Friday, March 06, 2009

The significance of foreign currency reserves, imported goods and inflation

"Libya had $44 billion balance of payments surplus in 2008[and]Libya's foreign currency reserves were at $136 billion at the end of 2008 [...]Oil producer Libya is among the few countries which are free of any foreign debt".[Reuters]

This all sounds like great news to me (regardless of the political system which is not my concern in this post.).

It's good to have liquidity in these high risk financial times. I still maintain that the OPEC countries though should stop pegging their economies to the US$ and diversify a little to spread the risk. Although I'm not sure at the safety of their respective countries from physical demolition if they do take that step. But the global financial crisis and credit crunch gripping most nations could be used as an excuse to divest from the US$ and stockpile gold bullion as in not put all the eggs in one basket). Maybe then the US will run less high trade deficits and get away with it! but this is not my concern today either :P

What I was wondering about was the central bank governor in the same article I quoted above was saying i.e. that "average inflation is expected to fall sharply this year as a result of the decline of prices of food and other imported goods as well as the fall of the euro-Libyan dinar parity,".

Again I'm no economist so I'm not able to project into the future but would appreciate someone explaining this to me.

Does he mean that in quarter 2 or quarter 3 of the financial year prices will drop ? Because I thought that many commodities have definetely increased - check On the Edge "I couldn't BELIEVE how much food items have gone up ! A small jar of coffee that used to be 3.50 is now 6 dinars and the large would be 10 , when it was only 7 something last month". This is imported goods that she is talking about.But maybe supermarkets in Libya are making their own prices unrelated to the global situation. I think the eggs are cheaper but for sure car fuel has gone up it is now officially at 20 dirham per litre. To be honest I was embarassed at the gas station when I asked him to fill up my car for 5 Dinars and that barely reached half of the car tank. I thought the employee was cheating and regretfully it showed in my faces (even though I did not voice it) and he had to explain that prices had gone up.

So basically if inflation goes down, will fuel, bread and food commodities decrease too ? How does this work ?


ibeebarbie said...

Salam Highlander,

Very good question. On so many levels one would think (with reason) that if it decreased so should everything else that has been over-inflated, but sadly that never seems to happen. Another example would be the increase of home rents or leases during the "high" times....during these difficult times I've never heard of a landlord lowering their rents for their tenants. The may perhaps lower their rents should one of their units become empty, but definitely not for their tenured tenants. Strange, huh?

MusicLover said...

The only reason oil prices were rising in the summer because the value of Dollar was falling.

Libya had $44 billion balance of payments surplus in 2008[and]Libya's foreign currency reserves were at $136 billion at the end of 2008 [...]Oil producer Libya is among the few countries which are free of any foreign debt

Currency reserves $136 Billion, no big deal, plus the country has nothing to show for being a rich country.

This is only Harvard, and this Egyptian used to manage it and he is now CEO of Pimco which USA Treasury and Federal Reserve have to deal with this company which deals with World Bonds.

Mr William Gross moves the world market not Mr. Warren Buffet who happens everybody knows about him.

Jerry Maguire (Tom Cruise) - Show me the Money (clean edit)

It is sad we are rich country and Libyans are in financial distress. The new Libyan students in Portland are not even getting their scholarship money, somebody in the Libyan Embassy is making money by putting the scholarship money in monthly deposits in Citibank and then turn the money to the students. The Libyans look as if they came from historic photos in 1940, when we had no oil.

We just hope the best for the Libyans

Highlander said...

Ibeebarbie I really can't figure these things out, I simply assume it's the law of demand which is why things are expensive ?

Highlander said...

Interesting links Music Lover thanks, I could not access the NYtimes one though as I kept getting this message using 3 browsers ( safari, firefox and explorer) "Server Error
We're sorry, but we are temporarily experiencing a server error. Our systems administrators have been notified and are working to fix the problem. Please wait a few moments, then press Reload or Refresh in your Web browser. If the problem persists, please exit your Web browser and try again. We regret the inconvenience." I'll check tomorrow. Sorry to hear about the Libyan students :(

khadijateri said...

Nice post highlander!

MusicLover... it was common practice in the 1980s for Libyan students on scholarship to go even up to 8 months without getting their monthly money. There was one family that had five small children who resorted to begging at the local mosque.. really sad to see that this happening once again and Libyan students have to feel embarrassed.

The cost of everything is up these days. But one problem that I see is that Libyans still refuse to use coins. So instead of the price of something going up 5 dirhams it increases 25 dirhams. Are Libyans too lazy to carry coins? Are they too heavy to lug around? Or is the problem that they are so difficult to count? ... sigh..

MusicLover said...

Endowment Director Is on Harvard’s Hot Seat


These are links for the same article. If none of these links work please google the Title. Sorry for the wrong link.

Highlander said...

Thanks Khadijateri. As for the coins I've heard this brought up a few times already now, so you gave me an idea for an upcoming post!

Music Lover, thanks this time the link is working so I'm off to study a bit.

Maya M said...

"So basically if inflation goes down, will fuel, bread and food commodities decrease too?"
I don't think so. After inflation is the rate of prices going up, if it goes down, these prices will go up slower, but why decrease? If your driving speed goes down, this will not bring your car closer to the starting point.

Mitchell said...

"Does he mean that in quarter 2 or quarter 3 of the financial year prices will drop ?"

If inflation is greater than zero, prices are still increasing. So if inflation drops, it just means they don't increase as fast as they did. If *all* prices fall, then you have deflation.

Most countries estimate overall inflation by taking the average of many different goods. So if food is part of the average and food goes down in price, it will bring down the overall average increase without necessarily making that overall average negative.

Another good link for global finance is

Highlander said...

Maya M, thanks for this logical reply yes makes sense to me now.

Mitchell- can I say I miss you :) always in win the wise word when needed. Like your link as well thanks.