Libya's strategy of using letters of credit (L/Cs) to stabilise exchange rates and curb inflation appears not to be achieving its objectives.

The black market rate of the dinar has been at record lows, prompting traders to use cash obtained from informal currency dealers rather than L/Cs to fund purchases of foreign goods. Inflation is running at around 25-30 per cent.

L/C abuse

For more than two years, Libya's audit bureau and the UN-backed government have been restricting the use of L/Cs for certain goods.

But the policy has resulted in widespread abuse of L/Cs that are used in mis-invoicing scams to obtain hard currency, which traders then buy on the black market.

Official credit is available to traders, but just US$2.5 billion of an expected US$7.4 billion of this has been allocated.

Policy implications

The central bank has recently blamed the audit bureau and the government for restricting L/Cs for essential imports.

Libyan security services have been investigating widespread L/C fraud since the country began to control the use of L/Cs to maintain its foreign currency reserves (DC World News, 11 September 2015 and 18 September 2015).

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.