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The monetary mechanism of stateless Somalia

Abstract

A peculiar monetary institution emerged during the period of interregnum in Somalia from January 1991 to August 2012. Without a functioning government to restrict the supply of notes in circulation, Somalis found it profitable to contract with foreign printers and import forgeries. The exchange value of the largest denomination Somali shillings note fell from US $0.30 in 1991 to US $0.03 in 2008. However, the purchasing power eventually stabilized at the cost of producing additional notes.

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Fig. 1

Notes

  1. 1.

    See, for example, Alesina and Summers (1993), McCallum (1995), and Fischer (1995).

  2. 2.

    The idea is usually associated with Rogoff (1985) and has spurred much research. More recently, Guzzo and Velasco (1999) find cases wherein a populist central banker might be desirable. See also Jerger (2002).

  3. 3.

    See Walsh (1995) and the large subsequent literature.

  4. 4.

    I refrain from using the term “counterfeit,” which denotes the illegal imitation of a currency. Lack of an obvious legal authority in Somalia over the period considered makes it unclear whether issuing forged notes is illegal.

  5. 5.

    Previous works have considered self-governing monetary institutions (e.g., Selgin 1988, 1994; White 1984). However, these works typically assume that a government exists to secure property rights and enforce contracts, thereby enabling the monetary institution to function tolerably well.

  6. 6.

    Marshall and Jaggers (2010) classify Somalia as “interregnum” over the period.

  7. 7.

    Both views are consistent with standard search-theoretic random matching models of money (e.g., Kiyotaki and Wright 1989, 1991, 1993; Li and Wright 1998; Aiyagari and Wallace 1997).

  8. 8.

    The 1000 shillings note was the largest denomination in circulation at the time the state collapsed. Other notes in circulation included those with nominal values of 5, 10, 20, 50, 100, and 500 Somali shillings.

  9. 9.

    Ali Mahdi Muhammad issued 80 billion Somali shillings in 1991. Although one might argue that he did not have the legal authority to issue notes, the notes in question were not forged. They had been ordered by the Barre regime in December 1990.

  10. 10.

    See: Mubarak (2003, p. 318, fn. 11) and Symes (2006, p. 26).

  11. 11.

    A settlement payment of 2.5 billion Somali shillings (US $250,000 in 1999) to Hussein Aideed on the condition that he not block efforts to import the remaining balance of forged pre-1991 notes provides additional evidence as to the profitability of the transaction (Abdurahman 2005, p. 59).

  12. 12.

    The difference is quite subtle. However, one can spot this variant by looking at the purple centered number 1000, which is green on original and all other known forged variants (Symes 2006, p. 27).

  13. 13.

    Mubarak (2003) and Abdurahman (2005) refer to these notes as Na′ and N′ shillings, respectively.

  14. 14.

    Symes (2006, p. 25) discusses similar design elements found in the old and new shillings notes.

  15. 15.

    At the end of 1990, 50 shillings exchanged for roughly US $0.01.

  16. 16.

    Mubarak (2003, pp. 321–322) discusses the problem at length, including exchange difficulties arising from the one-note system. See also Luther (2012).

  17. 17.

    The World Bank stopped collecting exchange rate data after the state collapsed in 1991. Other sources of exchange rate data include Abdurahman (2005), which produces end-year exchange rates from 1971 to 2001, and SAACID (2012), which produces monthly exchange rates from Mogadishu’s Bakara market between 2007 and 2012. Both sources are consistent with the data presented herein and are available from the author upon request. The reader is cautioned to avoid Forex data. Although the ISO 4217 currency code SOS still refers to the Somali shilling, Forex uses SOS to refer to the Somaliland Shilling, which has not been issued a unique currency code.

  18. 18.

    FSNAU (2012) also provides exchange rates with the Kenyan shilling.

  19. 19.

    Exchange rates for Bay are unavailable in December 1999 and equaled $US 0.155 in January 2000. In calculating the non-Bay average for February 2000, the exchange rate for Sanaag is omitted; whereas 1000 shillings exchanged for US $0.0011 in Sanaag, it ranged from US $0.100 to US $0.116 in the other nine regions for which data is available.

  20. 20.

    Average exchange rates for January 1996, 1999, and 2001 are calculated from Banadir, Bari, Gedo, Lower Jubba, and Middle Shabelle—the only regions for which data are available in all three months.

  21. 21.

    According to Mubarak (2003, p. 317), it was common to introduce notes at a five percent discount. It is not known how the standard discount varied over time, but notes ultimately were traded at face value.

  22. 22.

    The case of Munich-based Giesecke & Devrient, the printing house supplying blank sheets to Zimbabwe during its period of hyperinflation, illustrates the potential for public pressure. After being denounced by German foreign minister Frank-Walter Steinmeier in July 2008, the company agreed to stop deliveries. Concerning fear of personal harm, it is rumored that at least one ex-Malaysian military officer brokering a deal between Hussein Aideed and a foreign printing house was tortured and killed when negotiations went sour.

  23. 23.

    If Togdheer is excluded, the average falls to US $0.0315.

  24. 24.

    Monthly exchange rates are unavailable for Banadir in September 2008 and Hiraan in April 2009.

  25. 25.

    The Erigavo (Sanaag) and Lasanod (Sool) markets are located in the contested territory claimed by both Somaliland and the Puntland Administration. All other markets considered are set in northeast or southern Somalia.

  26. 26.

    January 2012 is the last month in which Somali shillings to USD exchange rates were collected for Togdheer.

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Acknowledgments

I am indebted to Peter Boettke, Peter Leeson, George Selgin, David Skarbek, Richard Wagner, and Lawrence H. White for providing valuable comments on an earlier draft of this paper. The usual caveats apply.

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Correspondence to William J. Luther.

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Luther, W.J. The monetary mechanism of stateless Somalia. Public Choice 165, 45–58 (2015). https://doi.org/10.1007/s11127-015-0291-6

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JEL Classification

  • E42

Keywords

  • Institutions
  • Monetary regime
  • Monetary standard
  • Somalia
  • Somali shilling
  • Purchasing power