Somaliland Shillings Will Never Gain Strength under the Country’s Multiple Currency Policy

As the liberation of Somaliland independence had been announced in 1991 and the re-establishment of government institutions in the country, Somaliland government introduced a new Somaliland banknote in early 1994 which replaced the previous Somali shillings. Indeed, at the end of 1994 the Somaliland shilling plummeted in value against almost all other major world currencies and had suffered from large and continuous devaluations. These devaluations, in turn, added to the inflationary pressure, eroded the purchasing power of money and caused a chaotic financial situation that, according to many observers, was the decisive factor contributing to the outbreak of civil war in early 1995. Perhaps the most chilling effect of Somaliland shilling’s steep slide was the lack of monetary policy objectives by the central bank of Somaliland, therefore exchange rate changes are most of the time dictated by the parallel market (black market).

Since the introduction of Somaliland shillings two decades ago neither late president Mohamed Ibrahim Egal nor his successors build a strong policy for strengthening the Somaliland shillings, because it was introduced without clear policy in place.

In order to make Somaliland Shillings as the sole legal tender, there must be an effective central bank which regulates the country’s monetary policy as well as strong central government for overseeing and guiding the country’s economy.

The massive growth in money supply in 1994, and the consequent high inflation rates and perennial exchange rate depreciations, brought about a widespread “dollarization” of the economy as people learned to switch shillings into dollars as a hedge against inflation.

The main reason that Somaliland needs single currency is that our economy is highly dollarized in addition to other currency such as Ethiopian Birr that we use our daily transaction and as long as the economy remains highly dollarized the Somaliland shilling will continue depreciating and its value will decline year after year. The following table is rough estimation for the exchange rate.

 

Table: Average exchange rate 2010-2015

YEAR	EXCHANGE RATE PER DOLLAR	NOMINAL DEPRICIATION IN THE SL SHILLING
2010	6,422
2011	6500	1.2%
2012	6800	5.8%
2013	6900	6.9%
2014	7200	10.8%
2015	7500	14.37%

 

Using the percentage change formula as useful tool, the Somaliland Shilling has never appreciated over the past five years. The cumulative depreciation for the last five years was around 39%. In fact if we extend the argument to 2000 and before the Somaliland shilling has lost nearly 100% of its value.

As long as the Somaliland continues the multiple currency policy in place, the Somaliland shilling will continue to depreciate dramatically year after year and we will reach a time that the situation never going to get better by itself or through monetary and fiscal policy. We are insane if we think that there can be monetary or fiscal policy in an economy that is up to 85% dollarized.

In conclusion, from my point of view it’s clear as crystal that politicians who are running to become the president of the country will never bring the table any kind of policy for solving the multiple currency policy and we are not ready to use the Somaliland shilling as the sole legal tender in our country.

Muse Yusuf kamil

mykamil@hotmail.com