The Impact of Government Spending on the Official Exchange Rate of the Libyan Dinar: An Econometric Study (1990 – 2024)

Abstract

This study aimed to measure the impact of government spending on the official exchange rate of the Libyan dinar during 1990–2024 by analyzing the short- and long-run relationship, while considering oil revenues and inflation, using the Autoregressive Distributed Lag (ARDL) model. The results showed that government spending had a negative and significant effect on the exchange rate in the current period, which shifted to a positive and significant effect in the subsequent period in the short run. In the long run, government spending had a negative and significant effect, which can be explained by the rentier nature of the Libyan economy, where spending is linked to oil revenues, enhancing foreign currency availability and supporting exchange rate stability under a managed exchange rate system. The error correction coefficient was -0.6714 and significant at the 1% level, indicating that 67.14% of short-run disequilibria are corrected within one year, confirming the speed of adjustment toward long-run equilibrium. Oil revenues had a positive and significant effect on the exchange rate in the short and long run, reflecting their influence on government spending, import demand, foreign currency demand, and exchange rate management. Inflation had no significant effect in the current period, but became positive and significant in the subsequent period in the short run, indicating a time lag in transmitting price pressures to the exchange rate. In the long run, inflation had a negative and significant effect, attributable to domestic supply factors, while the managed exchange rate mechanism limits the transmission of domestic price changes to the official exchange rate.