The Devastating Local Currency and the Unofficial Dollarization in Somalia

Abstract

Currency devaluation and prevalent unofficial dollarization in Somalia inspired the volatility of exchange rate. U.S dollar has become a good choice to store the value to prevent the volatility of the Somali Shilling and its frequent devaluation. Almost all price tags of products and services are charged in dollar form including the salaries of public and private employees, taxes collected by the central government and FMS, rentals and school fees. Commercial banks deposit, lend clients and charge bank fees solely in USD. The only remaining one denominator of the Somali Shilling in the markets is heavy to carry, old and damaged to be in circulation and susceptible to be faked. The study employed time series analysis to investigate the volatility of the exchange rate and its relationship with the dollarization using daily nominal exchange rate data for the study period 2009–2018. Empirical results indicate that the exchange rate regime has no major consequence in promoting dollarization. Introducing new domestic currency is deemed very necessary, but considering the challenges faced by the weak central authority, such initiative is hard to be achieved in the near future.