A Credible Somali Shilling: The Case for Compliance & a Trustworthy Reserve Currency Board

BY Guleid Osman: Somalia is approaching one of the most consequential economic reforms since the reconstruction of its federal institutions, restoring a credible national currency after more than three decades without regular official banknote issuance. The monetary reality is unusual but clear. The economy is deeply dollarized, US dollars dominate higher-value transactions and mobile-money balances, while the remaining Somali shilling notes have largely served small cash transactions. Counterfeiting, deterioration of notes and declining acceptance have eroded the shilling’s usefulness and disproportionately harmed lowincome households, petty traders and people outside formal digital finance.

The reform is no longer merely theoretical. The Central Bank of Somalia’s 2025-2029 Strategic Plan identifies issuance of a viable national currency and strengthened monetary policy among its priorities. IMF-supported programmes have continued to refer to preparation for a currency exchange and a currency board arrangement. In 2026, publicly reported preparations included work on the currency-board framework, amendments to the

Central Bank law and specialised technical assistance adapted to Somalia’s highly dollarised economy. These are encouraging steps, but preparation must not be confused with readiness to launch.

From my experience working in Somalia’s financial sector over the past eight years, including banking, compliance, payments and regulatory matters, I believe the country needs a monetary arrangement that is simple enough to understand, strict enough to resist political pressure and transparent enough to earn public confidence. A properly designed currency board can meet that test. A weak peg presented as a currency board cannot.

What an orthodox currency board means

Steve H. Hanke and Kurt Schuler’s Currency Boards for Developing Countries: A Handbook defines the essential discipline of an orthodox currency board. It issues domestic monetary liabilities convertible on demand into an anchor currency at a fixed exchange rate, holds foreign reserve assets sufficient to cover those liabilities, and does not conduct discretionary monetary policy. Money is issued when the board acquires anchor-currency reserves and is retired when holders redeem domestic currency. The rule, rather than official discretion, governs the monetary base.

This distinction is fundamental. A conventional fixed exchange-rate promise can be weakened by reserve losses, central-bank lending or government financing. An orthodox board is designed so the promise is operationally and legally binding. Hanke and Schuler generally advocate reserve coverage above 100 percent of the monetary base, commonly within a 100-110 percent range, with reserves held in liquid, low-risk assets denominated in the anchor currency. Convertibility must be genuine and available through the banking system, not an administrative slogan.

Broader literature supports both the credibility benefits and the need for caution. IMF studies by Bennett and by Ghosh, Gulde and Wolf describe currency boards as strong rule-based regimes capable of reducing inflation and strengthening confidence. Experience in Estonia, Lithuania, Bulgaria and Hong Kong shows that such arrangements can anchor expectations. Yet Argentina’s collapse in 2001-02 demonstrates that calling a system a currency board is insufficient, fiscal weakness, banking fragility, rigidities, policy inconsistency and departures from orthodox backing can eventually overwhelm a peg. The lesson for Somalia is not that currency boards inevitably succeed or fail, it is that institutional design and supporting policies determine the outcome.

Why a currency board fits Somalia – with conditions

Somalia has limited practical scope for discretionary monetary policy today. Dollarisation already imports US monetary conditions, but without giving Somalia an accepted, welldesigned local means of payment or the seigniorage associated with a trusted national currency. A dollar-anchored Somali shilling would formalise the stability preference that households and businesses have revealed through their own behaviour.

The US dollar is the logical initial anchor because it dominates remittances, trade invoicing, bank deposits and mobile-money transactions. Pegging to a currency unfamiliar to the market would create unnecessary conversion risk. A credible dollar anchor could make prices easier to compare, reduce exchange uncertainty, support small-value payments and enable the government to restore a monetary symbol of national economic administration without pretending that Somalia can immediately replace the dollar.

However, a currency board is not a shortcut around institution-building. It removes monetary financing and discretion, but it cannot repair weak public finances, insolvent banks, poor supervision, fragmented political ownership or deficient payment infrastructure. It also gives up an independent interest-rate policy and greatly limits conventional lender-of-last-resort support. Somalia must therefore adopt the board as one component of a wider financialstability framework.

Ten recommendations for a credible Somali currency board

1.  Establish the regime in primary law: Parliament should enact a clear Currency Board Act and align it with the Central Bank of Somalia Act, public-finance laws, and the bank-resolution framework. The legislation should define the anchor currency, fixed exchange rate, eligible reserve assets, minimum reserve ratio, convertibility requirements, prohibited activities, governance, auditing, disclosure, and procedures for exceptional amendments. Administrative decisions should not be able to alter the fixed rate or core safeguards. Any fundamental change should require a supermajority and a published independent assessment.
2.  Ring-fence the currency board balance sheet : The currency issue function should have a balance sheet legally and operationally separate from CBS’s banking supervision, payment oversight and other functions. Currency-board reserves must not be pledged, lent to government, invested in domestic public debt or used to recapitalise banks. This structure can operate as an autonomous currency-board department within the CBS if the separation is enforceable, independently audited and visible to the public.
3. Require full and prudent foreign-reserve backing : Every Somali shilling note, coin and other monetary-base liability covered by the law should be backed by eligible net foreign reserves at no less than 100 percent, with a prudent target of 105-110 percent. The surplus absorbs valuation and operating risks. Eligible assets should be highly liquid, high-quality US-dollar instruments held with reputable international custodians. Borrowed reserves and encumbered assets should be separately disclosed and should not count as freely usable backing.
4.  Set the conversion rate through evidence, not politics: The opening rate must reflect the prevailing market rate and be tested against reserve adequacy, prices, wages, government accounts, cash demand and bank balance sheets. An artificially strong shilling would encourage immediate redemption and reserve loss; an excessively weak rate would unfairly reduce domestic purchasing power. The selected rate should follow an independently reviewed technical study and a clearly announced valuation date.
5. Guarantee practical two-way convertibility: The board must buy and sell US dollars against Somali shillings at the fixed rate, subject only to a narrow, published operational spread or fee. Banks and licensed foreign exchange dealers should act as access points across Federal Member States. Convertibility should be supported by reliable settlement, cash logistics, cybersecurity, AML/CFT controls and business-continuity arrangements. Legal convertibility without operational access will not create trust.
6.  Prohibit monetary financing and building fiscal buffers: The board and the CBS currency-issue function should be prohibited from lending to the Federal Government, Federal Member States, public enterprises or banks. The government must finance spending through revenue, grants and transparent borrowing. Because monetary financing and exchange-rate adjustment will not be available, Somalia should adopt a medium-term fiscal framework, cash buffer, debt limits and a contingency mechanism for drought, security and other shocks. Fiscal discipline is not an optional companion to a currency board, it is one of its foundations.
7.  Protect financial stability without compromising reserves: Somalia needs a pre-funded emergency-liquidity and bank-resolution architecture outside the currency-board reserves. A limited liquidity facility could be financed by government deposits, bank contributions, donor support or a separately accumulated stability fund, with strict collateral and solvency requirements. Deposit-protection and resolution arrangements should be developed gradually. The CBS must strengthen risk-based supervision, capital and liquidity standards, related-party exposure controls, stress testing and recovery planning before launch.
8.  Use coexistence, non-forced de-dollarization: The new shilling should circulate alongside the US dollar during a defined transition period. The government can foster demand by accepting taxes and fees in shillings, using them for a measured share of small domestic payments, and ensuring an adequate supply of lowdenomination notes and coins. It should not force households to surrender dollars, impose punitive exchange controls, or abruptly redenominate bank and mobile-money balances.  Voluntary confidence will encourage adoption; coercion will undermine it.
9. Make inclusion and federal ownership part of the design: The exchange plan must protect people holding small amounts of old notes, including those without identity documents or accounts, while applying proportionate safeguards against bulk counterfeits and illicit funds. Exchange windows, thresholds and enhanced checks should be published in advance. Federal Member States, banks, money-transfer businesses, mobile-money operators, merchants, women’s groups and representatives of vulnerable communities should participate in implementation planning. A national currency cannot succeed if it is perceived as a Mogadishu-only project.
10.  Publish the numbers and submit them to independent verification: The board should publish a concise balance sheet at least monthly – preferably weekly during the launch period – showing monetary liabilities, eligible reserves, reserve coverage, asset composition and convertibility transactions. Annual financial statements should be audited by a reputable independent auditor and reported to Parliament. A public reserve dashboard, combined with regular IMF-supported safeguards assessments, would allow citizens and markets to verify that each shilling is genuinely backed.

Risks that must be acknowledged

A publication advocating a currency board must be candid about its costs. Somalia would not be able to devalue the shilling or expand base money freely in response to domestic shocks. Adjustment would occur through prices, wages, fiscal policy and financial flows, which can be painful. The dollar may strengthen against the currencies of Somalia’s trading partners, affecting competitiveness. Reserve losses would automatically contract the monetary base. Banks would need stronger liquidity management because central-bank emergency lending would be narrow.

These risks do not necessarily argue against the arrangement. Somalia already has extensive dollarisation and little effective discretionary monetary policy. They do, however, argue against launching the board before fiscal, supervisory and operational safeguards are credible. They also argue for periodic public evaluation of competitiveness, payment inclusion and financial stability – without undermining the fixed-rate rule.

Conclusion: credibility before currency

Somalia does need a national currency, but the country’s immediate objective should not be monetary symbolism or rapid de-dollarisation. It should be the creation of a trustworthy shilling that ordinary Somalis will accept voluntarily. Hanke and Schuler’s core insight is highly relevant: confidence arises when the issuer is bound by a simple rule, maintains full reserve backing and exchanges its currency on demand at a fixed rate. The IMF and wider academic literature add an equally important warning: the rule survives only when supported by sound law, fiscal discipline, banking resilience and political commitment.

I therefore recommend that Somalia adopt a US-dollar-anchored currency board in principle, subject to independently verified readiness conditions. The regime should be orthodox in its reserve and convertibility rules, adapted to Somalia in its institutional placement, financialinclusion measures and coexistence with mobile money and the US dollar. The government should publish the proposed law, reserve plan, exchange methodology and readiness assessment for consultation before activation.

The decisive question is not whether Somalia can print attractive new banknotes. It is whether the state can credibly promise that every shilling issued is backed, convertible and protected from fiscal or political use. If that promise is embedded in law and demonstrated in daily operations, a new Somali shilling can become more than paper. I t can become a foundation for confidence, inclusion and accountable economic sovereignty.

Selected references

• Bennett, Adam G. G. (1993). Currency Board Arrangements: Issues and Experiences. IMF Occasional Paper No. 110. International Monetary Fund.
• Enoch, Charles, and Anne-Marie Gulde (1998). Are Currency Boards a Cure for All Monetary Problems? Finance & Development, 35(4). International Monetary Fund.
• Ghosh, Atish R., Anne-Marie Gulde, and Holger C. Wolf (1998). Currency Boards: The Ultimate Fix? IMF Working Paper WP/98/8. International Monetary Fund.
• Gulde, Anne-Marie (1999). The Role of the Currency Board in Bulgaria’s Stabilization. Finance & Development, 36(3). International Monetary Fund.
• Hanke, Steve H., and Kurt Schuler (1994; later revised edition). Currency Boards for

Developing Countries: A Handbook. ICS Press / Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise.

• International Monetary Fund (2018). Somalia: Currency Reform Assessment Letter for the Central Bank of Somalia.
• International Monetary Fund (2024). Somalia – Assessment Letter for the Central Bank of Somalia.
• International Monetary Fund (2025). Somalia: Third Review Under the Extended Credit Facility and Requests for Modification of Performance Criteria and Financing Assurances Review. IMF Country Report No. 25/191.
• Knöbl, Adalbert, Andres Sutt, and Basil B. Zavoico (2002). The Estonian Currency Board: Its Introduction and Role in the Early Success of Estonia’s Transition to a Market Economy. IMF Working Paper WP/02/96.
• Central Bank of Somalia (2025). Strategic Plan 2025-2029.
• African Development Bank (2025-2026). Somalia Financial Sector Development Project implementation and technical-assistance materials.

About the author
Guleid Osman Mohamed | Somali Currency Board | 8 and institutional governance. He is a former HSBC Bank employee, former Chief Executive Officer of the Somali Bankers Association, and former Banking Expert at Somalia’s Financial Reporting Center. He currently works as Economic Regulation Advisor. He holds an undergraduate degree in Economics, and a postgraduate qualification in Banking and Finance from the University of Leicester, United Kingdom. He is currently a PhD candidate in Leadership and Sustainable Economic Development. The views expressed in this article are personal.