Central recommendation: Somalia should move toward a legally protected, US-dollar-anchored currency board, but activation should wait until reserve, fiscal, banking, operational and public-confidence safeguards have been independently verified. The process should start with a fully backed currency exchange that operates alongside the US dollar; forced de-dollarisation should be ruled out.
Somalia’s monetary moment
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Somalia is nearing one of the most significant economic reforms since the rebuilding of its federal institutions: the restoration of a credible national currency after more than three decades without the regular issuance of official banknotes. The country’s monetary landscape is unusual, but its direction is unmistakable. The economy remains deeply dollarized, with US dollars dominant in high-value transactions and mobile-money balances, while the Somali shilling survives mainly in small cash payments. Counterfeiting, worn notes and declining public acceptance have further weakened the currency, with the greatest burden falling on low-income households, petty traders and people outside formal digital finance.
The proposed reform has moved beyond theory. The Central Bank of Somalia’s 2025-2029 Strategic Plan lists the introduction of a viable national currency and stronger monetary policy among its priorities. IMF-supported programmes have continued to reference preparations for a currency exchange and a currency board arrangement. Publicly reported work in 2026 included development of the currency-board framework, amendments to the Central Bank law and specialised technical assistance tailored to Somalia’s heavily dollarised economy. Those developments are positive, but preparation should not be mistaken for launch readiness.
Drawing on more than eight years of work in Somalia’s financial sector, including banking, compliance, payments and regulatory affairs, I believe the country requires a monetary system that is easy to understand, resistant to political pressure and transparent enough to command public confidence. A carefully designed currency board could meet those requirements. A weak peg marketed as a currency board would not.
What an orthodox currency board means
In Currency Boards for Developing Countries: A Handbook, Steve H. Hanke and Kurt Schuler describe the core discipline of an orthodox currency board. It issues domestic monetary liabilities that can be converted on demand into an anchor currency at a fixed rate, holds enough foreign reserves to cover those liabilities and does not pursue discretionary monetary policy. Domestic money enters circulation when the board acquires anchor-currency reserves and is withdrawn when holders redeem it. The monetary base is governed by a rule rather than official choice.
That distinction matters. A conventional fixed exchange-rate commitment can be undermined by falling reserves, central-bank lending or government financing. An orthodox currency board is intended to make the commitment legally and operationally binding. Hanke and Schuler generally support reserve coverage above 100 percent of the monetary base, commonly in the 100-110 percent range, with reserves invested in liquid, low-risk assets denominated in the anchor currency. Convertibility must be real and accessible through the banking system, not simply promised in official statements.
The wider literature points to both the credibility gains and the dangers. IMF studies by Bennett and by Ghosh, Gulde and Wolf identify currency boards as strong rule-based arrangements that can lower inflation and reinforce confidence. Estonia, Lithuania, Bulgaria and Hong Kong demonstrate that such systems can anchor expectations. Argentina’s collapse in 2001-02, however, shows that the label alone offers no protection. Fiscal weakness, fragile banks, economic rigidities, inconsistent policies and departures from orthodox backing can ultimately break a peg. Somalia’s lesson is therefore neither that currency boards always work nor that they inevitably fail; outcomes depend on institutional design and the policies supporting it.
Why a currency board fits Somalia – with conditions
Somalia has little practical room for discretionary monetary policy at present. Dollarisation has already imported US monetary conditions, but without providing the country with a widely accepted local means of payment or the seigniorage that comes with a trusted national currency. A Somali shilling anchored to the dollar would formalise the preference for stability that households and businesses have already expressed through their behaviour.
The US dollar is the logical initial anchor because it dominates remittances, trade invoicing, bank deposits and mobile-money transactions. Choosing a currency unfamiliar to the market would introduce avoidable conversion risk. A credible dollar peg could simplify price comparisons, reduce exchange-rate uncertainty, improve small-value payments and allow the government to restore a monetary symbol of national economic administration without claiming that Somalia can immediately displace the dollar.
A currency board is not, however, a substitute for institution-building. It can eliminate monetary financing and limit discretion, but it cannot repair weak public finances, insolvent banks, inadequate supervision, divided political ownership or deficient payment infrastructure. It would also surrender an independent interest-rate policy and sharply restrict conventional lender-of-last-resort assistance. Somalia must therefore treat the board as one element of a broader financial-stability framework.
Ten recommendations for a credible Somali currency board
1. Establish the regime in primary lawParliament should pass a clear Currency Board Act and bring it into line with the Central Bank of Somalia Act, public-finance legislation and the bank-resolution framework. The law should specify the anchor currency, fixed exchange rate, eligible reserve assets, minimum reserve ratio, convertibility obligations, prohibited activities, governance arrangements, audit requirements, disclosure rules and the process for exceptional amendments. Administrative action should not be enough to change the fixed rate or remove core safeguards. Any fundamental amendment should require a supermajority and a published independent assessment.
2. Ring-fence the currency board balance sheetThe currency-issuance function should operate on a balance sheet legally and operationally separate from CBS responsibilities for banking supervision, payment oversight and other activities. Currency-board reserves must not be pledged, lent to the government, invested in domestic public debt or used to recapitalise banks. The arrangement could remain an autonomous department within the CBS, provided the separation is enforceable, independently audited and clearly disclosed to the public.
3. Require full and prudent foreign-reserve backingEvery Somali shilling note, coin and other monetary-base liability covered by the law should be supported by eligible net foreign reserves equal to at least 100 percent, with a prudent target of 105-110 percent. That surplus would provide protection against valuation and operating risks. Eligible assets should consist of highly liquid, high-quality US-dollar instruments held with reputable international custodians. Borrowed or encumbered reserves should be disclosed separately and excluded from freely usable backing.
4. Set the conversion rate through evidence, not politicsThe opening exchange 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 could trigger immediate redemptions and drain reserves, while an excessively weak rate would cut domestic purchasing power unfairly. The rate should be based on an independently reviewed technical study and a clearly stated valuation date.
5. Guarantee practical two-way convertibilityThe board should purchase and sell US dollars for Somali shillings at the fixed rate, subject only to a narrow, publicly disclosed operational spread or fee. Banks and licensed foreign-exchange dealers should provide access across the Federal Member States. The system will also require dependable settlement, cash logistics, cybersecurity, AML/CFT controls and business-continuity plans. Convertibility written into law but unavailable in practice will not build confidence.
6. Prohibit monetary financing and building fiscal buffersThe board and the CBS currency-issue function should be barred from lending to the Federal Government, Federal Member States, public enterprises or banks. Government spending would have to rely on revenue, grants and transparent borrowing. Since monetary financing and exchange-rate adjustment would not be available, Somalia should establish a medium-term fiscal framework, a cash buffer, debt limits and a contingency mechanism for drought, insecurity and other shocks. Fiscal discipline is not an optional addition to a currency board; it is one of the regime’s foundations.
7. Protect financial stability without compromising reservesSomalia needs a pre-funded emergency-liquidity and bank-resolution structure that sits outside the currency-board reserves. A limited liquidity facility could draw on government deposits, bank contributions, donor support or a separately built stability fund, subject to strict collateral and solvency conditions. Deposit-protection and resolution arrangements should be introduced gradually. Before launch, the CBS must strengthen risk-based supervision, capital and liquidity standards, related-party exposure rules, stress testing and recovery planning.
8. Use coexistence, non-forced de-dollarizationThe new shilling should circulate alongside the US dollar for a defined transition period. The government can encourage its use by accepting shillings for taxes and fees, assigning them a measured role in small domestic payments and ensuring sufficient supplies of low-denomination notes and coins. It should not compel households to surrender dollars, impose punitive exchange controls or abruptly redenominate bank and mobile-money balances. Adoption built on voluntary confidence will be stronger than adoption imposed through coercion.
9. Make inclusion and federal ownership part of the designThe exchange programme must protect people holding small quantities of old notes, including those without identity documents or bank accounts, while applying proportionate safeguards against large-scale counterfeiting and illicit funds. Exchange locations, thresholds and enhanced checks should be announced in advance. Federal Member States, banks, money-transfer companies, mobile-money operators, merchants, women’s groups and representatives of vulnerable communities should help shape implementation. A national currency will not succeed if it is viewed as a Mogadishu-only initiative.
10. Publish the numbers and submit them to independent verificationThe board should issue a concise balance sheet at least monthly and, ideally, weekly during the launch period. It should show monetary liabilities, eligible reserves, reserve coverage, asset composition and convertibility transactions. Annual financial statements should be audited by a reputable independent firm and presented to Parliament. A public reserve dashboard, supported by regular IMF safeguards assessments, would enable citizens and markets to determine whether each shilling is genuinely backed.
Risks that must be acknowledged
Any serious case for a currency board must also address its costs. Somalia would lose the ability to devalue the shilling or expand base money freely in response to domestic shocks. Adjustment would instead take place through prices, wages, fiscal policy and financial flows, potentially causing hardship. A stronger dollar against the currencies of Somalia’s trading partners could weaken competitiveness. Reserve losses would automatically shrink the monetary base, while banks would need more sophisticated liquidity management because emergency central-bank lending would be tightly limited.
Those risks do not automatically rule out the arrangement. Somalia already operates with extensive dollarisation and has little effective discretionary monetary policy. They do, however, make it essential to establish credible fiscal, supervisory and operational safeguards before activation. They also support regular public assessments of competitiveness, payment inclusion and financial stability, provided those reviews do not weaken the fixed-rate rule.
Conclusion: credibility before currency
Somalia does need a national currency, but its immediate priority should not be monetary symbolism or rapid de-dollarisation. The goal should be a dependable shilling that ordinary Somalis choose to use. Hanke and Schuler’s central insight remains relevant: confidence develops when the issuer is constrained by a simple rule, maintains full reserve backing and exchanges the currency on demand at a fixed rate. The IMF and broader academic literature offer an equally important warning: such a rule can endure only when backed by sound law, fiscal discipline, resilient banks and sustained political commitment.
I therefore recommend that Somalia endorse a US-dollar-anchored currency board in principle, subject to independently verified readiness conditions. The arrangement should follow orthodox reserve and convertibility rules while adapting its institutional structure, financial-inclusion provisions and relationship with mobile money and the US dollar to Somalia’s circumstances. Before activation, the government should publish the proposed legislation, reserve strategy, exchange-rate methodology and readiness assessment for public consultation.
The central issue is not whether Somalia can produce attractive new banknotes. It is whether the state can convincingly guarantee that every shilling issued is backed, convertible and shielded from fiscal or political use. If that commitment is secured in law and demonstrated through daily operations, the new Somali shilling can become more than paper. It can provide 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 has more than 20 years of professional experience spanning banking, financial-sector regulation, economic regulation, AML/CFT compliance, payment systems 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 serves 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 also a PhD candidate in Leadership and Sustainable Economic Development. The views expressed in this article are personal.
