Many Somalis see 2017 as the year of political progress. There seem to be widespread expectations that the new government will take a greater step in addressing political and social challenges bedevilling Somali citizens. Expectations aside, the new regime should seize this genuine opportunity to work towards shared national agenda and put forward its short-term and long-term plans to rebuild government and public institutions for citizen service delivery.
Importantly, to achieve such a monumental task, the new government has to start addressing monetary shortfalls by working with its international aid partners or alternatively borrowing from international capital markets. For these critical functions, a strong central bank is required for streamlining major financial operations, mobilizing international financial assistance and supporting economic policy decision making.
The recent political realignment in Somalia that has taken the form of a federation requires a close collaboration and fiscal planning between the governments of the states and federal power. With a gradual transition from financial centralization to decentralization to achieve developmental targets, a strong banking and administrative system (which includes state banks and a central bank) is required to promote stabilization and implementation of economic action plans. As the country struggles to overcome various barriers to development, it will be necessary to assemble and operationalize monetary institutions to promote private sector growth, foster job creation and support industrial investment. Further structuring of the financial system will also be required for the purpose of adopting a new tax and revenue collection system on a national scale in the near future.
As part of the reformulation of a national monetary policy framework, the country’s national banking charter should accommodate both national banks and state level banks to act as authorised deposit-taking institutions and provide financial intermediation services. The reorganization of the financial system will prepare grounds for not only relaunching the national currency but also moving to the next ‘amorphous phase’ of sustaining a healthy Somalia currency.
The central bank should prepare a plan and a budget for a comprehensive currency reform and draw up a realistic time plan to phase out old bank notes. Once accepted, the bank should only be the authorised institution to issue a new national currency, fix its denominations and ensure sufficient currency circulation for commercial purposes. With time and as opposed to spontaneous switching, the central bank should establish a convertibility law and gradually replace the existing notes.
Somali is already a dollarized economy to a large extent. Although in an unofficial sense, it is now a common practice that dollar deposits are accepted, payments are preferred to be in dollars and all loans are made in US dollars. Despite the fact that Somalia notes are still in circulation, assets and liabilities are valued in dollar terms and the prices of most of goods and services are in US Dollar. This brings me to my next question: do we need a stronger Somalia Central Bank to relaunch a stronger Somalia shilling and embark on an ambitious adjustment program and far-reaching macroeconomic stabilization reforms?
Somalia is a strange but fascinating case study for those who believe in modern economic theories and international political economy. Unlike countries like Zimbabwe where the local currency was discarded and became virtually worthless due to hyperinflation, the Somali shilling banknotes are still operational. Empirical evidence suggests that its purchasing power is increasing over time. Secondly, as noted by JP Koning, streams of counterfeit Somali shillings are also accepted in trade in many parts of the country. Thirdly, the Somali shilling is made up of only one denomination.
The modern day central bank plays three critical roles for the state. Firstly it is the bank of banks. Secondly, it has the monopoly power in issuing national currency, regulating money supply and overseeing the efficient operation of the commercial banking system. Thirdly, it acts as a lender of last resort.
Although the new economic globalization poses formidable challenges to state sovereignty, the driving force behind having a central bank is to facilitate financial and monetary stability and achieving a high level of economic growth through national planning. Although some economists have advocated for a free banking environment where central banks should have no major mandate, economic decision making is always based on the needs of the society. In fact, central banks’ roles have become even more prominent since 2008-2009’s global financial crisis where governments used package of spending measures to help stave off economic downturn.
The new government in Somalia faces a number of challenges in its effort to initiate urgent economic reconstruction. Urgent national priorities include financing critical infrastructure and operationalizing key national institutions to initiate (or strengthen) public service delivery. Without serious commitment to revive the financial sector (and strengthening the role of central bank), the national government may not be able to carefully plan its financial and budgetary needs and obligations. In order for the country to secure true independence, both politically and financially, political leaders should take a common stand in strengthening the institutional foundations that support governance and enforcement, much to the benefit of the society.
A stronger Somalia Central Bank is therefore needed to expand financial services, coordinate the direction of government resources and foster planning and policy formulation. A stronger central bank is a symbol of certainty and stability and plays a critical role in signalling trust and promoting efficiency. This is the only institution that can generate a reliable data collection and official statistics. The oversight role of this prime body involves monitoring, evaluating, and supervising of national programs to ensure accountability and transparency in government-sponsored initiatives.
To achieve these long-term objectives, it is inevitable that it operates with large degree of independence and free of political interference. On this, Willem Buiter argues more forcefully that [while] “monetary policy [role] is institutionally delegated to the central bank, the treasury [and the state] has to ‘stand behind’ the central bank” to meet national policy commitments. Citizens should bear in mind that any efforts towards rebuilding the country’s financial system will require collective commitments, both from the public and government agencies. Certainly, shaping the future of Somali’s financial infrastructure starts now.
By Professor Abdullahi D. Ahmed
School of Accounting, RMIT University, Australia