The toughest central banking job in the world?

Few central bankers have jobs as tough as that of Abdusalam Omer, governor of the Central Bank of Somalia (CBS). While those in the developed world fret about their subdued economies and those in emerging markets worry about tightening monetary policy in the US, Mr Omer has to try and build an institution virtually from scratch in one of the world’s least developed and most dangerous countries.

Somalia’s state institutions collapsed when its ruling regime was overthrown in 1991, plunging the country into two decades of lawlessness and violence at the hands of warring clans and religious extremists.

Yet in the past two years – following the ousting of Islamic militants from urban areas by African Union and Kenyan troops – it has begun a delicate recovery. In September 2012, the Horn of Africa state formed its first permanent government in more than 20 years.

Baby steps

The fledgling administration, based in Mogadishu, the capital city, faces a daunting challenge, not just to consolidate peace, but also to revive Somalia’s economy. Crucial to its success will be creating a properly functioning central bank and financial system, a task Mr Omer, a dual Somali-US national, took up in January when he returned to the country he left at 16.

Mr Omer, an economics graduate, has experience of managing troubled public bodies. In the 1990s he was the deputy chief financial officer for the Washington, DC, municipal government, and helped turn around the district’s shoddy finances.

His latest role will test his skills even more. He has had to start with the basics, such as getting a Swift code (which has allowed the central bank to transact with the rest of the world) and hiring staff, several of whom have had to come from the Somali diaspora, given the absence of economists and financial specialists locally. “We are taking baby steps,” he says.

The central bank still lacks a formal governance structure, including a board of directors, which Somalia’s president is yet to appoint. This concerns international organisations. A UN report in July described the CBS as a “slush fund” from which politicians routinely made withdrawals for their personal gain. Mr Omer, who was not interviewed by the authors of the report before they published it, and the government have heavily criticised the UN's findings, a stance many analysts have backed. But the governor admits that having proper structures in place is needed, not just to bolster the CBS’s credibility, but to allow it to formulate a monetary policy. “We haven’t been working on new policy issues because we have to wait for a board,” says Mr Omer. “It is costing us progress. But it will happen.”

Building a banking sector

There is no shortage of work for Mr Omer in the meantime, however. One of his most pressing needs is to establish a banking sector. Somalia’s civil war destroyed all of its commercial lenders. While it does have several remittance companies, Mr Omer says it is essential to reintroduce properly licensed banks. “There will be no economic development without commercial banks,” he says.

Plenty of investors are considering creating new lenders, which the CBS has stipulated must have at least $5m of capital. Foreigners will be allowed to own banks outright, rather than having to partner with Somalis.

The governor hopes to grant two or three licences by the end of this year, but says he will hold back until he is satisfied with the central bank’s money laundering and supervisory frameworks, which are works in progress. “We have had tremendous interest from both local and international people who want to establish commercial banks in Somalia,” he says. “But not all of them will get licences. We need to be careful that they are not suitcase banks. We want to do it properly.”

He adds that the CBS will encourage Islamic banking, but has no plans to launch a state-owned lender. “Somalis already trust banks. They either deal with them in the outside world or in Somalia, even though they’re not banks in the proper sense,” he says. “What I doubt they will warm to is a government-owned bank, because of past experiences. At least from my end, there is no plan to licence a publicly owned bank. I’m not saying it’s necessarily wrong, but right now I don’t see the need.”

Somalia's contenders

Among international lenders, at least three from neighbouring Kenya – Equity Bank, CfC Stanbic Bank (a subsidiary of South Africa’s Standard Bank) and Chase Bank – are thinking of moving into Somalia. Other interested groups are Turkey’s state-owned Ziraat Bankasi, some Djibouti-based banks and Jordanian investors.

Dahabshiil, the biggest remittance firm in Somalia and which already provides some banking services, including business loans, is likely to be among the first banks. Mr Omer says it and some of its rivals have proved they can run big businesses (they handle about $1.5bn of transfers to Somalia annually), with several having grown into global operations with outlets in North America and Europe. “Somalia may not have banks as we know them,” he says. “But in the past 20 years, remittance companies have become a lifeline for the country. These are conglomerate financial houses that use modern technology, are efficient and reach every corner of Somalia.”

Granting the remittance companies banking licences might also provide a solution to the problem of international lenders becoming wary of dealing with them. Barclays, the only global bank still working with Somali-based houses, was set to close their accounts at the end of September out of fears they might be breaking money laundering regulations. Analysts believe that if remittance houses turned themselves into formal banks, they would more easily meet the requirements of international banks.

New currency

The CBS’s other priorities are a payments system, a new currency and data collection. Mr Omer says a national payments system will be expensive to create and require the technical help of the International Monetary Fund (IMF), which readmitted Somalia after a 22-year suspension in April. But he says the mobile money transfer services already provided by some telecommunications companies can form the starting point from which to make electronic transactions commonplace. “The whole economy of Somalia is based on cash,” he says. “That’s not going to take us where we want in terms of economic development.”

The Somali shilling has appreciated substantially in the past two years thanks to the country’s increased stability. But the currency, last printed in 1991, is in short supply and the biggest denomination of SoSh1000 is worth only about $0.05. “The current Somali shilling cannot be saved,” says Mr Omer. “It’s a top priority of the government to have a new currency, without which the central bank will struggle to control inflation. But it is complicated and we are at a very preliminary stage. We will have to work out the details with the IMF and other financial institutions.”

The governor wants the new currency to be used throughout Somalia, including in the north-west region of Somaliland, which proclaims independence from the federal government. “One has to put together some sort of viable Somali state that includes Somaliland,” he says. “It doesn’t have to be a centralised state or one size fits all. But to be a viable state, a few things have to have uniformity. One of them is the currency.”

The central bank’s job is made all the more difficult by a lack of economic data. It can only guess Somalia’s inflation and growth rate (it thinks that in the first half of 2013 the former fell heavily and the economy rose about 4%). But it is expanding its statistics department and hopes to launch a household survey and consumer price index soon. “Research and statistics are vital,” says Mr Omer. “The informal economy is big. But without data, we can’t give it direction and help it grow.”

Hopes for peace

The CBS estimates that Somalia’s gross domestic product last year was $6.3bn, which would put it roughly on a par with Rwanda. Most of its output comes from livestock, telecommunications and money transfer businesses (Dahabshiil claims to be the biggest private sector employer in the country). Mr Omer says activity has picked up in the past 12 months because of improved security, particularly in Mogadishu, from where exports of animals such as goats and camels to the Middle East are rising.

Stability cannot be taken for granted yet. Violence still plagues Mogadishu – 15 people were killed in a bomb in early September, just a few days after the president survived an assassination attempt by an Al-Qaeda-linked group. And the government’s authority does not extend far beyond the main towns. But Mr Omer insists that Somalia has reached a turning point. “Over the past few years, the change has been incredible,” he says. “The attitude of Somalis towards extremism has changed. They now all want to have a government. That’s the really big thing going against extremism. People want government.”

If he is right and security is maintained, there will be little holding the economy back in the medium term. Over a longer period, much will depend on the strength of Somalia’s institutions, not least its central bank.

The CBS has so far started laying the foundations for a viable, modern financial sector. Should it manage to create one in the coming few years, it will have played a big part in Somalia’s overall political and economic recovery.

After The Banker had gone to press, Mr Omer was replaced as Somalia's central bank governor by Yussur Abrar in a reshuffle.