Somalia's Currency Reform (Part 3)

Somalia's Currency Reform (Part 3)

The Conversion Programme: Successful Execution


Somalia is a graveyard for failed programmes and Somali policymakers have a long history of failing to turn good initiatives into results. This is largely because of an underappreciation of the challenges and risks on the ground, overreliance on informal structures which complicate even the most basic of tasks and a failure to ensure the right leadership, expertise and resources to be in place from the outset.

Somalia’s Shilin reform is probably one of the most complex and expensive reforms the Somali Government has ever attempted.  The scale and complexity of the programme means it will cut across many government departments and agencies (eg. The Central Bank of Somalia, Ministry of Finance; Ministry of Justice; National Security Agency; Ministry of Defence; etc), creating real issues of capability and cohesion. Getting this right is unlikely to be straightforward and requires policymakers’ step-change in thinking.

This final article summarises the three important steps which, if integrated into the policymakers’ current reform discussions, will help increase the currency reform’s chances of success.  

1.    First, getting the process of the Shilin conversion right and the sequence of steps needed to plan for the conversion programme.

2.    Second, performing some scenario planning to mitigate foreseeable high impact / high probability risks (such as terrorist attacks, speculation attacks and negative market signaling).

3.    Third, exploring alternative ways to back the new currency to improve the government’s currency reserves.

1-    Getting the conversion process right means setting up the right legal, regulatory and organizational readiness structures…

Introducing a new currency is not a one-off exercise. A significant volume of the work that needs to be done relates to the regulatory and legal structures that will underpin the operational implementation of the new currency for the longer term.   

There are four steps in this:

•    Oversight and Regulatory Structures;
•    Stakeholder Engagement;
•    Contingency Planning, Security and Logistics; and
•    Central Bank Operations.

This is summarized in the diagram below:

Somalia's Currency Reform (Part 3)


One thing that is importantly clear from the sequence of steps above is the need for there to be a collective understanding of the programme’s oversight structures.  Good oversight means reliable and timely decision-making and a clear focus on strategic delivery. Most programmes in Somalia fail because of incoherence in approach and confusion about accountability. If past lessons are not learned, the programme will never get off the ground.  

Another important element of the conversion process is understanding the scale of the counterfeit Shilin notes in circulation and setting out an appropriate way of disposing of the old Shilin currency. There needs to be a strengthening of both the regulatory rules and criminal laws, the systems to register identities, and laws to deter and prosecute those caught with counterfeits.

Given almost all of the Shilin notes in circulation are fakes, a key challenge will be how to distinguish between criminal counterfeiters from vulnerable victims that were caught up in the counterfeiting crime. One way of addressing this is setting up a risk-based voluntary identity and source-of-income verification process to minimize the threat of criminals gaining access to the new currency.

An effective engagement with the wider public will help minimise the likely confusion and panic that will ensue in the market. There needs to be clarity of messages to the market, workshops for businesses and training notifications for the public (eg. through the media, mobile messages, etc).

The organizational readiness work at both the Central Bank of Somalia and Ministry of Finance should be prioritised. A sensible temporary measure could be to exploit the skills and expertise of the money exchange operators in the country who will have deep understanding and intelligence of the nature and flow of counterfeit notes.  

2- Policymakers should plan for disruption scenarios and prepare for foreseeable high impact/ high probability events….

It is prudent to think about some worst-case scenarios from the outset. Stress testing the programme allows policymakers to have a menu of realistic alternative options (Plan B), that can be implemented to get the programme back on track.

The high probability scenarios to consider include:

1- Programme-specific
The risk of the security features of the new Shilin currency being compromised; assumptions about the scale of the counterfeit notes in circulation proving to be wrong; incomplete legislative frameworks leading to major legal and operational issues.

2- Market Risks
They will likely be market rumours that will create widespread confusion about the value of the new Shilin; some businesses will refuse to use or accept the new Shilin; and the reserve backing for the new Shilin may become inadequate, creating significant devaluation of the new Shilin against the USD.

3. Security and Logistics

Significant terrorist attacks against people trying to convert their old notes are likely to happen, and threats against anyone/companies seen to be using the new Shilin will have a huge impact on the smooth introduction of the new Shilin (and the conversion timelines). The logistical challenge of securely transporting many tons of valuable new Shilin may prove too difficult, leading to shortages of the currency in some regions of the country. Widespread theft of the new currency through corruption and/or mismanagement is also likely to happen.

4- Recirculation Risk
Recirculation happens when Shilin notes that have already been exchanged for the new Shilin are re-used again and again. This generally happens when the process to obtain, invalidate and destroy the old Somali notes is weak and does not operate effectively. Through incompetence, mismanagement or corruption, it is plausible to assume a large-scale recirculation risk crystallising in many parts of the country.

5. Political Turmoil  

With the increased level of government/ministerial turnover, it is likely that there will be significant disruption to all of the programme’s operational partners as key government personnel change colours. This will hamper the progress of the whole programme.  

The five risk categories above may not be exhaustive and policymakers should prudently assume that these and other risks are likely to happen and may combine to imperil the conversion programme. Policymakers should prepare for these scenarios and factor the mitigating actions early in their programme planning.

3- Policymakers should explore innovative ways to back the new Shilin and avoid the risk of a disorderly market disruption…

The new Somali Shilin needs to be backed by USD reserves to help create a self-sustaining market confidence and manageable target exchange rate. However, the Somali Government is not in a position to raise the significant printing and reserve funding for the new Shilin. In that context, four options are possible:

1- Remittance Inflows: Billions of USD inward remittances to Somalia are paid in USD. Policymakers should consider the option of requiring a certain percentage of inward remittances to be paid in the new Shilin, thereby increasing the supply of the new Shilin. Implicit in this approach is the need to simultaneously open up the Mobile Money Transfer System to the new Shilin to help facilitate currency flows. Such a policy approach, albeit very sensible, is fraught with dangers unless it is seen to be fair, well-thought through, proportionate and subject to careful industry consultation.  

2- Fiscal Policies:  Policymakers could legislate for some government taxes to be paid in the new Soomaali Shilin to help increase the demand for the new Shilin. This should be targeted at those sectors in the economy with high volumes of USD trades.

3- Foreign Currency Conversion Requirements: Requirements at the airport/seaport for passengers to convert a small proportion of foreign currency cash (eg. convert $30 to Shilin on arrival at the airport) will boost the currency inflows into the government’s coffers.

4- Donor Grants and Programmes: A significant proportion of the Somali Government income is in the form of foreign currency donor grants. With the appropriate level of oversight, some of these funds can be ringfenced and reserved as backing for the new Shilin (and currency equivalent Shilin used as appropriate instead).  

The political pressure to introduce a new currency means destabilising shortcuts may  become appealing options…

Policymakers should resist the temptation to press the print button and use the new Shilin as a substitute budget stream for the government, force the Shilin’s introduction though government expenditure (eg. civil service pay), or indeed engage in market making activities to influence exchange rate conversions. Those actions are likely to have a destabilising and counterproductive impact on the long-term viability of the new Shilin and potentially create serious social unrest.       

Conclusion

A successful Shilin conversion is possible but difficult. These articles are intended to raise awareness of the complexities and risks involved in a currency conversion process and prompt discussions on how best to meet this challenge.

What is also clear from these articles is the scale of Somali policymakers’ ambition to deliver on the Shilin conversion programme needs to be equally matched by a realistic assessment of what is possible in Somalia. A considerable degree of realism and a step-change in thinking is indeed needed here to ensure these risks are managed and mitigated effectively.  

Lastly, effective oversight and accountability are the two required key pillars if the programme were to succeed in achieving its intended outcomes. The programme is unlikely to have the confidence and support of key stakeholders (the Somali public, the Somali business community and/or the international community) if its governance structures preclude strong expertise, transparency and accountability frameworks.


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