by Abdiwahab Hussein Mohamed
February 18, 2023
Somalia, a country that has been ravaged by conflict
and political instability for more than three decades, has recently announced
plans to issue new banknotes to tackle the problem of inflation and stabilize
the economy. The move is expected to address the unusual situation in Somalia's
currency market, where both legitimate and counterfeit notes are accepted
interchangeably despite the fact that it is easy to distinguish between the
The Somali shilling operates in a unique manner
without the support of a central bank, as the civil war that erupted in 1991
left Somalia without a functioning Central Bank and national government.
Despite the absence of a regulatory framework, the Somali shilling banknotes
have remained in circulation, a testament to the resilience of the Somali
people who continue to utilize the currency in their daily transactions. This
phenomenon has challenged traditional monetary policies and prompted experts to
explore alternative currency systems, leading to a new understanding of
monetary policy and financial regulation.
Adding to the peculiarity of the situation in Somalia
is the rampant counterfeiting of banknotes, flooding the market and driving
down the exchange value of the Somali shilling. What's even more surprising is
that Somalis have found a way to turn this problem into a lucrative business by
contracting with foreign printers to import even more counterfeit notes.
Despite the decrease in the shilling's value from
$0.30 in 1991 to a mere $0.03 today, the influx of fake currency has actually
stabilized the currency's purchasing power through the introduction of
additional banknotes. This unique phenomenon of counterfeiting leading to
financial stability is a paradoxical marvel, but it raises ethical questions
about the legality and morality of profiting from illegal activities.
To address the issue, the Central Bank of Somalia
(CBS) has announced its intention to introduce new banknotes in mid-2024. This
move could effectively address several long-standing issues that have plagued
the country's economy, including high rates of inflation, the circulation of
counterfeit currency, and the use of cash for terrorism. Currency reform is an
indispensable component of Somalia's economic recovery. Since 1991, the CBS has not issued any notes,
relinquishing control over the exchange rate and money supply. The bulk of
transactions in Somalia, whether via cash or mobile money transfers, are made
in US dollars or counterfeit Somali shillings. Currently, 95% of the Somali
shilling in circulation is counterfeit and widely accepted as a means of
payment, despite being unmistakably fake. Regrettably, an influx of new
counterfeit notes has played a pivotal role in the depreciation of the
However, the success of this move is uncertain, as
other countries that underwent rapid demonetization experienced negative
consequences, including riots, deaths, and significant economic downturns in
Zimbabwe, Ghana, and Myanmar.
The journey towards weaning Somalis off the ubiquitous
US dollar is a daunting task, even with the development of a currency reform
plan. The process of de-dollarisation presents complex logistical challenges,
and reintroducing the Central Bank of Somalia printed notes will put the trust
of the Somali people in the federal government to the ultimate test. It's worth
noting that for over two decades, Somalia has been operating essentially as a
failed state, and the reintroduction of national currency comes with
significant political implications.
The involvement of the International Monetary Fund may
add some measure of credibility to the process, but the fight against the
pervasive counterfeit currency market presents an even greater challenge. This
is because the dismantling of corrupt networks will require navigating complex
political terrain that is highly susceptible to manipulation.
In the face of all these daunting challenges, however,
we must remain hopeful that Somalia can overcome the obstacles and achieve its
goal of a stable, self-sufficient economy. It will take a concerted effort from
all stakeholders, including the government, civil society organizations, and
the Somali people themselves, to make the currency reform plan a success.
Ultimately, the process of transitioning away from the dollar and rebuilding
trust in the Somali shilling will require patience, resilience, and sustained
commitment from all involved.
In the midst of persistent economic instability and
uncertainty in Somalia, the efficacy of the central bank's proposed banknote
policy in curbing inflation and ushering in a new era of stability in the
country's currency market remains to be seen; as the events unfold, it is
crucial to monitor the policy's impact and its potential to chart a new path
for Somalia's economic progress.
Abdiwahab Hussein Mohamed