The title of the book of Dr. Ali Isse Abdi, former IMF official, “Somalia: Crisis in Economic and Financial Management: The Root Cause of the State Collapse and the Principal Challenge to National Recovery”, summarizes the main source of the past and present troubles of Somalia.
At the end of 1970s, Somalia endured severe economic downturn due to high inflation and unemployment caused by widespread macroeconomic mismanagement, political repression, corruption, wars and draughts. Black market economy, capital flight, tax evasion, Franco Valuta system (import of commodities without foreign exchange payment through the banking system), currency substitution (dollarization) and public service desertion (brain drain) flourished and changed the structure of the Somali economy.
The Somali currency (the Somali Shilling) begun to lose progressively its three functions of unit of account, medium of exchange and store of value. Thus, the ruling regime entered negotiations with IMF and WB for economic and financial support and adopted successive Structural Adjustment Programs (SAP).
While Somalia’s performance of SAP was presented as a success story, this success did not last long because selfish politicians and technocrats campaigned for the program’s interruption. The regime refused to implement trade liberation, financial and public enterprise reforms that have been the major source of economic deterioration. The Central Bank of Somalia (CBS) was unable to resist the financing of rampant government budget deficit.
The interruption of IMF/WB program followed by massive credit creation utilized through cashier checks precipitated economic and financial catastrophe that led to the collapse of the Commercial Bank of Somalia. This financial calamity combined with general discontent fuelled the uprising that brought down the entire Somali state in 1991. That economic deterioration continues as of today. The lack of credible macro-economic data on GDP and GNP, debt to GDP ratios, foreign currency reserve, consumer price index, inflation rate, unemployment, money supply, human development indicators and accountable institutions will be one of the major obstacles to economic recovery. It is not wrong to assume that the economic and social indicators produced by donors after 1991 are not capturing in full the depth of the socio-economic disaster that afflicted Somalia for more than 35 years.
The recent appreciation of the value of the 1,000 note Somali Shilling (So Sh) vis-à-vis the dollar throughout Somalia has thrown the FGS and regional authorities into confusion because both levels of government were not prepared for how to deal with this macroeconomic shock. All necessary informational, political and institutional/administrative conditions for macroeconomic management are yet to be established.
The supply of fake notes fueled continuous spiral of the Somali exchange rate from So Sh. 15,000 in 2006 to So Sh. 35,000 in 2008 before it came down to So Sh. 19,800 in 2013. Contrary to the economic theory explanations, both the appreciation and depreciation of the Somali exchange rate have had devastating effects on the large segment of the poor population because the consumer goods, services and assets are priced in US dollar.
The formulation and implementation of macroeconomic policies requires effective leadership, trained staff, aggregate data collection, analysis, monitoring and evaluation. The Ministry of finance, the CBS, the General Accountant, and General Auditor share the responsibilities of the macroeconomic financial management functions. The integrity and capability of those institutions under the leadership and oversight of the president, prime minister, and the federal parliament is critical for laying the basic foundation of the statebuilding in Somalia.
National integration and close cooperation with the IFI will expedite the painstaking process of the return to the use of domestic currency as the legal tender for the restoration of financial system of Somalia. As part of its institutional responsibilities, the CBS must endeavor to establish first its internal functional structure to face the challenges of establishing an efficient and secure national payment system which is crucial to the economic recovery and development. Incidentally, it would be appropriate that the FGS considers the destruction of the “N” Banknote held by De La Rue, a longtime client of the CBS. De La Rue deserves credit for not using corrupt tactics to transfer the currency stock in its warehouses to illegitimate local warlords or entities in order to get back its outstanding debt.
Finally, the efforts of the FGS with regard to macroeconomic management policies cannot be effective unless the country is hierarchically organized. The circular flows of the economy presuppose formation of markets, freedom of movement, reliable national public administration and system of justice in all corners of Somalia. The time span Somalia will graduate from the failed/fragile situation will depend on the determination of the Somali people for unity, cooperation and common agenda for the ultimate purpose of national economic prosperity.
(Somalia’s priority National integration for economic recovery)
Mr. Mohamud M Uluso firstname.lastname@example.org
Xafiiska Wararka Midnimo, email@example.com firstname.lastname@example.org