Thursday, September 18, 2014

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A Stateless Currency?

The Somali Shilling is defying economic theory to remain the main currency of use in Somalia.
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When an individual gives another individual money for goods it seems like a two-way transaction, but there is a third silent actor: the state. The use of a banknote is dependent on the receiver’s level of trust in the issuing state. What would happen to that banknote if the state did not exist?

Somalia is the only place where this situation can be seen in practice. Even if other African countries have experienced state failure, they have never known the depth and the duration of the Somali state collapse. After Siad Barre's flight in 1991, all state institutions and infrastructures broke down. However, the local currency, the Somali Shilling, did not join them. Not only it has survived the absence of a central bank (which reopened only in 2009), but in relative terms it also performed more effectively in the stateless period, challenging many established theories on money.

Still circulating

Milton Friedman affirms that the state activities of printing and regulating the quantity of currency circulating are essential to prevent inflation from rising to an infinite level. Without a functioning state, seigniorage (the earning from forged money) would push private suppliers to print large quantities of banknotes. This would lead to an overflow of money into the economy, and thus to an endless spiral of inflation. The currency would be abandoned in favour of more stable ones. In 1991, that seemed the likeliest scenario for Somalia. However, 20 years later the Somali Shilling (So.Sh) is still circulating, and, according to a 2006 World Bank  report, it constitutes 80% of all the currency of the economy, alongside the US dollar, Ethiopian Birr, and  Somaliland Shilling, the official Somaliland currency since 1995.

The unexpected So.Sh survival is underpinned by a few interrelated elements. This is what emerges from the works of Professor Peter Little, in Somalia: Economy without a State, an anthropologist who conducted field research in southern Somalia before and after state collapse, and Jamil Mubarak, a Somali World Bank economist. From a social point of view, the Somalis have shown a persistent affection for the traditional appearance of the notes. When warlords started printing and importing forged currency from abroad, the most widely accepted notes were those that most resembled the pre-1991 ones. Furthermore, denominations higher than the existing were rejected. From an economic point of view, the So.Sh “degenerates into a pure commodity money”, Mubarak argues. He estimates that the production cost of printing and importing one unit of forged So.Sh was US$0.03 in mid-1990s.  In 1997, the So.Sh1,000 note, the highest denomination, was exchanged for US$0.12. However, in late 2001 the exchange rate dropped to US$0.04: producing So.Sh500 notes became counterproductive, and printing So.Sh1,000 notes was no longer more profitable than other enterprises. The best option would have been creating higher denominations, but knowing that they would not have been accepted by Somalis, many suppliers abandoned the activity. Therefore, the printing of forged money was self-limiting, and the infinite spiral of inflation was avoided. The inflow of US dollars, which entered into Somalia’s economy with the UN mandate and then with remittances, also contributed to the survival of the So.Sh. The dollar started working as a back-up currency, without replacing the local one completely because its denominations were too high to fulfil people’s needs for their everyday transactions.

Exchange rates

Beside surviving, the So.Sh also seems to have had an improved exchange rate trend after the state collapse. As data on the exchange rate for both the state and stateless period is not included in the main official datasets of the World Bank and IMF, different sources need to be used for the comparison.  Data from 1981 to 2000 was collected by Peter Little from local currency exchange markets. Data from 2000 onwards is available from the Food Security and Nutrition Analysis Unit-Somalia (FSNAU), which collects it to monitor food prices. Although caution is needed when analysing data from different sources, some comparisons can be made. The exchange rate increased from So.Sh18 /US$ in 1981 to So.Sh3,800 /US$ in  1990. In 1991, it soared to So.Sh6,000 /US$, then it reached So.Sh10,000 /US$ in  2000, and So.Sh25,000/US$ in  2002. In 2011, US$1exchanged for So.Sh35,000. To sum up, in the last period of Barre's rule the exchange rate soared from So.Sh18 to 3,800 /US$, a 21,000 % increase, while in the stateless period it has risen from So.Sh3,800 to 35,000 /US$, an 821% increase. Therefore, even when taking into account  accuracy failures and approximations, the size of the change can be grasped, and the fluctuation is seen to be wider in the last state period than in the stateless period. Apparently, the massive printing ordered by Barre in the late 1980s was more harmful than the seigniorage competition carried out by warlords after 1991.

Survival without stability

Despite that, the So.Sh is far from being stable.  According to the FSNAU Somalia, since 2007 the currency has risen 136 - 253% on the Consumer Price Index (depending on the region). However, rather than being the result of an overflow of banknotes into the economy, the present wave of inflation is due to the rise in prices deriving from scarcity in food supplies, both from agriculture and humanitarian aid, and to the new conflict intensification.

Somalia's local currency has survived the collapse of the state, and until now has persisted despite the challenging political and economic environment, avoiding the extreme inflation that some state-backed currencies encountered, such as the Zimbabwean dollar in 2008-2009.  This implies that if the state is gone, the public value that money holds in a society may remain, and that the absence of the state in Somalia does not equal a total vacuum of social institutions.

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Comments

Thanks for the insightful article Chiara. The Somali shilling just like the Somali people will never die, even if no one else bets on it/them.  A warrior dollar for a warrior nation of people.Peace

Somali people made it survive. They created a huge remittence system for billions of USD per year which also helped the economy of the country.

read DAS KAPITAL AND what is happening in Somalia will make perfect sense.  It will also validate Marx's prognostication that Capitalism must be superceded as it constantly shoots itself in the foot by revolutionizing the production process,  expelling human labour while insisting that value be measured in terms of to human labour time expended in generalized commodity production.   "Time is money" "you only live once"...these pithy nostrums have empirical substance.  As does the notion that commodities are worth the human labour time expended upon their production and that this can be measured at the macro level.   The more mechanized an econonmy the less value produced....recurrent crisis, falling rate of profit need to depress cost of human labour.  Make sense now?RR