From multiple exchange rates to unification: Libya’s experience and the lessons learned
By Farhat Bengdara, Governor of the Central Bank of Libya from 2006 to 2011 and Deputy Governor from 2000 to 2006
An official exchange rate can be changed in a single day by administrative decision. But persuading the market that the change is worthwhile, and restoring confidence in official banking channels, takes more than announcing a new number.
In January 2026, the Central Bank of Libya devalued the dinar by 14.7% against the Special Drawing Rights (SDR) unit, following an earlier 13.3% cut in April 2025 — the second devaluation in less than a year. Even so, neither decision succeeded in closing the gap between the official rate and the parallel market rate.
The dollar had already passed nine dinars on the parallel market before the January devaluation took effect, and stayed close to that level after the decision was issued, while the official rate settled at about 6.37 dinars to the dollar. Changing the official rate alone, in other words, was not enough to address what drives citizens and businesses to deal outside the banking system.
Libya is no stranger to this problem. In the late 1990s and early 2000s, it faced a proliferation of exchange rates and a large gap between the official rate and the black market, before a gradual programme carried out between 1999 and 2002 allowed it to unify the rate and, in practice, end the parallel market at the time. That experience holds lessons for Libya today, and for other countries grappling with foreign currency shortages and multiple exchange rates.
Why does a parallel market emerge?
A parallel market is not simply a pricing distortion that can be eliminated by law or security measures alone. It emerges when there is demand for foreign currency that official channels cannot meet at the announced rate and on the announced terms. That demand falls into two basic types, which must not be confused.
The first is genuine demand linked to economic activity and real needs: importers need foreign currency to buy goods and production inputs, students to pay for their studies abroad, patients to cover medical treatment, and companies to settle their invoices and foreign obligations. This demand does not disappear because of restrictions or instructions; if it cannot find a way through the banks, it moves to the parallel market.
The second is speculative demand, which arises from exploiting the gap between the official rate and the parallel market rate. When certain groups can obtain foreign currency at a low official rate and sell it at a much higher price, the gap becomes a profit-making activity in its own right, divorced from the production of goods and services.
As the gap widens, so do the incentives to buy currency at the official rate and resell it, or to resort to sham transactions with no real imports behind them. This creates artificial demand that drains resources and pushes the parallel rate even higher.
Meeting genuine demand is therefore not enough if opportunities for speculation and arbitrage remain open — just as devaluing the dinar is not enough without a reliable legal channel for obtaining foreign currency.
The parallel rate is not a fixed target
A conventional prescription is to lower the official rate and bring it closer to the parallel market rate, in the hope that the gap will disappear on its own. But the parallel market is not a static number waiting for the official rate to catch up with it; it is shaped by expectations, by speculation and by how readily foreign currency is available.
If the drivers of demand persist, and official channels remain hard to access or unable to supply foreign currency, the parallel rate may rise the moment a cut in the official rate is announced — or even before the decision itself.
That is why repeated devaluations do not necessarily solve the problem. The gap may stem from limited supply, numerous restrictions and a lack of confidence that foreign currency will continue to be available, as well as from an absence of fiscal discipline and unregulated growth in public spending.
The experience of other countries, including Egypt, shows that partial, successive devaluations may fail to end the parallel market unless they are accompanied by an adequate supply of foreign currency, genuine unification of the exchange market and the removal of the restrictions that push customers away from the banking sector.
Libya’s experience from 1999 to 2002
In the late 1990s, the official rate for the dollar stood at about 0.33 dinars — meaning that one Libyan dinar was officially worth almost three dollars — while the dollar fetched about 3.70 dinars on the black market. That was a huge gap between an announced administrative rate and the rate at which most people were actually able to deal.
The official rate was not available to the public or for most commercial purposes. It was reserved for specific transfers and uses, while most personal and commercial needs were met at the parallel rate. The result was distorted prices, higher costs for imported goods, and a thriving speculative and informal trade in foreign currency.
The remedy began in February 1999 with the “declared special exchange rate” programme, which allowed commercial banks to sell foreign currency for personal purposes and was then gradually expanded to cover letters of credit and commercial needs.
The legal rate was initially set close to the parallel market level: while the dollar was selling for about 3.70 dinars on the black market, the selling rate through the banks was set at about 3.20 dinars. The aim was to shift demand from the informal market to the banks, rather than impose a rate far removed from the reality of supply and demand.
Making foreign currency legally available at a competitive rate reduced the incentive to turn to the black market. After that, the dollar’s selling rate was lowered gradually from 3.20 to 3.10 dinars, then to 2.95, then 2.50 and 2.25 dinars, and kept falling as the programme was widened to cover commercial transactions.
At the same time, the dinar’s official rate was adjusted in the opposite direction to bring the two rates closer together and reach a level that the economy and available reserves could sustainably support.
The studies we carried out at the time showed that the equilibrium rate lay between 1.25 and 1.30 dinars to the dollar, based on the money supply, actual demand for imports, the size of reserves and the state’s capacity to provide foreign currency.
On 24 December 2001, the decision to unify the exchange rate was issued, taking effect on 1 January 2002 at about 1.30 dinars to the dollar. That ended the declared special exchange rate, and the unified rate came to apply to personal, commercial and government transactions alike.
The result was not the product of a sudden leap, but of a gradual process lasting about three years, during which transactions moved into official channels in stages.
How I experienced the programme’s implementation
I was Deputy Governor of the Central Bank of Libya during the early stages of the programme, and Dr Al-Taher Al-Jehaimi was the bank’s Governor when the experiment was launched.
When Dr Ahmed Menesi took over as Governor, I continued to serve as Deputy Governor, and the programme stayed on its set course. I also chaired the committee that oversaw the programme and followed its implementation, including assessing price changes, monitoring demand for foreign currency and supervising the gradual move towards the target rate.
That responsibility gave me the chance to follow how the market responded to each adjustment, and to see how far demand was shifting from the informal market to the commercial banks.
The clearest lesson was that the market responds to the availability of foreign currency, ease of access to it and its confidence in the continuity of banking channels far more than it responds to announcements and theoretical decisions.
Nor can the equilibrium rate be set by a mere political or administrative decision. It must emerge from careful study of actual demand, the money supply, import needs, reserves and the economy’s capacity to sustain the adopted rate.
Why did exchange rate unification succeed at the time?
The programme succeeded because it started from a rate close to a level the market would accept, not the rate the government preferred, and because it did not stop at devaluing the dinar. It provided a legal channel for buying foreign currency, broadened the purposes financed through the banks and eased the restrictions that had been pushing individuals and companies towards the black market.
From my direct oversight of the programme, I became convinced that a parallel market does not end simply because it is banned administratively. It recedes when legal channels become safer, more reliable and better able to meet needs than their informal counterpart.
The ingredients of success can be summed up in six interlinked factors. The first is setting a target rate based on a study of genuine supply and demand, rather than choosing it on political or administrative grounds.
The second is opening a legal banking channel that sells foreign currency at a rate close to the prevailing parallel market rate. The third is keeping that channel continuously supplied with foreign currency, strengthening customers’ confidence in its ability to meet their needs.
The fourth factor is a gradual, orderly transition to the equilibrium rate, avoiding a shock that could push the parallel rate up again. The fifth is gradually widening the use of banks from personal to commercial needs, rather than restricting access to currency to a limited set of purposes or groups.
The sixth factor is unifying the rate at the end of the programme, ending multiple rates and preferential treatment between different bodies and sectors.
Why did the parallel market return later?
Successful unification at one stage does not guarantee that the parallel market will disappear for ever. Keeping it in place depends on the banking system’s ability to supply foreign currency, and on a disciplined fiscal policy consistent with monetary policy.
After 2014, political and institutional divisions, the halting of oil production and exports at various times, expanding public spending, multiple channels for foreign exchange and weak confidence in the banks all helped recreate the conditions that allow the parallel market to return.
When domestic spending and the money supply grow faster than the state’s foreign currency resources, pressure on the dinar mounts. However many tools it may have, a central bank cannot defend for long an official rate that does not match the fiscal reality.
The Central Bank alone, therefore, cannot be held responsible for the exchange rate crisis. It is also shaped by fiscal policy, the scale of public spending, oil production levels and prices, the efficiency of the banks and the degree of trust in state institutions.
Six lessons for the current stage
The first lesson is that devaluing the dinar is no substitute for unifying the exchange market. The gap may narrow temporarily, but the parallel market will persist as long as access to foreign currency remains limited or unequal.
The second lesson is the need to choose a sustainable equilibrium rate — not merely a rate close to the parallel market on the day the decision is issued — one that reflects revenues, reserves, spending, the money supply and genuine demand for imports.
The third lesson is to distinguish between genuine demand and demand driven by speculation. Financing real demand through the banks shrinks the parallel market, while curbing speculation requires closing off the avenues for illicit profit generated by price differentials.
The fourth lesson is that exchange rate stability starts with fiscal discipline. A currency’s value cannot be stabilised amid open-ended spending, multiple spending authorities or the absence of a unified budget with clear limits on expenditure.
The fifth lesson is that an abundance of foreign currency is not enough on its own. It must go hand in hand with transparent and fair criteria for obtaining it, and with oversight of letters of credit and transfers to prevent the financing of sham transactions or the resale of currency through official channels.
The sixth lesson is to protect people on limited incomes from the impact of reforms. Adjusting the exchange rate, though necessary in some circumstances, raises the cost of imports, so it must be accompanied by direct, targeted support for the hardest-hit groups, rather than exchange rate subsidies that may benefit middlemen and speculators more than consumers.
Conclusion: unify the market before celebrating devaluation figures
The success of an exchange rate policy is not measured by the size of the official devaluation, but by its ability to unify the foreign currency market and restore confidence in the banks.
Libya’s experience between 1999 and 2002 proved that ending the parallel market in practice is possible when reform is built on a realistic understanding of supply and demand, foreign currency is made legally available at a competitive rate, and a defensible equilibrium rate is reached gradually.
Later developments also showed that exchange rate stability cannot be separated from political stability, fiscal discipline and a continued flow of foreign currency revenue.
A parallel market does not vanish just because the central bank announces a new rate or imposes a ban on it. It loses its reason to exist when the legal rate reflects reality, and obtaining foreign currency through the banks becomes easier and more reliable than buying it on the street. That is the most important lesson of the Libyan experience.
Written for Al-Marsad by Farhat Bengdara
