Background to the Central Bank of Somaliland
It was under the late President, Mohamed Ibrahim Egal that Somaliland created the Central Bank of the Republic of Somaliland based in the capital Hargeisa. Although the Head Office of the Central Bank has always been based in the capital, Hargeisa, the Central Bank has seven other branches, and four foreign exchange offices in regional capitals such as, Berbera, Boorama, Lasanood, Burao and Erigavo as well as an exchange office in the border town of Wajaale.
President Egal foresaw the Central Bank as serving as both a monetary authority and a commercial bank for the country. The Somaliland Central Bank was one of the first institutions in the country enshrined in Somaliland’s Constitution. In line with Article 3 of the Constitutive Law of Somaliland Bank, the Central Bank of Somaliland is responsible for:
- Maintaining price and exchange rate stability
- Promoting credit and trade condition which support balanced economic growth
- Supporting the economic and financial policies of the government where possible
In 2012, under the Ahmed Mohamed Mohamoud “Silanyo” presidency, Somaliland’s parliament passed the Central Banking Act into law. According to the 2012 Central Banking Act law, the principal objectives of the Central Bank of Somaliland includes:
“… fostering monetary stability, maintaining the internal and external value of the Somali shilling, and promoting credit and exchange conditions conductive to the balanced growth of the economy of the Republic, and within the limits of its powers, it shall contribute to the financial and economic policies of the State.”
In the aftermath of the Central Banking Act, it was expected that the Somaliland legislative branch would sign into law the Commercial Banking Act, according to the former governor of Somaliland’s Central Bank, Abdi Dirir who spoke to Reuters in 2012. According to SomalilandBiz’s sources, the draft Commercial Banking Act continues to languish in the House of Representatives six years after it was intended to be passed. Nor is it clear whether the Somaliland Central Bank will process applications for licenses of Islamic Banks until the Commercial Banks Law is promulgated.
The New Administration and the Central Bank of Somaliland
Since the advent of a Kulmiye-led government, first under President Ahmed Mohamed Mohamoud “Silanyo” and President Musa Bihi Abdi, Somaliland’s populace has suffered from dangerously high levels of inflation. Widespread inflation has been exacerbated by the fact that the Somaliland Central Bank does not control the hard currency in circulation in Somaliland. It is under this backdrop that on the 21st April 2018, the current President, Musa Bihi Abdi named a new Governor to the Somaliland Central Bank. According to the Somaliland News Agency (SOLNA) the president through decree number RSL/XM/WM/222-83/042018 has announced the hiring of a new Governor and Chairman of the Central Bank of Somaliland, Ali Ibrahim Jama (Bagdhadi). This move is seen as the government’s latest attempt to combat the inflation levels that are crippling Somaliland’s economy and causing the price of consumer goods and the cost of living to skyrocket.
Observers point to a pattern of the current administration empowering the Central Bank of Somaliland since President Bihi’s inauguration where he spent a large portion of his inauguration speech touching on his administration’s plans to combat inflation. This is also proven by the Central Bank of Somaliland’s ultimatum on 16th April 2018 to all private financial institutions to register at the Central Bank. These same private financial institutions which includes; private banks, money transfer services, payment providers and foreign exchange traders are also required to renew their operating licenses within 3 weeks to ensure they meet the ultimatum. Analysts point to the boldness of the new government’s policy programme for tackling inflation. The Central Bank of Somaliland now has a new executive leadership, including a new Governor and a new Tender Board. If the current administration of President Bihi can empower the Central Bank to become a genuine monetary authority in the country, then this will go a long way towards reaching President Bihi’s campaign promise to successfully combat inflation.
Potential Developments for the Central Bank of Somaliland
There are developments that are ensuring that the current cabinet remains confident of reaching its inflation related goals. One such development can be found in the aftermath of President Bihi’s state visit to the UAE in March 2018 when the President informed Reuters that he expects the UAE government will make a hard currency deposit into Somaliland’s Central Bank. Although there was no definitive agreement, recent developments in relation to Somaliland’s relations with the UAE show that this hard currency deposit is very likely. On 23rd April 2018, the UAE took the unprecedented step of accepting Somaliland Passports exclusively following the visit of a high-powered 12-man delegation to the President’s Office in Hargeisa the day before. If the UAE government deposit tens or hundreds of million in dollars or dirhams into Somaliland’s Central Bank, then this will go a long way to increasing the Central Bank’s foreign currency reserves in USD and/or Dirhams. In turn this will play a key role in combating the high levels of inflation that are plaguing Somaliland’s legal tender, Somaliland Shillings. This is because the greatest challenge causing Somaliland’s high inflation levels include the existence of a parallel exchange rate. This access to hard cash and forex currency for Somaliland’s Central Bank will mean that the government will not have to resort to setting the official exchange rate which in turn will stifle Somaliland’s resilient and vibrant free market economy.
Next Steps For The Government
In conclusion, if the current government is serious about combating inflation then they will need to ensure the privatization of the banking sector by passing the long awaited Commercial Banking Act which has remained stationary in Somaliland’s House of Representatives since 2012. Since the delay, Somaliland has seen the explosion of mobile banking services which have penetrated the entire population and caused Somaliland’s economy to become increasingly dollarized. Without a Commercial Banking Act enshrined in law, only Somaliland’s Central Bank is legally allowed to act as a commercial bank which it barely does. This in turn means that consumers are hoarding their savings and money either in hard cash or on mobile banking services. This not only serves to undermine the local currency and dollarize the economy, but it also exacerbates the high levels of inflation already holding back Somaliland’s economy from reaching its full potential.