The cost of living has been going up steadily in Somaliland for the last few months due to depreciation of Somaliland Shillings against the U.S. Dollar since most of the goods are services, especially the imported goods, are priced in Dollars. In addition, local producers and service providers are pricing their goods and services in dollars since Somaliland Shilling fluctuates erratically and is therefore considered unreliable. Even private schools, universities, health centers, residential rentals (landlords) are pricing their goods and services in dollar instead of the local currency. Therefore, whenever the value of Dollar appreciates, the value of the Somaliland Shilling depreciates which hits, especially hard, on laborers, daily wagers and government employees including civil servants, police, correctional officers, coast guard and the military because their salaries are paid in Somaliland Shillings. If not addressed immediately and without further delay, this problem could have devastating negative effect on peace and social stability. The political leaders in Somaliland can no longer ignore this problem without putting Somaliland’s stability in greater risk.
Evidence that the Problem Exists:
The exchange rate of the Somaliland Shilling against the U.S. Dollar has increased from $1= SL Sh. 6,500 to over 1$ = SL Sh. 9,000, an increase of 40% from 2010 to 2017. Since there is no economic boom in the country which can cause inflation, there is a clear indication that there is an excess supply of Somaliland Shilling relative to the amount the market demands for.
In order to address the problem, the Minister of the Presidency, Mahamoud Hashi, has issued two policy directives. First, he artificially fixed the exchange rate of U.S. Dollar against Somaliland Shilling to $1 = 7,000 SL. Sh. This directive has resulted the opposite effect: the local money exchangers immediately hoarded their U.S. Dollar holdings which eroded the supply of dollar in the market and further depreciated the value of Somaliland Shilling bringing the bad memory of Kadare (the one who made the situation worse)—-the failed economic policies of the then Somalia’s Finance Minister, Abdirahman Jama Barre, who miserably failed when he tried to artificially fix the prices of goods and services in the market thirty years ago.
Second, he has ordered Telesom and Dahabshil, which operate mobile money transfer/e-payment systems of Zaad and E-Dahab services, respectively, to restrict the ability of their customers to electronically send or buy goods and services in excess of $49. The logic goes that if this restriction is imposed, customers would buy goods and services that are less than $50 value in Somaliland Shilling which in turn would increase demand for the local currency and thereby result appreciation of its value. The Telesom Company has argued and has since convinced the government that it could not technically implement this policy without a major programming revamp of its IT systems which, they argued, could not happen right away. As of today, this directive has not been implemented. However, even if it is implemented, it would have little or no effect in the money market.
Factors Contributing to the Problem:
There are several factors contributing to this problems some of which are listed below:
- The inability of the Central Bank to conduct Open Market Operations due to shortage of its reserved U.S. Dollars which is mainly the result of:
- Closure of Central Bank branches in the main airports where travelers used to pay immigration entry/exit fees in U.S. Dollars as well as mandatorily buy some local currency in exchange of their U.S. Dollars. This was a good source of U.S. Dollars currency for the Central Bank
- The drastic reduction of government dollar revenue source from the export of livestock to Gulf States due to the drought and the health related ban imposed on Somali livestock by the Saudi Arabian health authorities. This reduction of this revenue stream again negatively impacted Dollar reserves of the Central Bank
- The reckless policy of the government to pay some of its well-connected contractors/suppliers in U.S. Dollars instead of Somaliland Shillings which subsequently depletes Dollar reserves in the bank.
- The new decision of Ethiopian Qat traders to sale their “drug” in U.S. Dollars instead of their local currency, the Birr. This increased the demand for Dollar in the money market because of the buying spree of Qat importers from Somaliland who normally buy U.S. Dollars from the local market in exchange of Somaliland Shillings thereby reducing Dollar supply in the market and causing the appreciation of its value against the local currency, the Somaliland Shilling.
- The demand of the Ministry of Finance to collect some of taxes/fees in the form of U.S. Dollars. For instance, anyone applying a vehicle title transfer has to pay taxes/fees in Dollars. This increases the demand for dollar in the market and the appreciation of its value against the Somaliland Shilling.
- The inability of the government to recognize that this is an Economics problem and it needs an Economics solution. The government has to convene a council of economists to advise her on economic issues.
Possible Solutions (Policy Alternatives):
There are several policies that, if implemented, can address the problem. Below are some of those policy choices:
- Increase the U.S. Dollar reserves of the Central Bank of Somaliland to conduct Open Market Operation–a Monetary Policy tool whereby Central Bank buys local currency in exchange with dollars–whenever the market conditions demand in order to maintain the value of the Somaliland Shilling. This will require the government to take the following steps:
- Re-open Central Bank branches in main airports and restore its monopoly to collect government immigration entry/exit fees in Dollars.
- Pay all government contractors/suppliers in local currency, the Somaliland Shilling. This will stop the depletion of Dollar reserves in the bank.
- Negotiate with Government of Ethiopia to stop the demand of its Qat importers to sell their “drug” in Dollars. This will greatly reduce the demand for Dollar in the local market and subsequently result the depreciation of its value against the Somaliland Shilling.
- Put the blame on Telesom’s Zaad and Dahabshil’s E-Dahab, Somaliland’s e-commerce and money transfer brands, for the depreciation of Somaliland Shilling. Theoretically, restricting the use of electronic e-commerce in Dollars may increase the demand for Somaliland Shilling but it will not offset its excess supply in the market.
Preferred Policy (Recommended Policy):
I recommend that the government adopt policy alternative (1) listed above. The government should not re-invent the wheel since Open Market Operation was the most effective tool that previous governments have used with success to regulate the value of the Somaliland Shilling.
By: Abdilahi Husein