Somalia's Mighty Shilling: Hard to Kill - The Economist

[Constantine MMX]

A currency issued in the name of a central bank that no longer exists

USE of a paper currency is normally taken to be an expression of faith in the government that issues it. Once the solvency of the issuer is in doubt, anyone holding its notes will quickly try to trade them in for dollars, jewellery or, failing that, some commodity with enduring value (when the rouble collapsed in 1998 some factory workers in Russia were paid in pickles). The Somali shilling, now entering its second decade with no real government or monetary authority to speak of, is a splendid exception to this rule.

Somalia’s long civil war has ripped apart what institutions it once had. In 2011the country acquired a national central bank under the remit of the Transitional Federal Government. But the government’s authority does not extend far beyond the capital, Mogadishu. The presence of the Shabab, a murderous fundamentalist militia, in the south and centre of the country, makes it unlikely that Somalia will become whole anytime soon. Meanwhile, 2.3m people are in need of edible aid. Why, then, are Somali shillings, issued in the name of a government that ceased to exist long ago and backed by no reserves of any kind, still in use?

One reason may be that the supply of shillings has remained fairly fixed. Rival warlords issued their own shillings for a while and there are a fair number of fakes in circulation. But the lack of an official printing press able to expand the money supply has given the pre-1992 shilling a certain cachet. Even the forgeries do it the honour of declaring they were printed before the central bank collapsed: implausibly crisp red 1,000-shilling notes, with their basket weavers on the front and orderly docks on the back, declare they were printed in the capital in 1990.

Abdirashid Duale, boss of Dahabshiil, the largest network of banks in Somalia, says that his staff are trained to distinguish good fakes from the real thing before exchanging them for dollars. Others accept the risk of holding a few fakes as a cost of doing business (shillings are often handed over in thick bundles of 100 notes). By this alchemy, an imitation of a thing which is already of notional value turns out to be worth something.

Shelling out shillings


A second reason for the shilling’s longevity is that it is too useful to do away with. Large transactions, such as the purchase of a house, a car, or even livestock are dollarised. But Somalis need small change with which to buy tea, sugar, qat (a herbal stimulant) and so on. Many staples are not produced domestically, making barter impractical. The shilling serves as well as shells or beads would as a medium of exchange. It also has a role as a secondary store of value. Once a year the economy gets an injection of dollars when goats are sold to Saudi Arabia to feed pilgrims undertaking the haj. Herders need to find ways to save money received then for spending over the next year. The shilling is one of them.

The shilling has a further source of strength. Since each party to a transaction is likely to be able to place the other within Somalia’s system of kinship, the shilling is underpinned by a strong social glue. Paper currencies always need tacit consent from their users that they will exchange bills for actual stuff. But in Somalia this pact is rather stronger: an individual who flouts the system risks jeopardising trust in both himself and his clan.

Having survived against great odds, the shilling now faces a serious challenge in the form of dollars transferred by mobile phone. Zaad, a mobile-money service, allows users to pay for goods by texting small amounts of money to a merchant’s account, and is proving popular in Mogadishu. But the shilling’s endurance suggests it should not be counted out. If it can survive without a government, it can probably brush off modern technology, too. - Source

[Xusein]

Apparently the shilling has apperciated significantly since the oil exploration has started, which is contrary to logic.

[Constantine MMX]

I'm more surprised that the currency has stayed relevant despite all the ish it went through. When the Central Bank is in a better position and the construction boom starts it will be a major player in Africa, its already transnational (Somali merchants):

the SoSh's stability is reflected by the fact that in parts of neighboring Ethiopia the SoSh is more extensivly used than Ethiopia's own currency (:2003 :144) In fact prior to the last large monetary injection in Somalia in march 1999 and in 2000 the SoSh showed greater stability than the currencies of Ethiopia and Kenya from 1996 february to 1999 the SoSh depreciated against the US$ only 12.14%, between 1996-1999 the Kenyan shilling lost 32.55% against the US$ and the Ethiopian birr depreciated against the dollar 26.58% - Peter Leeson (PDF)

[Constantine MMX]

Elaborate discussion about the Economist's article on the Keiser Report:

In this episode, Max Keiser and co-host, Stacy Herbert debt fondue and Central Banks. They also talk about Somalia's stable shilling and the lesson it holds for Europe. In the second half of the show Max talks to professor and economist, Constantin Gurdgiev about the new book of essays he's edited - What if Ireland defaults? They discuss the good cop, bad cop routine by the Troika in Ireland and what lessons can be drawn from the Russian default of the late 90's.