Hiiraan Online

by Ahmed Hassan
Monday, July 28, 2008

Inflation creates distortion in the allocation of resources and definitely hurts certain groups. It tends to discourage saving and encourage consumption at fast rate to stay ahead of rising prices. Moreover, the declines of saving rate discourage the capital investment. Unfortunately, it means the economic growth at side of productivity tends to slow down, the fall in productivity means that the supply of new goods and services cannot keep pace with rising demands, putting further upward pressure on price leading to what is know as inflation.

A one thousand shilling today in Somalia doesn't buy as much as it did 3 years back.The cost of living has doubled, tripled and still rising. The main factor is the increase of general price level and its called .In general, the most commonly used measure of the level of prices is the consumer price index. If you want to measure the CPI of a country for example Somalia, you simply go the archive of statistics department and find the prices of basket of goods and than by applying  CPI formula you find how much the cost of living have changed from time to time. Therefore, the CPI turns the prices of many goods and services into a single index measuring the overall level of prices.  Data gathering is an important factor for researching or writing an article like this, after searching data about the consumer price index or the official exchange rate of the last 17 the answer is, there are no official data records available. All these have been destroyed following the collapse of the last national state in 1991. Therefore one must rely on his knowledge of the subject matter plus independent sources.

Friedman described the causes of inflation as primarily an increase of money supply. One of the well known inflation in the history is the German Hyperinflation in 1921-1923 and latter followed by the US inflation 1960-1980, proves his proposition that inflation is monitory phenomenon. In recent history one of the worst hit countries includes Argentina, Brazil and Peru; all these Latin American countries suffered very high rates of inflation exceeding 100%. In Africa Zimbabwe and Somalia are the latest victims and in Asia Iraq, take the case of Zimbabwe inflation up to 100580% in January 2007 up from 6621% in December. 

In Somalia the recent inflation which had engulfed the lives of many people mainly the poor and daily wage earners have attracted neither the attention of the current TFG nor any one else, the TFG issued no comments about the soaring food prices and increased cost of living, but instead they involve money laundering and spread fake notes to markets. This spree has lowered the value of Somali shilling against any other official notes. How ever, figures from independent analyst shows that inflation is about 70% increase of some other basic commodities will bring down the average to around 68%.

In Somalia the food price increase more adversely affects the poor and daily wage earners but those getting remittance and people who receive their pay in terms of US dollars have nothing to do with these crises that are why people in the Capital Mogadishu and surrounding areas prefer their pay in terms of Dollars. Food inflation is effective in African countries where food security is low compared with non-food items, the food items are life saving or necessary for life. Therefore, their demand is inelastic (Quantity are Fixed but Prices vary).

During the Rules of ICU the exchange rate was about 13000 against one US Dollar, while currently the TFG official exchange rate is around 21000-22000 and the black market is 35000 S S.shilling. The table below indicates the prices of some local and imported products in South and central regions before and after the ICU rule:

The other factor that caused the price increase is decline of value S. shilling. Which has minimum of 1000 and maximum of 1000 shilling. There is no change; even a candy can cost you 2000 Somali shilling. In international markets, Dollar is weak in terms of other currencies. But the case of Somali shilling is different from the international perspective.        

CAUSES OF INFLATION

v  Supply of fake notes printed locally to the main markets.

v  Increase of oil price accompanied by bad weather, severally affected the local farmers and reduced their productivity.

v  Increase of money supplies with shortage of Dollars causing great disparity between the two currencies have also fuelled the inflation

v  Hoarding and monopoly "become another factor that causes inflation."

v  Lack of business ethics

v  Lack of effective central bank.

SOLUTION TO THE PROBLEM

v  All the Somali's should clench to the way of Allah and ask his forgiveness thoroughly.

v  People should stop all malpractices that are harmful to the poor people, and particularly the business community should observe Islamic business ethics. Example in the case of hoarding, the Prophet (peace be upon him) said: "Whoever hoards a commodity in order to raise prices the Muslims have to pay is a sinner for doing so." [Musnad Ahmad (8617), Mustadrak al-Hâkim (2/12) and Sunan al-Bayhaqî (6/30) – a narration which is strengthened to the grade of good by virtue of supporting narrations)

In one narration of this hadîth, there is the additional phrase: "…and Allah is free of any responsibility towards him."