Somalia’s de-dollarization process must be carefully managed and requires high level coordinated efforts between Federal Government of Somalia and Federal Member States to internalization of the Somali Shilling across the country.
By Mohamed Dubo
Somalia is about to re-introduce its local currency – the Somali Shilling. The country has not had an official Somali currency since the collapse of Government in 1991. The risk-benefit pendulum of the currency re-introduction could easily swing either way — depending on its handling. A couple of weeks ago I met with the International Monetary Fund (IMF) resident representative for Somalia, Samba Thiam, in Nairobi in a bid to get some colour on the progress. Remember that IMF is at the heart of this currency re-introduction.
In my conversations with Samba, however, one thing stood out: The whole process has to be carefully managed, lest it runs into some two monster headwinds. The first headwind gravitates around restoring faith in the currency given the current highly dollarized market. For the past 25 years or so, Somalia has been dollarized-hence the fixation with the US Dollar is quite elevated. Undoing this fixation requires concerted effort.
Additionally, Somalia operates a fragile federal system with each federation almost assuming some level of autonomy. Internalization of the Somali Shilling across the Federal Member States (FMS) will also require some high level of coordinated efforts.
Secondly, the currency has to be backed by some level of official hard foreign currency reserves. At the moment, Somalia doesn’t have enough foreign currency reserves in its balance sheet to finance such a reform.
Consequently, the country’s reserves will have to be built primarily or Federal Government of Somalia (FGS) will have to rely on donors to finance the reforms. Multilateral arrangements might not deliver the desired results on this front since Somalia is still in arrears-especially with the IMF, World Bank and AfDB.
A third, but minor, issue is a lack of federal fiscal framework (of fiscal federalism). At the moment, FMS collect and appropriate revenues within their collection jurisdictions-leaving (FGS) to finance federal expenditures from revenues collected in Banadir region only-of course, in addition to direct bilateral budgetary support from partners, most notably Turkey, Saudi Arabia or European Union. This fragmentation of the fiscus will continue to entrench dollarization. On the flipside, centralization of the fiscus could see fiscal transfers to the FMS implemented in the local currency, hence aiding the de-dollarization process.
“The country’s reserves will have to be built primarily or FGS will have to rely on donors to finance the reforms. Multilateral arrangements might not deliver the desired results on this front since Somalia is still in arrears – especially with the IMF, World Bank and AfDB.”Author
Aside from the pre-currency re-issuance hurdles, there are also post-re-issuance sequencing risks. These include conversion rates between the fake Somali currency currently in circulation and the new official notes as well as the distribution infrastructure-especially since the Central Bank of Somalia (CBS) is only in the process of reopening its branches, which will serve as currency centers outside Mogadishu.
But it’s not all gloom and doom. Indeed, aside from the post and pre re-issuance hurdles, the re-introduction of the currency will restore CBS’ lender of last resort functions (LOLR) as well as allow the apex bank introduce a monetary policy framework-hence domestic interest rates.
According to official estimates, some $900million is moved through mobile money services – that’s 16% of Somalia’s GDP. The figures, however, in my assessments, could be much higher if unofficial flows are factored in. Platforms such as Hormuud’s EVC+ or Telesom’s Zaad, have been acting as a virtual, dollarized currency since their inception. Even beggars have become savvy. Outside mosques, beggars plaster telephone numbers across their busts-inviting potential philanthropic donors to credit their mobile wallets instead of handing out cash. Not your typical beggar in the streets of your city.