the world strongest currency over the past 12 months belongs to a small, recovering African state without foreign currency reserves or any discernible monetary policy and a central bank of only three years’ standing.
Yet the Somali shilling, Somalia’s official currency, has overcome such disadvantages to appreciate against the US dollar by just under 60 per cent since March last year, becoming the strongest among global 175 currencies tracked by Bloomberg. Its surge has been so pronounced that the second most robust currency over the same period – the Icelandic Krona – could only manage a measly 10.2 per cent rise.
So what lies behind the shilling’s gravity-defying performance?
Improving security over the past year has encouraged native Somalis to return to the country, bringing foreign currency with them, said Galad omar a student of the university of Somalia.
Donors have pledged billions of dollars to help secure and rebuild Somalia at recent conferences in the hope that it can make good on recent military gains against the militants.
The inflows and modest levels of foreign investment have been largely responsible for the appreciation of the Somali shilling.
“As a result, the supply of US dollars in relation to the Somali shilling has increased. With shillings in comparatively short supply, the value of the currency has appreciated.”
The shilling’s story stands in sharp contrast to the weakness of many other emerging market currencies hit by the US Federal Reserve’s unwinding of monetary stimulus since the start of this year.
The appreciation of the Somali Shilling is an anomaly as remittances (hawalas) from abroad constitute the economic lifeline for many of its people. These are mostly received in dollars, with some then converted into local currency.
As the rates between the dollar and the shilling are determined by black market traders, “there are considerable variations in the rates offered by different operators.
Somalia’s central bank was re-established in 2011, but remains powerless to set monetary policy in the country situated in the horn of Africa and it isn’t backed by any hard currency reserves.
One of the strategic goals of the Somali Central Bank’s five-year strategic plan from 2013-2018 released in August was to expand its monetary instruments including the introduction of new currency.
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