TABLE OF CONTENTS
EVOLUTION OF THE EXCHANGE RATE PROBLEM IN SOMALIA
AND REGIMES OF EXCHANGE RATES
SUPPLY, EXCHANGE RATES AND INFLATION
CURRENCY BOARD SYSTEM FOR SOMALIA
CHRONOLOGY OF THE CIVIL WAR
in Exchange Rates 1977 – 1998
Supply 1981 – 1989
Credits 1981 – 1989
Supply, Parallel Exchange Rates and Inflation rates 1985 – 1989
This review of Somalia’s experience with
monetary and exchange rate polices over the period 1960 – 1990
was originally written as my Maters Thesis for a graduate program
in Administration conducted jointly between the Somali Institute
of Development Administration and Management and the State
University of New York at Albany.
It has been updated and revised, especially the last
chapter, so as to take into account developments since 1991.
program was funded by U.S. Agency for International Development
and was intended to train top Somali administrators.
Unfortunately, the completion of the program coincided with
the outbreak of the civil war.
As a result, of the fifty-five graduates we were, only
three returned in Somalia, four remained in U.S.A. and the rest of
us headed to Canada where we joined an already large Somali
community in Toronto and Ottawa.
has been written about Somalia in the last eight years; about its
history, politics, civil war, clans, warlords, famine, the
humbling of the United Nations etc, but little was written, as far
as I know, about monetary issues.
By publishing this work, I, therefore, intend to provide
some insight into the past monetary experience of Somalia in the
hope that some lessons will be drawn from it.
would like to thank my instructor David McCaffrey for his advice.
I would also like to thank Mr. Ali Khalif Galayr who
encouraged me to publish this book.
During the 1980s the Somali shilling
had suffered from large and continuous devaluations.
These devaluations, in turn, added to the inflationary
pressure, eroded the purchasing power of money and caused a
chaotic financial situation that, according to many observers, was
the decisive factor contributing to the downfall of General
Mohamed Siad Barre’s government.
underscore the importance of exchange rates, Professor Robert
Mundell, a renowned international currencies expert, warned that
“if there is a single issue that could lead to the break up of
Canada, it’s the exchange rate.”
He argued that Quebec may realize that it could be better
off by fixing an independent currency to the U.S. dollar instead
of sharing an unstable Canadian dollar1
is the exchange rate? And
why is it so important? The
exchange rate is the price of a currency in terms of other
currencies. It is the
most important price, perhaps the single most important price in
the economy. In fact,
the exchange rate is regarded as a barometer, which measures the
relative strength of an economy over time.
Well-performing and successful economies are judged by the
strength and firmness of their currencies; while less successful
and crisis-ridden economies are associated with soft and
depreciating currencies. The
fact that the Somali shilling had depreciated from So.Sh.
6.23 per US dollar in early 1970s to SoSh. 6,000 at the end
of 1990 is held as a proof of the gross economic mismanagement
done by the previous government.
exchange rate is also important because it profoundly affects the
standard of living of the population.
In a small open economy like Somalia, where almost
everything is imported, a depreciating currency raises the
domestic prices of imported goods and thus reduces the purchasing
power of money, and finally erodes the real income of the
population, especially the poor.
the exchange rate heavily affects the cost of external debt
servicing which is crucial for Less Developed Countries.
In fact, large devaluations lead to exorbitant debt
servicing costs in terms of the local currency, which in turn lead
to higher fiscal deficits and further inflationary pressures and
exchange rate devaluations.
rates, also, have broad and pervasive effects on the economy.
The are not only an instrument for achieving balance of
payments equilibrium, but also a key instrument in the allocation
of scarce resources within sectors in the economy, between
domestic and external sectors and even between regions of the same
Central Bank of Somalia was the authority legally responsible for
the conduct of exchange rate policy.
One of the bank’s objectives, as written in its statutory
law was to safeguard the external value of the Somali shilling2
Despite this clear mandate, decisions regarding exchange rate
policies were either assumed by the minister of finance, or the
practice, however, exchange rate changes were most of the time
dictated by the International Monetary Fund, or the parallel
market (black market).
purpose of this book is to document the exchange rate policies
pursued by the government of Somalia in the last thirty years and
look for lessons from past policy mistakes.
One important lesson to be learned is that the process of
money creation must be kept outside the control of the politicians
not only to achieve exchange rate stability but also to reduce the
scope for corruption and abuse of power.
That is why I recommend the introduction of a currency
board system in Somalia, a system that constrains the ability of
politicians to print money at will.
book is organized in four chapters.
The first chapter traces the evolution of the problem of
exchange rate instability in Somalia, looking into all different
phases through which the Somali shilling had gone over the years.
second chapter reviews some of the literature on the exchange rate
determination as well as exchange rate regimes.
There are several theories explaining the rationale behind
exchange rate movements. These
will be briefly reviewed along with the different exchange regimes
that existed in Somalia.
third chapter analyzes data on money supply, inflation rates, and
exchange movements. The
analysis will concentrate on the relationship between growth in
money supply on the one hand, and inflation and exchange rate
depreciation on the other.
fifth chapter offers recommendations for dealing with exchange
rate stabilization. In
particular, it proposes the introduction of the currency board
system in Somalia as a way to stabilize the exchange rate.
an annex is provided at the end of the book with a chronology of
major events that happened since 1991.
EVOLUTION OF THE EXCHANGE RATE
the Second World War, Britain occupied the Southern part of
Somalia, which was until then an Italian colony.
The Northern part of Somalia was, and remained, a British
that period the British Administration introduced the East African
shilling to Somalia. The
latter circulated in Kenya, Uganda and Tanganyika.
The East African Shilling (E.A.Sh.) was issued by the East
African Currency Board, based in Nairobi, Kenya, and had a gold
parity of .0124414 grams, which was equivalent to an exchange rate
of E.A.Sh. 7.14 per US dollar or E.A.Sh. 20 per UK pound.
In 1950 the Southern part of Somalia
was transferred to Italian Trusteeship Administration under United
Nations supervision. The
Italian Administration followed the example of the British.
They introduced a currency board
“Cassa per la Circolazione Monetaria della Somalia”
and issued a new currency called “Somalo”, which had
the same gold parity as the E.A.Sh. and the same denominations,
namely 5, 10, 20, and 100 shilling banknotes; and 1.00 Somalo; 50,
10, 5, and 1 cent coins3
On July 1, 1960, Italian Somalia and
British Somaliland, after attaining independence, united to form
the Republic of Somalia. On
the same day the Somali National Bank was established and the
currency was renamed as the Somali Shilling (So.Sh.), with a gold
parity of .0124414 grams or So.Sh. 7.14 per US dollar, the same as
the E.A.Sh. and the Somalo, and with full backing of foreign
In 1968 the requirement of covering
the currency in circulation with foreign reserves and gold was
In October 1969, General Mohamed Siad
Barre seized power in a military coup. One year later, the
military regime declared Scientific Socialism and nationalized all
major economic activities. Of
particular importance was the nationalization of four foreign
owned commercial banks, namely Banco di Roma, Banco di Napoli,
National and Grindlays Bank and Banque de Port Said.
Out of the nationalized banks came two new government owned
banks, the Somali commercial Bank and the Somali Savings and
In 1975 a mini reorganization of the
banking system was carried out.
The two banks were amalgamated into one bank, the
Commercial and Savings Bank of Somalia (SCSB), which remained the
only commercial bank in the country until it collapsed in 1990 and
dragged the whole financial system down.
Furthermore, the Somali National Bank’ name was changed
to Central Bank of Somalia.
In January 1991 Siad Barre was ousted
from power and forced to flee from the capital.
Since then Somalia had no central government and no
monetary authority. At
present, the country is divided into four or five mini zones
controlled by clan based factions.
From 1991, some faction leaders
started issuing their own separate banknotes, which circulate only
in their mini-zones of influence. The first was Ali Mahdi, the
Mogadishu North faction leader who introduced a new currency, the
“N” currency, which was planned and ordered by the former
Also, M.I. Egal the president of the “Somaliland Republic”, in
Northwestern Somalia, issued his own currency called the
“Somaliland shilling” and Mogadishu South faction leader
Hussein Aideed issued notes similar to the old Somali shillings.
In June 1998, a new regional state “The Puntland State”
was established in Northeastern Somalia.
Probably it too will introduce its own currency in due
years of stability 1960-1970
the decade of 1960s the So.Sh. Displayed a remarkable degree of
official rate remained fixed at its declared gold parity and the
country adhered firmly to the fixed exchange rate system.
Under such a system countries could devalue or revalue
their currencies only under conditions of “fundamental
disequilibrium” and with the consent of the International
Monetary Fund (IMF). 6
The stability of the So.Sh. can be
better gauged by the absence of a parallel market rate of any
significance and the reduced level of restrictiveness of the
exchange control system during the period under review.
Nevertheless, economic conditions were not without strains.
In 1964 a severe balance of payments situation emerged.
An overall deficit of So.Sh. 60 million was recorded in
1964 and the trade deficit reached an all time high of So.Sh.
202 million. In
1965 net foreign reserves dropped to an uncomfortably low level of
So.Sh. 5.8 million. Several
factors were responsible for the strained balance of payments
conditions. In early
1964, there was a border clash with Ethiopia, drought had struck
in many parts of the country and the United Kingdom terminated its
aid to Somalia following a break up of diplomatic relations
between the two countries7
In 1965 the authorities adopted a
comprehensive stabilization program under a stand by arrangement
from the International Monetary Fund.
The program relied on credit control as an instrument of
stabilization, which proved very successful.
So successful was the program that 1971-73 development plan
document had to not: “The
economic picture, as the 1971-73 plan gets underway, is reasonably
bright, consumer prices are stable, the trade deficit is
improving, the government’s budget for this year is in balance.
The national foreign exchange reserves are at a ten-year
pegging of the Somali shilling
In 1971 the US dollar crisis
disturbed the international monetary system.
On August 15, 1971 the US government suspended the
convertibility of the US dollar into gold and devalued the dollar
establishing a new parity of US$ 38 per ounce of fine gold.
Many countries followed the example of the US government
and devalued their currencies.
Somalia, however, did not devalue and the new So.Sh/US$
exchange rate became So.Sh. 6.91 per US dollar.
On June 23, 1972 the British authorities decided to float
the pound sterling. The
floating of the pound Sterling and its continued deterioration
caused many difficulties to the Somali exporters, because the
pound was the major export currency, particularly for the
livestock sector. To
cope with this problem, the Central Bank of Somalia introduced a
system of differentiated spreads between buying and selling rates
ranging from 2.3 to 4.5%.
In 1973 international foreign
exchange markets experienced unrest.
The US dollar was further devalued and finally the Bretton
Woods system broke down, and was replaced by a floating exchange
Again, Somalia did not deem it necessary to follow the US dollar
devaluation and therefore the So.Sh./US$ rate appreciated to So.Sh.
6.23 per US dollar.
The advent of the generalized
floating system confronted the Somali authorities with a new
problem: how to set the value of So.Sh. against other currencies
in a regime of floating exchange rates.
After some initial hesitance, the Somali authorities
decided to peg the So.Sh. to the US dollar, instructed exporters
to switch their earning currencies from the UK pound and Italian
lira to the US dollar, and unified the spreads between the buying
and selling rates to 2%. The
peg to the US dollar was justified, because many developing
countries, some of which Somalia had close trade relations, such
as Saudi Arabia and Kenya, had switched to the US dollar.
The peg at the rate of So.Sh. 6.23
per US dollar remained unchanged for a long time 1973-1981.
That, however, did not mean true stability, as we will see
in the following section.
emergence of the parallel exchange market.
The origins of the parallel exchange
market lie in the nationalization policies adopted by the Somali
government in the 1970s. Between
1970 and 1975 the government nationalized the importation of
foodstuffs, petroleum products, construction materials, medicines
and pharmaceuticals, clothes and a wide range of other
October 1975 all import trade was practically under state monopoly
with twelve government agencies involved in foreign trade.
State trading proved disastrous in
terms of the balance of payments position.
Lack of experience in foreign trade, poor distribution and
inventory systems, combined with waste, mismanagement and
patronage, caused an upsurge in imports and shifted the balance of
payments from a surplus of So.Sh. 124 million in 1972 to deficits
of So.Sh. 45 million and So.Sh. 124 million in 1972 to deficits of
So.Sh. 45 million and So.Sh. 66 million in 1973 and 1974
As the foreign exchange reserves were depleted, import
restrictions were introduced and consequently an acute shortage of
goods in the domestic market occurred.
The ensuing inflation considerably overvalued the So.Sh.
And paved the way for the emergence and thriving of the parallel
market. Soon traders
started to smuggle So.Sh. banknotes abroad.
They sold the notes to Somali workers in the Gulf and used
the proceeds for the importation of badly needed commodities into
the country. The
initial reaction of the authorities was harsh.
Controls at ports and airports were tightened, and
punishment for foreign exchange law offences was raised11
However, the gap between the official and parallel rates grew so
large that the Somali workers were reluctant to use the official
banking channels, and the prospect for profit was so attractive
that the traders were willing to operate in the parallel market
despite the risks involved.
To ease the acute shortage of goods
in the market, the government introduced in 1976 a scheme known as
Under this scheme an importer, who obtained foreign exchange
abroad (from migrant workers) was automatically given permission
to import goods into the country.
This, in effect, amounted to a government recognition and
legalization of the parallel market (the hitherto illegal black
the scheme increased its scope both in terms of participants and
transactions and developed into a sizeable parallel market that
overwhelmed the official one.
For example, from 1986 exporters were allowed to retain 60%
of their foreign exchange earnings and sell them at the parallel
market. Later, the
scheme was extended to landlords who leased houses to expatriates
and foreign diplomats. In
addition, the parallel market was regularly supplied with foreign
exchange obtained from official channels at a lower exchange rate.
Under the parallel market, the exchange rate depreciated
continuously in response to market conditions and set the pace for
the perennial devaluation of the Somali shilling.
crisis of the Somali shilling
June 1981 the Somali authorities adopted a stabilization program
within a framework of a stand-by arrangement with the IMF.
The objectives of the program were to close the growing gap
between the official and the parallel exchange rates, attract
foreign exchange resources into official channels, and curb the
mounting inflationary pressure.
Under this program the Franco Valuta system was abolished,
restrictions on foreign trade were eases, and a dual exchange rate
system was introduced. Under
the dual exchange rate system, the official exchange rate applied
to some essential imports, and 100% devalued rate (So.Sh. 12.5 per
dollar) applied to all other foreign transactions.
With that devaluation, the government embarked on a course
of continuous and large devaluations chasing the parallel exchange
rate (see table 1). The
sequence has been as follows:
In 1982 the
official rate was devalued to So.Sh. 15.01 per U.S. dollar, while
the parallel rate stood at So.Sh. 24 per U.S. dollar.
September 1983 a managed floating system was introduced under
which the official rate devalued to So.Sh. 17.0 per U.S. dollar
compared to a parallel rate of So.Sh. 45.0 per U.S. dollar.
the official rate was devalued several times to So.Sh. 42.5 per
dollar, while the parallel rate fell to So.Sh. 115.0 per U.S.
the official rate was devalued by So.Sh. 4 per month until it
reached So.Sh. 86.5 per dollar in October 1986.
1986 a system of foreign exchange auction was introduced.
Under that system, foreign exchange was auctioned to
successful bidders on a regular fortnightly basis, who used it for
the importation of commodities into the country.
The aim of the foreign exchange auction was to unify the
different exchange rates and provide a stable and realistic
exchange rate. However,
under the auction system, the official rate depreciated form So.Sh.
94.1 in November 1986 to So.Sh. 159.9 per U.S. dollar in September
1988. Over the same
period the parallel rate, which was supposed to disappear,
depreciated from So.Sh. 120.0 to So.Sh. 180.0 per U.S. dollar.
developments in the exchange rate, the Somali authorities
suspended the auction system in September 1987 and pegged the
exchange rate at an unrealistic rate of So.Sh. 100 per U.S.
dollar. That rate
soon proved ineffective and consequently the auction system was
In June 1988 a
managed floating system was reintroduced, and the official rate
was devalued to So.Sh. 180 per U.S. dollar.
Thereafter, the exchange rate was adjusted on a weekly
basis. By December
1990 the official rate stood at So.Sh. 4,500.0 per U.S. dollar.
The sharp and continuous depreciation
of the Somali shilling was due to the high volume of liquidity
injected into the economy through expansive monetary and fiscal
policies. As we will
see later, excessive monetary creation fueled the inflationary
pressure, which in turn, led to further depreciation, plunging the
economy into a vicious circle of inflation-depreciation-inflation.
With the collapse of the Somali
State, many national institutions faded away, but not the foreign
exchange market. On
the contrary, it grew bigger; more efficient and more endowed with
factors explain this development, namely the absence of any sort
of controls, a cheap and good communication system, and the
increased inflow of remittances from the large Somali community
Moneychangers operate in all parts of
Somalia crossing clan lines and have representatives all over the
world. In recent
times, many small moneychangers joined forces and formed several
large companies with far greater capability and expertise13
The exchange rate is freely determined by
the interplay of market forces.
For example, if the harvest is good, or more livestock is
exported to Arabia, or more remittances and international aid are
received, the shilling strengthens.
An opposite situation, of course, makes the shilling weak,
e.g. the ban on export of Somali livestock to Arabia.
A list of exchange rates is published daily in local
newsletters and even posted in the Internet.
The US dollar remains by far the dominant currency in the
economy. Other widely
used currencies include the Kenyan shilling, the Ethiopian Birr,
The Saudi Arabian riyal and the UAE dirham.
Principal foreign exchange markets include Mogadishu,
Bossaso, and Hargeysa.
In contrast to the massive devaluations of
the Somali shilling in the 1980s, the exchange rate showed a
remarkable stability in the period 1991-98, floating between So.Sh.
6,500 and So.Sh. 8,000 per U.S. dollar.
This stability is due to the fact that there has not been
any large-scale monetary creation, of the sort experienced in the
significantly, there were no commercial banks that created money
through their lending operations as happened in the past.
Later we will see how the commercial bank created money
excessively and thus contributed to the financial crisis in the
While the notes issued by Mogadishu North
leader Hussein Aideed, which are similar to, and passed as the old
shilling notes, put some pressure on the exchange rate, yet they
did not cause any large depreciation14.
Apparently, they filled a gap left by the physical
depletion of the old Somali shilling notes. However, the
“Somaliland shilling (S/L)” fared very badly.
It depreciated dramatically from S/L 50 per dollar in 1996
to S/L 3,920 per dollar in October 199815.
This happened because M.I. Egal the president of the “Somaliland
Republic” inflated the economy by printing and spending
planeloads of banknotes exactly as the regime of Siad Barre used
to do. The
depreciation was so severe that, at times, merchants refused the
“Somaliland shilling” and demanded payments in U.S. dollars16.
1. Developments in
exchange rates 1977 – 1998
shillings per U.S. dollar)
1991 – 98+
6000 – 8000.00
Central Bank of Somalia and interview with moneychangers.
From June 1981 there was a second exchange rate of So.Sh.
12.59 per U.S. dollar.
Up to July 1998
AND REGIMES OF EXCHANGE RATES
this chapter, I will discuss the various approaches to exchange
rate determination. It
should be pointed from the outset that these approaches are not
mutually exclusive. Each
one explains the process of exchange rate determination from one
perspective, and contributes to our understanding of this process.
I will also examine the different exchange rate regimes,
which basically deal with the mechanism of setting the exchange
rates. Finally, I
will discuss the rationale behind the movements of exchange rates
of exchange rates.
Power Parity (PPP)
The PPP theory explains the movements of
the exchange rates in terms of inflation differentials.
It states that, in equilibrium conditions, prices of the
same goods and services in different countries must be equal when
translated at the current exchange rate.
Thus, the PPP exchange rate is the one that equates the
price of externally traded goods in one country with the price of
the same goods in another country17.
For example, if the price of a pair of shoes in USA is US $50 and
the same pair of shoes cost So.Sh. 250,000.00 in Somalia, the PPP
rate is SoSh. 5,000 per US dollar.
The Economist magazine provides a good
example. The latter
publishes every year what it calls the Big Mac index based on PPP
theory. The Big Mac
is McDonald’s hamburger, which is produced in 110 countries.
“The Big Mac PPP is the exchange rate that would leave
Mac Donald hamburgers costing exactly the same in America as
abroad. Comparing actual rates with PPPs signals whether a
currency is under-orovervalued.”18.
The PPP suffers from a number of defects.
First, it is difficult to establish a point at which
currencies were in equilibrium.
Second, there are many price indices, which do not only
vary between themselves but also suffer from statistical defects
and make the calculation of PPP very problematic.
Third, many goods are not traded goods, that is, they are
not imported or exported which further complicates comparison
between prices in different countries.
Finally, PPP assumes a free flow of international trade.
The reality is, however, different.
In fact, there are innumerable barriers, tariffs, and other
impediments that restrict world trade and cause distortions to
of Payments Approach
The Balance of Payments Approach attributes
movements in exchange rates to developments in the balance of
to this approach, the exchange rate is a price, and as such is
determined by the demand for and supply of currencies in the
foreign exchange market. As
demand for foreign exchange is derived from imports, and the
supply is derived from exports, the balance of payments is,
therefore, regarded as a better indicator of exchange rate
attention was focused on the current account.
As it is known, the current account comprises merchandise,
services, and transfers (grants and remittances).
A deficit in the current account means that a country is
paying for purchase of goods and services and for transfers than
it is obtaining. Such
a deficit, the argument goes, will consequently lead to a
depreciation of that country’s currency.
The opposite is true in the case of a surplus.
Nowadays, the role of the current account
as a better guide for exchange rate movements is put into
question. This is so
because of the increasing importance of the capital account.
In fact, as a result of the generalized floating of
exchange rates, the sophistication of international financial
mangers, the spread of technology, the globalization of markets,
and the increased volatility of interest rates, funds move easily,
and quickly from one country to another, causing appreciation or
depreciation even though the current account sends opposing
Asset Market Approach
Today’s foreign exchange markets are
dominated by a multitude of investors and speculators who are
motivated by profit making or risk avoiding.
By transferring funds quickly and massively from one
currency to another, these investors/speculators cause sharp
swings in exchange rates that are not often justified by balance
of payments developments or other economic fundamentals.
The Asset Market Approach attempts to explain why exchange
rates fluctuate more than is warranted by economic fundamentals.
According to this approach currencies are considered as
assets. As any other
assets, demand for currencies is determined by the
follows that expectations of future events, be they political,
economic or even trivial, will affect the exchange rate.
Monetary Approach to Exchange Rates
Monetary Approach to exchange rates views the process of exchange
determination as a monetary phenomenon.
It focuses on the demand for and supply of monetary assets.
This approach postulates that since the exchange rate is
the price of one currency in terms of another currency then it
must be determined by the relative supply of and demand for the
two currencies. For
example, if money supply grows faster in one country than in the
rest of the world, while demand for money remains the same, the
exchange rate of the country experiencing higher growth of money
supply should depreciate.
The Monetary Approach to exchange rates
assumes that the Purchasing Power Parity holds true, that money
supply is exogenously determined by the authorities, and that
relative interest rates affect the demand for money20.
In its simplest form, the Monetary Approach
to Exchange Rates is no more than the quantity theory of money
applied to an open economy. In
brief, it states that an excess money supply will eventually lead
to an increase in imports and will cause balance of payments
deterioration or exchange rate depreciation.
The simple monetary model is said to be an
extreme case not very mush close to developments in this real
It also has been criticized for failing to provide “an adequate
explanation of the movements in major currency values during the
floating rate period that began in 1973.”22.
Furthermore, some economists rejected what they called the strong
version of the Monetary Approach, which always identifies balance
of payments deficits with an excess money supply.
Instead, they suggested a weak version that reconciles with
other approaches, and recognizes that “although shifts in the
demand for and supply of money to hold are not necessarily the
immediate cause of exchange rate movements, they can be and
perhaps usually are.”23
rate determination in Somalia
In analyzing the causes of exchange rate
depreciation in Somalia, I will argue that the weak version of the
monetary approach applies. At
the same time, I acknowledge the importance of other factors.
Indeed, balance of payments developments, inflation
differentials, expectations, and political uncertainties have
played their part. But
the point is that without monetary accommodation the effects of
the other factors would have been absorbed or even reversed.
In my view, the Monetary Approach is relevant in the case
of Somalia, because of the following reason:
The massive growth in money supply during
the 1980s, and the consequent high inflation rates and perennial
exchange rate depreciations, brought about a widespread
“dollarization” of the economy as people learned to switch
shillings into dollars as a hedge against inflation.
After the 1991, the “dollarization” phenomenon
increased to such an extent that the dollar is now used not only
as a store of value but also as the most preferred means of
payment. In addition,
the parallel market became now the only foreign exchange market
where the Somali shilling floats freely with full convertibility.
Under these conditions any access monetary creation affects
immediately the exchange rate causing a chain reaction of
depreciation-inflation-depreciation as demonstrated by the
experience of the shilling in the 1980s and the Somaliland
shilling more recently. A
likely scenario will be as follows: excess money is created, cash
balances are converted into dollars, the exchange rate of the
shilling depreciates, merchants revise the prices of their stocks
up-word as they anticipate higher import costs in terms of the
local currency, new money is needed to offset the effects of
inflation, depreciation follows, and the process goes on.
Exchange rates are said to be freely
floating when they are determined by the forces of demand and
supply without government intervention.
Free or “clean” floating is seldom encountered in real
world (present stateless Somalia being the exception).
Instead “dirty” or managed floating is the norm.
This is so because exchange rates are so pervasive in their
effect that governments feel obliged to intervene, from time to
time, in the foreign exchange market to prevent sharp fluctuations
of their currencies.
Supporters of floating exchange rates argue
that such a system is advantageous because it provides a
continuous and smooth adjustment of the exchange rate, relieves
the authorities from holding large foreign exchange reserves to
support their currencies, and depoliticizes the process of
exchange rate setting. The
chief disadvantage of this system is that movements in exchange
rates can be large and frequent and cause uncertainty in
This system is mainly practiced in
developing countries. It
is characterized by the existence of two markets: A free market in
which the exchange rate is determined by the interplay of market
forces; and an official market controlled by the government.
Under this system, exporters and other foreign exchange
earners are allowed to retain a portion of their foreign exchange
income and sell it in the parallel market at market determined
The advantage of this system is that it
reduces the scope for illegal black market, and allows the
government time to unify the two markets.
Its chief disadvantage is that it discourages those exports
which are channeled through the official market, and may encourage
the illegal siphoning off of resources from the official to the
free market where exchange rate are high.
this system foreign exchange is auctioned to successful bidders.
Supply of foreign exchange comes from specified exports,
services, and transfers which are surrendered to the central bank,
and auctioned on regular basis (fortnightly, weekly or even
daily). All bidders
are required to lodge either partial or equivalent of 100% of the
foreign exchange they are going to purchase.
Once bids are opened and examined, foreign exchange is
allocated to the successful bidders from the highest bidder to the
bid which exhausts the available supply, and clears the market.
This rate becomes the market exchange rate and applies
until the next auction. Under
a “Dutch auction” system, each bidder pays his bid price, and
the weighted average bid price may determine the exchange rate24.
this system the exchange rate is determined in negotiations
between the central bank and the commercial banks on the basis of
the demand for and supply of foreign exchange.
Individuals and firms bid through the commercial banks.
this system rates are determined by the authorities, which accept
an obligation to peg the exchange rate at a determined level and
prevents the market deviating from that level.
The advantage of this system is that
it provides a high degree of stability.
However, a big problem arises when a government under fixed
exchange rates pursues deficit-financing policies.
The expanding money supply associated with the deficit
financing leads eventually to balance of payments deterioration,
loss of reserves, and build up of speculation.
At the end the government will be forced to devalue in an
environment of crisis and political recrimination.
rate regimes of Somalia
described in chapter one, almost all sorts of exchange rate
regimes have been tried in Somalia.
From 1960 to 1971 a fixed exchange rate system reigned.
The “Franco Valuta” system (the parallel market), which
was introduced in 1976, was in effect a partial floating.
In late 1980s the official rate used to be adjusted weekly
for inflation differential between the Somali shilling and a
basket of currencies representing Somalia’s major trading
partners, and that was managed floating.
The auction system was in use from 1986.
Finally, the present exchange rate system of Somalia
constitutes a classical case of “clean” floating.
One may wonder why the exchange rate
system of Somalia prior to 1990 was so unsuccessful.
The problem, however, is not with the exchange rate regime,
but rather with the fiscal and monetary policies.
In fact, “no exchange rate system can do well if fiscal
and monetary policies are out of control, while most exchange
systems will do reasonably well if fiscal and monetary policies
In recommending a particular exchange
rate system for a country, one has to take into account the
characteristics of that country’s economy.
For a small, open country like Somalia, with rudimental
financial markets, a small number of exchange dealers, and a
history of irresponsible monetary policy, the fixed exchange rate
system is the most appropriate26.
But, as repeated again and again, a fixed exchange rate regime has
to be supported by tough monetary and fiscal policies.
If the authorities lack the credibility to enforce these
policies, as happened in Somalia, a currency board system can best
serve the interests of the country.
SUPPLY, EXCHANGE RATES AND INFLATION
chapter will analyze the relationship between money supply,
exchange rates and inflation.
It will start by showing developments in monetary
aggregates, will identify factors affecting money supply and
finally will examine the link between money supply, exchange rates
and inflation. To
begin with, the relevant variables will be defined as follows:
Money supply is
defined as the stock of total monetary assets (broad money).
These comprise currency in circulation, demand deposits and
savings deposits. They
are, in fact, the only monetary instruments that were available in
Somalia. It is worth
noting here the composition of demand deposits, which consist of
current accounts “xisaabaha socda” (checking accounts) and
circular cheques “jeegagga wareega”.
The latter are banker’s drafts that were widely used in
Somalia in place of personal cheques.
Originally, the circular cheques were intended for small
payments and transfers, but, over time, they became a widespread
and convenient means of payments and replaced cash for settlement
of big transactions. As
will be discussed below, circular cheques had proven to be an
uncontrollable source of monetary creation by the Commercial and
Savings Bank of Somalia (CSBS).
data have to be examined with caution.
This is so because the banks, especially CSBS, experienced
some difficulties in reporting data accurately and on timely
communication between the headquarters and the branches coupled
with inadequate and dubious accounting practices (not excluding
some element of book-cooking) caused considerable delays in
reporting data. Nevertheless,
the figures reveal the trend experienced in those years.
Exchange rate is
the nominal rate that measures the relative price of the Somali
shilling in terms of U.S. dollar.
The official rate is the one published by the Central Bank
of Somalia, while information on the parallel rate is supplied by
is measured by the consumer price index of Mogadishu, which is
based on a Mogadishu family budget survey in 1985.
It used to be published by the Ministry of Planning.
shown in table 2, money supply increased phenomenally from So.Sh.
4.4 billion in December 1981 to So.Sh. 158.0 billion in December
1989, which represents a spectacular growth of 3,474%.
Among the components of money supply demand deposits showed
the highest increase (3,767%) followed closely by currency in
circulation with an equally sharp increase of 3,649.5%.
Savings deposits went up 2,331%.
It is worth noting that, only in one year 1989, money
supply increased by a staggering amount of So.Sh. 97.9 billion.
However, a word of caution is in order here.
It is highly probable that part of these figures may belong
to previous years. This
could happen because of poor and dubious accounting practices.
Still these are huge numbers for one year even discounting
for the faulty accounting practices.
When one considers that this explosive trend continued also
in 1990, for which data are not available, one understands how far
things got out of hand.
It may be
interesting to see monetary developments in Ethiopia; a country
that had suffered from civil war, famine and influx of refugees as
Somalia did. Figures
show a sharp contrast with Somalia.
In fact, during the period 1981-89 money supply in Ethiopia
increased by only 148% compared to 3,474% recorded in Somalia (see
2, Money supply 1981 – 1989
millions of So.Sh.)
End of Period
Currency in Circulation
Central Bank of Somalia, Quarterly Bulletin, various
Currency outside banks’ figures for 1989
were taken from International Financial Statistics Year Book.
IMF, Washington, 1992
The Major factor, which contributed
to this enormous increase in money supply was credits by the
banking system. As
can be observed from table 3, total credits rose sharply by So.Sh.
94.3 billion or 2,076% between December 1981 and December 1989.
The bulk of these credits represented loans to the private
sector which expanded from So.Sh. 0.6 billion in December 1981 to
So.Sh. 56.1 billion in December 1989.
3: Total credits 1981 – 1989
millions of So.Sh.)
End of Period
Credits to government
Credits to public enterp
Credits to Private sector
Central Bank of Somalia, Bulletin, various issues,
Credits to public enterprises rose by
So.Sh. 27.1 billion or 1,573% while credits to the central
government went up by So.Sh. 11.8 billion or 525%.
Only in 1989 credits to the private sector and the public
enterprises rose by an enormous amount of So.Sh. 53.9 billion, and
most probably by a bigger one in 1990.
In addition to credits, there were
also two other factors that fueled the increase in money supply.
These were uncontrolled and wasteful expenditure by the
banks and government’s misuse of the proceeds from the sale of
commodities received as aid.
In fact, both the treasury and the banks went into an
incredible spending spree. They
spent huge sums on construction, furniture, luxury cars, foreign
trips and on a wide range of other goods and services that should
not have been bought except for corruption; looting may be the
As it is evident from the table
above, in the early 1980s government deficit was the major factor
behind the excessive monetary expansion.
The war with Ethiopia, the influx of large numbers of
refugees, natural calamities and government profligacy
necessitated huge expenditures that were financed through recourse
to central bank borrowing. Later,
however, the government position improved as a result of inflow of
sizeable official grants and loans.
Unfortunately, while the government
position was somehow improving, credits to the private sector grew
out of control and stood as the major factor contributing to the
monetary expansion. This
happened because the CSBS, the only commercial bank at that time,
became more politicized, resisted successfully central bank
supervision, and indulged in widespread abuses, irregularities and
The Central Bank itself did not
provide an example of financial discipline and integrity.
It also succumbed to political pressure, and became too
busy rationing scarce foreign exchange than developing policies.
For example, in a typical day the Director General of the
Central Bank spent most of his time either signing, promising,
refusing, or delaying to sign the “D Form”, or the permit to
purchase foreign exchange at the official rate.
In a sound banking system, a
commercial bank must keep a reserve of legal tender to meet any
possible demand by its customers.
This, the CSBS did not do.
Not only did the CSBS lend out all of its reserves, but
also it issued uncovered circular cheques in large quantities and
situation became so critical that in mid 1989 the bank was
literally unable to meet the demand of its depositors even for
small amounts of cash. As
if that were not enough, the bank continued to issue more circular
cheques against new unsecured credits at a massive scale.
This further aggravated the situation, and caused the
worst-banking crisis in the history of the country.
The bulk of the circular cheques were cashed at high
discount (20-40%) by private traders who used them for the payment
of taxes and/or the purchase of foreign exchange in the auction
system. In turn, this
contributed to the depletion of reserves from the central bank,
which was receiving only circular cheques, and led to an acute
shortage of banknotes in the country with devastating
Ironically, the authorities blamed
the currency crisis on the public who allegedly hoarded cash as a
plot to undermine the government’s credibility.
In fact, the President warned, in a broadcast speech, that
those hoarding cash were doing so at their own risk as the
government could not guarantee their security.
To ease the severe cash shortage, the
central bank printed large quantities of banknotes and supplied a
portion of them to CSBS on regular basis, further swelling the
volume of money supply. But,
despite the continuous and substantial injection of liquidity, the
fortunes of the CSBS could not, however, be reversed.
For circular cheques were still being issued by corrupt and
politically protected commercial bank’s branch managers, while
the ability of the central bank to print more cash was constrained
by lack of foreign exchange resources.
To compound the problem, the President refused to authorize
the printing of higher denomination banknotes arguing that these
will facilitate the smuggling of currency out of the country.
Because of hyperinflation the cost of printing exceeded the
face of value of almost all of the denominations.
By early 1990, the situation was out of
control and the CSBS totally lost the confidence of the public,
and practically ceased to act as a financial intermediator.
Its role was taken up by a multitude of small private
parallel banks that held abundant cash and discounted circular
cheques at heavy discount rates.
In July 1990, the government adopted a
comprehensive financial sector reform within the framework of an
IMF sponsored program. The
most important measures adopted in the program were the
A new commercial
bank the “Somali Commercial Bank” was established by the
government, and started operations in August 1990.
The initial capital of the bank was So.Sh. one billion paid
up by the Ministry of finance (50%) and Central Bank of Somalia
businesses were allowed in principle to buy shares into the new
bank and take over the ownership and management of the bank within
a year. The objective
of establishing a new bank was to fill the gap left by the CSBS
and, in general, to introduce some competition in the banking
The CSBS was instructed to stop any new issues of circular
The central bank
was instructed to cease granting any further loans and advances to
cheques were declared no longer valid for the payment of taxes
and/or purchase of foreign exchange in the auction system.
decided that the central bank pay in cash up to 20% of all
deposits owed by the CSBS to its customers within August 1990.
The remaining balance of deposits will be paid by CSBS
through loan recovery.
By the time the negotiations of
financial sector reform were completed, the situation was out of
control politically, economically and militarily.
The rebel movements, which were fighting the government
since early 1980s were closing in on Mogadishu, the capital, while
inflation, by wiping out the value of wages, turned government
soldiers, who were supposed to defend the regime, into street
vendors. For more
details about the civil war see appendix.
link between money supply, exchange rates and inflation
Having discussed developments in
monetary assets and identified the major cause behind the
excessive monetary expansion, I will now examine the link between
money supply, exchange rates, and inflation rates.
Table 4 shows movements in money supply, parallel exchange
rates and inflation rates. Generally,
the figures reveal a noticeable relationship between the three
variables. Over the
period 1985-1989, on average money supply increased by 88%,
parallel exchange rates by 99% and inflation by 59%.
However, one can distinguish between tow periods.
In the first period of 1985 to 1987 money supply increased
faster than the depreciation in exchange rates and the rise in
prices. This is
explained by the inflow of grants and loans in favor of the
government, which partly absorbed monetary expansion and therefore
offset its inflationary impact.
In the second period 1987-1989, the exchange rate
depreciated more rapidly than the growth in money supply.
It is in this last period that currency substitution (dollarization)
has emerged, as people became more sensitive to exchange rate
depreciation and the rapid loss of purchasing power.
As a result, any new addition to the money supply triggers
a bigger amount of depreciation.
4: Money supply,
parallel exchange rates and inflation rates 1985-1989
End of period
Parallel Exchange rate
Consumer price index
Central Bank of Somalia, Ministry of Planning and Private
In sum, the adjustment program failed
to close the gap between the official and parallel rates as well
as stabilize the exchange rate for the simple reason that there
were no supportive monetary and fiscal policies.
This is not to say that the program neglected the monetary
and fiscal aspect. Rather,
it prescribed some tight monetary and credit measures as usually
stabilization programs do. But
these, for one reason or the other, were not compiled with, and
consequently the burden was put on the exchange rate.
The argument is that devaluation is not only appropriate
for small open economy like Somalia but it is also dangerous
politically as it lowers the standard of living of the population.
That argument is supported by a number of authors who claim
that “by allowing countries to adop administered exchange rate
system characterized by frequent small devaluations, IMF programs
have been excessively inflationary.”28
Currency board system for Somalia
As pointed out in the introduction, the
collapse of the financial system of Somalia was one of the major
factors that contributed to the fall of the Somali government.
At the root of the financial crisis was the tendency on the
part of the government leaders to create money at will to finance
their personal, political and clan interests.
The same factor, e.g., the power to
create money, is probably the chief obstacle that stands in the
way of the formation of a broad-based national government.
For it is common knowledge that faction leaders have so far
failed to form a government, mainly because of the dispute over
who would become the President and, therefore, would control the
printing presses of the Central Bank.
So far, faction leaders who printed their own currency have
shown that, as far as currency management is concerned, they are
worse than the previous regime.
Apparently, their motive in issuing currency is not to
provide the economy with a medium of exchange but merely to
generate funds for themselves, their clans and clients.
In this chapter I recommend the
introduction of the currency board system in Somalia in the place
of the Central bank as a way to achieve exchange rate stability as
well as stop the politicization of monetary creation.
The currency board system, I believe, is appropriate for
Somalia because of its simplicity, transparency and its relative
ease of implementation. Most
importantly, it provides an effective way “to stop currency
chaos, limit corruption, and establish stability.”29
In recent years, a number of
countries have successfully adopted the currency board system.
The Economist magazine reviewing the countries under the
currency board system noted that “Estonia’s currency board
helped stabilize the Baltic country’s economy.
Hong Kong’s, created in 1983, has kept the colony’s
currency steady despite the massive changes in China.
Argentina’s has put an end to decades of inflation.”30
Historically, Somalia has had
experience with the currency board system as described in the
first chapter. Moreover,
the experience of eight years of a free and stable foreign
exchange market and the absence of banking crisis make the
introduction of a currency board system much easier.
The beauty of the currency board is
that it can be established even without a central government
provided the international financial community sponsors it.
Professor I.M. Lewis of London School of Economics suggests
that, since a centralized Somali state is impossible to restore,
Somalis have the option to co-operate in specific fields without
reference to any national authority31.
The currency board system provides, I believe, an excellent
opportunity for cooperation and national reconstruction.
the Currency Board
is a currency board? A
currency board is a monetary authority which issues notes and
coins in exchange for a reserve currency at a specified fixed
exchange rate. Unlike
the Central Bank, a currency board cannot print money at will
since it is required to maintain foreign reserves equal in value
to the total amount of notes and coins in circulation.
Thus, the core features of a currency board are the fixed
exchange rate, the reserve or anchor currency and full
U.S. dollar should, logically, be the anchor currency as it is the
most widely used and accepted currency in Somalia, in addition to
being the international currency par excellence.
rate: As to the exchange rate, the prevailing market rate at
the time of the establishment of the board will be adopted, e.g.
So.Sh. 8,000 per dollar. In
the last eight years, the exchange rate of the Somali shilling
vis-à-vis the U.S. dollar had exhibited a remarkable stability
floating between 6,500-8,000 shilling per dollar.
At any given time the currency board should maintain
dollar reserves equal to 100% of the value of the notes and coins
in circulation. This
will ensure the unlimited convertibility of the shilling into U.S.
to government: By law the currency board is prohibited form
lending money to the government, or public enterprises.
The government should finance its budget through taxes, or
borrowing from the capital market, if there is any, or
international aid, and not through recourse to printing money and
thereby creating inflation.
to banks: The currency board is prohibited from lending money
to the banks. This
means that the currency board has no responsibility to bail out
insolvent banks. It
follows that commercial banks must rely on other sources for
lending of last resort. Generally,
“a currency board would be much easier to operate if all banks
were foreign, supervised by the monetary authorities of other
countries, and with access to their lender-of-last resort
Given the past banking history, government owned commercial banks
must be vigorously opposed. Instead
joint ventures between Somali private banks and foreign banks
should be encouraged.
As for the supervision and regulation
of the banks, a department within the ministry of finance can do
the job, or an office specially established for that purpose.
currency: The board cannot redeem the notes currently in
circulation unless dollar reserves of equal value are provided.
For example, notes issued by faction leaders cannot be
redeemed unless the latter provide the backing dollar reserves.
One option is to let these notes circulate along side with
the currency board notes until reserves are provided or they wear
The board will be governed by a board of directors
representing the different regional states of the country and will
establish branches in regional capitals.
Each region or state of Somalia will contribute a certain
amount in U.S. dollar s and receive the equivalent in Somali
Shillings. To enhance
the credibility of the board, representatives from international
financial or aid organizations, and Somali businesspersons
(moneychangers) could sit in the board as shareholders.
The board realizes profit from the difference between
the interest earned from the assets held in US dollars and its
operating costs. A
part of these profits could be allocated as reserves and the rest
paid to the shareholders in proportion to their contributions
(e.g. federal government regional governments, and international
financial organizations, moneychangers).
of Currency Board
biggest advantage of the currency board system is the
depoliticization of the process of money creation.
By prohibiting the financing of government budgetary
deficits, the currency board system prevents corrupt governments
from printing money at will.
This is extremely important in the case of Somalia as the
involvement of politicians was behind the financial chaos that
inflicted so much damage on the economy and on the people.
Other strong benefits of the currency
board system are price stability, stable exchange rate and
currency convertibility, which result from the imposition of
strict fiscal discipline. The
resulting stable economic environment promotes trade, investment
and economic growth.
of currency board system
currency board system is criticized for being inflexible and not
allowing the use of discretionary monetary policies to suit a
country’s own economic conditions.
In fact, the monetary base (notes & coins) is
automatically determined by changes in the balance of payments.
For example, a deficit in the balance of payments, and the
resulting outflow of foreign reserves, causes the monetary base to
contract, and hence the interest rate to rise sharply.
However, this may not be the case in Somalia as the
incidence of large speculative capital outflows are minimal and
there is no market determined interest rate of any kind.
Another weakness of the currency board
system is that it precludes use of the exchange rate as an
instrument for correcting balance of payments imbalances.
As the local currency is linked to a strong currency, it
could become overvalued and make the country’s exports
as experience had shown, devaluations, by adding to the
inflationary pressure, do more than good to a small economy like
The currency system is preferred because of
its simplicity; predictability and rule based nature.
Furthermore, it promotes greater stability of domestic
prices and the exchange rate, and as a result, enhances
confidence is of crucial importance given the high rates of
inflation and pervasive exchange rate instability experienced
throughout the 1980s, not to mention the public’s mistrust of
government institutions and the feuding of different regional clan
It should, however, be noted that the
currency board system is not a panacea.
Certainly, it cannot provide a magic solution to a
country’s economic problems; nor it can operate in an
environment where other important supporting institutions are
missing. But it
provides a stable and convertible currency, which must be seen as
a fundamental right of every citizen.
It also reduces the scope for corruption and at least does
not allow corrupt politicians to hide their fiscal abuses.
with The Ottawa Citizen, July 25, 1998.
No. 27 of 26 November 1968.
Somali National Bank, annual Report, 1960, Mogadishu, 1961
The Somali National Bank inherited foreign reserves and gold
worth US $6 million backing the amount of notes in circulation
as of June 30, 1960.
Unofficial reports indicated the Ali Mahdi received banknotes
worth So.Sh. 18 billion ordered by the former regime of Siad
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Somali Democratic Republic, Ministry of National Planning, Three
Year Plan 1971-73, Mogadishu 1971
Solomon. Op. Cit.
In early 1970s a joke was made to dramatize the incompetence of
state enterprises. At
that time the government was fighting to no avail the sand dunes
that spread to large tracts of agricultural land.
This is the joke: Do
you want the sand dunes to disappear quickly?
Transfer their management to “E.N.C.”
The latter stands for Ente Nazionale per il Commercio or
National Agency for Trade.
Law No. 54 of January 1, 1975
Somali Democratic Republic, Ministry of Trade Circular,
There are now three big moneychanger companies:
Dahabshil, Barakat and Amal.
Hussein Aideed printed So.Sh.l 35 billion banknotes of 1000
shillings denominations. The
notes were manufactured in Malaysia.
Reported in Xog Ogal newspaper, Mogadishu, October 1,
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OF THE CIVIL WAR
1978 there was an attempted coup, the organizers escaped to
Ethiopia and formed the first rebel movement, the Somali
Salvation Democratic Front (SSDF).
In 1981 The Somali National Movement (SNM) was formed
followed by the United Somali Congress (USC) in 1988.
Later on more rebel movements were formed along clan
bases and put pressure on Siad Barre’s regime.
early 1990 a group of 114 prominent Somalis, known as
“Manifesto Group” wrote an open letter to Siad Barre calling
for his resignation.
January 27, 1991, Siad Barre was ousted from power and forced to
flee from the capital. Earlier,
he tried to manipulate the clan system distributing modern
weapons to clan militias. But
the weapons were turned against him.
The ousting of Siad Barre was followed by a cycle of
lawlessness, abuse, violence and reprisals by the USC militia
January 29, 1991 Ali Mahdi Mohamed was named interim President
by USC, a move which angered other opposition movements.
May 18, 1991 SNM proclaimed independence for Northern Somalia,
formerly British Somaliland, and declared the formation of the
“Somaliland Republic” but failed to receive recognition from
the International Community.
July 1991, peace talks aimed at ending Somali factional fighting
took place in Djibouti. The
“Djibouti accord” was signed but soon became ineffective.
November 1991 fighting intensified in Mogadishu between factions
loyal to Ali Mahdi and General Mohamed Farah Aideed.
The fighting caused 14,000 deaths and 27,000 wounded
according to Africa Watch estimates.
April 1992 UN approved sending military observers to monitor a
cease-fire arranged by the UN in February 1993.
May 1992 Siad Barre flees to Kenya after an ill-fated attempt to
recapture Mogadishu. He
later goes to Nigeria as asylum seeker.
July 1992 UN Secretary General Boutrus Gali alerts the world to
the Somali disaster observing that little attention was given to
“poor man’s war”. The
UN estimated that 1.5 million Somalis were at that time in
imminent danger of starvation.
August 28, 1992 UN Security Council called for the dispatch of
3,000 soldiers along with 500 Pakistani soldiers destined for
Mogadishu. After a
number of delays caused by Aideed, the 500 Pakistani soldiers
were stationed at Mogadishu airport in November 1992.
The Pakistani contingent was insufficient; ill equipped
and remained stuck to their barracks at the airport.
the Somali situation deteriorated into a human disaster of
An estimated 300,000 died as a result of drought,
factional fighting, and looting of relief supplies by the
organizations estimated that as of September 1992, 25% of all
Somali children under five of age had died.
Also, an estimated one million Somali refugees fled into
December 1992 the UN Security Council authorized the deployment
of a multinational force led by the United States in order to
secure the distribution of food to the starving.
The first U.S. soldiers in “Operation Restore Hope”
landed in Mogadishu on the morning of December 9, 1993.
March 1993, fifteen Somali factions met in Addis Ababa, Ethiopia
in a reconciliation conference under the auspices of the UN.
They agreed on cease-fire, disarmament of the militias
and the establishment of a Provisional National Council.
But these provisions were never implemented.
May 1993 a force of 20,000 from 27 nations took over the
operation from the U.S. led coalition.
June 1993, 24 Pakistani soldiers were killed in an ambush.
The UN accused Aideed of masterminding the ambush and
issued a warrant to capture him and put him on trial.
The incident sparked an urban guerilla between UN troops
and Aideed supporters which escalated into a heavy fighting on
October 3, 1993 with 19 UN soldiers dead, 18 of them Americans.
An American helicopter pilot was captured and later
casualties run into thousands.
October 6, 1993 U.S. President Clinton announced that he was
withdrawing the American troops by March 31, 1994.
As planned, the U.S. forces completed their pullout from
Somalia on March 26, 1994 leaving behind a UN force of 19,000
troops, which were withdrawn in March 1995.
January 2, 1995, Mohamed Farah Aideed died after being wounded
in a Mogadishu battle between his forces on one part and those
of Ali Mahdi, his archrival, and Osman Ato, his clansman and
former financier, on the other.
Aideed’s son, Hussein, a former U.S. marine, took
command of his father’s faction.
January 1997, Somali factions announced, after six weeks’
meeting in Sodere, Ethiopia, that they formed a Provisional
National Salvation Council.
They pledged to form a national government in six months,
but failed to carry through.
June 1998, the UN political office for Somalia acknowledged the
total failure of internationally and regionally sponsored peace
agreements by Somali factions, and announced that it was
launching a new “bottom-up approach”.
Under this approach, the UN will support leaders to form
regional administrations and will concentrate on building
institutions of civil society.
July 1998, delegates from Northeastern Somalia established,
after seventy days of meeting in Garowe, a new regional state
the “Puntland State”, but declared that they were not
seceding from Somalia. They
elected Col. Abdullahi Yusuf Ahmed as president.
Some other regional factions declared their intention to
establish their own regional states.
1998. All rights reserved
author is a former Director General of the Central bank of