Fiscal Dominance in Libya: How Government Spending Shapes the Dinar
When the Libyan dinar weakens in the parallel market, explanations usually focus on foreign exchange shortages or speculative activity. But beneath that volatility lies a deeper structural issue: the relationship between government spending and monetary expansion.
In Libya, fiscal policy plays an unusually large role in shaping liquidity conditions. Official data published by the Central Bank of Libya show that total government expenditure reached approximately 136.8 billion Libyan dinars in 2025. During the same period, Libya’s broad money supply, M2, expanded to roughly 203 billion dinars by the end of December.
The significance of these figures is hard to ignore. Annual government spending alone represents nearly two thirds of the total money stock circulating in the economy. In practice, that means fiscal policy is one of the main forces shaping liquidity in Libya.
In macroeconomic literature, this is commonly described as fiscal dominance: a situation in which monetary policy becomes constrained by the scale and structure of government spending.
The Composition of Public Spending
The structure of Libya’s public expenditure further reinforces this dynamic. The 2025 breakdown shows that the overwhelming majority of fiscal injections are directed toward consumption rather than productive investment.
Public wages alone amounted to approximately 73.3 billion dinars, while subsidies reached around 34.5 billion dinars. Together, these two categories accounted for more than 78 percent of total government expenditure.
Operational spending, which covers the day to day functioning of government institutions, accounted for roughly 9 billion dinars, while development spending amounted to about 20 billion dinars.
This pattern matters because most of the fiscal expansion is translated directly into household income and consumer demand, rather than into long term productive capacity.
Consumption in an Import-Dependent Economy
In economies with a strong domestic production base, consumption driven fiscal spending can stimulate industrial activity and employment. Libya’s economic structure, however, remains heavily dependent on imports.
A large share of the consumer goods, industrial inputs, and food products used in Libya are imported. As a result, the liquidity generated through public spending is quickly converted into demand for foreign currency.
The cycle is straightforward. Oil exports generate foreign currency revenues, which the government converts into dinars through public expenditure. These dinars then circulate through the economy in the form of wages and subsidies. Households and businesses spend those dinars on imported goods, creating demand for dollars to finance imports.
In effect, fiscal expansion becomes a major driver of foreign exchange demand.
The Structural Dollar Gap
The scale of Libya’s external imbalance illustrates the point clearly. According to official statistics, total foreign exchange usage in 2025 reached approximately $31.1 billion. During the same year, oil revenues transferred to the Central Bank amounted to roughly $22.1 billion.
That gap, nearly $9 billion a year, represents the difference between the foreign currency the economy generates and the foreign currency it uses.
The imbalance becomes even clearer on a monthly basis. On average, Libya’s economy demanded around $2.6 billion in foreign exchange each month, while oil inflows averaged roughly $1.8 billion. This produced a recurring monthly gap of about $700 million to $800 million.
Such a structural imbalance creates persistent pressure on the exchange rate.
Early Signals from 2026
Data released by the Central Bank for the first two months of 2026 suggest that the same pattern is continuing.
Between January and February, oil revenues and royalties reached approximately $2.25 billion, while total foreign exchange usage climbed to around $4.28 billion. This means that in just two months, the economy recorded a foreign exchange gap of nearly $2 billion.
If this pace continues, the annual imbalance could exceed $10 billion.
Liquidity Growth and Exchange Rate Pressure
Monetary statistics also show the speed at which domestic liquidity has expanded.
Between the end of 2024 and the end of 2025, Libya’s money supply increased from approximately 158 billion dinars to more than 203 billion dinars, an increase of roughly 45 billion dinars in a single year.
When domestic liquidity grows at that scale while foreign currency inflows remain constrained, pressure on the exchange rate becomes a predictable outcome. Households and firms seek to preserve purchasing power by converting dinars into foreign currency, particularly when inflation expectations are rising.
That behavior, in turn, reinforces demand for dollars in the parallel market.
The Central Bank’s Response
In response to rising liquidity pressures, the Central Bank of Libya has recently introduced new instruments aimed at absorbing excess dinars from the financial system. These include short term Islamic deposit certificates designed to attract idle funds from banks and the public.
Such instruments may help reduce short term liquidity pressure and stabilize financial conditions. But their effectiveness ultimately depends on the broader fiscal environment. When fiscal policy continues to inject large volumes of liquidity into the economy, monetary tools alone have clear limits.
A Structural Constraint
Libya’s currency dynamics therefore reflect a structural constraint rather than a purely monetary problem. Three forces continue to shape exchange rate pressures.
First, large fiscal spending injects liquidity into the economy. Second, foreign currency inflows remain largely dependent on oil revenues. Third, the import dependent nature of the economy converts domestic liquidity into demand for foreign exchange. As long as these three factors remain aligned in their current form, exchange rate pressure is likely to persist.
The Arithmetic Behind the Dinar
The instability of the Libyan dinar ultimately comes down to simple macroeconomic arithmetic. Domestic liquidity continues to expand through fiscal spending, while the economy’s capacity to generate foreign currency remains tied almost entirely to oil revenues.
In such a system, exchange rate pressure is not simply a temporary market reaction. It is the predictable result of a structural imbalance between the creation of dinars and the generation of dollars.
Until that imbalance narrows, the path of the dinar will continue to be shaped less by speculation and more by the underlying arithmetic of Libya’s economy.
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.
