It's just a figurative use of "literally". It's like saying "He's such a baby" of an immature (<- also figurative!) adult. You aren't saying that such an adult is actually a baby.
Yes, but that introduces some backwards incompatibility. The C standards body has a really, really high bar for doing so. English, not so much. That is a choice they're making.
I'm not sure this is helpful though. We've accepted "literally" also means "not literally" without creating a new language.