The poorest Somalis are especially affected, holding increasing amounts of depreciated shillings that have little purchasing power. Image credit: Guardian
Somalia presents a rare case of a country where the national currency (Somali shilling) still exists but is not performing its economic function. Since the collapse of the central government in 1991, the Somali shilling has suffered a long period of monetary instability, which has weakened its role as a store of value and unit of account.
Without any credible monetary authority, there is no stable system for issuing, withdrawing or replacing banknotes, with the result that worn and damaged notes continue to circulate, now trading at a reduced value or are being rejected entirely. The inconsistent and disorganised cash system has further reduced public confidence in using the Somali shilling. People are uncertain whether their cash on hand will still be accepted the next day, which is why many are increasingly shifting to US dollars and mobile payment systems.
This trend has produced both positive and negative effects for everyday families and businesses. On the one hand, the US dollar and mobile payment systems allow families and businesses to have more stability and ease of transaction in their daily lives. On the other hand, the increased use of the US dollar has pushed the prices of food and basic goods for everyone, which is affecting the poorest groups the most, who are more likely to depend on cash or have less access to mobile phones and have limited access to foreign currency. Some are left with worthless shillings, which are difficult to use for purchasing essential needs.
Today, while the Somali shilling is still considered a legal currency and is available for use, public confidence in the shilling is extremely weak. Questions remain about how to enforce monetary rules when the government has such limited capacity to manage currency supplies or circulation. Without any meaningful reforms in this area, it poses a risk to further widen any gap of inequality between those who can access reliable forms of currency and those who cannot, which could result in more people falling deeper into poverty.
References
International Monetary Fund. (2023). Somalia: Staff report for the sixth review under the extended credit facility arrangement (IMF Country Report No. 23/438). Link
GSMA. (2023). State of the industry report on mobile money 2023. Link