Public Spending and its Impact on the Exchange Rate of the Libyan Dinar

Abstract

This study aims to analyze the impact of public expenditure on the Libyan Dinar's exchange rate from 1990 to 2024, within the context of the Libyan rentier economy and its heavy reliance on oil revenues. Employing the Autoregressive Distributed Lag (ARDL) methodology on annual time-series data, the study finds a long-run equilibrium relationship between the two variables. A 1% increase in public spending leads to a depreciation of the dinar (an increase in the exchange rate) by 0.82% in the long run and by 0.46% in the short run. Granger causality tests also confirm a unidirectional causal relationship from public expenditure to the exchange rate. The findings confirm that uncontrolled fiscal expansion is a primary source of pressure on the national currency's value. The study recommends rationalizing public spending, enhancing coordination between fiscal and monetary policies, and directing expenditure towards productive sectors to support macroeconomic stability