Fiat currencies supposedly receive their value from the dictates of the issuing government. Citizens must pay their taxes in official currency and even the acceptance of a certain money in private transactions may be mandated by the state. Accordingly, the exact value of fiat currencies is usually linked to the health of the issuer. If a country relies on printing money to fund state deficits, for example, then the currency may weaken. But what happens if the issuing government disappears? This is precisely what happened in Somalia almost thirty years ago. However, rather curiously, the Somali shilling continued to circulate for years after the state that supported it disintegrated.
The modern Somali Republic was formed in 1960 from the unification of British Somaliland and the United Nations Trust Territory of Somaliland, up to then under Italian administration. Italian influence in the African country dated back to the late 19th century but the currency adopted by the Italian portion of Somalia after the Second World War was not the Italian lira or a derivative. Rather, in 1950, the Italians introduced the ‘somalo’ which was pegged to gold at the same rate as the British East African shilling, a choice designed to ease the eventual unification of the country. The currency became known as the Somali shilling after independence and was administered by the new country’s central bank, the Banco Nazionale Somalia.
Independence brought more changes than a new monetary authority. The currency’s convertibility into gold was abandoned in 1962 and a coup in 1969 brought a new government to power that relied on seigniorage revenue to fund deficits. Inflation in the 1970s and 1980s prompted the release of higher denomination banknotes. A 50-shilling note was introduced in 1983, a 500-shilling note in 1989, and a 1,000-shilling note in 1990. Nonetheless, the design of the notes changed little.
The 1969 coup saw a general, Mohamed Siad Barre, overthrow the previous government of Somalia. Once in power, Siad Barre created a centrally planned economy in Somalia, one supported by the Soviet Union until a war against Ethiopia in the late 1970s caught Somalia on the wrong side of most of the socialist world. The 1980s were marked by high deficits following a failed attempt at modernizing the country and its defeat in the war against Ethiopia. In 1989, the annual government deficit stood at 37% of GDP; the following year, the public debt reached 277% of Somalia’s GDP.
The regime brought many economic problems to Somalia besides borrowing. The collapse of the state-owned Somali Commercial and Savings Bank in 1989, the only bank in the country besides the central bank, was caused by corruption and mismanagement. As was already noted, the regime relied on printing money to plug its fiscal deficits, especially after aid from the socialist nations evaporated. Currency in circulation in Somalia grew from 3.8 billion Somali shillings in 1985 to 155.7 billion in 1990.
In the late 1980s, civil unrest began under the rule of Siad Barre, partly the result of tension on the issue of where to resettle war refugees, and Somalia descended into civil war before Siad Barre fled the country in 1991. However, no new government was established as the rebels who overran the regime fought amongst themselves. Portions of northern Somalia declared their independence and even the capital Mogadishu was split down the middle by two militant factions.
There was a profound economic cost to this anarchy. Foreign aid declined during the civil war until the United Nations intervened again in Somalia’s history to provide food in the early 1990s. This aid shrank again in the years following the U.N. withdraw in 1995. As with other former socialist economies in transition, a large informal economy grew in the years after the end of the Siad Barre regime. However, it was not an anarcho-capitalist paradise as warlords levied tolls and taxes on those transporting goods through their territories, causing prices to rise and damaging business.
Despite all this trouble, the Somali shilling continued to circulate even after the country’s long experience with anarchy began. Circulation of the forsaken currency continued even through the monetary authority, the Central Bank of Somalia, which had replaced the old Banco Nazionale Somalia, had ceased to exist. The shilling continued to be actively traded against other currencies, especially the U.S. dollar, Ethiopian birr, Saudi riyal and Emirati dirham, in the Suuqa Bakaaraha, a market in Mogadishu. A year into the anarchy, the currency was trading at 3,800 to the dollar in this market.
Soon after the state’s disintegration, a monetary free-for-all developed. After Somaliland in the northwest of the country declared independence, it established a central bank of its own and introduced a new local currency. At the same time, the existing valuation of the old shilling provided an incentive for substantial counterfeiting. New production of the shilling was ordered by Somali warlords and local entrepreneurs. It is estimated that 481 billion Somali shillings were printed between 1991 and 2006, obviously without the approval of the abolished government. Some of these counterfeits were produced in Western countries. One Somali warlord placed an order for 165 billion shillings in notes from a Canadian banknote-printing firm, the British American Banknote Company of Ottawa.
With this counterfeiting and the circulation of foreign currencies, the shilling’s value continued to fall, but at a measured pace. It fell from perhaps 5,000 to the dollar in 1995 to around 8,500 in 1997 and 10,500 in 1999, a steady fall but hardly a hyperinflationary one. After some time, counterfeiting reduced the value of the shilling to the cost of producing and delivering new 1,000-shilling notes. Because the cost of producing different denomination notes was essentially the same, just 1,000-shilling notes were produced in truly significant quantities and it became the only banknote used in the country.
To understand the economics involved, the cost of producing and importing the largest denomination note was estimated to cost $0.03 in 2003 and the value of 1,000 shillings had by 2001 fallen to about $0.04. After accounting for the risks involved in shipping the money and the return expected by a counterfeiter for his investment, this valuation eliminated the incentive for further counterfeiting. As a result, new note-printing ceased and inflation eventually dissipated altogether; the currency would in the subsequent decade begin a strong recovery as governance returned.
The monetary events in Somalia reveal much about the psychology of currency. The counterfeits were readily accepted but people refused to respect any note attempting to pass off as having a higher denomination than the 1,000-shilling notes issued in 1990. Also, even more recent counterfeit notes were dated no later than 1990 to allow them to mimic the old shillings. In other words, though the government that issued the notes had ceased to exist and counterfeits were common, the proper specifications still carried weight; there was still something legitimate about the old money. Some attribute Somalis’ strong system of kinship to perpetuating the currency; to not accept the notes was socially unacceptable. Whatever the reason, the shilling had truly outlived the Somali state despite the currency being simple fiat money.
Even though the country had no official government, business in Somalia not only survived but grew to a surprising degree. In 2004, Coca-Cola opened a bottling plant in the country. The German delivery service DHL shipped parcels there and an affiliate of British Airways operated flights to the country, one where surprisingly high airport fees may have gone to buy guns for an armed faction but certainly not into any investment in improved facilities.
On the monetary front, the International Monetary Fund provided technical assistance from 2016 on, particularly in the area of currency. By now, the reconstituted government and central bank had begun exchanging old counterfeit notes with new official ones. It was the first time the Central Bank of Somalia issued currency since 1991; new 5,000 and 10,000-shilling notes were introduced in 2018. The country also secured financing for debt restructuring and regained access to World Bank aid in 2020. So, against all odds, the shilling lives on, though it has increasingly been replaced by mobile wallets holding U.S. dollars. Somalia, like East Africa generally, has seen widespread adoption of mobile payments services at the expense of paper notes.
In the end, that the value of the Somali shilling eventually stabilized may not be surprising, especially since it stabilized at the foreign currency cost of producing counterfeit notes and importing them into the country. However, why the currency was used at all is a bigger surprise. After all, foreign currencies increasingly circulated in the country and at least one breakaway region issued its own new currency. The shilling notes were backed by no commodity, its acceptance regulated by no law, and even the promise of any government to maintain its value was inexistent. Whether by cultural custom or ingrained inertia, the circulation of the Somali shilling after 1991 suggests there is more to currencies than is popularly understood.
More from the Tontine Coffee-House
1. Hard to Kill. The Economist, 31 Mar. 2012.
2. Luther, William J., and Lawrence H. White. “Positively Valued Fiat Money after the Sovereign Disappears: The Case of Somalia.” George Mason University Working Paper in Economics No. 11-14, 4 Apr. 2011.
3. Maruf, Harun. Somalia ‘Now in Good Standing’ With World Bank. Voice of America, 27 Feb. 2020.
4. Powell, Benjamin, et al. “Somalia after State Collapse: Chaos or Improvement?” Journal of Economic Behavior & Organization, vol. 67, no. 3-4, 2008, pp. 657–670.
5. Webersik, Christian. “Mogadishu: An Economy without a State.” Third World Quarterly, vol. 27, no. 8, 2006, pp. 1463–1480.