💹 Exchange Rate Dilemma: Balancing Deficit & Stability 💹

By Dr. Ahmed Hadhhal, Professor of Financial Economics

In light of the financial indicators for the 2026 budget, it appears that the exchange rate will be the focus of economic decision-making and the last line of defense against the widening deficit gap, which is expected to reach 70–90 trillion dinars.

 With the slowdown in non-oil revenues, the rise in current expenditures, and the decline in the ability to borrow domestically, fiscal policy enters a critical area that leaves the government with limited and difficult options.

The first logical solution is to rationalize spending and reduce non-salary operating expenses, and to control non-oil revenues through a strict automation and collection system, as well as reforming the state's financial management and reducing the spread of administrative and financial corruption. 

This can significantly reduce the deficit. Reducing privileges and imposing mandatory savings on senior officials can add a large amount to public finances, in addition to this measure being a gesture of goodwill to society so that it accepts the high costs of reform. 

Selling or investing part of the state's assets may provide between 10-15 trillion dinars, an amount that covers only a limited part of the gap. Even when these measures are applied together, the deficit remains high and cannot be fully financed through domestic borrowing without risking a large jump in domestic debt. Therefore, reform must be real through a structural "surgical operation" on spending and revenue items.

The exchange rate appears to be a short-term option, as the government recognizes that the resources generated by raising the exchange rate are the fastest and most effective way to bridge the financing gap.

 Trends and potential scenarios indicate that raising the rate from 1300 to 1500-2000 dinars would provide between 15 and 70 trillion dinars, depending on the level of the increase and the volume of dollar sales.

 This makes adjusting the exchange rate a readily available financial tool that the state resorts to when traditional methods fail to close the gap.

I believe this policy represents a price the economy pays for maintaining the current monetary policy throughout the period of pegging.

Therefore, the government might consider integrating financing tools instead of relying on a single option:

1- A genuine reduction in operating expenses by 15-20%.
2- Reform of the spending system and financial oversight to ensure that artificial inflation in expenditures is not repeated.
3- Selling and investing specific highly liquid assets to secure quick resources.

A gradual and well-considered adjustment of the exchange rate towards 1500-1700 dinars as a starting point is advisable, with the risk of reaching 2000 if oil revenues do not improve.

Combining these tools together reduces the deficit pressure to limits that can be financed internally, and the central bank may pay for this adjustment through its reserves, given that most government spending is directed towards consumption and is considered a tool for effective aggregate demand directed towards imports financed and covered by the exchange rate.

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