the effect of dollarization on small businesses in Somalia
After the collapse of the central government of Somalia in 1991, fallowed by immediate civil war breakout. the country is still suffering from the consequences of the war in present day after almost three decades, one of the severest consequences in the aftermath of the war is the collapse of central bank of Somalia(CBS) since then the country dramatically adopted dollarization, that in today the exchange rate of Somali shilling(ssh) against the US dollar is 25000ssh, and there is only one remaining item of the shilling out of seven denominations it used to be in the early days, and only small payments is used for the shilling today.
back in the day, the idea of adopting the dollar as a medium of exchange come out for mainly two reasons, firstly, the confidence of the people on local currency was destroyed due to the vulnerability of the shilling to be forged easily because the lack of regulatory body(central bank) to administer the supply and the demand for money, secondly, the shilling experienced excessive devaluation since the start of the war, as a result it become unavoidable for people to carry their money(Somali shilling) in large fragile bundles which was difficulty for security purposes(dr.Mohammed ibrahim).
the amount of dollar circulating the economy is estimated around (200-250)million, and the amount of shilling circulating the economy is 60 million, the imbalance between the two currencies is what soars the inflation rate of the shilling and made it perform poor against the US dollar in the exchange market. and it led to an absolute failure to achieve price stability in the local market.
although some economists have argued that the dollarization helps countries to obtain price stability(monetary stability) attraction in investment, lower interest rate, and an increase in international trade due to the reduction in transaction cost of international trade. yet, though i am not in position to say that the dollarization has done more harm than good,but has done more harm in the economy of Somalia specially for small businesses.
the severe devaluation of the shilling against the dollar has put many citizens under the poverty line because the majority of small businesses and minor workers(xoogsato) are paid in the shilling for their earnings, for instance, if they go all the day out for work, they may just earn an average of 100shilling(which is rare and glory day for them) but its just $4 in the exchange market, as a result they probably fail to purchase and deliver basic goods like, food, shelter and cloth to their respected families,
as the adjusted inflation is estimated around 3%, they live in poverty with their per day earnings while they may be working all the sunrise out, that is why they are discouraged to come in the market and exist early if they try starting new businesses.
if the shilling appreciates(its value raises) against the dollar, then arguably the standard of living of so many citizens will fallow positively, and it will encourage small businesses to grow vastly.
a study conducted by Ahmed Mahdi and Mohamed Omar of ADMAS university in hargeisa concluded that empirically there is a negative relationship between dollarization and poverty, unemployment and inflation as well for somaliland, and that, the dollarization has severely damaged small enterprises in hargeisa , same can be true in Mogadishu arguably, although the exchange rate differs slightly between the somaliland shilling(slsh) and Somali shilling(ssh) in comparison with the dollar, i believe Mogadishu can claim more harm than hargeisa when it comes to the effect of dollarization on small businesses due to the fact of their difference in security and political stability.
its believed what makes the situation worse is that local goods sellers intend to increase the price of basic goods when the exchange rate increases, but not decrease the price of basic goods when exchange ate decreases, because of nothing but to increase profits, to make the situation worse, and there is no effective regulatory body which supervises the efficiency of the market to balance between the supply and demand for goods and the amount of money circulating into the economy.
so what is the solution. its recommended the best possible way out of the situation is the exercise of basket of foreign currencies whilst developing ideas to attain strong domestic currency. the policy makers and business community should step forward to at least lessen the reliance of US dollar which is weakening globally.
Contact: cadhiye1@gmail.com
back in the day, the idea of adopting the dollar as a medium of exchange come out for mainly two reasons, firstly, the confidence of the people on local currency was destroyed due to the vulnerability of the shilling to be forged easily because the lack of regulatory body(central bank) to administer the supply and the demand for money, secondly, the shilling experienced excessive devaluation since the start of the war, as a result it become unavoidable for people to carry their money(Somali shilling) in large fragile bundles which was difficulty for security purposes(dr.Mohammed ibrahim).
the amount of dollar circulating the economy is estimated around (200-250)million, and the amount of shilling circulating the economy is 60 million, the imbalance between the two currencies is what soars the inflation rate of the shilling and made it perform poor against the US dollar in the exchange market. and it led to an absolute failure to achieve price stability in the local market.
although some economists have argued that the dollarization helps countries to obtain price stability(monetary stability) attraction in investment, lower interest rate, and an increase in international trade due to the reduction in transaction cost of international trade. yet, though i am not in position to say that the dollarization has done more harm than good,but has done more harm in the economy of Somalia specially for small businesses.
the severe devaluation of the shilling against the dollar has put many citizens under the poverty line because the majority of small businesses and minor workers(xoogsato) are paid in the shilling for their earnings, for instance, if they go all the day out for work, they may just earn an average of 100shilling(which is rare and glory day for them) but its just $4 in the exchange market, as a result they probably fail to purchase and deliver basic goods like, food, shelter and cloth to their respected families,
as the adjusted inflation is estimated around 3%, they live in poverty with their per day earnings while they may be working all the sunrise out, that is why they are discouraged to come in the market and exist early if they try starting new businesses.
if the shilling appreciates(its value raises) against the dollar, then arguably the standard of living of so many citizens will fallow positively, and it will encourage small businesses to grow vastly.
a study conducted by Ahmed Mahdi and Mohamed Omar of ADMAS university in hargeisa concluded that empirically there is a negative relationship between dollarization and poverty, unemployment and inflation as well for somaliland, and that, the dollarization has severely damaged small enterprises in hargeisa , same can be true in Mogadishu arguably, although the exchange rate differs slightly between the somaliland shilling(slsh) and Somali shilling(ssh) in comparison with the dollar, i believe Mogadishu can claim more harm than hargeisa when it comes to the effect of dollarization on small businesses due to the fact of their difference in security and political stability.
its believed what makes the situation worse is that local goods sellers intend to increase the price of basic goods when the exchange rate increases, but not decrease the price of basic goods when exchange ate decreases, because of nothing but to increase profits, to make the situation worse, and there is no effective regulatory body which supervises the efficiency of the market to balance between the supply and demand for goods and the amount of money circulating into the economy.
so what is the solution. its recommended the best possible way out of the situation is the exercise of basket of foreign currencies whilst developing ideas to attain strong domestic currency. the policy makers and business community should step forward to at least lessen the reliance of US dollar which is weakening globally.
Contact: cadhiye1@gmail.com
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