Somalia's Currency Reform (Part 2) - Somalia’s Dual-currency Economy

Somalia’s Dual-currency Economy

This article summarises the outcomes from a Household Survey that I conducted in Somalia. The Survey assessed the scale of the use of the Shilin and United States Dollar (USD) and highlights some key notable implications for the Somali Government’s ambition to reform the Shilin.


In order to assess the potential impact of the Shilin reform in Somalia’s dual-currency economy, it is important to understand who the Shilin users are and how the Shilin is used. The vast majority of the people in Somalia use the Shilin either as a store of value (for saving money) or as a means of exchange (to buy goods/services with it). My survey found that:

  • The high-income households (eg. those in highly paid civil service jobs or on international contracts, people in commerce and industry) exclusively use the Dollar. They are highly concentrated in the big cities. This sector accounts for a small proportion of the total households - around less than 1%. This group is least impacted by the Shilin reform.
  • Middle income and Subsistence Earners benefit from the spillover effects of High Income Households (eg. they work for or trade with them). These sectors also include Small and Subsistence Earners and Traders (SaSET) and Remittances-reliant households. They are spread across big cities and in out-of-town areas. This group is significantly impacted by the Shilin reform.
  • The Very Poor – defined as those that cannot afford at least one Qutul Daruuri a day - form the largest proportion of households. Dollar use amongst this group is minimal (almost zero). They are concentrated in cities, rural and out-of-town areas. This group is heavily impacted by the Shilin reform.


And this also means…

Those in the top bracket (High Income Households/Earners) are the ones that are likely to have USD bank accounts in Somalia or overseas and would have significant preference for their continued use of the USD.

A substantial element of the conversion programme would therefore be focused on the rest (99%) – Middle Income, Subsistence Earners and the Very Poor. Remittances-reliant households are particularly sensitive to the Shilin reform (they have the option to embrace the reform or stay completely out of it) and would require innovative policy solutions to bring them into the currency exchange perimeter.

Another major finding from the survey was the inflationary impact caused by the inappropriate locking into the $1 (USD 1) denomination. 

The threshold for the use of the Dollar seems to be set at or around the fifty-cent ($0.50), which means goods are generally priced at or above this threshold. Given USD coins are not used, most transactions are rounded up to the nearest dollar, creating an artificial inflation in prices. This is one of the key reasons most people cannot afford basic necessities in major towns and cities.

In the absence of low-denomination changes, those that use the Shilin also employ mental debit and credit note system, rather than settling on the spot.  If, for instance, a typical person wants to buy one mango (for 300 Shilin Soomaali) but the lowest denomination in circulation is the Kun (1000) Shilin, he/she would be forced to buy a few more goods to use up the remaining SOS 700 change or give a debt to the trader to be netted against future shopping. This largely works for daily Qutul Daruuri items.

The implications of the lack of lower denomination currency mean economic development is constrained (eg. a shopper’s option, to use the currency for other means, is removed, so is the shopkeeper’s obligations which may not never be fully settled in full, restricting options to diversify their product offerings).

The wide dispersion of the use of the Shilin in cities and regions also highlights the potentially complicated security/ logistical heavy- lifting ahead

Whilst Mogadishu is predominantly a USD city and a key economic hub, Dollar use in other regions is not as widespread. A Mogadishu-centric policy approach is likely to give a misleading picture of the scale of the conversion requirements, and additional currency-use analyses in all key regions may be required.  The vast majority of the currency conversion may need to take place outside of Mogadishu, and this has added security and logistical implications which policymakers need to assess carefully from the outset.  

Understanding the currency-use in the regions is also quite important for another reason: the practicalities of the conversion process. Somalia does not have a well-functioning banking system and the vast majority of people have no bank accounts. This means when a conversion process needs to take place, the new Shilin would have be to physically distributed at exchange locations with people queuing up to do the exchange. This requires considerable logistical and security planning.

Moreover, as people are dispersed across the country, it would become imperative to open other exchange locations in the other key regions where the use of the Shilin is significant. This is why currency-use analysis in an important indicator for policymakers as a way of understanding the areas of focus for the conversion programme.

For a number of years, Mogadishu had its own multiple Shilin currencies – an indication of the counterfeiting challenge for policymakers

In probably one of the unique examples of its kind, Mogadishu had three currencies in circulation for a number of years, all within a two-mile radius – the N50, N20 in the North of Mogadishu, the “old” Kun Shilin and a “New” Kun Shilin in the South of Mogadishu. An alarming indication indeed of the ease with which entirely new denomination counterfeit currencies could be introduced into the market.  

Picture: The many currencies of Mogadishu


There is a need for policymakers to be cautious in their approach and appraise the reform options carefully. Three broad lessons can be drawn from the Survey:


Somalia’s Dual-currency Economy

  1. Successful introduction of the new Shilin will be highly dependent on good security and logistical planning. The vast majority of those in scope for the conversion programme are likely to be the least accessible, most vulnerable and who are dispersed widely across the country. 
  2. The choice of the monetary and economic policy tools that policymakers deploy to back up the currency, stabilise the exchange rates and control inflation will be quite important. This requires a clear understanding of what is realistic and possible in a country like Somalia. 
  3. There is the very difficult task of keeping one step ahead of counterfeiters. If the conversion programme is mismanaged, it could be overwhelmed by the inflows of counterfeits (both new and old Shilin). Failure to appreciate this risk is likely to be fatal to the programme.


In the final part of this analysis, I shall look at a number of options for the delivery of the currency conversion programme, including ways to support the government’s foreign currency reserves. This final article will also articulate the extent of contingency planning needed to mitigate the logistical, security, regulatory and economic risks.



Abdi Ali works in banking and is based in London.   

Abdi recently finished a Sabbatical career break, volunteering in Somalia where he was an expert banking consultant on a number of financial sector reform programmes.    

Abdi is both a Chartered Banker and Chartered Accountant and holds an MBA from the University of Cambridge.

Post a Comment

Previous Post Next Post