Exchange rate volatility and its impact on monetary stability in Libya An analytical study of the Libyan economy from 1990 to 2023

Abstract

This study aims to analyze the dynamics of the exchange rate in Libya over the period from 1990 to 2023, focusing on measuring its volatility and its impact on monetary stability indicators. The importance of this topic stems from the fact that the Libyan economy is a rentier economy that relies primarily on oil revenues, making it vulnerable to external fluctuations, exchange rate fluctuations, and the resulting inflationary pressures and liquidity disturbances.

To achieve the study's objectives, the descriptive analytical approach was used to construct the theoretical framework for the concept of monetary stability and the relationship between relevant macro variables. Econometric analysis was also used to estimate the impact of the exchange rate on inflation and liquidity. This was done using the Autoregressive Distributed Lag Model (ARDL), which enables the study of short- and long-term relationships between the studied variables.

The results revealed a statistically significant positive relationship between the exchange rate and the inflation rate, reflecting that the decline in the value of the local currency leads to increased inflation rates, thus negatively impacting monetary stability levels. The results also confirmed that exchange rate fluctuations are a major factor explaining the instability of monetary policy in Libya during the study period, especially given the weak economic diversification and heavy reliance on imports to meet domestic demand.

The study concludes that achieving monetary stability in Libya requires more stringent exchange rate management policies, along with structural reforms in fiscal and macroeconomic policy to reduce the vulnerability of the monetary system to internal and external shocks.