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|Borrowing From the Poor: The Cost of Uncontrolled Money Printing in Somaliland|
Dr. Ismail Ibrahim Ahmed, London UK
Governments sometimes print money to finance budget deficits. Printing too much money increases the quantity of money in circulation and the result is inflation. The unavoidable consequence of inflation is general price increase. By creating inflation, the government is in effect borrowing from its citizens.
If the local currency is only used by one section of the population, the effect of inflation will only be felt by this group. In Somaliland, because of de facto dollarisation, the local currency is only effectively used by low-income households - nomads, farmers, petty traders and civil servants. Those who receive remittances, small- and medium-sized businesses and NGO staff use US dollars and donít have to worry about governmentís monetary policies. While those who can afford to have made the rational decision to migrate to the dollar, poverty has excluded low-income families from the dollar economy.
When the government prints inflationary money, it is borrowing from the poor - nomadic pastoralists, farmers, petty traders and its own poorly paid civil servants. Like the taxation system, this distributes the burden in the most unfair way. The poorest citizens, who are least able to bear, foot the bill. And they have paid a heavy price. When the SL shilling was introduced eight years ago, the dollar was worth 50 SL shillings. Today one dollar is exchanged for 8,000 shillings. That is an average annual inflation rate of over 200%.
This disguised and insidious form of taxation has had a disastrous impact on rural households. Ten years ago one sheep used to buy five sacks of cereal grain. Today they have to sell at least 8 sheep to buy the same amount of grain. Many factors may have contributed to the current plight of rural people, but the currency inflation caused by reckless printing of money has certainly been the single most important one.
Rural people also receive no services. The limited government services are only available to those who live in wealthy neighbourhoods in urban centres with schools and piped water. Since 1994 livestock export taxes generated revenue in excess of $40 million. A fraction of this would have paid for the best livestock export certification system. Instead of investing a small proportion of tax revenue on such critical rural services, it has effectively closed entire veterinary services. Private export traders now employ the countryís vets.
Printing money is appealing. The government does not have to declare the proceeds or disclose information. The whole process is shrouded in mystery. How much money was printed, for example, last year? How many instalments were released in the market? Also the government does not have to worry about the consequence of its actions. It conveniently blames on the money changers, speculative traders who refuse to accept the SL shilling, conspiracy and everything else except money printing. Money changers and small traders are routinely rounded up and warnings issued on the radio every time the value of SL shilling drops significantly. In 2001, this happened twice and it looks as if those were the periods when newly printed money was released into the market.
With the rural economy now in deep trouble and the value of the SL shilling at an all time low, the Central Bank has now come up with a new policy initiative. It has instructed remittance companies to stop providing savings facilities and other banking services. Those who have dollars can only deposit their money at government banks. In other words, it wants to "borrow" from those who have escaped the local currency inflation. This time it may be trying to bite off more than it can chew!
Dr. Ismail Ibrahim Ahmed