THE EFFECT OF DOLLARIZATION ON DEVELOPING ECONOMIES: LESSONS FROM SOMALIA’S INFORMAL MARKET

ABSTRACT
Arguments on dollarization and its effect on the economy have been published mainly on
economics and financial journals, yet, little is known about Somalia’s unofficial dollarization. To
contribute in that matter, this paper presents the effect of dollarization on Somali economy. The
study is carried out using literature analysis. The study found out that dollarizing Somali economy
brings severe economic turmoil including an absolute failure to achieve price stability in the local
market. In addition, adopting this policy impedes achieving strong financial management system
in the country. The study recommends that policymakers and business community should try to
lessen the reliance on US dollar and encourage the use of a basket of currencies (in the short-run)
while strengthening the use of local currency (in the long-run). Adopting such strategy will
facilitate to avoid recurrent financial crisis which might happen if the use of US dollar as an
internal currency is collapsed.