictions on foreign currency trading and soaring oil prices caused a significant increase in the reserves. On March 18, 1986 more flexibility was introduced in the exchange rate system, the LD was de-pegged from the USD and was instead pegged to the SDR at a rate equivalent to SDR 2.8 per LD 1. On May 01, 1986, a margin was set for the LD to fluctuate no more than ± 7.5%. The lower bound of this margin was equivalent to SDR 2.6046. However, the margin was later expanded several times.
- The above mentioned changes were introduced pursuant to the provisions of the Banking Law, which authorized the CBL to revise the exchange rate of the LD according to the economic and monetary developments so as to prevent the negative effects of such developments on the national economy. Since February 14, 1999 until the end of 2001, the CBL implemented a program that enabled commercial banks to sell foreign currency for personal and business purposes, without any restrictions and in accordance with the prices set by the CBL. The new exchange rate, known as the “declared special exchange rate “, was used beside the official exchange rate after the elimination of what was known then as the “commercial price” which was approved and used for certain purposes since 1994 until the beginning of 1999.
- The most important objectives of this program were:
To rationalize the use of foreign currency. To resolve the problem of citizens who need foreign currency for various personal purposes through a legal mechanism, according to legitimate procedures and without restrictions on the exchange. To raise the value of the Libyan dinar against the foreign currencies in the black market. To support the purchasing power of the LD. To lower the prices of goods provided and funded by the parallel market and to maintain their stability. To eliminate the parallel market for foreign currency. The program aimed at establishing an appropriate framework to adjust the LD exchange rate up to its real effective exchange rate that coincides with Libyan economic indicators; achieving efficient and rational use of available resources and eliminating distortions in the prices. During the period of 1999 to 2000, the LD has gradually been appreciated in terms of the declared special exchange rate, accompanied from time to time with devaluation in terms of the official exchange rate. As a result, the official exchange rate of the LD against the USD fluctuated between USD 3.54 for LD 1, at the end of 1990, to USD 1.55 per LD 1, at the end of 2001. The LD exchange rates against other major currencies varied according to the fluctuations that have occurred in the LD as denominated in SDR. On January 1, 2002, the exchange rates of LD were unified by a fifty percent devaluation in the official rate, compared to its value at the end of 2001, to SDR 0.6080 per LD, equivalent to LD1= USD1.3. On June 16, 2003, the LD was further devaluated by 15%, to SDR 0.5175 per one LD in order to account for the tax on the Man Made River, which was imposed on all letters of credit and remittances of foreign exchange, as well as to eliminate the discrimination in the exchange rate among the tax-exempt and non tax-exempt. This rate is still in effect until now. On June 21, 2003, Libya officially informed the International Monetary Fund (IMF) of its decision to accept the obligations of Article VIII of the IMF Agreement. Libya eliminated the restrictions that were involving compliance under Article VIII, including the tax of the Man Made River of 15% on remittances, purchases of foreign currency by individuals and the private sector, and all other restrictions that were imposed on the operations of the current account.