However, none of the above applies to Libya. Libya, as an oil exporter and a rentier state, would devalue its currency to stabilize public finances, preserve foreign currency reserves and solve the liquidity crunch by making letters of credit for imports worth much more in the local currency, increasing government revenues and balancing the current account. In Libya, the public sector is inflated with 1.3 million employees (out of a population of 6 million). Therefore, in Libya, devaluation is not exactly about boosting local outputs and solving unemployment.
By allowing the dinar to weaken, the CBL aims to keep the oil revenues and currency reserves stable and hence combat the liquidity crunch of the public sector. Oil is priced in US dollars, but the important fact is that most government expenditures are in dinars (e.g., salaries) and hence the importance of oil revenues and the amount of dinars they produce.
It stands to reason that Libya will have to undergo a devaluation of its currency eventually; the question is when and under what political circumstances. With no breakthrough in the political standoff, daily life under devaluation would be sky-high prices, continued lines outside banks and looting. While devaluation is unpopular in Libya, a political breakthrough would restore hope and help Libyans endure their economic suffering.
Hedi Sal contributed on-the-ground research to this article.