A Strong Currency in Somalia: How and Why

By Karl Muth - 18 July 2012
somalia shilling deflation currency valuation fx foreign exchange piracy

A thinly-traded currency on the horn of Africa has been getting some attention in the past 100 days. The historically-weak Somali shilling has been fluctuating violently against the dollar, with double-digit swings day-to-day. The trading range for the Somali shilling in recent history has been roughly 8,900 to 41,000 shilling to the dollar. For instance, on March 7 one dollar bought 25,000 Somali shillings; less than twenty-four hours later, the same dollar (the dollar was stable in this trading period) bought only 19,000 shillings. While the moves in the shilling have been erratic, the trend has been toward a stronger Somali currency.

Most agree the appreciation of the Somali shilling is tied to the influx of dollars into Somalia’s economy. The explanation of how so many U.S. dollars are flowing into Somalia’s street-level economy, however, is generally inadequate. Various groups are blamed, from a Turkish diplomatic delegation that handed out $100 notes to refugees to a decision in Mogadishu to pay high-ranking civil servants in greenbacks.

The group that, erroneously, has been missing from the conversation is the obvious one: pirates. The ringleaders of pirate gangs are sophisticated people: often foreign-educated, with bank accounts, attorneys, and shell companies in Europe or the Caribbean. That these people, or their senior lieutenants, are spending the booty (or a fraction of it) in Somalia may be a positive sign from a security perspective. Two or three years ago, pirate booty from Somalia was more likely to be buying champagne in London or drinks on the beach on St. Barth’s. But today at least some of this money seems to be staying in Somalia.

This likely means one, or both, of two things: 1) It is comparatively safer for people to use dollars to consume goods and services in Somalia than it once was, or 2) There are goods and services offered in Somalia that were not offered before. I would posit both are likely true.

First, Mogadishu is calmer than it has been in years, and more legitimate businesses are forming. Private security agreements provide a “quasi green zone” calmer than anything the AU or UN had been able to provide. The use of multiple currencies continues, but this likely a non-problem and is common elsewhere in East Africa, where large transactions typically occur in U.S. dollars or GBP, while smaller transactions occur in local currencies.

Second, services like security and transportation, due to a combination of state failure and equipment importation (particularly light arms and vehicles), have been successfully privatized. This means a wider range of goods and services, but particularly services, has become available in Mogadishu (and presumably its inland districts, where warlords in semi-retirement carefully ration their supplies of imported luxuries). Unsurprisingly, the providers of these services demand to be paid in hard currency.

Which brings me to the next question: Why doesn’t Somalia simply dollarize? There is precedent in Latin America for tying financial instruments directly to the U.S. dollar without any official or diplomatic approval from the White House or the Treasury. This would remove one of the biggest short-term problems, money supply management (no substantial number of new Somali notes has been printed in nearly a decade), and one of the biggest long-term problems (negotiating import-export or protection agreements with Chinese investors).

Until large-scale change occurs in the Somali economy, the strengthening shilling may be a symptom of development in the society closest to anarchocapitalism. The next question will be whether the dollars can really keep flowing and whether there will be anywhere to spend them.
 

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