Dollarization in East Africa: Causes, Consequences, and Future Forecasts
Keywords:dollarization, East Africa, Somalia, US Dollar
The dollarization phenomenon has been widespread among the East African countries for many decades. This trend results in several consequences that might be either beneficial or harmful to these countries and their likes.
The objective of this research was to empirically examine the causes, consequences and the future scenarios of dollarization in one of the leading regional countries such as Somalia. The research used a survey of over 100
respondents and applied descriptive statistics and t-tests to achieve the above objectives. The findings show that the main causes of Dollarization in Somalia are the implementation of the Hawallah (money transfer) system,
the remarkable absence of the central bank and other monitoring financial authorities, the increasing exports and imports of the Somalian economy, the loss of confidence in the local Somalian Shilling, and the relative ease at
which the Somalian Shilling can be printed and manipulated by selected market players. These causes are found to be mainly triggered by the revenue from exports, the policies and regulations implemented by the Somali government, the Somali Diaspora, and the international aid organizations. This has resulted in the foreign traders buying Somali goods at a relatively lower price and taking advantage of the depreciated Somali Shilling against most international currencies.
Aarle, B., & Budina, N. (1996). Currency substitution and
seignorage in Eastern Europe. The Journal of Policy Reform, 1(3), 279-298.
Berg, A., & Borensztein, E. (2000). Full dollarization: The
pros and cons. International Monetary Fund, IMF Economic Issues, 24, 17.
Bolbol, A. (1999). Seigniorage, dollarization and public debt: The Lebanese civil war and recovery experience, 1982-1997. World Development, 27(10), 1861-1873.
Čihák, M., & Podpiera, R. (2005). Bank behavior in developing countries: Evidence from East Africa. New York: International Monetary Fund.
Cockayne, J., & Shetret, L. (2012). Capitalizing on trust harnessing Somali remittances for counterterrorism, human rights and state building. Goshen, USA: Center on Global Counterterrorism Cooperation.
Court, E., Ozsoz, E., & Rengifo, E. W. (2012). The impact
of deposit dollarization on financial deepening. Emerging Markets Finance and Trade, 48(6), 39-52.
East Regional Department. (2012). Somalia country brief.
Tunisia: African Development Bank, African Development Fund.
Freitas, M. L. (2004). The dynamics of inflation and currency substitution in a small open economy. Journal of International Money and Finance, 23, 133-142.
Hake, M., Lopez-Vicente, F., & Molina, L. (2014). Do the drivers of loan dollarization differ between CESEE and Latin America? A Meta-analysis. Focus on European Economic Integration, 1, 8-35.
Hanke, S. H. (2003). Money and the rule of law in Ecuador.
The Journal of Policy Reform, 6(3), 131-145.
Heng, L. S., Makoto, K., & Koji, K. (2012). Exchange rate
movements in a dollarized economy: The case of Cambodia. ASEAN Economic Bulletin, 29(1), 65-78.
Honig, A. (2009). Dollarization, exchange rate regimes. Journal of International Money and Finance, 28(2), 198-214.
Kang, K. (2005). Is dollarization good for Cambodia? Global Economic Review: Perspectives on East Asian Economies and Industries, 34(2), 201-211.
Kasawneh, O., Salem, R., & Al Shaher, T. (2010). Unofficial
dollarization (Evidence from Jordan (1988-2007)). International Research Journal of Finance and Economics, 58, 7-13.
Katarikawe, M. (2001). Monetary policy frameworks in Africa: The case of Uganda. Kampala: Bank of Uganda.
Kessy, P. (2011). Dollarization in Tanzania: Empirical evidence and cross-country experience. London: International Growth Centre, London School of Economics and Political Science.
Kyriakos, N. C., & Christos, S. S. (2013). Institutions and financial dollarization: Indirect effects based on a policy experiment. Economics Letters, 121(3), 405-410.
Lin, S., & Ye, H. (2010). Dollarization does promote trade.
Journal of International Money and Finance, 29, 1124-1130.
Maimbo, S. M. (2006). Remittances and economic development in Somalia: An overview. Washington DC: Conflict Prevention & Reconstruction, Social Development Department, The World Bank.
Mengesha, L. G. , & Holmes, J. M. (2013). Does dollarization alleviate or aggravate exchange rate volatility? Journal of Economic Development, 38(2), 99-118.
Menon, J. (2008). Dealing with multiple currencies: What
options for the transitional economies of Southeast Asia? Journal of the Asia Pacific Economy, 13(2), 131-146.
Minda, A. (2005). Full dollarization: A last resort solution
to financial instability in emerging countries? The European Journal of Development Research, 17(2), 289-316.
Neanidis, K. C., & Savva, C. S. (2009). Financial dollarization: Short-run determinants in transition economies. Journal of Banking & Finance, 33, 1860–1873.
Nenova, T. (2013). Private sector response to the absence
of government institutions in Somalia. Washington DC: World Bank.
Nicolo, G. D., Honohan, P., & Ize, A. (2005). Dollarization
of bank deposits: Causes and consequences. Journal of Banking & Finance, 29(7), 1697-1727.
Payne, J. E. (2009). Official dollarization in El Salvador and
the inflation–inflation uncertainty nexus. Applied Economics Letters Volume, 16(12), 1195-1199.
Planning, M. O. (2013). Federal republic of Somalia, economic recovery plan 2014-2015. Mugadisho: Federal Republic of Somalia.
Ra, H. R. (2008). Modeling the dollarization: A case study for Cambodia, Laos, and Vietnam. Global Economic Review: Perspectives on East Asian Economies and Industries, 37(2), 157-169.
Samreth, S. (2010). Currency substitution and seignioragemaximizing inflation: The case of Cambodia.
Applied Economics, 42(15), 1907-1916.
Sayid, O., & Echchabi, A. (2013). Attitude of Somali customers towards mobile banking services: The case of Zaad and Sahal services. Economic Insights – Trends and Challenges, 2(3), 9-16.
Schuler, K. (1999). Dollarising Indonesia. Bulletin of Indonesian Economic Studies, 35(3), 97-113.
Selcuk, F. (1994). Currency substitution in Turkey. Applied
Economics, 26(5), 509-518.
Sharma, S. C., Kandil, M., & Chaisrisaw, S. (2005). Currency substitution in Asian Countries. Journal of Asian Economics, 16, 489-532.
Solovyeva, P. A., & Vasilieva, E. (2013). Financial dollarization in Russia: Causes and consequences. Macroeconomics and Finance in Emerging Market Economies, 6(2), 221-243.
Uganda, B. (2012). Annual supervision report. Kampala:
Bank Of Uganda.
Vieira, F. A., Holland, M., & Resende, M. F. (2012). Financial dollarization and systemic risks: New empirical evidence. Journal of International Money and Finance, 31, 1695-1714.
Authors who publish with this journal agree to the following terms:
a. Authors retain copyright and grant the journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution License - Share Alike that allows others to share the work with an acknowledgment of the work's authorship and initial publication in this journal.
b. Authors are able to enter into separate, additional contractual arrangements for the non-exclusive distribution of the journal's published version of the work (e.g., post it to an institutional repository or publish it in a book), with an acknowledgment of its initial publication in this journal.
c. Authors are permitted and encouraged to post their work online (e.g., in institutional repositories or on their website) prior to and during the submission process, as it can lead to productive exchanges, as well as earlier and greater citation of published work.
All articles published Open Access will be immediately and permanently free for everyone to read and download. We are continuously working with our author communities to select the best choice of license options, currently being defined for this journal as follows: Creative Commons Attribution-Share Alike (CC BY-SA)