It's a populist touch, according to Brian Palmer at slate.com. The hat itself is a Libyan variant of the fez. It's called a "checheya." The checheya is shorter than a fez, is worn low, and never has a tassel.
Qaddafi wore a military uniform for the first decade or so of his time in power. Having consolidated his rule, he opted for the "man of the people" look by wearing the checheya and bedouin robes.
Oh, he still goes "full display" from time to time. Check out Time magazine's pictorial of some of Qaddafi's more outlandish fashion decisions.
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