By Mohamed Ismail
The causations of inflation are primarily three: demand-push, rapid raise of wages and cost-push. The demand-push inflation is when there is too much money in the circulation of the economy, which can either be attributed to higher wage rate or the economy reaching at its full employment potentiality. In this instance, overheated economy is economical terminology that is used to describe this kind of economy phenomenon. The logical explanation of this is that when the disposable income of the people increases, they tend to consume more goods and services for the extra income earned. Consequently, higher consumption rate directly increases the demand for goods and services, which results in higher prices. When the spending power of a consumer increases, companies tend to supply more goods and services to the market, thus require to recruit more employees to maximise productivity. Hence, Somaliland’s higher inflation rate is neither caused by higher wages nor by full employment rate, thus demand-push is NOT the cause of this inflation.
Divergent governments pursue varied monetary policies to deal with both inflation and deflation. This is where a functioning central bank, which formulates these polices and set the inflation rate targets is of a great importance. There are three main components of monetary policies. The first mechanism that is used to deal with inflation is the manipulation of the interest rate both on savings and loans. When the economy is overheating, the interest on savings is increased as an incentive to encourage savings whilst reducing the spending power of consumers, thus decreasing the overall money into the circulation of the economy. The Interest on loans is also enhanced in order to discourage businesses to borrow money from banks for expansion purposes. Since, paying interest rate is prohibited in our religion, this is not an option. Another component of monetary policy strategy that can be deployed is the manipulation of money supply, which is in essence reducing or enhancing the government spending depending on the state of the economy and the inflation rate. For instance, when the inflation rate is high and the economy is overheating, the government tend to adapt contractionary monetary policy in order to avoid economy meltdown. In the case of Somaliland, money supply policy can be utilised to strengthen and enhance the value of Somaliland Shillings while decreasing the US Dollars. The central bank of Somaliland should formulate and implement policies, if the banks’ finance and human capital resources permit, to buy Somaliland shillings from the market by supplying more US Dollars to the market. The impact of this is that there will be fewer Somaliland Shillings in the market, and this, will thereafter result in an appreciation of Somaliland Shillings. A radical and rigorous analyses are needed to save Somaliland Shillings otherwise akin scenario to the Zimbabwe dollarization can be a real possibility in order to stabilise the prices of goods and services.
On the first hand, when a country exports large quantity of goods and services to the world, a depreciation of its exchange rate is advantageous- that is, the goods and services of this particular country become competitive and rather attractive in the foreign markets due to their lower prices. On other hand, particularly in the case of Somaliland, when a country has substantial deficits of a balance of payment where import of goods and services outweighs considerably the export, then, a depreciation of Somaliland Shillings solely contribute to higher inflation rate. This is because the extra cost of the exchange rate will be passed on consumers, as businesses need to buy foreign currencies to purchase goods and services from abroad and this only reduces the value of Somaliland Shillings further. Put differently, when a country imports more goods and services than it exports, the economical implication, specifically for the exchange rate is a depreciation of Somaliland Shillings whilst the value of other currencies will be sky-rocketed due their high demands. This is where the central bank of Somaliland needs to play an integral part in balancing the currencies in the market by supplying more dollars to the market in order to decrease its value.
Cost-push inflation is when the cost of producing goods and services increase, such as raw materials, patrol, etc. This can be influential factor that contributes to the high inflation rate of Somaliland, particularly the prices of petrol. This is where the intervention of Somaliland government is absolutely necessary. This intervention can take many forms and shapes, such as offering subsidiaries to the industries that are effected and provide more financial aides to businesses.
In conclusion, the inflation rate can solely be reduced via a functioning central bank that has the financial resources and the human capital to initiate and implement radical monetary policies that are specifically formulated to this issue.