Understanding Legal tender in Somalia

Abstract

The paper is structured into three parts, Part I is an introduction to the paper, Understanding Legal Tender and defections of currency as discussed in Part II, Legal Framework and Currency Management in Somalia highlighted and examined in part III. While part IV, examined the responsibility and the functions of the Central bank of Somalia. This paper concludes that the crisis in the banking sector was one of the major contributing factors that led Somalia to abandon its own currency and introduce the Semi-official U.S. dollar as legal tender between 1991 up-to-date.

Keywords: Somali, legal tender, Somali shillings

1.1 INTRODUCTION

‘‘Everyone can create money; the problem is to get it accepted”.

—Hyman Minsky

A nation’s currency serves as a barometer of its economic health and is linked to its culture and sense of national pride. Famous monuments and images of people who have had a significant impact on the history of the country are frequently depicted on coins and banknotes. Somalia is no exception. Its intriguing currency tells us a lot about the nation.

1.2 UNDERSTANDING LEGAL TENDER

Legal tender is established by a statute that specifies the thing to be used as legal tender and the institution that is authorized to produce and issue it to the public. Bills of exchange, bank drafts, postal orders, and cheques are examples of non-legal tender money. These types of money are usually accepted but legally there is no obligation to accept them.

The Black’s Law Diction defines the word ‘Currency’ as, ‘coined money and such banknotes or other paper money as are authorized by law and do in fact circulate from hand to hand as the medium of exchange.[1] Currency is also defined in the Chambers Dictionary[2] as, ‘the money of a country, which comprises notes and coins.

1.3 Legal Framework and Currency Management in Somalia

The Somalia shilling (SOS) is the official currency of Somalia. The foreign exchange market operates free from the influences of regulatory monetary authority. The Federal Republic of Somalia generally have a monopoly on the issuing of currency. As per article 21 of the Central Bank of Somalia[3], the bank shall have the sole right to issue notes and coins in Somalia and only those notes and coins shall be legal tender in Somalia.[4]

However, the Somali Shilling cannot be used to settle all financial obligations in the country, including paying for goods, services, taxes, and debts. Under article 19 of the Central Bank of Somalia, states that the unit of currency of Somalia shall be the Somali Shilling.  The subsequent article 20 of the said act also provides that all monetary obligations or transactions entered into or made in Somalia shall be deemed to be expressed and recorded, and shall be settled, in the currency determined under Article 19 unless otherwise provided for by law or agreed upon by the parties. As just stated above, there are no clear provisions regarding money that have been agreed upon by the Federal Republic of Somalia or Federal Member States; instead, individual citizens have become the sole decider in the currency or foreign exchange.  

Central banks carry out a nation’s monetary policy and control its money supply, often mandated with maintaining low inflation, steady GDP growth, cash and federal reserve’s requirement among others. While the Ministry of Finance regulates to physical policy. However, the monetary policy of the Central Bank of Somalia (CBS) is currently not functioning.

However, the Somali Shilling cannot be used to settle all financial obligations in the country, including paying for goods, services, taxes, and debts. Under article 19 of the Central Bank of Somalia, states that the unit of currency of Somalia shall be the Somali Shilling.  The subsequent article 20 of the said act also provides that all monetary obligations or transactions entered into or made in Somalia shall be deemed to be expressed and recorded, and shall be settled, in the currency determined under Article 19 unless otherwise provided for by law or agreed upon by the parties. As just stated above, there are no clear provisions regarding money that have been agreed upon by the Federal Republic of Somalia or Federal Member States; instead, individual citizens have become the sole decider in the currency or foreign exchange. 

Central banks carry out a nation’s monetary policy and control its money supply, often mandated with maintaining low inflation, steady GDP growth, cash and federal reserve’s requirement among others. While the Ministry of Finance regulates to physical policy. However, the monetary policy of the Central Bank of Somalia (CBS) is currently not functioning. Yet, the central bank of Somalia has a department called Currency Department.

Under Article 123 of the Federal Constitution as well as Article 21 of the Central Bank Act give the Bank the exclusive right to issue notes and coins, which is one of the two main functions of the department (Issue of currency & Custodian of National Reserve). However, this department keeps money in dollars and all Somali shillings or cash that is now in circulation within the country has been rendered ambiguous or vague by the Central Bank of Somalia.  

NO SEPARATE LEGAL TENDER

Under a no separate legal-tender regime, a country adopts another country’s currency, thereby surrendering its monetary policy power. According to the International Monetary Fund (IMF), under an exchange arrangement without separate legal tender, the currency of another country acts as the only legal tender. The most widely used example of an exchange arrangement with no separate legal tender is a formal dollarization. In this case, the country adopts the dollar as its currency. The most common examples are the case of Somalia since dollars coexist with the former domestic currency, the Somali Shillings. However, the printing of new Somali Shillings is prohibited, so they will coexist with dollars until all shillings’ notes wear out physically.

1.4 THE FUNCTIONS OF THE CENTRAL BANK OF SOMALIA

Central Bank of Somalia (CBS) serves as the Central Bank of Somalia and is responsible for regulating and controlling the monetary and banking system in the country. Under article 3 of the Central Bank of Somalia Act Law no. 130 of 22 April 2012, states that the Bank shall be known as the Central Bank of Somalia and shall also be known by its alternative corporate name of Bankiga Dhexe ee Somalia.

However, after the central government of Somalia disintegrated, all institutions, including the country’s central bank, were also destroyed. The Somali central bank has begun to open branches gradually around the country, particularly at the administrative centers of the federal member states. Given that the branches in the South West and Galmudug states have previously opened, the Central Bank’s branch in Jowhar is the third branches of the federal member states. In order to contribute to the country’s economic recovery, the Central Bank intends to decentralize and provide services to federal member states, which includes the opening of the third branch (Jowhar) on 19^th October-2023.  

Under article 5 of the same law provides the functions of the Central Bank of Somalia; –

The Bank shall:

1. Formulate implement and be responsible for monetary policy and implement the foreign exchange policy;
2. Hold and manage the foreign exchange reserves of Somalia;
3. License, regulate and supervise all banks and financial institutions so as to foster the liquidity, solvency and proper functioning of a stable financial system;
4. Formulate and implement such policies as to best promote the establishment, regulation and supervision of efficient and effective payment, clearing and settlement systems;
5. Where appropriate, administer payment, clearing and settlement systems;
6. Act as banker and adviser to, and as fiscal agent for the Government and public entities;
7. Act as sole issuer of legal tender Somali currency notes and coins; and
8. Shall compile, analyze, and publish the monetary, financial balance of payments statistics and other statistics covering various sectors of the national economy.

1.5 OLD DOLLAR NOTES ARE REJECTED IN THE COUNTRY

Large commercial or influential business persons have a great effect on the market in relation to financial sectors, including the fixed rate of exchange system, which is based purely on their instructions and command, given that Somalia lacks a strong central authority.  

On earlier 2021, a certain area of the country, prohibited the use of fifty dollars by dealers and businessmen. In particular, this $50 cash, dated 2013 was rejected as fraudulent. The report also claims that the business-community’s rejection would imply that a 50 dollar note before 2013 will no longer be accepted or be a legal tender anywhere in the world… this effort is to curb billions of illegal monies in dollar bills warehouse around the region and continent at large emanating from drug-related, terrorism and fake bills or multiple suspicious bills, that are not perfectly aligned in a row.

The country’s Central Bank director, Mr. Abdirahman Mohamed Abdullahi, ordered Private Sector Banks and big tycoons to accept the fifty dollars, but that was in vain because Puntland and Somaliland businessmen have refused to accept that money as of 2023.

1.6 CONCLUSION

The pursuit of national economic goals may be made simpler by the presence of a national currency. Additionally, it can be helpful in emergency situations and shields citizens from potential issues with being forced to use foreign currencies. It is also a part of sovereignty. Stable countries are considered to be attractive destinations for investments. The more that people want to invest in a country, the more that country’s currency will appreciate or be worth. This is because investors from other countries need to use that country’s currency in order to invest. The opposite is also true: unstable countries do not attract investors. When investors are uncertain about a country’s future, the demand for its currency typically falls. Somalia, is a good example which experienced a financial crisis following the fall of its central government.

[1] Sixth Edition 1990

[2] Published by Chambers Harrap Publishers Ltd, 1993

[3] Act Law no. 130 of 22 April 2012

[4] See, Article 54 of the constitution