Every nation in the world belongs to economic institutions whose main activity is on how to shoulder the responsibility of stabilizing of its macroeconomic policies in order to avoid the economic problems that could distort the entire system of economic functionality. The prudential regulatory mechanism undertaken by such institutions could save any nation from turning into an abyss of economic collapse if held such problems in check before the disease run its course. It is the ultimate responsibility of the government to create coherent economic policies that will be able to make an “economic prognosis” before the situation has gone into a paroxysm of rage and violence.
The Central Bank is perhaps the most important financial institution which is entrusted with the duty of regulating the volume of currency and credit in that country. Also, the Central bank issues currency, regulates and controls money supply in the circulation, it also fixes both the nation’s different interest rates and exchange rates, controls inflation. Apart from this, the Central bank regulates and controls the activities of all commercial banks in a country – it is the lender of last resorts.
According to economists, Central Bank may be defined as an institution which is charged with the responsibility of managing the expansion and contraction of the volume of money in the interest of “general public welfare.” Bank of England was the world’s first effective central bank that was established in1694. As per the resolutions passed in Brussels Financial Conference, 1920, central banks are formed almost in every country in that year, for the interest of world cooperation.
The governments often play a crucial role in regulating and administering its local economy by using the appropriate tools in the event of economic hardships. For example, by using monetary and fiscal policies to combat the inflationary pressures, in this instance, all types of foreign currency has to come into hands of the State, as the State is the sole monetary regulator for the country’s “money supply.” It is the key functions of the central bank to regulate the cash deposits in the commercial banks whether it is private or public. As a general rule, there is no commercial bank that could operate beyond the domain of the central bank. In the context of Somaliland, there are no functional commercial banks as Somaliland is still in de facto state, and could not secure foreign currency to compensate imports of foreign goods, or open a letter of credit in a bank in their favor.
Every nation of the world belongs to its own unit currency, which is described as the “legal tender.” The double currencies usually precipitate a serious economic collapse into people’s livelihood and economic vibrancy as well. The practicality of such cases occurred in many countries of the world i.e. Angola, Zambia and most notably, Zimbabwe, where dual currencies have paralyzed the entire system of its economy, (World Bank Report, 2017).
The use of USD as a medium of exchange for goods and services has displaced the local currency of Zimbabwe, and instead involved unprecedented “hyperinflation.” The inflation rate of Zimbabwe topped 50% per month, the minimum rate to quantify as hyperinflation, each year the government used to print denominations of worthless currency papers. For example, a 100 trillion Zimbabwean dollar note is equivalent to 0.50 cents. Dual currencies devalue the local currency when all business transactions have taken place in the form of foreign currency. In this scenario, it is practically scientific to use ones local currency in all forms of business transactions, debts, e-money, government taxation etc. to avert devaluation of currency against foreign currency.
Unnecessary government expenditure and kleptocracy involve “exchange fluctuations” when too much money is chasing few foreign currencies in the domestic markets, engendering spiral inflation as a result. Under this circumstance, the foreign currency automatically replaces the purchasing power of the local currency if the government fails to immediately intervene in the situation – this is true for Somaliland case.
The economic red signals emerge when the entire nation is not having a “staple food” and will not be able to locally produce food for consumption. When the nation becomes dependent on foreign exports for their livelihood, it is symptomatic of an ailing economy is in the offing. It is the fundamentals of economic principles: “to efficiently utilize the allocation of scarce resources at our disposal.”It is economically viable to produce local production, in order to survive from the demand driven foreign goods, and instead has to be an “export promoter” to gain an inflow of hard currency into ones country – meaning exports must exceed imports. Under this case, an investment of local production in the form of joint venture is indispensably necessary for the promotion of such economic activities. The State should encourage its businessmen to make an inflow of domestic investment, and has to offer a wide package of incentives to the talented entrepreneurs and enterprising young people.
Abdulqadir Omer Jama
The views expressed in this article are the author’s own and do not necessarily reflect Horndiplomat editorial policy.
If you want to submit an opinion piece or an analysis please email it to Opinion@horndiplomat.com