Between Political Deadlock and Isolated Islands: How Decision Making Conflicts are Weighing on the Libyan Economy

Libya’s economy continues to pay the price for a fractured political system in which power is split across competing institutions and rival interests. Since the fall of Muammar Gaddafi in 2011, the country has failed to build a unified political framework capable of managing oil wealth, still the backbone of the national economy, in a coherent and sustainable way.

A striking contradiction

In 2025, Libya’s economy appeared to offer a rare bright spot. Growth reached 13.3%, driven largely by oil production rising to 1.3 million barrels per day. Yet that headline figure concealed a deeper crisis.

Despite the recovery in output, political divisions contributed to two devaluations of the Libyan dinar in the same year. The result was a foreign currency shortfall estimated at $9 billion, inflation of between 2.1% and 2.4%, and a sharp increase in the cost of basic goods. With Libya relying on imports for around 80% of its domestic needs, commodity prices rose by 20% to 30%, placing even more pressure on households.

The dinar’s slide on the parallel market, where it traded above 10 to the dollar, pushed living costs higher and triggered renewed scenes of citizens lining up outside banks to withdraw salaries. In explaining its second currency adjustment in less than a year, the Central Bank pointed directly to continuing political and economic instability.

Politics on separate islands

Libya’s rival political actors often behave as though they are operating in separate political spheres, with little coordination and no shared economic vision.

Few episodes illustrate that fragmentation more clearly than the controversy over the foreign exchange tax.

The House of Representatives approved the measure after a proposal from the Central Bank, but without any serious assessment of its likely social impact. The result was immediate. Prices of basic goods jumped by between 20% and 30%.

The measure was introduced against the backdrop of public spending that had exceeded 120 billion dinars, and it was presented as a way to narrow the gap between the official exchange rate and the parallel market rate, a gap that was putting pressure on the Central Bank’s reserves. But the way it was adopted exposed how little coordination existed among the institutions involved.

A decision with no real defenders

Rather than producing consensus, the exchange tax deepened existing fault lines. It highlighted divisions within the House of Representatives itself, including tensions between Speaker Aguila Saleh, his deputies, and other members. The High State Council sought to use the issue to increase pressure on the Government of National Unity, while disagreements also surfaced inside the Presidential Council.

Once public anger mounted, few were willing to stand firmly behind the decision. Saleh later said the measure would be withdrawn if it became clear that its approval had not served the national interest or the interests of citizens. The repeated cycle of approving, suspending, and revisiting the tax under judicial and public pressure pointed to something deeper than a policy misstep. It revealed a decision making process that remains reactive, fragmented, and politically immature.

In that context, economic policy is no longer shaped by a coherent national strategy. It is shaped by rival calculations, institutional competition, and short term political survival.

The wider cost of fragmentation

The UN Support Mission in Libya has stressed that resolving the crisis around the dinar and public spending is essential for creating a fair national environment, one that can protect democratic processes and support the rebuilding of unified institutions.

A growing body of research also suggests that the hardship faced by Libyan citizens cannot be separated from the structural weakness of the country’s economic institutions and the instability of its political system. As the World Bank has noted, Libya continues to face deep structural, political, and security challenges that weigh heavily on its long term economic prospects.

Dr Atef Al Hassia of Omar Al Mukhtar University argues that the political struggle has cast a shadow over every major state institution. In his view, the Government of National Unity has effectively returned to “square one,” reflecting the incomplete implementation of the economic policy recommendations that emerged from the Geneva process.

Al Hassia, who previously served on a UN affiliated economic committee that was sidelined in 2021, said this institutional confusion has had direct consequences for economic governance. Public spending expanded irresponsibly in the absence of a unified budget law, while confidence between citizens and the state continued to erode.

When institutions become arenas of influence

The economy has become even more exposed amid renewed conflict over the management of the Central Bank. Although a new governor was appointed and the board was restructured, the bank has remained entangled in political balancing. That has weakened the independence of monetary policy and left one of Libya’s most important institutions vulnerable to competing political interests.

The consequences have been serious. Over the past two years, the dinar has lost at least 30% of its value against major foreign currencies. Rival governments have failed to agree on most areas of spending beyond salaries, and even those have not escaped the effects of political division. With oil still serving as the state’s only meaningful source of income, the gap between expenditure and revenue has pushed public debt higher, without any clear strategy for repayment.

At the same time, many political actors continue to place immediate advantage ahead of structural reform. Economic policy becomes a bargaining chip, a tool for pressure, or part of a broader political deal. The World Bank has repeatedly pointed to political division as one of the main barriers to meaningful economic reform in Libya.

Al Hassia warns that without a unified authority capable of enforcing disciplined monetary policy, prudent fiscal management, and supportive trade measures, the Libyan economy will remain highly vulnerable to corruption, external pressure, and further deterioration.

An economy held hostage

Libya’s political deadlock is no longer just a constitutional or institutional problem. It has become a direct economic threat. The absence of unified governance has blocked reform, deepened corruption, and turned the economy into a space where rival actors compete for influence at the expense of the public interest.

What emerges is the picture of a fragile state with fragmented authority, where competing centers of power continue to hold the economy hostage. Until that fragmentation is addressed, economic gains, however impressive they may appear on paper, will remain unstable and vulnerable to reversal.

The ideas and concepts expressed in this piece are those of the author and do not necessarily reflect the positions of Libya Economic Review. If you would like to contribute to LER, contact us at younis@libyaeconomicreview.com.