In 1991, the collapse Mohamed Siad Barreâ€™s Democratic Republic of Somalia, and subsequent descent into chaos, saw the emergence of a new commodity currency, a currency worth its paper, ink, and transport costs.
Prior to the collapse of the state, the national currency of Somalia was the Somali shilling (SoSh). The value of the SoSh had been diminished by a reckless monetary policy pursued by the central bank in an attempt to gain seigniorage for the government. Just how reckless this policy was is made clear by the fact that the total quantity of currency in circulation in 1985 was 3.8 billion SoSh, but had increased to more than 155.7 billion SoSh by 1990.
Nevertheless, the collapse of the state saw the collapse of all governmental institutions â€“ including the central bank. Since the collapse of the Somali central bank in 1991, four currencies have gone into circulation in Somalia: the Naâ€™ Shilling, the Somaliland Shilling, the Balweyn I, and the Balweyn II.
The Naâ€™ Shilling was introduced in northern Mogadishu in 1992 and again reissued in 2001. It is a distinct note that does not resemble the pre-1991 note. It has, however, failed to gain widespread acceptance, and instead circulates mainly within a single clan. The semi-autonomous region of Somaliland has established its own central bank, and issues its own currency, the Somaliland shilling, intended to be circulated exclusively, and act as legal tender within the territory. In 1997, a south Mogadishu leader issued the Balweyn I note, which is a forgery of the pre -1991 central bank notes. Similarly, a Puntland administration has issued the Balweyn II, another forgery of the pre-1991 SoSh. Both notes are widely accepted forgeries of the pre-1991 SoSh. The Somali public have, despite the collapse of and, until recently, continued absence of a Somali central bank, not changed their expectation of the currencyâ€™s exchange value.
Although the Balweyn notes can be distinguished from each other and the pre-1991 currency, the Somali public have treated them all as the same currency. This has led to the peculiar situation where, rather than competition limiting the amount of inflation and seigniorage in each currency, there has been competition for seigniorage in the same currency. Nevertheless, rather than leading to unbounded inflation, Somalis have limited inflation by refusing to accept anything larger than the pre-1991 denominations. This has placed an upper limit on inflation, and has actually allowed for a relatively stable monetary system to emerge.
It has been estimated that it cost $0.03 to print and import new bank notes into Somalia. When the first Balweyn notes began to circulate in Somalia in 1997, they traded for about $0.12. By late 2001, competition for seigniorage had pushed the value of a 1000 SoSh down to approximately $0.04. This has transformed the SoSh into â€˜â€™commodity money,â€™â€™ worth its paper, ink and transport costs. This has meant further printing of the money is no more profitable than any other investment. So after an initial bout of inflation, prices have stabilised, and the currency has, in fact, appreciated slightly, as imports of new reprints has slowed.
Nevertheless, although the currency provides some stability, it is not without its problems. To make purchases of any significant size, large bundles of money are needed. For this reason, it is used alongside US dollars. The Somali peopleâ€™s use of the currency in absence of a state monopoly, however, is testament to its relative success; as is the fact that it circulates with easy convertibility 50 km within the Ethiopian border; whereas the Ethiopian Birr has little circulation in Somalia.