Libya’s recent currency devaluation against the US dollar has sent ripples through its fragile economy, marking the first official adjustment in over 4 years.

Libya’s central bank declared a 13.3% devaluation of the Libyan dinar, setting the new official exchange rate at 5.5677 to the US dollar, effective immediately. This move is the first since the 2020 decision to fix the exchange rate at 4.48 dinars per dollar.

However, the reality in Libya’s shadow economy paints a starker picture — the dinar trades at 7.20 to the dollar on the parallel market, highlighting the growing disconnect between official policy and public perception.

This financial shift follows last year’s deepening crisis over control of the central bank, which saw a steep drop in oil output and exports — the backbone of Libya’s revenue stream. Though the conflict was resolved in September 2024 through a UN-brokered agreement between rival Eastern and Western legislative bodies, the appointment of a new central bank governor has yet to deliver economic stability.

Libya, engulfed in turmoil since the 2011 NATO-backed uprising, remains divided between eastern and western governments. This dual administration continues to complicate fiscal planning, as spending by both governments reached a staggering 224 billion dinars ($46 billion) in 2024 alone, according to the central bank. Of that total, 42 billion dinars were spent on crude-for-fuel swaps.

The consequences of operating without a unified national budget are already evident. Public debt stands at 270 billion dinars, and projections suggest it could surpass 330 billion dinars by the end of 2025. In December, Stephanie Koury, deputy head of the U.N. mission to Libya, warned decision-makers to “urgently agree on a framework for spending in 2025 with agreed limits and oversight.”

Currency Strategy Raises Domestic, Global Concerns

Currency devaluation, while often seen as a desperate measure, can serve as a powerful economic tool. It is a deliberate adjustment that lowers the value of a nation’s currency relative to foreign currencies. At first glance, this may appear counterintuitive. But the logic lies in stimulating economic activity, particularly in boosting exports.

When a country devalues its currency, its goods become cheaper and more attractive to foreign buyers. Simultaneously, imports become more expensive, prompting consumers to turn toward locally produced goods. This strategy helps correct trade imbalances and can kickstart domestic industries suffering from foreign competition.

In Libya’s case, this move might offer temporary relief in an economy battered by instability, dwindling oil revenues, and a dual administration system that frustrates any hope of unified economic planning. It could also offer fiscal relief.

Devaluation effectively lowers the real value of sovereign debt, especially when debt is denominated in stronger foreign currencies. If a nation owes $2 million monthly in interest payments, a weakened domestic currency can cut that burden in half when measured in local terms.

Furthermore, a lower currency can give central banks more room to maneuver. With less pressure to keep interest rates high to support the currency, policymakers can cut rates to stimulate borrowing, investment, and overall economic growth.

Yet, currency devaluation is not without cost. Chief among them is inflation. As imported goods become more expensive, the cost of living rises, eroding consumer purchasing power. Imported food, medicine, and fuel — all critical in Libya’s import-dependent economy — could surge in price, triggering public dissatisfaction and unrest.

A worst-case scenario arises when several nations engage in competitive devaluations, leading to what economists dub a “currency war.” Such actions can destabilize global markets, erode trust among trade partners, and ignite retaliatory policies that harm the international economy.

Despite these risks, Libya’s central bank seems to have accepted devaluation as a necessary move in the absence of political unity and budgetary discipline.