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The Impact of inflation in Somaliland

INTRODUCTION

 

 

Somaliland is a self-declared state since 1994. It is internationally recognized as an autonomous region of Somalia which is in fact headed by the Government of Somaliland under the presidency of Ahmed Mohamed Mohamoud. The state lies in northwestern Somalia, on the southern coast of the Gulf of Aden. With approximate population area of 137,600 Km2 with approximately 4 million people. The capital and the largest city is Hargeisa, with the population of around 1,500,000 residents.

 
When civil war broke out in Somalia In 1988, during the Siad Barre regime, against Somaliland and other suspected militias, there was lawless in the country in the early 1990s and consequently led to the cessation of Somaliland that is now an autonomous republic. The conflict left the country’s economic and military infrastructure severely damaged. Today the country is democratically elected seeking international recognition as the Government of the Republic of Somaliland.

 
Economically, Somaliland runs its own central bank called, The Bank of Somaliland that runs its own monetary system for the state. The bank was established in 1994, it serves as both a monetary authority and a commercial bank for the territory. The central bank was provided for in the constitution of Somaliland. It has a head office in Hargeisa, in addition to seven other branches, and four foreign exchange offices in the airports at Hargeisa, Berbera, Borama and Gabiley. The bank not withstanding other functions: it maintains price and exchange rate stability; promote credit and trade condition which support balanced economic growth; support the economic and financial policies of the government where possible.

 

 

 

ECONOMIC SCENARIO

 

 

The challenges facing the economy Somaliland are Poverty and inequality in the economic well being. According to the World Bank’s statistic 2014, More than 1 in 3 households in rural (1 in 4 in Urban) do not have enough to meet their daily basic needs. The countries GDP are $ 1.9 billion (2016) and per capita of $ 347 makes it one of the poorest states. Also there are limited basic services. Besides, there is limited and inequitable access to education, health. In addition, there is high unemployment and underemployment, low investment rate (-11% of GDP) and the country depends on importation of commodities (91.5%). Because of high importation, there is high demand for the dollar. Therefore, the exchange rate of the local Somaliland shilling has experienced abnormal exchange rates in favour of a dollar. Consequently, the Somaliland population has consistently minimized the use of local currency, preferring rather to use the much more stable U.S. and European currencies. These foreign currencies are used in local transactions of goods and services just like the Somaliland Shilling.

 
Livestock exports and foreign remittances are the backbone of the economy. But the industry is in a bad shape. The dependability of these sources of income in the future is uncertain due to the persistent droughts and poor livestock management that threaten the survival of livestock populations. Somaliland cannot effectively implement economic and financial regulations until the public sector is able to enter into a bilateral agreement with international organizations. This is not forthcoming as no such agreement has been presented to, let alone be recognized or accepted by all relevant parties. The state-owned bank should keep its hands off the private sector that has served Somaliland so well to date. The best way to tackle current economic hardships is to prevent the import of kat, which erodes Somaliland’s economy substantially. It is time to move away from a subsistence economy to a healthy and growing consumer-based economy. Stability in the state-regulated financial sector is necessary for this type of healthy economic growth and development to occur.

 
According to the UN Office of the High Representative for the Least Developed Countries, Landlocked Developing Countries and Small Island Developing States, Somaliland has been growing at of 8% to 11% annually for the past 5 years. About US$780 Million annually is fueld in Somaliland. About 30% of this (US$234 Million) comes in as capital and/or financial investments and the remaining 70% (US$546 Million) comes in as small money between US$100 and US$500, received as household maintenance for families and individuals. This has led to the disadvantages such as creating remittance dependency culture; rendering use the dollar as local currency; increasing inflation and money laundering; encouraging human trafficking as well as fuelling clan and religious tensions through instant cash supplies etc.. This is because there is Lack of legal and regulatory banking structures;

 
INFLATION

 
In Somaliland, the cost of living has increased and inflation has worsened due to volatility of food prices. The price of rice, sugar, milk, vegetable, clothes, cooking oil, fuel, water electricity and transportation fares have climbed sharply, seriously affecting most families the purchasing power of the people. This has been worsened by the exchange rates.
The escalating conflict in Somalia has created an economic crisis, leading to a hyperinflation equivalent to 165% and mainly driven by the excessive printing of the local currency to partly finance the war, the UN said on Friday. The warring factions in Somalia are engaged in excessive printing of the local Shilling, which has recently flooded the local market and led to a huge depreciation of the currency (165% since January 2017 and still growing in hundreds). The humanitarian crisis in Somalia has hit alarming levels and is currently considered one of the worst around the world.

 
The exchange rate is rarely adhered to by the local people because of limited influence of the Central Bank. For example, The Central Bank of Somaliland adjusted the exchange rate to 6000/US dollar on January 21, 2016. The previous rate was 6090 shillings, US dollar but it was 7050 Shillings in unregulated markets and currency exchange kiosks. The exchange bureaus, shop keepers, retailers and service providers continue to charge goods and services based on at their own desired exchange rates.

 
The cost of electricity is very high in the region because all of the electric companies rely on imported petroleum fuel, to generate electricity. Due to weak regulations, the supplying companies do not adjust the cost of electricity to the decline of fuel prices but set their own prices. The average home pays between approximately 50 dollars a month for electricity.

 
The main stay of Somaliland include livestock exports and foreign remittances. But the industry is in a bad shape. The dependability of these sources of income in the future is uncertain due to the persistent droughts and poor livestock management that threaten the survival of livestock populations.
Livestock exports and foreign remittances are the backbone of the economy. But the industry is in a bad shape. The dependability of these sources of income in the future is uncertain due to the persistent droughts and poor livestock management that threaten the survival of livestock populations.

 
Recommendations:

Increased investment in basic service provision—particularly in rural areas—is essential to break this cycle, end extreme poverty and ensure shared prosperity.
The main solutions include identifying drivers of growth and understand the key constraints then focus on the growth strategy such as job creation or poverty reduction
Assess the is macro, business infrastructure, environment, identifying sources of growth to know if its conducive for growth.

 
The government should be pro-active in public resource mobilization to provide the basic needs and increase especially private investor confidence in domestic investment or SME and agricultural productivity are key for enabling business environment.
The financial sector development is crucial for savings mobilization which is needed to finance investment. This can be done through Boosting exports to finance investment especially in livestock products. Increased trade is associated with Growth, Structural change, employment and Poverty Reduction.
NGO will encourage entrepreneurial skills and willingness to take risks. They can mobilize young people to engage in Agriculture, livestock and fisheries which are key sectors for the Economy of Somaliland as well as for livelihood. In turn financially included youths can be able to meet basic needs and lead a respectable life hence they avoid terrorism activities.

 
In agriculture, livestock and fisheries NGO can help in educating the local population in value addition so that products are not exported as raw material instead people should understand how to process livestock products locally e.g. instead of exporting raw animal skin and hide.

 
NGO should also educate people on how to tap on local resources such as use of livestock waste in making biogas to supplement electricity. Also encouraging the use of renewable energy resources such as the solar and wind power because there are no rivers hydro-electricity generations and reduce dependence on imported petrol fuel for electricity.

 

 
Allah Mahad Leh

Mukhtaar H. Muhumed
Msc Islamic banking & finance
University Of South Wales,
Bristol, UK