Somalia's Currency Reform (Part 1) - In the Need for Shilin Reform: Context and Background

 

Somalia’s Currency (Shilin) Reform: Risks & Options

Reforming the Shilin is critically important for Somalia’s economic development. However, the economic, regulatory, logistical and security risks and complexities inherent in such a reform programme in Somalia are considerable.

In a three-part article, Abdi Ali explains what these risks are, how they can be managed and the options Somali policymakers need to understand and assess carefully at the outset of their planning. Abdi notes that Shilin reform is more than just printing of new Shilin notes: realism about the scale of the complexity of this programme and a step-change in policymakers’ thinking is important and indeed required if the Shilin reform programme were to succeed in achieving its intended outcomes.      

• Part 1:  In the Need for Shilin Reform: Context and Background, Abdi articulates the continuing harmful economic consequences of using the Shilin – a significantly devalued and heavily counterfeited currency;

• Part 2: In Somalia’s Dual-Currency Economy, Abdi will summarise the outcomes of a Household Survey that was conducted in Somalia to assess the scale of the use of the Shilin and United States Dollar (USD), and will set out the implication this has for Somali Government’s ambition to reform the Shilin; and

• Part 3, In The Conversion Programme: Successful Execution, Abdi will look at a number of frameworks for the delivery of the currency conversion programme, including options for supporting the government’s foreign currency reserves and the extent of contingency planning as well as stress testing needed to address foreseeable risks.

Part 1:  The Need for Shilin Reform: Context and Background

The Somali Shilin “SOS” (Shilin Soomaali) is one of the best examples of a fiduciary currency: it has a very low value, and with no Central Bank to back it, its use depends entirely on the fact that people in the country, who may have no other option, accept it. If people stop using it, or lose confidence in its value, the Shilin is worthless. Those that can avoid the use of the Shilin do so and almost all key economic transactions are done in United States Dollars (USD). As a consequence, the vast majority of those that use the Shilin are on very low incomes and/or trade in low value goods and services with neither the means nor the income bracket to use the Dollar. I have called here that segment of the population the Small and Subsistence Earners and Traders (SaSET). If there were a loss of market confidence in the Shilin, making it worthless overnight, the economic consequences would be disastrous for the country as a whole and hit particularly hard those who are most vulnerable on a hand-to-mouth existence.  

The scale of the Shilin counterfeits is a major problem for policymakers…

The Kun Shilin (SOS 1000 denomination) is also widely counterfeited and several varieties (red, deep- red and grey-red versions) are in circulation. The minimum note value in circulation is the Kun Shilin – the highest denomination in print since before the civil war in the 1990’s. Coins or other low value denominations are not in use, had long ceased to be accepted as medium of exchange and are not widely faked, partly because of counterfeiters’ preference to print the highest denomination note – the Kun Shilin Soomaali. Because the Shilin has no significant value and heavily counterfeited, the USD currency is widely used instead. Key basic necessities “Qutul Daruuriga” are valued in the USD and most suppliers prefer, if not insist upon, all goods and services to be transacted in the Dollar.  

The economic problems caused by the dual-currency economy are significant and profound...
First, fluctuations in Shilin- USD exchange rates amplify price inflation in the country, and with no Central Bank monetary policy levers to manage the USD money supply and/or exchange rates, the resulting damaging spiral in inflation harms the country’s economic development, significantly impacting the prices of key Qutul Daruuri (necessities) items.  

Second, the widespread use of USD currency as a medium of exchange creates a significant fiscal drain on the country’s coffers. Somalia’s taxation system is at best embryonic and a large proportion of the Government’s income is either in foreign currency donor grant or income from the Seaport / Airport levies. These currency inflows are then used to pay for the Government’s expenditure, increasing the outflows from the government’s currency reserves, further weakening the value and market use of the Shilling to almost zero. This not only creates a sustained drain on the overall government currency reserves, but also injects more inflationary pressures into the economy by increasing the flow of the (expensive) USD in the economy and exacerbating the galloping inflation in the prices of basic necessities.

Third, Somalia’s dual-currency economy also stunts the country’s economic growth and continues to damage the livelihoods of millions of Somalis in the long-term. The daily Shilin-USD mismatches (i.e. receiving or raising revenues in the Somali Shilin and having to pay for things in USD) means it becomes impossible for millions of Somalis on meagre incomes to afford daily Qutul Daruuri items or access basic services when there is a fall in the value of the Shilin because of increased counterfeit inflows and/or a strengthening of the Dollar due to exogenous events. My survey has highlighted this to be a recurring problem, impacting nearly all of the Qutul Daruuri items on which the livelihoods of both the SaSET and many millions of the poorest Somalis depend. Consequently, even the most basic of necessities (eg. tomatoes, Bananas – “Yaanyo iyo Moos”) are valued in the Dollar which is economically damaging and unsustainable.

Somalia’s Currency (Shilin) Reform: Risks & Options

The societal problems created by the large-scale counterfeiting of the currency is a ticking time bomb…
For its use as a store of value, the very poor and the SaSET– in particular small market traders, fruit and vegetable farmers and their supply chain, rely heavily on the Shilin as a store of value, especially in rural and out-of-town areas. Counterfeit inflows devalue the value of the Shilin in their pockets and increases their loss of income. In Mogadishu, most SaSETs are often forced to price their goods in the USD, whilst in rural regions, the Shilin is still widely used. My survey found instances in some regions where ordinary Somalis who have no access to the Dollar were unable to use their Shilin to pay for certain foods / rent, top up telephone or buy spare parts for machinery.

Against this backdrop...
the Somali Government’s initiative to introduce a new Shilin is a major step in the right direction and a key fundamental building block in Somalia’s economic recovery. However, as has been the case with many programmes in Somalia – a country in which there is hardly a functioning regulatory and monetary system - pulling off such a reform programme with its added scale and complexity is no mean feat. If not thought through carefully and risks managed effectively, the chances of the currency reform programme achieving its intended outcomes are very slim indeed.  

In this analysis work, Abdi sets out the key risks and options that Somali policymakers need to understand and assess. Abdi also summarises a number of Somalia-specific challenges which would have a major bearing on the currency reform programme, and cautions policymakers against a rushed and disorderly introduction of the new currency. In Abdi’s view, it is imperative policymakers ensure the key reform pillars necessary for the currency’s success are thought through carefully at the outset of planning before the printing press button is pressed.

The other overarching point Abdi will make is the need for there to be greater awareness of the interdependencies (both expected or unanticipated) between the successful delivery of the Shilin conversion programme and the other important elements (eg. logistics, security, expertise) which, in the context of Somalia, may largely be outside of the policymakers’ control and will present the biggest challenges. The extent to which these challenges and risks are understood and factored into policymakers’ decision-making will have a significant bearing on the programme’s chances of success.   

End:

In next week’s article, Abdi summarises the outcomes of the Household Survey that was conducted in Somalia to assess the scale of the use of the Shilin and United States Dollar (USD). The article will set out the regulatory, logistical and security implications the Survey findings have for Somali Government’s ambition to reform the Shilin.

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