Congratulations: The shutting down the Dollar Denominated E-Money was long overdue ZAAD and E-DAHAB were creating fictitious demand for the Dollar, and causing steep depreciation of the Somaliland Shilling. The common man in the street was made to believe that he needs USDs to buy food or pay for his kids school fees. Last October, I happened to be in Hargeisa and the waiter of the hotel where I stayed asked for 2 dollars. I asked him why he needed the two dollars. He told: I need them to recharge my mobile phone. This guy was made to understand that in order to make a couple of calls, he has no option but to first own 2 United States dollars – that is sheer nonsense. A couple of days after that, I returned to Saudi Arabia and landed at Riyadh Airport. However, I realized that I have no Saudi Riyal notes and offered the Taxi driver 50 dollar. The driver laughed and asked me what this money is? He has probably never seen a USD note before and could not recognize it. He also he rejected to accept the dollar note and insisted on being paid in his country’s currency.
The people of Somaliland were taken for long ride. One of the main reasons behind the depreciation of the Somaliland Shillings is the introduction of USD denominated E-money. This week, the Government of Somaliland has literally shut down the dollar denominated electronic money and the operators were told to shift to the SLS E-Money. This step was long overdue but has finally arrived – at last. The Government has also revoked the exchange licenses of leading exchange houses like DAHABSHIIL OOMAAR, TELESOM etc. It is worth noting that these companies and others are licensed to carry out other economic activities. For instance, OOMAR is food and building material importer, DAHABSHIIT is money Transfer Company, and TELESOM are Telecommunication providers. But over the years they have transformed into mega foreign exchange giants and literally took control of the exchange market. In the process, they were capable of fixing the rate as and when they like. These sharks have somehow involved into mammoth de facto foreign exchange market houses. The private banks (DAHABSHIIL INTERNATIONAL BANK AND ALSALAMA BANK) were also instructed to stay away from the business of money exchanges – they are another type of sharks that would control the market and fix prices in pursuit of quick profits.
The tactics adopted by the Somaliland government are rather primitive and unorthodox but were necessitated by the absence of any other normal tools of government supervision and control of the foreign exchange and inflation etc. The government does not issue Treasury Bills, and has no control over interest rates etc. In the circumstances, they resorted to the only tools at their disposal as follows: The government has decided to empower the small exchange traders to undertake the business of foreign currency exchange. The reasons are as follows: A) The small exchangers operate in every corner of the country – broad-based. B) These small exchanger operate in open and active market where the consumer can easily shop around. C) The small exchangers represent a classical example of open, active market were the market players are free, willing, knowledge of the going price and actually operating in a competitive environment. D) The small operators are undercapitalized and fragmented and tghey cannot control market and agree to fix the Forex rates. Only such an open and broad-based market can stop the hoarding and cornering the foreign currency by a few big players who were literally dictating the rate of the dollar.
Another major step that the government has recently taken is fixing the USD rate at 7000. However, in my opinion, fixing foreign exchange rates have previously failed and will backfire. We are fully aware that Somaliland is not a recognized state and we are not part of the international banking system. The Government also lacks the traditional monetary and fiscal controls that are normally used to stabilize the exchange rates and inflation etc. This means they have to operate in unchartered waters and created homemade solutions. But, fixing the FOREX rate through a memorandum will only create more problems. For instance, no one in his own mind will accept to buy One dollar at 8000 SLS, sell the same dollar for 7,000, and incurred a loss of 1,000 SLS. Such a policy if applied would create a US black market and negatively impact the economy. At the present stage, the government should leave the dollar rates to the market – operated by small, broad-based, and actually competing players. The other possible solutions are of long term and cannot be covered in this small note.
Finally, in order to curtail the inflation and the ever-increasing prices of the essential products, the Somaliland government should implement the following system which has been proven and had profound effects. This step was recently tested in Saudi Arabia and it helped maintain the prices of consumer products.
This system is called PRICE TAGS. The importers of the 4 major food products (rice, flour, veg oil, and sugar) should be asked to affix price tags on their products at the port entry (price aimed at the consumer or the end user). However, the Price Tag of the imported product should be stated in foreign currency. This is because since the importer has bought the goods in foreign currency we should ask him or her to add their profit margin without going through the exchange rates movements. Consequently, we would know the profit margins that the importer, the wholesaler, and retailer are charging the ultimate consumer. Suppose an importer bought a shipment of rice from Thailand and the goods arrived at Berbera at 500 USD per ton. This means the 50 kilo sac cost him 25 dollars. However, the same 50 kilo sac of rice could carry a price tag of 31.25 calculated as follows:
– Cost of the 50 kilo of rice to port of entry = 25 – Add say 10% profit margin of the wholesaler = 27.5 – Add 5% transport &’distribution cost = 28.75 – Add 10% middlemen and retailer profit margins = 31.25 – Therefore, the 50 kilo sac of rice should carry a price tag of USD 31.25
It should be mandatory that no importers, wholesalers, retailers or anybody else could sell this sac for more than the tag price. Equally, no one should sell the products for other than the local currency. The Ministry of Commerce should closely monitor the situation and price violators should be severely penalized. The consumer should be offered a uniform and fixed price (in USD) and since he is fully aware of the prevailing exchange rates, and he can easily calculate the actual price in SLS. Once again it should clear that no one can sell any goods or service in a foreign currency. Finally the government should set up THINK-TANKS that could formulate long term and strategic solutions for the inflation and the high in foreign exchange rates etc.
Hassan Abdi Yousuf