The Volatility Of Somalia’s Unregulated Exchange Rates
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Date
2015-05
Authors
Ibrahim Nor, Mohamed
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Abstract
Historically, the monetary system of Somalia was stable and its national currency
(Somali Shilling) had very strong value but Somali shilling started to depreciate after
1980s and its value reached to a very low level. Somalia’s central government
collapsed in 1990 following three decades of stability. Following the collapse of the
government, the national currency continued to circulate without sovereign support
and the country’s FX market has been operating without regulation. Though Somali
people have been using this FX market, the market is criticized of not having the
basic foundations of an FX market. During this period, the value of the Shilling
experienced unpredictable volatility in particular in 1997, 2001, 2008, and 2011. The
aim of this study is to examine the volatility of Somalia’s unregulated exchange rates
and whether internal and external factors of the economy can influence this volatility.
This study utilized GARCH model to model the volatility of Somalia’s unregulated
exchange rates. The study found that the volatility of Somalia's unregulated exchange
rates is influenced by its own shocks and the internal and external factors of the
economy. On the other hand, the study found that the volatility of Somalia’s
unregulated exchange rates are highly persistent, indicating the existence of volatility
clustering in the series. However, the volatility is not explosive and reverts to its
mean over time. Therefore, the behavior of Somalia’s unregulated FX market implies
the existence of informal monetary mechanisms that was created naturally during the
absence of regulatory authority in Somalia. Nevertheless, the existence of highly
persistent exchange rate volatility in the context of Somalia challenges the
assumption that Somali national currency gained positive value without sovereign support. This study argues that though Somali shilling circulated without regulatory
authority during the absence of effective government in Somalia, this circulation is
not accompanied by healthy and stable bilateral exchange rates. These results suggest
the need for re-building the federal central bank of Somalia and establishing central
bank offices (braches) in each state. In addition, the new federal government should
introduce a new national currency that can support Somalia's postwar re-building.
Introducing a new currency is difficult and goes through a complex process but it can
be completed if the commitment of top government officials is received.
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Management