Economic Dollarization, growth and role of Central banks in emerging democracies.

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Somalilandsun:In this era of economic codependency having access to international markets is imperative, as emerging democracies such as Somalia, Somaliland and South Sudan find ways to return to international regulatory system an effective monetary policy plays a vital role.

 

Out of the ashes of civil war a failed state has to reconcile differences amongst its warring parties, without political stability and peace efforts the most vulnerable citizens suffer burden of destabilisation, subsequently vicious cycle of poverty effects economic growth. What is required as part of state building by leaders is a plan for economic recovery and a Central Bank provides protection against inflation, high interest rates, currency devaluation and capital flow.

 

The World Bank recently lauded success of mobile money services, Bella Bird country director for Tanzania, Somalia,Burundi, and Malawi said

 

 “The mobile money revolution has made a tremendous impact on the lives of millions of people who can now send and receive money and this save at low cost”.

 

The beginning of Financial Technology began with providing access to people who existed outside of the financial system, in times of war and hardship getting remittance from relatives in the diaspora was a life line and companies such as Somatel, Hormuud and Dahabshille strategically, rapidly and efficiently took control over financial transactions.  In 2016 it was estimated 88% of Somali over the age of 16 own at least 1 SIM card, while 83% of SIM card owners used mobile money.

Thus a symbiotic relationship is cultivated, without these conglomerates a citizen can not purchase groceries ,medicine, pay for school fees or receive salary. How and why should governments learn to regulate the Industry is to be explored in this essay.

 

In light of the recent newly ratified African Continental Free Trade Agreement, African Development Bank president  Akinwumi Ayodeji Adesina (AFDB) suggested Africa needs to create 18 million jobs by 2035 to face the challenges ahead for economic and sustainable growth. Out of these cited difficulties he essentially listed  Access to finance/banking, cheaper electricity-energy , water infrastructure and stable governments. The bank has allocated £1Billion enterprise supporting medium but only 15 countries accessed trade account, thus an integrated financial subsystem, African data centre collating information and utilising technology across the continent, investing in youth education  and start up companies is part of a strategy to move Africa from mineral and resource dependent economy to a diversified tertiary/service sector.

 

This phenomenon of mobile telecom industry has paved the way to consolidating control over basic  finance but essentially government central bank has to take robust action in formulating a fiscal monetary regulatory system to safeguard its citizens rights against virtualised Dollarized cashless service.

 

Currently mobile money usage is 73% and only 15% of the population in Somalia/Somaliland have formal bank accounts and the connection between MTBs (money transfer business) and mobile network operators ever expanding suggest the risks are high.

There is no KYC (know your customer), there is no set rules or guidance between the operating networks and national currency pegged against the dollar is devaluing the shilling and raising inflation.

 

The recent public disagreement between Ismail Omar Gelleh (IOG) president of Djibouti and business person Ahmed Osman  Guelleh about asset misappropriation, false arrest warrants and lack of public trust in leadership of  (Musa Bihi president of Somaliland)  questions the role of government and transparency at  the highest level to protect its private sector from external sabotage.

 

The scale of corruption in the Horn of Africa is centralised in an internationally recognised government such as Djibouti bullying and forcefully trying to detain unlawfully  Mr Ahmed Osman Guelleh   a prominent business person whom provided employment to hundreds of people in Somaliland via his Coca Cola bottling plant. The $17M is one investment by SBI (Somaliland Beverage Industries), Mr Osman Guelleh father founded the company 1949  in Djibouti before the country became independent from France in 1977. The sons continued their father’s work in shipping, construction and property resisting Arab countries companies after the breakdown of Somali state taking advantage of Somali economic collapse, for competitiveness sake SBI cut its prices by 30% to dominate the market, so how did the government of Djibouti respond to this entrepreneurial innovative feat by capitalising on Osman Guelleh success and shutting down/confiscating his business operations.

 

Guelleh in his 40s is an Oxford graduate with a long term vision and plans for Horn of Africa economy instead of accolades for providing employment and alleviating poverty his reputation is been tarnished by avarice Djibouti president.

Djibouti president Ismail Omar Gelleh rules the small country with an iron fist, he is in debt to the Chinese firms and  is required by the courts to pay astronomical compensation to DP World. The Djibouti president runs a family based patronage system of government that lacks justice, fair distribution of wealth and transparency.

 

The president of Somaliland close relationship with Djibouti first family placed his leadership in tenable position,  corruption at the highest level requires constitutional amendment and legislations to safe guard the workers rights in Somaliland. It also requires clear objectives of the role of a leader, if President Bihi continues to ignore unemployment, high inflation, corruption and mismanagement of public finance Somaliland may not survive balkanisation of Somali state nor will it ever be recognised as an independent state.

 

Somaliland and Somali economy exists outside financial regulatory system, remittance estimated at $2 billion is what drives the economy, with the purchasing power of shilling falling the role of money exchange  operators and mobile banking becomes prominent in deciding the rate of exchange, cost of services and basic affordability of goods. The CEO of private sector  companies can not be allowed to make decisions for the government but their input and expertise on trade should be prioritised, without collaboration growth stagnates and conflict over meagre resources rears its ugly head.

 

 

Currently unofficial dollarisation of the Somali economy is ongoing issue, it is up to the central bank of Somaliland and Somalia to construct fiscal control to avoid capital flow, fluctuating currency and  preventative measures for economic stability given that drought and poor infrastructure require urgent attention.

 

Somaliland still uses shilling  for purchases under $100 unlike Somalia, the disadvantage of full Dollarization of its economy will lead to losing  control over an already fragile economy. Central bank of Somaliland will lose “Seigniorage”  which is the profit gained from printing your own currency, instead the U.S  federal reserve will collect this tax effecting the GDP income.  In times of upheaval such as the 2008 banking crisis emergency funds from the central bank would not exist in a Dollarized economy and poor countries would be at the mercy of fluctuating international market which they aren’t part of due its reliance on high risk mobile banking.  Further more due to lack of a Cash reserve in Somaliland central bank it will have to burrow the money by running a “current account deficit”  or accumulate  “current account surplus”. In this case outflow of capital has been ongoing, the government overspent its budget from Somaliland development Fund in the most spectacular ways. For example £4.5m misappropriated funds by former Kulmiye finance minister (leasing UAE military base in Berbera) is still unaccounted for and no investigation has been forthcoming yet Somaliland current president is eager to hand over Osman Guelleh a major asset and citizen.

 

There are compelling reasons to do away with Shilling and commit to using the Dollar as currency but it would mean loss of autonomy, it would also mean dependence on unsteady globalised economy and losing hard won statehood . Given that Dollarization informally or formally comes with serious consequences for the future, emerging economies narrative of high risk and high returns should be mitigated by stringent laws. Strong  leadership is key component that can balance between national interest and volatile open market economy.

 

 

 

Fatheya Yallas

 

Political analyst MSc international Conflict.

 

 

 

 

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