The Shilling, a former unit of United Kingdom’s currency, was introduced into Northern Somalia in the early 1900s by the British colonizers. In 1962, the Shilling became the official name of Somalia’s currency. Today, many Somalis take the word “shilling” as a Somali word because it sounds Somali and has been part of Somalia’s history since independence. Moreover, when the central government of Somalia collapsed in the early 1990s, the Shilling remained as a functioning currency. However, over the years it has lost more than sixty percent of its pre-civil war value due to inflation, counterfeiting and lack of a backing government. But since the election of President Hassan Sheikh, there has been a renewed discussion about how to appreciate the purchasing power (value) of the currency to stabilize it. The debate has divided Somali intellectuals into two opposing camps. One group contests that it’s better to keep the Shilling as a currency and do some structural changes in country’s monetary. The other camp argues that Somalia should adopt a new currency with a native Somali name.

Whatever the outcome may be, money facilitates the business transactions that we do every day, and without that common currency it would be impossible to buy or sell things in today’s markets. Every business transaction has a value, and that value is directly linked to the purchasing power of the currency. For example, if someone exchanges $1.00 to Somalia Shilling today, he would get about S20, 000 Somalia Shillings (SOS) in exchange for the $1.00. That means the purchasing power of the U.S. dollar is much stronger than the Somalia Shilling, although both of them are fiat money.

Before the 1970s, the world currencies were anchored to the availability of gold. Each country’s currency was fixed to gold and the value of the denomination had an equal value to a certain weight of gold. But this has changed in 1971 when the U.S. government unilaterally took its currency off the gold standard instantly devaluing the dollar without the International Monetary Fund’s (IMF) approval. Countries that hoarded the U.S. dollar lost around 20 percent of the value of their reserved dollars, and the dollar became what’s known as fiat currency—money linked to nothing of value but the backing of its government and market acceptance. Fiat money today is the standard around the world, and Somalia’s future currency will also be a fiat currency that will depend on the smarts of Somalia’s government if the government takes the option of monetary stimulus (borrowing printing money to spend) approach in its economic development agenda.

There are five ways that a country could finance its economic projects: borrowing from abroad; borrowing through local banking; selling bonds; selling a valuable resource to other countries, and printing money. And each of these five options has its limitation. For starter, Somalia’s wouldn’t be able to borrow from abroad enough money to finance sufficiently its massive economic reconstruction programs because it has defaulted its previous debt obligations and it would be tough to convince countries to lend money to Somalia.

If Somalia decides to finance its economic development through borrowings from inside the country, the government would again fail to gain access to enough money from within because financial banking systems and national savings are non-existent in Somalia, plus these funds wouldn’t be able to finance large projects that would require billions of U.S. dollars. Selling Bonds would also be a problem because Somalia would have to offer an interest in return which is forbidden in Islam and too expensive. The other option is massive selling of the nation’s natural resources. Selling natural resources would require initial capital investments that would take years to materialize, and Somalia needs immediate finance for its economic recovery program. Then comes printing money, this option is a good in the short run as long as the money created is invested wisely and its velocity(the speed the money circulates) within the country is managed, which is really a tough job to do—keeping inflation in check.

Inflation happens when the price of goods keep rising more than 4-5 percent a year depending on the country’s central bank inflation schedule. The main reason why inflation occurs more than the usual is when governments print more money than the economy can accommodate. The economic concept that deals with finance in economics is called monetary economics and it says that using money as an economic development tool can only work in few years and after that inflation will kill the short time economic gains achieved through the stimulus spending. In 2009, after the election of President Barack Obama, the US undertook a massive economic stimulus spending close to $800 billion. Obama’s economic team believed that spending more money would stimulate the Gross Domestic Product (GDP), they justified this argument by using an argument known as “multiplier effect.” Basically what this says is that every dollar the government spends in the economy would create more spending in the economy as it circulates; but remember that US dollar is a global currency and the US government has a strong financial institutions that can handle such huge money printing scheme. Moreover, economists are divided on this issue and many believe the more the government spends on financing projects, the less the nation will gain from that continuous government spending (this depends on what the money was spent on such as food feedings or buying farming machinery). All in all, economists agree that economic stimulus financing is only sustainable in the short-run (couple of years) before inflation stalls the economy.

Currency wars and accusation of currency manipulation in developed and up-coming developing economies is a common economic struggle countries wage against each other. In the middle of the great liquidity recession of 2007-2009, US Treasury Secretary Timothy Geithner accused China for currency manipulation. Geithner said China undervalues its currency (Yuan) relative to the dollar to make Chinese products cheap while making U.S. made products much expensive for Chinese consumers, and in the process  China is killing U.S. manufacturing capacity and increasing unemployment. Developed nations often depreciate their currencies against other currencies depending on their macroeconomic interests. For example, China has to keep its currency cheaper than the euro, the UK pound and the U.S. dollar, because these are the currencies in the developed world that people use to purchase Chinese manufactured goods, and as long as the Chinese currency remains somewhat weaker than the euro and the dollar, the more goods China will sell to consumers of those countries—exporting more goods to Europe and North America, growing the Chinese Economy and employing more Chinese.

Somalia's problem is not about weakening its currency like China, but strengthening (appreciating) the currency for economic reasons. Currency is an economic tool that is indispensable in today’s market-based economy where countries must control, directly or indirectly, their currencies to keep their economic progress ascending. So Somalia to achieve an ascending economy, it would need a new currency that has a strong purchasing power. Yes, introducing a new currency with a new name is a complex process. It will require creating the institutions necessary to handle this process and make those political and economic decisions. The Federal Government of Somalia (FGS) would have to decide the printer company and the size of the banknotes, the value of each denomination and the purchasing power of the currency. Eventually, the FGS would have to sell this currency to domestic and abroad markets to make its use universal—creating what economists call “the network effect.” Although this might seem a lot of work, the economic impact a new currency would have is immense if it's used a way that would support the country's economic needs.

We should remind ourselves that today Somalia’s Shilling floats freely in currency exchange markets like the dollar and the euro, although the Shilling belongs to under-developed country that’s just recovering from three decades of economic and political regression, and has nothing much to export to the rest of the world unlike the U.S. dollar and the euro countries. Thus, to rebuild Somalia’s infrastructure and its basic domestic consumption manufacturing capacity in the short-run (for two decades or less), Somalia would need a strong currency that is fixed to itself (not pegged against any currency to avoid giving up country’s monetary policy).This strong currency against the U.S. dollar and the euro can be used to purchase necessary industrial machines and other things to create new industries and infrastructure. One obstacle to overcome is that Somalia would have to come up a smart way to justify this strong currency and make the Central Banks of the world to accept the currency and it’s purchasing power value set by the Somalia’s Central Bank. There are many ways this could be done.

This strong currency will also lower the value of the money that Somalia’s large diaspora community sends back home. If, for example, the Somalia currency is stronger than the U.S. dollar, families that use to get more for their $100 in Somalia will now buy less goods than previously. But this problem will be balanced by the increase of cheap imports, and the decrease of unemployment which cuts the dependence on remittances if the economic development takes off. The other critical thing that Somalia has to anticipate is that this artificially inflated currency will come down, and before that happens the Central Bank of Somalia will have to invest smartly to be ready for such devaluation when it occurs.

Of course, the IMF and the World Bank and others would argue that it is better Somalia to have a weaker currency so that Somalia can attract foreign direct investment. The problem with this argument is that Somalia still doesn't have the financial system, security, laws and the infrastructure that could attract such large foreign investment at the moment. Therefore, Somalia has to create such institutions before it is able to attract huge foreign direct investment. The IMF would further argue that the FGS shouldn't undertake itself creating industries but let the markets create (free markets argument)—it would say that State capitalism is bad!

State capitalism is when the government takes the driver’s seat, as corporations would, to respond to market demands by creating commercial enterprises known as State Owned-Enterprises, and wealth funds for the purpose to invest emerging industries. State capitalism is neither communism nor socialism or capitalism, but the government acts like a profit minded corporation that wisely targets where and what to invest—giving priority pillar industries if the country is underdeveloped one, for the good of its citizens. Singapore is a good example of the economic miracle that State capitalism could do for a developing economy. It would be stupid Somalia to listen the IMF on this topic.

The other important argument, for a nationalistic point of view, about having a new currency is that the Shilling was a byproduct of the colonial rule, and if Somalia is going to usher a new era, its currency must be a native one. Call the new currency “Lacag” and give it this symbol "L" if necessary, but we have to remember every country’s currency represents its people. Regardless of the name of the new currency, it’s important that it’s originally Somali, and it should have a strong purchasing power against the euro, the US dollar and the pound for the next decade or so to use it as a tool for economic development. Later Somalia can reevaluate its currency’s purchasing power value when Somalia’s export industries are created and ready to export.

Shire Salaad (Hassan Mire) [email protected] is a political and developmental economics strategist, and has extensively written about Somalia’s politics and economics.

Courtesy:Somaligo.blogspot.com