Somaliland faces a high inflation rate as the surge in local goods and services prices rises exponentially and lowers our standard of living! Is it caused by the Government’s oversight, or is it more deep-rooted and driven by our import-based national cuisine? An economist’s point of view!
Preface
Despite not being a recognised country, Somaliland has devised all the necessary institutions and legal framework to manage its monetary matters and indeed has excelled in curbing inflation in the first four years of the current government tenure, Alas! But it is not a secret that the beast is out there and managed to jailbreak and escape the tight hands of the Government. Inflation, a menacing beast, usually makes its presence known loud and clear. Hence, it has caused the public’s outcry and is now the everyday talk of all the grannies and mothers who bear the burden of putting bread on our household dinner tables.
Inflation, one of the world’s most paradoxical phenomena due to its nature to be seen sometimes as a threat and other times as a blessing, is suddenly here among us uninvited and taking its toll. In simple terms, inflation is the rise in the price of goods and services over a given period. It is also the result of how our Federal Reserve controls our monetary policy, mainly the money supply. Many see inflation as a ‘booming economy’ while others describe it as a failing economy or heading towards a recession.
Inflation has a direct linkage to the standard of living by devaluing our money. From food, rent, fuel, transportation, and almost every goods and service, prices have recently been rising in Somaliland. The effect of inflation has made it very difficult for many of our households to acquire necessities needed for survival as it has gone beyond their purchasing power. The politicians and public both voiced their frustration and disappointments without really bothering to analyse the root cause of this sudden inflation reasonably.
Inflation is also a risk to our peace and stability and will be a detriment to our future if we do not address it rightly and on time, as it brings an unbearable burden on our citizens. Sure, inflation makes the public adamantly and slowly lose hope with their governments usually demand effective remedy/solution to be undertaken, realising that they may not live comfortably for a more extended period, such is the harsh reality. We must not lead them towards a path akin to Zimbabwe’s that has failed to curb inflation in its early infancy days and then was left to fight the mother of all inflations that grew tooth and nail.
After gaining independence in 1980, Zimbabwe was well and truly on its way to economic prosperity, experiencing growth for the next two decades relatively better than its African counterparts. It was a country blessed with natural resource endowment. In 2008, Zimbabwe recorded the second-highest inflation levels ever known on Earth. How did this come about? It was a combination of a fall in government income due to reduced production and exports and increased government spending. As a result, there was a classic case of ‘too much money but not goods’, which led to high inflation. We should heed the warnings of one of our African neighbours!
This article will analyse the correlation between the rise of prevailing inflation and its effect on the standard of living in Somaliland. Also, we will point out the necessary precautions and measures that can be taken to mitigate the dangers of such a curse on our blessed and untainted motherland.
Standard of Living & The Effects of Inflation
The average annual salary in Somaliland, which is yet to be adequately documented and varies from source to source, is thought to be one of the lowest in the world. All of the Government’s employees and the labourers, military personnel, and police force are all paid their wages by the ever-declining Somaliland Shilling against foreign imported products. The cause for the decrease in the countries national banknote is because Somaliland is a heavy import country. This means that it always imports products without exporting a similar figure. This system causes money flow to be consistently flowing out of the nation, causing its currency to get weaker and weaker.
Inflation is not always a bad thing regarding the change in the price of items in an economy. However, that is if it is coupled with an increase in money supply in the market. In Hargeisa, prices of general goods have immensely increased, such as the prices of coriander, potato, and lettuce have increased by 24%,20%, and 20%, respectively. Such a significant increase in a short period spells trouble for the country. It could create civil unrest and discontent within the general population who have average income as this will lead them to shell out more of their wages on commodities that were significantly cheaper the previous year.
So, why does inflation keep happening? Why can’t everything stay the same, making it predictable and effortless to buy and sell things over the long run? Well, there are primarily two leading causes of inflation that make prices increase at alarming rates. These are:
Demand-Pull Inflation
This is when demand for a product significantly increases the cost as there are not enough supplies to fulfil the customers. This is usually a significant spike in economic growth, which causes retailers to increase their product prices to gain more profit. An example of this happening can be seen in the Sanaag region, where around 4,000 artisanal miners were obtaining abnormal amounts of minerals (especially gold) that have come into an unforeseen fortune. This caused them to go on a spending spree and drive the general prices of goods and services to inflate massively. The prices of khat increased to around $50 per quarter, and consumers were still demanding it. Of course, this is misfortunate for those who aren’t connected to the mining industry to miss out on their success and unwillingly obtain the increased prices. Although this can only be seen in one area, the rest of the country suffers from a different kind of inflation.
Cost-Pull Inflation
This type of inflation is the one that mainly affects Somaliland and occurs when retailers have to increase their product prices due to the rise in production costs. This is to ensure that their profit margin is protected. There are a few leading causes that initiate the increase of production costs, these are:
• Firstly, because of the increase in prices of components and raw materials such as oil, gas, and food items. There are many reasons for this occurring, but the specific cause is the shortage of containers to transport goods. We are in a global supply chain crisis never seen before; Covid-19 has caused the global population to save over 5 trillion dollars. Now that restrictions are loosened, the consumers in the richer countries went on a spending frenzy, causing the global container crisis.
• Another main reason is the country’s heavy dependence on almost all goods imported, and goods are bought in foreign exchange by the traders while passing out to the public in a dollar-shilling camouflage price tagging that safeguards their interest.
• Although the central bank of Somaliland has successfully fixated the Shiling to Dollar exchange rate to around S.Sho 8500 – $1 for the fourth year straight, and as it may politically sound an outstanding achievement, it is futile for the public since all products at the market place are priced in dollars. The economy is more based on Dollars due to heavy dependence on imports.
Ninety percent of the products that Somaliland consumes are foreign imported. This system implies that the country does not hold power to control the prices set. People in the capital city, Hargeisa, are living in a worrying situation as the standard of living is gradually but certainly falling. Having done the research, the consumer price index (CPI) obtained from the Somaliland ministry of planning and national development states the CPI increased by 2.4 percent up to May 2021. This seems to be a relatively safe rate. However, looking at market prices portrays a different and gloomier image. For example, last year, it took me 5 dollars to get a pack of eggs, but this year it takes me 7.5 dollars to purchase that same packet. That’s is a 50% increase in the price of eggs. I’m sure that many of the consumers are struggling to afford eggs the same way they used to last year
Our Parting Sage & Advice
Inflation is genuinely a curse that affects and ravages the economy of the country after country and must be addressed immediately. A little inflation can be good for our economy as it encourages consumer spending before price rise as well as lowers our Government’s debt levels. What we ‘Somaliland’ need to watch out for is the high inflation that reduces the citizen’s real spending income, eventually leading them to consume less and enter a state of poverty. After analysing and dissecting the effect of Inflation on Somaliland’s standard of living and the risks associated with it. We want to recommend several critical points to the Government of Somaliland on sailing out of these troubled waters and setting sail smoothly.
• First of all, devising a 30-year national plan for food security and altering our 100% import-based national cuisine. Come on! A nation that all the ingredients of its national cuisine are based on imported stuff will never be free of economic crisis, and hence we need to have a long-term plan to have homegrown national cuisine.
• The import of the menacing Khat/Jaad must immediately be controlled to its ultimate ending as it drains our foreign exchanges without any reciprocal trade balance. If this can not be achieved in the short term, we need to balance our trade imbalances with more exports to Ethiopia.
• In the long term, if Khat/Jaad usage can not be rooted out of society, which is the best solution indeed, let us then accept defeat with humility and farm Khat/Jaad locally to retain our much needed foreign exchanges.
• To reduce the burden and effects of inflation on the social workforce like Teachers, Health workers, Army, consider introducing a Cost-of-living adjustment known as COLA. Cola is usually negotiated into a contract, meaning workers and firms will agree on a salary over one year and factor in inflation rate into the pay. For example, if the rate is 5%, the bump in salary will also be the same margin. This would considerably help those most affected by the rise in prices, such as government workers, police, and military force.
• The Government can subsidise and introduce agriculture farming as a ‘cash crop’ to replace the imported daily consumed vegetables and even consider exporting to profit.
• For the Government to introduce and subsidise local food production and eliminate the need for import. Ethiopia, for example, uses 90% of locally produced goods in their households and lie within their means. Factories must be immediately built so that future generations can reap the rewards of lower-priced foods.
• A mandate must be set that all individual and business expenses be paid in Somaliland Shillings, and we must prioritise our currency instead of the $US Dollars.
• It is proven that with more employment opportunities, the effects of inflation decrease. The Government and private sector should improve capacity and create more job opportunities
Jointly co-authored by Mohd Faisal Hawar and Mohamoud Faisal Hawar, both Oil and Gas Management Graduates, specialising in Oil and Gas Fiscal Regimes, Oil and Gas Economists, Trainers & Consultants on all the Extractive Fiscal Regimes.
Mohamed Feysal Hawar
Extractive Resources Economist (Upstream Petroleum & Mining Economist )
BBA (Hons) Oil and Gas Management.
mohd.f.yusuf@gmail.com
Mohamoud Feysal Hawar
Extractive Resources Economist (Upstream Petroleum & Mining Economist )
BBA (Hons) Oil and Gas Management.
mahmoudfeysal@gmail.com