I don’t usually write on the monetary situation in Libya but today I will take a stab at what I’ve learnt the last few days. One thing to note is that the Libyan banking industry is unusual. It has gone from some sort of Islamic banking system to a national banking system and now finally some sort of private banking exists, however it is highly regulated. This type of policy has dramatic impact on the functions of finance. As well in general the more conservative Libyans see taking out loans as sinful and a sizable minority are well known to hoard their income literally underneath their mattress. This comes from a rural and traditional view on business that is further supported by various institutions.
To really understand Libyan monetary policy you have to understand that the philosophical groundwork of the central bank is completely awash. First inflation in Libya is all over the place. There will be 30% or higher one year and then heavy deflation the next. And the cherry on top of this entire cake is that the data itself is very unreliable. The central bank is unclear about how it calculates it when many Libyans use unorthodox banking and business operations. How they calculate the prices of goods is beyond me but from historical standpoint the data below seems correct.
You would think that the central bank is employing some sort of counter cycle policy, which is the case for some of those years. However, the bank’s aim is mostly devalue and subsequently boost the Dinar and increase exports. This objective has driven devaluation and then repeated correction of the currency in aims of helping the country sell more oil, minerals, water, etc. This may be the reason for the issues with inflation in ’78 however it will be noted that the country was plagued by financial and economic sanctions in the ’80s thus this could of caused some deflation that reeked havoc afterwards.
I am still in the process of piecing this together. I see the ability to target NGDP instead of interest rates or exports (if banks do such a thing besides just using up reserves) but that’s more of a policy preference (2nd to free banking). Till I understand my own country better.