Somaliland is fascinating experiment in minimalist state building

Down the street the porter walked, wheelbarrow piled high with thick wads of Somaliland shillings held together with elastic bands. Along the pavements, tea-sipping money traders sat behind similar stacks of wealth, trading shillings for dollars, pounds, euros and even slivers of gold.

The shilling is the official currency of the self-proclaimed sovereign Republic of Somaliland; but the currency, much like the republic, is yet to be recognized by any country in the world. The 3.5 million residents of this breakaway territory along the Gulf of Aden carry a veritable currency basket in their pockets – personal savings are in dollars, but shopping is in shillings.

The money traded on the streets, residents say, is a testament to the safety and security of their town.

On May 18 1991, the northern province of Somaliland broke away from Somalia. Somalia was torn apart by two decades of internecine violence, but in Somaliland, clan elders set about assembling their own nation state with an elected government at the capital in Hargeisa, a judiciary, a nominally independent central bank with a national currency, and relative security.

Twenty two years on, international isolation has resulted in a stilted economy without a formal banking or energy sector, but a robust money transfer industry, high cell phone penetration, and reasonably fast internet.

Hargeisa is a dusty town of about a million residents, its streets peaceful, bazaars raucously decorated in the red, green and white colours of the flag, and supermarkets stocked with milk from Saudi Arabia, chicken from Brazil, and iPhones from Dubai.

While Somalia has been ravaged by clan conflict, Somaliland is controlled by an uneasy alliance of the majority Isaaq clan and several smaller groups. A clique of business families have created a minimalist state confined to providing security and stability for a fast growing private sector that has created significant wealth for some, even as more than half the urban population and a quarter of the rural population rely on foreign remittances to make ends meet.

“When our first president came he didn’t have a pencil on his desk, nor a paper,” said Abdulkader Hashi, a former petroleum engineer who returned from the Kuwait oilfields to set up The Mansoor, Hargeisa’s biggest hotel.

Mr. Hashi mobilized the Somaliland diaspora, telling his friends, “Give money to the government, bring your goods and we’ll waive customs duty. We bought the stationery, knocked on the door of the President and said, let your people go to work. We opened offices, police stations, we paid them. We called judges, put them in office, paid them.”

Driven by clans of currency, spectrum

Across town from Hargeisa’s money exchange market is a large green building that looks and acts very much like a bank, but isn’t one. Dahabshiil is Africa’s largest money transfer company and has 24,000 agents in 144 countries; its operational headquarters are in Hargeisa, and the company is one of the cabal of businesses keeping Somaliland together.

A recent study by the FAO estimates that Somalia, including Somaliland, receives “a minimum of $ 1.2 billion per year” as remittances, compared to international aid that averaged $ 834 million a year between 2007 and 2011. Most of the money remitted, the study found, was spent on food and household expenditure like school fees and medical expenses. A recent decision by Barclay’s bank in London to withdraw banking services for companies like Dahabshiil has prompted an international advocacy campaign to protect remittance dependent families in the Horn of Africa.

“You can walk into a Dahabshiil office anywhere in the world, give the name, location and contact number of the intended recipient and the money is transferred instantly,” said Amina Issa, a Dahabshiil spokesperson. The company also provides payroll services for the Somalia operations of international organisations like the United Nations.

“There is no commercial banking system here,” said Ms. Issa, “So we offer our customers a basic deposit account for keeping money safe.” The account comes with a chequebook for $5 and an ersatz debit card that works with select retailers, but offers no interest on savings.

A banking law is expected soon, but for now there are no regulations to govern Dahabshiil’s operations in Somaliland, no minimum cash reserve ratios, depositors insurance, or loan regulations. In a recent survey by the Somaliland National Industry Association, 90 percent of respondents identified the lack of institutional finance as the most critical challenge facing new enterprises.

“If you are on the inside, it is easy to get capital on an informal, family basis,” said a local businessman, “But if you are on the outside, it is impossible to raise money.”

Dahabshiil, however, is in the enviable position of holding depositor’s money at zero interest with no regulations to govern how the money is invested. The company has since opened its own bank in Djibouti, launched SomTel, a cellular service across Somaliland, and continues to run its own general trading arm.

As the biggest source of dollars in Somaliland, Dahabshiil plays a role in keeping the exchange rate at 6500 Somaliland shillings to the dollar. This gives the company an unusual edge when trading across currencies.

“When there is a dollar shortage, we borrow dollars from Dahabshiil and inject them into the market. If there are excess dollars, we buy them using shillings,” said Abdilahi Hassan Aden, Director General of the Somaliland Central Bank. The Central Bank, Mr. Aden said, relies on companies like Dahabshiil for dollars because no international body recognizes the Somaliland shilling.

There is no formal currency exchange in Hargeisa, so when the shilling fell to 7500 to the dollar, Hargeisa residents said bank officials drove down to the money exchange with a vehicle full of dollars. “They made a mistake,” said one irate businessman, “They started selling shillings first. We had to tell them to stop.”

In 1996, Abdikarim Dirie gave up his job as an accountant in Toronto and returned to Hargeisa to manage his family business. “At the time, we only had fixed telephones in Somaliland and so I saw an opportunity,” he said.

In 2000, Mr. Dirie set up TeleSom as a shareholder company and raised money through his network of investors, including the Djibouti-based Salaam Group that has the same telecom, banking, and money transfer profile as Dahabshiil.

“We relied on expatriates initially. Very expensive, very difficult to persuade them to come here, the city was just emerging from the war,” Mr. Dirie said, describing how he built the company, “In 2002… we succeeded in training local staff to replace the expatriates. It was a major turning point.”

Today, TeleSom is the largest cellular operator and private sector employer in Somaliland with 1 million subscribers and a staff of 1800. Somaliland has amongst the lowest call rates in the world and 85 percent of the territory is connected to the cellular grid.

There is no telecom regulator to monitor tariffs or auction out spectrum. Instead, the Somaliland Association of Telecom Operators (SATO) regulates the industry. Two years ago, SATO retroactively assessed how many subscribers each company had and formalized their spectrum accordingly.

“I called all the operators to my office and discussed all the spectrum we have. When we agreed on the spectrum, I assigned each company a frequency, and all these documents were then sent to the ministry,” said Yusuf Ahmed Omar Hashi, SATO’s Secretary General, describing how the telecom operators divided the spectrum amongst themselves.

By fixing the price of spectrum, this fraternal dialogue reduced the fixed costs of setting up a cellular service and could explain Somaliland’s low call tariffs. But this could also explain why the Somaliland government is perennially cash strapped. SATO members point out that they pay corporate taxes and an annual license fee but declined to reveal the respective amounts.

SATO also failed to hammer out an inter-operability agreement between networks, so it very cheap to call within a network but prohibitively expensive to call a rival. A call between Somtel number and Telesom numbers are treated as international calls and routed via satellite.

In private conversations, Somaliland’s businessmen puzzle over a disjointed economy that is intensively competitive like in the telecom sector, yet riddled with glaring market failures like the telcos’ refusal to connect their networks.

International recognition, and its attendant benefits, is still many years away as international agencies like the AU and the UN are invested in the idea of a united Somalia.

In the meantime, clan elders and investors realize that the booming remittance industry indicates that the domestic economy has failed to produce employment. The money traders and their cash piles are feeling the pressure of a recession in Europe and the changing demographics of the Somali diaspora.

“The remittances will last another ten years at most,” said Mohammed Igeh, an energy investor who recently returned from Norway, “I have been sending money home to my parents, but my daughters in Norway? No way. They were born there, they live there. They don’t even know anyone in this country.”

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