The Effect of Dollarization On Economic

ADMAS UNIVERSITY
Faculty of Economics
THE EFFECT OF DOLLARIZATION ON ECONOMIC GROWH,
THE CASE OF SELECTED FINANCIAL INSTITUTIONS IN HARGEISA
DISTRICT, SOMALILAND.
BY:
Abdiweli Mahdi Mohamad
And
Mohamed Omar Mohamoud
Supervisor: Mr. Zakaria Mouse.
A research proposal submitted to the department of Economics of

Admas University, in a partial fulfillment of the requirement for the
award of bachelor degree in Economics
July,2016
Hargeisa, Somaliland
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Declaration
hereby declare that this submission is my own word and to the best of my knowledge and belief it
contains no material previously published or written by another person nor material which has been
accepted for the award of any other degree of the university or other institute of higher learning,
expect where due acknowledge has been made in the test and reference list.
Name: Abdiweli Mahdi Mohamed

Signature____________________
Name: Mohamed Omar Mohamoud
Signature_____________________
This is to certify that this thesis is the original work of us, carried out under my supervision.
Name of the advisor: Mr. Zakaria Moussa.
Signature: _________________
Date: _________________
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Approval
This is to certify that thesis entitled THE EFFECT OF DOLLARIZATION ON ECONOMIC
GROWH, submitted by Mr. Abdiweli Mahdi Mohamed and Mr. Mohamed Omar Mohamoud
to Admas university towards partial fulfillment of the requirements for the award of the bachelor
degree of the arts in Economics.
Name of advisor: Mr. Zakaria Moussa

Signature: _______________________
Date: _______________________
Name of the academic director: Mr. Ahmed-Nasir
Signature: ____________________
Date: ________________________
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Dedication
Mohamad Omar Mohamoud
I dedicate this thesis paper to my family dear mother, uncle Hussein Mohamoud Hirad and my
grandfather Abdullah Hussein Roble that are support me morally, finance side and encouraged me,
secondly my dear brother Abdiweli Mahdi Mohamad we were take same path and worked together
to reach our goal. I didn’t forget my super visor my best lecturer in time I was in Admas University
Mr. Zakaria Mouse.
Finally, I would like to thank for everyone who helped me to reach my short term future dream.
Abdiweli Mahdi Mohamad
I dedicate this thesis paper to my Family specially my mother, Assad Hassan Biihi who has been
supported me for whatever I want through my life, and she my biggest teacher and my guidance
of important stage in my life, she made easy and with me whole my journey of my educational
background which was my first ad biggest dream forever. Also my dear teacher and supervisor
Zakaria Mouse for tireless effort and commitment, Finally, I would like to thank for everyone who
helped me to reach my short term future dream
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.
Acknowledgement
All praises and thanks are due to Allah (SWT) the creator of everything and the king of this
universe and the later one, and the most merciful, who gave us the courage, endurance, willingness
and ability to complete this paper successfully.
First we would like to express my appreciation, thanks and extend my indebted gratitude to my
genuine advisor, Mr. Zakaria mouse Mohamed which the work didn’t continue without his
tireless effort and constructive advice, patience, and rich contribution, and this paper would not
have succeeded without him. The encourages. Therefore, this paper is the result of two people. we
want to thank him for his guidance not only for this paper but also for our future life.
lastly, we would like to thank, gratefully acknowledgement my teacher and also the head of the
Economic Department Mr. Yimam D. Ali for his morally and technically helpful and preparing
the necessary guidance in our university career and the possibility to complete this research paper.
To all our colleagues in the struggle through the Bachelor of Arts 2015/2016 class, our success
deserves to be shared with you. You offered all the support needed to see us succeed and makeup
for my challenges and you contributed a lot of knowledge and skills for our development.
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Abstract
The effect of dollarization on local currency is negative impact from the dollarization existing in
Somaliland which is Semi-official dollarization or double currencies in the country is the first
challenge and most obstacle existing toward for Somaliland reaching underdevelopment and
higher economic growth, less of dollarization and economic development generate employment,
strongly contribute to the GDP and play a crucial role in poverty alleviation. The main objective
of this study is to identify the key determinants of employment growth and economic growth in
Somaliland and good regulatory and effective central bank exists in the country, particularly
Hargeisa. Randomly selected 65 workers working in different banks both private/public sectors
and market of exchange through simple random sampling is included in the sample. Survey
method for primary data and literature survey for secondary data is used to obtain the relevant
data. Self-administered questionnaire and key informants face to face interview was employed
as data collection instruments. The target respondents were owners of those working in the
market of change and managers and other working in the three different banks exists in Hargeisa
and they are those surveyed respondents in this paper accordingly.
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Table of Contents
Declaration ............................................................................................................................................... ii
Dedication ............................................................................................................................................... iv
Acknowledgement.................................................................................................................................... v
Abstract ................................................................................................................................................... vi
List of Figures............................................................................................................................................ix
List of Tables ............................................................................................................................................. x
CHAPTER ONE: INTRODUCTION ............................................................................................................... 1
1.1) Background of The Study .............................................................................................................. 1
1.2) Problem Statement ........................................................................................................................... 2
1.3) Objectives of the Study ..................................................................................................................... 3
1.3.1) General Objective ...................................................................................................................... 3
1.3.2) Specific Objective ...................................................................................................................... 3
1.3) Research Questions........................................................................................................................... 3
1.4) Scope of the study............................................................................................................................. 3
1.5) Significance of the Study ................................................................................................................... 4
1.6) Description of the Study Area ........................................................................................................... 4
1.8) Organization of the Paper ................................................................................................................. 5
CHAPTER TWO: LITARETURE REVIEW...................................................................................................... 6
2.1) Concepts and Definitions .................................................................................................................. 6
2.1.1) Inflation...................................................................................................................................... 6
2.1.2) Types of Inflation ....................................................................................................................... 6
2.1.3) Sources of Inflation.................................................................................................................... 6
2.1.4) Dollarization .............................................................................................................................. 6
2.1.5) Types of Dollarization ................................................................................................................ 7
2.1.6) Economic Growth ...................................................................................................................... 8
2.2) Theoretical Review ............................................................................................................................ 8
2.2.1) Theory of Optimum Currency Areas ......................................................................................... 8
2.3) Empirical Framework ........................................................................................................................ 9
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2.3.1) Introduction ............................................................................................................................... 9
2.3.2) Full Dollarization in Practice: The case of Panama ................................................................ 11
2.3.3) Economic Growth in Ecuador Provided by Dollarization........................................................ 11
2.3.4) Dollarization in Africa:............................................................................................................. 12
2.3.5) Dollarization and the Zimbabwe’s Economy .......................................................................... 12
2.3.6) Somaliland shilling will never gain strength under the country’s multiple currency policy . 13
CHAPTER THREE: METHODOLOGY ........................................................................................................ 16
3.0) Variable Definitions ......................................................................................................................... 16
3.1) Research Design .............................................................................................................................. 16
3.2) Sampling Procedure ........................................................................................................................ 17
3.2.1) Study Population ..................................................................................................................... 17
3.2.2) Sample Unit ............................................................................................................................. 17
3.2.3) Sample Size .............................................................................................................................. 17
3.2.4) Sampling Techniques ............................................................................................................... 18
3.3 Data Collection Techniques .............................................................................................................. 19
3.4) Sources of Data ............................................................................................................................... 20
3.4.1) Primary Data Sources .............................................................................................................. 20
3.4.2) Secondary Data Sources .......................................................................................................... 20
3.5) Data Presentation and Analysis (tools) ........................................................................................... 20
3.6) Data Analysis and Interpretation .................................................................................................... 21
3.7) Limitations of the Study .................................................................................................................. 21
CHAPTER FOUR: RESULTS AND DISCUSSION .......................................................................................... 22
4.1 Sample Characteristics ..................................................................................................................... 22
4.2 descriptive Analysis .......................................................................................................................... 25
CHAPTER FIVE: CONCLUSSION AND RECOMMENDATIONS ................................................................... 40
5.1 Conclusion ........................................................................................................................................ 40
5.2 Recommendations............................................................................................................................ 42
Appendix 1 .............................................................................................................................................. 44
Reference ............................................................................................................................................... 44
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Questionnaire ......................................................................................................................................... 47
List of Figures
Figure: 4.2.1 Developmental obstacle comes from use of foreign currencies……… ………….28
Figure: 4.2.2 Somaliland’s practiced of foreign currencies…………………………………..…29
Figure :4.2.3 Sources those dollarization comes from………………………………………..…30
Figure :4.2.4 Somaliland: lack of effective central bank……………………………………..…31
Figure: 4.2.5 Dangerous impact of dollarization on local currency………………………….…32
Figure: 4.2.6 Higher prices from unstable exchange rate and dollarized economy…………..…33
Figure: 4.2.7 Commercial banks working in Somaliland and dollarization ……………….…....34
Figure: 4.2.8 Relationship between dollarization and inflation……………………………….…35
Figure: 4.2.9 Dollarization against job creation and economic development…………..……..…36
Figure: 4.2.10 Most communities have a negative result from dollarization……………….……37
Figure: 4.2.11 Decreasing of dollarization and use of local currency………………………...…38
Figure: 4.2.12 Dollarization against economic growth………………….…………………….….39
Figure: 4.2.13 Economic developments against dollarization……………………….…… ……..40
Figure: 4.2.14 Challenges among economic growth and less productivity………………… .…..41
Figure: 4.2.15 Risks of dollarization on economic growth………………………………… …….42
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List of Tables
Table 2.1: Average exchange rate 2010-2016 …………………………………………………...17

Table 3.1: Rule of thumb……………………………………………………….…………………21
Table 3.2: Sampling technique table.…………………………………….……………………….22
Table 4.1: Sample characteristics……………………………………….….…………………….27
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CHAPTER ONE: INTRODUCTION
1.1) Background of The Study
As we see in our nation’s situation about dollarized economy and losing the value of our local
currency day after day, it is serious situation having it is own negative impact for the near future if
don’t exactly stop what he had doing.
Malaysia removed its peg to the US dollar after several years of pegging and the rate of inflation
has been running at its highest level in those years (Netto, 2005). Malaysian currency (Ringgit) is
now in a managed float that guides the currency against a basket of currencies of its main trading
partners and as soon as this policy put in place, the Malaysian currency has experienced an
appreciation against US dollar (Netto, 2005). China lifted a similar peg. The current debate in
oilrich Gulf countries remains one of the hottest monetary policy implications in the world and the
centre of the debate is to de-peg their currencies from the US dollar. Qatar and the UAE are
believed to be the most likely Gulf countries to quit US peg (Drummond, 2008). Before quitting
this policy, Gulf countries have to identify a suitable alternative monetary policy that can replace
the current policy.
There is disagreement on the effect of dollarization on actual economic variables of growth,
employment and volatility (Edwards, 2006). Supporters of dollarization argue that it really affects
growth through two ways: firstly, it tends to produce higher investment, lower interest rates, and
faster growth (Edwards, 2006). Secondly, dollarization will encourage international trade
particularly between the two countries; the country that adopted dollarization policy and the senior
country to which it links its monetary policy (Rose et al., 2001). A view which goes back to Meade
(1951) indicates that economies with a hard peg will have troubles accommodating external
shocks, which may be translated into greater volatility and might sometimes lead to lower
economic growth (Magendzo, 2006). Another substantial drawback to adopting a foreign currency
is that a dollarized nation cannot influence its economy directly. The right to administer monetary
policy and any forms of exchange rate regime will be sacrificed for the benefits of using the US
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dollar (Heakal, 1997). One of the most notable effects of the recent financial sector liberalization
in Tanzania is the increased use of foreign currency (notably the
U.S dollar) as a way of holding wealth and a means of transaction for goods and services by the
domestic residents
The US dollar has been in Somalia, the medium of exchange and value for storage in more than a
decade. The above mentioned factors coupling with the lack of capabilities of the central bank
remain the driving forces of unofficial dollarization of Somali economy (UNDP, 2007)
Dollarization does not refer just to the United States dollar. It is a generic term used to characterize
the use of any foreign currency that effectively serves as a replacement for national currency.
Under this study, there are a physical disadvantage from dollarization those are the major problems
of economic growth in Somaliland, and most obstacle stagnates of the county’s development,
depending foreign currency is the biggest and hardest obstacle toward Somaliland’s economy,
highlighting major problems from this kind of using foreign currencies and telling those negative
impacts from is the main reason of this paper. The design of this study is descriptive design, and
scope of this is in Hargeisa Somaliland.
1.2) Problem Statement
Dollarization is serious issue in Somaliland economy which is semi- official dollarization country.
Dollar become the second national money in Somaliland and the indicator of this problem is that
everywhere dollar is available like Somaliland shilling and the community believes more than the
national currency. In this study the researcher will determine the effect of dollarization on
economic growth, in central bank, Hargeisa Somaliland. These small scale level of currency is
diminishing already, and it’s very important accordingly for exercising of using local currency to
protect it is value to avoid an increasing value of dollar in our country as well as losing/diminishing
value of our local currency, Central bank is the only solution that we have to control and protect
the dollarization, but unfortunately it works as store or warehouse of storing the employees’ salary.
When the situation is like this, the side of economic growth will be stagnant or some kind of
constantly developing because of using this foreign currency, if the exchange rate is determined in
US there is actual pricing of foreign currency as we are and that will have led us to have a same
problem with US if it will happen.
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As long as the Somaliland continues the multiple currency policy in place, the Somaliland shilling
will continue to depreciate dramatically year after year and we will reach a time that the situation
never going to get better by itself or through monetary and fiscal policy. We are insane if we think
that there can be monetary or fiscal policy in an economy that is up to 85% dollarized.
In conclusion, from my point of view it’s clear as crystal that politicians who are running to become
the president of the country will never bring the table any kind of policy for solving the multiple
currency policy and we are not ready to use the Somaliland shilling as the sole legal tender in our
country. (Muse, 2015)
1.3) Objectives of the Study

1.3.1) General Objective
 The main objective of the study is to assess the effect of dollarization on economic growth
in Hargeisa, Somaliland
1.3.2) Specific Objective
1. To determine the effect of dollarization on domestic consumption of goods and service

2. To evaluate the major economic problems of dollarization
3. To assess the level of dollarization and the use of foreign on local economy
4. To find out the sources of fluctuating exchange rate and devolution of local
1.3) Research Questions

 What are the effects of dollarization on domestic consumption of goods and service?
 What types of problems does the dollarization have on the economy?
 How assess the effect of dollarization on economic growth in Hargeisa, Somaliland?
 What are the major sources of fluctuating exchange rate and devolution of local currency?
1.4) Scope of the study
In the research, the researcher was a different dimensional of dollarization and its most drawbacks
coming on economic growth and what level of dependence will be there for some country adopting
dollarization while using for our currency, if your currency is determined in US, there is no control
and estimation of economic growth which is depends on the local currency.
The study area of this research was confined to Hargeisa, capital city of Somaliland. Hargeisa city
consists of five main districts which have been included in the sample of this study. And the
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researchers were focused on how this dollarization is determined and what is possible measures on
the economic growth the side of development.
1.5) Significance of the Study
This study wills significance of Somaliland government especially in Ministry of finance, central
bank and also emerging financial intermediaries especially commercial banks to know the level of
dependency of foreign currency. How much will achieve success full national currency in the
country. It will be reference of academic and future researchers in this topic.
Also this paper will be fully significance for future researchers those graduating from the
universities as a reference, especially those writing of the relationship between dollarization and
economic in Somaliland.
1.6) Description of the Study Area
The study area is ministry of trade and investment located in the Hargeisa capital of Somaliland.
Hargeisa is located in a mountainous area, in an enclosed valley of the northwestern Galgodon
(Ogo) highlands. It sits at an elevation of 1,334 meters (4,377 feet) above sea level Near Hargeisa
are the fertile Sheikh and Daallo mountains, which receive large amounts of rain. South of the city
is the Hawd savannah (Balli-gubadle), Which attracts many different species of wildlife to graze
in the area. Hargeisa has a semi-arid climate. The city generally features warm winters and hot
summers. However, despite its location in the tropics, due to the high altitude Hargeisa seldom
experiences either very hot or very cold weather Hargeisa is the financial hub to many
entrepreneurial industries ranging from gem stonecutters, to construction, food processing, retail,
and import and export firms. The Fund is expected to improve job opportunities for 1,300
entrepreneurs through ameliorated product distribution and investment in new technologies and
processing facilities (Muse, 2015).
Eligibility is determined through a competitive and transparent selection process overseen by the
Partnership program, the Somaliland Chamber of Commerce, and government officials and area is
71 km2 (27 sq mi), population 1,200,000 and density 1,600/km2 (3,000/sq. mi) (barkhad, 2013)
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1.8) Organization of the Paper
The thesis work is organized and structured as follow: Chapter One background of the study will
focus; Chapter Two presents the Theoretical Framework and the Literature Review. Chapter Three
discusses the methodology of the research. Chapter four provide data Analysis, Chapter Five
covers conclusion, recommendation and also findings of the study.
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CHAPTER TWO: LITARETURE REVIEW
2.1) Concepts and Definitions
2.1.1) Inflation
According to Investopedia Inflation is the rate at which the general level of prices for goods and
services is rising and, consequently, the purchasing power of currency is falling. Central banks
attempt to limit inflation, and avoid deflation, in order to keep the economy running smoothly.
2.1.2) Types of Inflation
Inflation means a sustained increase in the general price level. However, this increase in the cost
of living can be caused by different factors. The main 6 types of inflation are as flow
a) Demand Pull Inflation.
b) Cost Push Inflation.
c) Wage Push Inflation.
d) Imported Inflation.
e) Temporary Factors.
f) Core Inflation
2.1.3) Sources of Inflation
In developing countries, there are four frequently cited sources of inflation:
a) Demand pressures:
b) Fiscal and monetary policies:
c) Supply shocks:
d) Inertia:
2.1.4) Dollarization
As many authors mentioned for their written books, they had tell different and different definitions
about dollarization, most of them, they have a mutual definitions as a meaning of the term, the
term Dollarization states the adoption of the foreign currency in some countries like its own
currency commonly.
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Dollarization is a situation where the citizens of a country officially or unofficially use a foreign
country's currency as legal tender for conducting transactions. The main reason for dollarization
is because of greater stability in the value of the foreign currency over domestic currency. The
downside of dollarization is that the country gives up its right to influence its own monetary policy
by adjusting the money supply according to the Investopedia.
2.1.5) Types of Dollarization
Dollarization has three main varieties: unofficial dollarization; semi-official dollarization; and
official dollarization. (Meyer 2000)
a) Unofficial dollarization.
Unofficial dollarization occurs when people hold much of their financial wealth in foreign assets
even though foreign currency is not legal tender. (Legal tender means that a currency is legally
acceptable as payment for all debts, unless perhaps the parties to the payment have specified
payment in another currency. Legal tender differs from forced tender, which means that people
must accept a currency in payment even if they would prefer to specify another currency.) The
term "unofficial dollarization" covers both cases where holding foreign assets is legal and cases
where it is illegal (Kurt Schuler, 2000).
b) Semi-official dollarization.
More than a dozen countries have what might be called semi-official dollarization or officially
bimonetary systems. Under semi-official dollarization, foreign currency is legal tender and may
even dominate bank deposits, but plays a secondary role to domestic currency in paying wages,
taxes, and everyday expenses such as grocery and electric bills (Moreno-Villalaz 1999).
c) Official dollarization.
Official dollarization, also called full dollarization, occurs when foreign currency has exclusive or
predominant status as full legal tender. That means not only is foreign currency legal for use in
contracts between private parties, but the government uses it in payments. If domestic currency
exists, it is confined to a secondary role, such as being issued only in the form of coins having
small value (Kurt Schuler, 2000).
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2.1.6) Economic Growth
According to the Investopedia Economic growth is an increase in the capacity of an economy to
produce goods and services, compared from one period of time to another. Economic growth can
be measured in nominal terms, which include inflation, or in real terms, which are adjusted for
inflation. For comparing one country's economic growth to another, GDP or GNP per capita should
be used as these take into account population differences between countries.
Also Wikipedia, has explained, Economic growth is the increase in the inflation adjusted
market value of the goods and services produced by an economy over time. It is conventionally
measured as the per cent rate of increase in real gross domestic product, or real GDP, usually
in per capita terms.
2.2) Theoretical Review

2.2.1) Theory of Optimum Currency Areas
From an economic standpoint, the strongest argument that Mundell identified for individual
money is that it allowed a country to pursue its own monetary policy. In theory if the country
operates with a flexible exchange rate, the monetary authority can design a countercyclical pol-
icy that responds optimally to its own economic disturbances. In contrast, under a fixed ex-
change rate, monetary policy has to be subordinated to the maintenance of the exchange rate.
Fixed-rate regimes include a peg to another currency, which may or may not be permanent, and
the more serious commitments represented by currency boards and dollarization’s (by which we
mean one country's use of another country's money, which may not be the U.S. dollar) (Mundell,
1961).
Globalization and two other factors seem to explain why the world has been moving away from
the doctrine of one-country/one-currency and toward multi-country currency unions. The first
additional factor is the already noted dramatic increase in the number of independent countries.
For the many small, independent countries that have been created since the end of World War II,
the costs in terms of forgone trade of maintaining one's own currency are unacceptably high
(Mundell, 1961).
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The second additional consideration is that the benefit that economists and central bankers attribute
to independent monetary policy has diminished as we all have learned to value price stability over
active macroeconomic stabilization. In the 1960's and 1970's, there was much greater confidence
that monetary expansion and inflation, either in general or in the form of well-tailored
countercyclical policy, would con- vey benefits in terms of higher economic growth and lower
unemployment (Mundell, 1961).
Now there is widespread belief that monetary authorities should concentrate on providing a
stable nominal framework and otherwise staying out of the way (Mundell, 1961)
Based upon our previous discussion, the countries that should be more likely to abandon their
currencies are those that exhibit the following characteristic
(i) A history of high and variable inflation, which we take as an indicator of a lack of domestic
commitment ability;
(ii) A large actual or potential volume of international trade, particularly with the anchor country;
(iii) Business cycles that covers substantially with a potential anchor;
(iv) Reasonably stable relative prices (gauged by real exchange rates) with respect to a potential
anchor
2.3) Empirical Framework

2.3.1) Introduction
As many authors mentioned for their researcher paper and also found that there is negative impact
or relationship between dollarization and economic growth mostly, also we have tried to know the
biggest relationship between dollarization and economic growth and we had found that there is
negative impact for those variables, also some of the authors ar argued that there is positive
relationship between variables, 2001, the dollar became legal tender in Guatemala.
First, inflation will be lower in dollarized than in non-dollarized nations. Alesina and Barro
(2001 p. 382), for instance, have argued that adopting another nation’s currency “eliminates the
inflation-bias problem of discretionary monetary policy.” Second, countries that give up their
currency will tend to grow faster than non- dollarized countries. This growth effect is supposed to
take place through two channels: (a) dollarization will mean lower interest rates, higher investment,
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and faster growth (Dornbusch 2001). And (b), by eliminating exchange rate volatility, dollarization
is supposed to encourage international trade and this, in turn, will result in faster growth.
Rose (2000), and Rose and Van Wincoop (2001), among others, have emphasized this trade
channel. Other authors, however, have voiced skepticism regarding the alleged positive effects of
dollarization on growth and overall macroeconomic performance.
According to Eichengreen (2001) the evidence on the relationship between monetary regimes and
growth is inconclusive, and does not support the claim that dollarization – or any exchange rate
regime, for that matter – is an important determinant of growth.
The traditional view, on the other hand, is that in countries with a hard peg it is difficult to
accommodate external shocks, including terms of trade and world interest rate disturbances.
According to him, this will be translated into greater instability and lower economic growth
(Fischer 1996). And Frankel (1999) has argued that there is no unique recipe on exchange rate
policy; while some countries will benefit from hard pegs, for other countries a floating regime will
be more appropriate.
Surprisingly, until very recently there have been no formal empirical studies on the economic
consequences of dollarization. In particular, international comparative studies on alternative
exchange rate and monetary regimes have traditionally ignored dollarized countries. For instance,
the comprehensive study on exchange rate regimes, growth, and inflation by Gosh et al (1995),
does not include nations that do not have a currency of their own. Likewise, the IMF (1997) study
on alternative exchange rate systems excludes dollarized countries, and the recent paper by Levy-
Yeyeti and Sturzenegger (2001) on exchange rates and economic performance excludes nations
that do not have a central bank.
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2.3.2) Full Dollarization in Practice: The case of Panama
Not many large economies opt for a full dollarization regime. The Republic of Panama is a
relatively small economy with an overall GDP of $ 6.9 billion dollars in 1998 and a population of
2.76 million people. According to official statistics, in 1998, Panama's labor force employed was
only 945 thousand people. Notwithstanding its relatively small size, it represents the largest
dollarized economy in the in the Western Hemisphere, the U.S. dollar is legal tender in Panama
since 1904, although there is a national currency, the balboa, used for small transactions and as a
unit of account.
Panama’s decision to dollarize the economy followed political and historical reasons rather than
an economic choice for this exchange regime. Since colonial times, and because of its strategic
location as a narrow strip of land connecting North and South America, Panama is a natural
crossroad for trade and transit (Ilan Goldfajn and Gino Olivares).
Supporters of “dollarization” have pointed out to Panama’s experience as proof of the merits of
that system. Low inflation, macroeconomic stability, and low interest rates – including the
existence of long term credit in nominal terms – are mentioned as some of Panama’s most
remarkable accomplishents (Moreno-Villalaz 1999, Bogetic 2000).
2.3.3) Economic Growth in Ecuador Provided by Dollarization

Edwards and Magendzo (2003) argue that the growth in dollarized nations does not statistically
differ from that of non-dollarized ones (p. 18). The authors’ main interest is to take a comparative
analysis of dollarization on real macroeconomic performance (p. 6). In order to see the effect
dollarization has in a country’s growth, they use an “outcome equation” and an equation on the
probability of being a dollarized country (p. 6). Edwards and
Magendzo’s (2003) empirical investigation includes panel data for independent countries with an
official dollarized system from 1970 to 1998 (p. 3).
For the estimation of GDP growth, Edwards and Magendzo (2003) include the following as their
explanatory variables: initial GDP, a measure of openness, a geographical dummy called “tropics,”
and the dollarization dummy (p. 12). The repressors have the expected signs and are significant at
conventional levels. The initial GDP has a negative coefficient suggesting that there is “conditional
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convergence”; openness has a positive coefficient indicating that more open economies have
tended to exhibit a higher rate of GDP growth. The “tropics” variable has an only marginally
significant negative coefficient, confirming that geography plays a role in the growth process. In
terms of the exchange rate regime, these results show that the coefficient of the “dollarization”
dummy is positive, but not statistically significant (p. 13-14). Edwards and Magendzo conclude
that the growth in dollarized nations does not statistically differ from that of non-dollarized nations
(p. 18).
2.3.4) Dollarization in Africa:

According to what the African researcher have mentioned in their written books talking about the
relationship between Africa and dollarization and what kind of impacts they have already received
from the dollarization, so at least 25 African countries that have dollarized in the past and the
present. In the Southern African Development Community (SADC) countries, these include
Angola, Botswana, Lesotho, Namibia, Swaziland, Seychelles and Zimbabwe. In most cases
countries that have adopted foreign exchange as an official legal tender had a background of
economic, social and political disturbances that led to instability and poor economic growth. Some
countries used foreign currencies due to colonization or adopted the currency from their former
colonizers. Zimbabwe and Angola are those currently using the United States dollar. Although
dollarization creates a better cushion, and contains external economic shocks (Moreno-Villalaz,
2005), the costs involved are likely to force governments to be cautious on spending and employ
prudent fiscal policies.
2.3.5) Dollarization and the Zimbabwe’s Economy

Zimbabwe has a population of approximately 13 million people (ZimStat. 2, 2012) with 80 per
cent living in the rural areas. At independence in 1980, the gross national income (GNI) per capita
was US$ 1080 and by 2012 it had dropped to a GNI per capita of US$ 460 (UNIDO, 2011) which
is less than half of the GNI that prevailed in 1980/81. Furthermore, for the sake of national pride,
the country adopted the Zimbabwe dollar (ZW$) as an official currency, replacing the Rhodesian
dollar at parity. The Zimbabwe dollar at its inception had an exchange rate that was one
Zimbabwe dollar to 1.47 US$. However, by July 2008 its value had dropped to ZW$10 billion to
0.33 US$, fuelled by the substantial increase in money supply of ZW$20.5 trillion (RBZ, 2006,
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2008; ZimStat, 2008), and this led to an upsurge in inflation. By the end of 2008 most of
Zimbabwe’s business community stopped accepting the Zimbabwe dollar (Biti, 2013; Daily
Telegraph, 2008).
Hanke & Kwok (2009) concluded that dollarization tamed the hyperinflation that prevailed in
Zimbabwe’s economy in the period 2000-2008. As previously mentioned, a country that adopts
another country’s currency forgoes the use of monetary policy (Burdekin, 2008), and thereby
seignior age from printing local currency, which was the case with Zimbabwe. However, an
adoption of an orthodox currency boards allows a country to earn seignior age revenue from the
foreign currency (Burdekin, 2008, Hanke, 2002). Accordingly, In the case of Zimbabwe the
banking system experienced bank liquidity problems (RBZ, 2013), largely owing to poor cash
inflows from exports, foreign direct investment, portfolio inflows and lack of credit lines (RBZ,
2013). Minda (2005) asserts that the benefits from full dollarization were unclear as opposed to
the forfeiture of monetary sovereignty and national pride (Minda, 2005:
313).
2.3.6) Somaliland shilling will never gain strength under the country’s multiple currency
policy
As the liberation of Somaliland independence had been announced in 1991 and the reestablishment
of government institutions in the country, Somaliland government introduced a new Somaliland
banknote in early 1994 which replaced the previous Somali shillings. Indeed, at the end of 1994
the Somaliland shilling plummeted in value against almost all other major world currencies and
had suffered from large and continuous devaluations. These devaluations, in turn, added to the
inflationary pressure, eroded the purchasing power of money and caused a chaotic financial
situation that, according to many observers, was the decisive factor contributing to the outbreak of
civil war in early 1995. Perhaps the most chilling effect of Somaliland shilling’s steep slide was
the lack of monetary policy objectives by the central bank of Somaliland, therefore exchange rate
changes are most of the time dictated by the parallel market (black market).
Since the introduction of Somaliland shillings two decades ago neither late president Mohamed
Ibrahim Egal nor his successors build a strong policy for strengthening the Somaliland shillings,
because it was introduced without clear policy in place.
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In order to make Somaliland Shillings as the sole legal tender, there must be an effective central
bank which regulates the country’s monetary policy as well as strong central government for
overseeing and guiding the country’s economy.
The massive growth in money supply in 1994, and the consequent high inflation rates and perennial
exchange rate depreciations, brought about a widespread “dollarization” of the economy as people
learned to switch shillings into dollars as a hedge against inflation.
The main reason that Somaliland needs single currency is that our economy is highly dollarized in
addition to other currency such as Ethiopian Birr that we use our daily transaction and as long as
the economy remains highly dollarized the Somaliland shilling will continue depreciating and its
value will decline year after year. The following table is rough estimation for the exchange rate.
Table 2.1: Average exchange rate 2010-2016
Source: (Muse, 2015)
Using the percentage change formula as useful tool, the Somaliland Shilling has never appreciated
over the past five years. The cumulative depreciation for the last five years was around 39%. In
fact, if we extend the argument to 2000 and before the Somaliland shilling has lost nearly 100%
of its value.
As long as the Somaliland continues the multiple currency policy in place, the Somaliland shilling
will continue to depreciate dramatically year after year and we will reach a time that the situation
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never going to get better by itself or through monetary and fiscal policy. We are insane if we think
that there can be monetary or fiscal policy in an economy that is up to 85% dollarized.
In conclusion, from my point of view it’s clear as crystal that politicians who are running to become
the president of the country will never bring the table any kind of policy for solving the multiple
currency policy and we are not ready to use the Somaliland shilling as the sole legal tender in our
country (Muse, 2015).
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CHAPTER THREE: METHODOLOGY
3.0) Variable Definitions
As many authors mentioned for their written books, they had told different and different definitions
about dollarization, most of them, they have some mutual definitions as a meaning of the term, the
term Dollarization states the adoption of the foreign currency in some countries like its own
currency commonly.
According to Investopedia dollarization is a situation where the citizens of a country officially or

unofficially use a foreign country's currency as legal tender for conducting transactions. The main
reason for dollarization is because of greater stability in the value of the foreign currency over
domestic currency. The downside of dollarization is that the country gives up its right to influence
its own monetary policy by adjusting the money supply.
Another important definition about the second variable of the research saying that Economic
growth is an increase in the capacity of an economy to produce goods and services, compared from
one period of time to another. Economic growth can be measured in nominal terms, which include
inflation, or in real terms, which are adjusted for inflation. For comparing one country's economic
growth to another, GDP or GNP per capita should be used as these take into account population
differences between countries According to Investopedia.
3.1) Research Design
Kothari (2004) explained the importance of the research design for the research efficiency,
validity and reliability. This study incorporated descriptive type of research. The rationale of
employing a descriptive type of research lies on the fact that the researcher has no control over
the variables. As important factors determine on the effects of dollarization on economic growth
are identified, the rationale of their relative importance is needed to be explained. Both
quantitative and qualitative methods were used to make sure that all the important and relevant
information for the study was utilized. Another rationale is to neutralize the biases inherited in
either method through strength of the other or minimize their weaknesses
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3.2) Sampling Procedure
3.2.1) Study Population
The target population of this study was 80 from the market of exchange, Dahabshiil, Darasalam
and the central bank. Those are major financial centers and nearly they cover 90% of financial
services for both private and public sectors, after that, the researcher was evaluated the effect of
dollarization on economic growth, for those selected centers, Hargeisa, Somaliland.
3.2.2) Sample Unit
The sample unit of the study are generally banks whether they are private or public institutions in
Hargeisa, Somaliland. After that the most banks are lied in the 26th June district, including those
workers and officials of Market of exchange, Dahabshiil, Darussalam and Central bank are the
most important ones of those we had taken as a sample unit.
3.2.3) Sample Size
The sample size of the study was numbers of necessary respondent those the researcher was collect
from them the raw data of the research or the machine of the research was the sample respondents
because they will give the researcher full descriptions about what they know through that field.
The research sample size was determined the number of target population according to the banks
and the market exchange.
According to the study the sampling techniques used in this study is rule of thumb. Because
unavailability the exactly numbers of target population.
After making an estimation about this paper’s target population and using this below table (rule of
thumb), the target population of this study is approximately 200 those are works within those banks
and market of change in Hargeisa Somaliland, then the sample size of this study became 65 people
accordingly.
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Table 3.1: rule of thumb
Source: James Cridland, Sample size (The rough guide)
3.2.4) Sampling Techniques
Both probability and non-probability sampling techniques were employed in this study. Dealing
with the probability sampling, stratified sampling was incorporated since the population is
homogeneous. Stratified sampling technique results in more reliable and detailed information. On
the other hand, non-probability sampling technique was employed to select interviewees
purposively. The reason why purposive sampling technique was chosen is to intentionally include
in to the sample those key informants who have the knowledge and experience for the thematic
area in order to get in depth information. As a result, 5 key informants were purposively selected
for interview. Two informants were selected from the government institution of Somaliland
(Central banks) which are mandated to the financial service affairs; two were selected from private
bank agencies (Dahabshiil and Darasalam banks) in support of effects and impacts of dollarization
on economic growth based in Somaliland; and the other one from Somaliland exchange market
which hosts most of the dollarization effects on economic growth.
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Table 3.2: Sampling technique table.
Category of the Population Sample Size Sampling Method

Respondents
Market of exchange 30 24 Simple Random Sampling
Central bank 27 22 Simple Random Sampling
Dahabshiil bank 12 10 Simple Random Sampling
Darasalam bank 11 9 Simple Random Sampling
Total 80 65
Source: Primary data computed by authors
3.3 Data Collection Techniques

Survey through well-structured and self-administered questionnaire and interview as data
collection instruments were used for this study. The data collection was conducted by the
researcher
The first part of the questionnaire was designed to capture the characteristics of respondents such
as sex, age, level education, the position of the respondent in the enterprise, working experience
prior the current position as well. The second part contained questions which were designed to
capture dollarization characteristics. Both parts of the questionnaire are important to bring intended
variables in to play. Analysis and data presentation part represents the aforementioned data
perspectives.
The questions contained in the questionnaire were mainly close ended ones. This is to avoid
misinterpretation and make information valid and reliable. It is also to keep the questionnaire into
a sound and reasonable length.
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3.4) Sources of Data
3.4.1) Primary Data Sources
In this paper’s primary data source was come from this paper’s direct respondents through those
banks in Hargeisa, those responds were giving this paper’s raw materials and the researcher will
identify and analyses those raw materials and he will interpret it into useable findings and solution.
The respondents, they help for collecting whatever they knew about how dollarization effect on
economic growth. And we will share their experiences and knowledge about that side.
3.4.2) Secondary Data Sources
In this kind of data sources are those data from searching engines, books, journals, webs, articles,
quotes, researches etc. those researchers has used in his research and it’s an important part of this
research, citation is the most needed things in the every taken paragraph and context because of
guarding other property rights.
the secondary data source was come one or most of the previous types of data sourcing types and
the researchers was clarifying after the completed the research with the references accordingly.
3.5) Data Presentation and Analysis (tools)
During the data analysis the study were used descriptive analysis for analyzing various
respondents’ gives to a particular secondary data analysis then will be presented in tabulation and
graphs. Where the raw data of the researcher will apply the different important methods of
descriptive analysis and results and solutions will show through discussed and well interpreted
structure results of research.
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3.6) Data Analysis and Interpretation
The researchers have applied and used to analyze for the research for descriptive analysis because
of the study variables.
3.7) Limitations of the Study
There are the limitations and most problems faced the researcher in this study, there was more
limitations faced the researchers
1) There wasn’t enough time for preparing this paper, because it was need more than this
2) According to this paper’s secondary data availability for both those searching engines and
available books. So the most used and available data were primary or raw data.
3) Some of the respondents were abstained to the accept the questionnaire during data collecting
process, so this was another problem for those were this paper’s respondents
4) All of the institutions those were this paper’s target population were abstained to give the
exactly numbers of their workers.
5) There wasn’t any data recorded for GDP, GNP and inflation for the last years, and the
researchers couldn’t identify the exactly number rates toward the changes of those previous
factors.
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CHAPTER FOUR: RESULTS AND DISCUSSION
4.1 Sample Characteristics
The researcher have found that after their data collecting most repetitive age class is above 40, and
has the highest percent of 32.3%, because it’s the most labor force those works in the work fields
in Somaliland according to many factors exists in Somaliland, also, the smallest part of age class
of the respondents are 18-25 aged people, they have found the lowest percent of 18.5% those are
still young according to other groups of the respondents, the age class between 26-30 those have
found a percent of 21.7% and also group of workers 31-40 have got a percent of 27.7%, those two
groups are middle group ages according to the other respondents.
Most of the respondents those were crucial part of data collecting 72.7% of the respondents of the
interviewed were male while other 22.3% were female as shown in table 4.1. That’s common
characteristics known Somaliland community, mostly the gender balance is rare undertaken of
employment and other situational living styles. This implies that the majority of workers in the
banking and exchange market in Hargeisa are men.
The situational related to their marital status is the most of the respondents are married and still
having a couple, that group of respondents have got the highest percent of 58.5%, the second group
of the respondents according to the highest number of percent they got are single those have got
30.8%, the last group of the respondents are widowed people those have the smallest percent of
10.8%.
According to the educational level of the respondents, the most level which having the most
percent are those University level whether graduates or still undergraduate level of the
respondents, mostly those are graduated people from the respondent. This group of people have
the highest number of percent which is 69.2%, this better for the companies and also bankers
because they have found some knowledgeable persons rather than employing through clans
without looking their educational background.
The second group from the educational level point of view are those secondary level of the
respondents and they have found 16.9%, according to the secondary, these group of respondents
are those unable to continue for their educational studying and taking the opportunity cost of
working for the institutions. The third part of the respondent are those primary graduates and they
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have a number of percent reaching 10.8%, mostly this part of the respondents is those working
within in the market of exchange, because of the reasons, first: the higher institutions not employee
them because of their educational level, second: market of exchange doesn’t have more
complicated rules and regulations according to Somaliland’s central bank power regulating the
money supply.
The last part of the respondent in their educational level, those the researcher have collected the
data are those non-educated people, those also working within the market of exchange, but having
a higher level experience because or practicing for their jobs, and they have graduated “practice
makes you perfect” school.
According to the last part of the respondents’ profile is that their working occupations, this is too
important according the researcher’s data collecting from the target population. Those have highest
number of percent are those businessman (employees of private companies), they have got a
percent of 36.9%, these workers are those working for Dahabshiil and Darassalam banks in
Hargeisa, those mostly know about the use of foreign currencies and how effect for the currency
because of their high level of experience. The second stage which is having the also the higher
level of percent is government staff those working within the Somaliland central bank, those have
33.8%, These group people have level of effect for uses of foreign currencies in Somaliland, if
they tried to stop Simi-official dollarized economy in Somaliland accordingly.
The third part of the respondents from their working situations are self-employee respondents,
these part have a percent reached 29.2%, and especially this part is those works within the market
of exchange in Somaliland, those sets a daily exchange rate in Somaliland’s exchange rate
situations.
These is the largest group of the respondents accordingly, the problem they have is that they don’t
have a good builds suitable for their daily works, mostly they sit around a front of normal buildings
of the peoples’ workshops.
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Table 4.1: Sample characteristics
Frequency Percent
Age
18-25 12 18.5
26-30 14 21.5
31-40 18 27.7
Above 40 25 32.3
Gender
Male 47 72.7
Female 18 27.3
Marital status
Single 20 30.8
Married 38 58.5
Widowed 7 10.8
Educational level
University 45 69.2
Secondary 11 16.9
Primary 7 10.8
None 2 3.1
Occupation
Gov’t staff 22 33.8
Business man 24 36.9
Self-employee 19 29.2
Student 0 0
Unemployed 0 0
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4.2 descriptive Analysis
This section explains and discusses the results of findings based on the analysis made on the
collected data descriptively. The results of the study are discussed here by triangulating the
different instruments i.e. Questionnaire, interviews and the literature survey results. The
discussion attempts to accomplish the objectives of the study and answer the research questions.
Figure 4.2.1 Developmental obstacle comes from use of foreign currencies
As this above figure 4.2.1 states, according to respondents’ answers, the researchers have found
that the most of the respondents are telling they are strongly agreeing there is some problems
toward an economic development comes from most repetitive kind using foreign currency, a
percent of 44.62% are saying that there are problems related increasing use of foreign currencies
rather than local one. Because they have seen practically those problems and feel it morally.
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Also there is higher level of agree people which behind after strongly agree but emphasizes it,
those people saying there is problems have got a percent of 40% for the collecting the data,
The other hand, there is people abstaining that there are problems comes dollarization and they
have refused the other people have said, they are around 9.231% of the respondents.
The last part saying there is no problems at all are those refused or strongly disagreed, and they
have the least percent of numbers of 6.154%, they have the minor votes accordingly.
Figure 4.2.2 Somaliland’s practiced of foreign currencies
Figure 4.2.2 tells that the majority of the respondents have chosen that there are problems related
Somaliland’s economic problems and its uses of dollarization, strongly agree 40% and agree which
is 41.538%, are those respondent said yes there is problems came from it, lastly in this figure
shown, those respondent disagreed and also those strongly disagreed are 16.923.5% and 1.5385%
respectively.
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Figure 4.2.3 Sources those dollarization comes from
As this above figure shown, most of the respondents agreed that importing goods and services are
the fathers of dollarization in Somaliland, highest respondents those have highest number of
percent 48.438% are strongly agreed during data collection, while the higher ones are those said
we are disagreed and having a number of 29.688% and they abstain from that there is any problems
related dollarization in Somaliland. The last part those have 21.875% are those said yes and we
have agreed.
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Figure 4.2.4 Somaliland: lack of effective central bank
This above figure has mentioned that a majority of the respondents are chosen that there is strong
and effectively working central bank, there is central in Somaliland but is not working as its
international banks as lender of the last resort. A percent reached 56.92% are chosen and strongly
agree flowed that its true there is effective central bank in Somaliland, also 35.38% agreed its true,
the other side of the respondents those have denied and disagreed or strongly disagreed are 6.154%
and 1.538% respectively. The meaning of this is, Somaliland hasn’t had a good working bank but
a good working store, and they must change the policy toward this kind of bank.
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Figure 4.2.5 Dangerous impact of dollarization on local currency
The impact from dollarization on local currency obviously dangerous as this above figure 4.2.5
showing, most of the respondent are strongly agreed that there are problems comes from
dollarization to the local currency, a highest percent which is 49.231% are strong agreed and
additionally a percent 4.6154% are agree also, lastly there is higher percent against that there is
negative impact on local currency, and said no, there is no problems at all.
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Figure 4.2.6 Higher prices from unstable exchange rate and dollarized economy
Source: Own Survey
Exchange rate it’s one of creators of a good economic development also economic growth, as this
above states, there is unstable exchange rate in Somaliland according to a few years of changed a
high level and devolution of the local currency had taken a bad path accordingly, most of the
respondents are saying strong agreed (55.38%) and agreed (40%) that problem is true already,
there is some refused for and saying disagree and strongly (3.077% disagreed (1.538%)
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Figure 4.2.7 Commercial banks working in Somaliland and dollarization
Existing good and effective commercial banks in Somaliland, the situation of local current should
have better than right now, highest percent of 44.62% are agreed there should be some solutions
from those missing banks in Somaliland, also 23.08% are said strongly agreed, while the other
27.69% and 4.615% are said disagree and strongly disagreed and it’s better for missing those
commercial banks, may be its true, because conventional banks are not allowed in Somaliland
because of their perspective religion, but commercial banks rather than interest rate and their
transaction based on Islamic transactions may have positive impact on the local currency.
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Figure 4.2.8 Relationship between dollarization and inflation
The level of dollarization increases is flowed by also higher level of inflation as majority of the
respondents said, a percent of 33.85% are said disagree also 7.692% are strongly disagreed, but
the other side of the respondents, those have been accepted are saying there is an inflation comes
from dollarization, a percent of 30.77% and 27.69% are strongly agreed and agreed there are
problems on local currency from the dollarization,
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Figure 4.2.9 Dollarization against job creation and economic development
As this above figure stated there is more of economic growth and job opportunities created after
decreasing of dollarization, because most of the respondents have strongly agreed (30.77%) and
agreed (44.62%) and this majority voting of respondents are additionally states that there is
existing situations of economic growth and job creation of decreasing of uses of foreign currencies,
on the other hand there is some people disagreed (13.85%) and strongly disagreed (10.77%) and
saying there is an economic growth jobs with the increase of the dollarization.
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Figure 4.2.10 Most communities have a negative result from dollarization
The most and victims of dollarization are those in the low income level of community as the
majority of the respondent saying, those are the last stage of the life and living under/around the
poverty line are the most victims of uses of foreign currencies within the country, most respondent
said there is negative impacts on low income community after taking use of foreign currencies and
a percent of 96.923% have voted, on other hand, those people in the middle income community
are less other than low income, and a less percent have (3.0769%) voted there is problems on
middle income community after applying of dollarization preferred from the local currency.
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Figure 4.2.11 Decreasing of dollarization and use of local currency
This above figure states that there is relationship between the use of local currency and
dollarization, because majority of the respondents(44.615%) are the saying totally community
will the local currency after decreasing the dollarization within the country, also, the second higher
of the respondents are saying on average he community will the local currency, also some of the
respondent are saying minimally(6.1538%) and every one (6.1538%) will use the local currency
after getting away from dollarization, lastly, some of the respondents have chosen that there is no
effect between the usage of local currency and dollarization.
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Figure 4.2.12 Dollarization against economic growth
This above figure 4.2.12 is shown that there is clear relationship between country’s economic
growth and its use foreign currencies as majority of the respondents have said agree (55.385%)
and strongly agree (27.692%) but some other respondent are said no, and there is no relationship
between use of foreign currencies and economic growth in country at all. They were disagreed and
strongly disagreed a percent of (15.385%) and (1.5385%) respectively.
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Figure 4.2.13 Economic development against dollarization
Figure 4.2.13 stated that most of the respondents were chosen that the country’s level of economic
development is depending on how that country uses his own currency and away from the usage of
foreign currencies, so, here is respondents chosen strongly agree (28.13%) and agree (40.63%) for
a same way of supporting this idea, the other left respondent were chosen and abstained from that
there is relationship between level of dollarization in the country and its economic development
but there is an other factors effecting it. Minority of the respondents said disagree (28.13%) and
strongly dis agree (3.125%) as shown in this below figure accordingly.
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Figure 4.2.14 Challenges among economic growth and less productivity
This above figure states that there are economic challenges and relationship between low
productivity and local economy also loss of huge value for local currency from them, most of the
respondent are said agree(47.62%) and strongly agree(34.92%) and this is majority of the
respondents according to this figure, some of the respondents are abstained from and
disagreed(11.11%) also strongly disagreed (6.349%) and said there is no economic challenges and
loss of the value of local currency toward the use of foreign currencies.
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Figure 4.2.15 Risks of dollarization on economic growth
This Figure 4.2.15 last figure of the researchers has found that there are some several economic
risks comes from the adaption of dollarization according to its level in some country uses for
foreign currencies rather than its own one, so economic risks and how the respondents have voted
are listed below
a) Low production (7.6923%)
b) Unemployment (9.2308%)
c) Inflation (43.077%)
d) Underutilization f resources (10.769)
e) All of the above (24.615%)
f) Other risks (4.6154%), So, most of the respondents have chosen that there is an inflation
after using of foreign currencies after dollarization, other respondents are said there are
many economic risks and many others, also some of the respondents are saying there are
all listed problems including inflation.
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CHAPTER FIVE: CONCLUSSION AND RECOMMENDATIONS
5.1 Conclusion
There are some of findings those the researchers have found in their collection of data those comes
from the crucial role model or respondents of this paper, finalizing and making less for those huge
information comes from the respondents are also an important task those the researcher has done
through this paper. The most and important findings are listed below according the highest votes
they found from the respondents.
1) There is much more level of inflation comes from the dollarization and its negative impact
on local currency and those goods and services those the society uses. The researchers have
found that there is the negative relation between the usage of foreign currencies and access
of good and services within the country.
2) The most types of problems those comes the dollarization are those have the highest votes
from the respondents and those problems are
a) Low production (7.6923%)
b) Unemployment (9.2308%)
c) Inflation (43.077%)
d) Underutilization f resources (10.769)
e) All of the above (24.615%)
f) Other risks (4.6154%)
Those above problems are those problems from the dollarization on the economy, inflation is the
highest problem which is coming from the dollarization having its negative impact on local
consumption. Some of the respondents were said there is another problems comes from the
dollarization on economy.
3) Assessing the level of dollarization within the country is very because of lacking the
amounts of changes those the GDP of the country has changed for the last years, so the
researchers has found that the only and most repetitive effect of dollarization on economy
growth is that inflation, which is having the highest of the economy of the country,
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4) Also last finding is that there is finding out the sources those fluctuations of the exchange
rate and devolutions of local currency comes is that lack of effective, policy maker, lender
of the last resort and regulator of money supply The Central Bank is already missing and
its role is still needed by the country, on other hand some of specific persons are those
setting the prices of foreign currencies and also local currencies those only looking for their
small interests, making the prices of foreign currencies like USD higher means devolution
of local currency and losing a huge value, the sources those the fluctuations comes from is
that importing all goods and services from outside of the country.
Whenever there are business fluctuations in business cycles there is fluctuations toward the
system of using local currency and those foreign currencies used within the country.
Dollarization existing in Somaliland which is Semi-official dollarization or double currencies in
the country is the first challenge and most obstacle existing toward for Somaliland reaching
underdevelopment and higher economic growth, less of dollarization and economic development
generate employment, strongly contribute to the GDP and play a crucial role in poverty alleviation.
The main objective of this study is to identify the key determinants of employment growth and
economic growth in Somaliland and good regulatory and effective central bank exists in the
country, particularly Hargeisa. Randomly selected 65 workers working in different banks both
private/public sectors and market of exchange through simple random sampling is included in the
sample.
Survey method for primary data and literature survey for secondary data is used to obtain the
relevant data. Self-administered questionnaire and key informants face to face interview was
employed as data collection instruments. The target respondents were owners of those working in
the market of change and managers and other working in the three different banks exists in
Hargeisa and they are those surveyed respondents in this paper accordingly.
By using SPSS software, descriptive statistics such as frequency tables and figures as analysis is
incorporated to examine the effect of dollarization on economic growth and determinants of
employment growth and the relative importance of those determinants as poverty reduction.
Interview results was interpreted and analyzed quantitatively. Although some exceptions are there,
descriptive analysis have shown that dollarization and less economic growth flowed by poverty,
unskilled labor, illiterate, and lack of governmental good implemented policies, underutilization
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of human capital, social capital, external resources and internal capabilities and business structure,
which were the incorporated main economic development, in general, significantly determine
dollarization exists is Somaliland and less economic growth comes from it the hinders of
employment growth with different degrees. The interview results were also consistent with the
survey findings.
Education and prior experience of the owners, managers and employees’ variables which
constitute and con were found to have a significant and negative effect of dollarization on
economic growth also reducing unemployment growth in Somaliland. Education strongly and
positively influences use of foreign currencies and making the desired economic growth as
compared to prior experience of the ownership and management. Only government promotion
schemes on economic growth and also less using of foreign currencies.
Despite the importance effective central bank in the economy, there are perceived potential
challenges to overcome if conducive monetary environment to money circulations those comes
from usage of foreign currencies in the country. Based on the primary data of the research survey,
less economic growth, less productive, unstable exchange rate, increase of foreign currencies,
increasing of importing goods and services from abroad, lack of effective central bank, negative
impacts comes from dollarization, lack of job opportunities, increasing level of poverty and rising
many other economic risks those from the dollarization exists in the country and lack of
government incentives were the challenges argued by the respondents. Lack of monetary strategy
and vision were also among the potential challenges forwarded by the respondents.
5.2 Recommendations
After taking journey from the data collection to recommendations through crucial important part
of the of the study which is respondent, those are this didn’t work without them, so, in this situation
of dollarization which Somaliland is within and hindering of reachable economic growth, here are
some of most and important recommendations are listed below
 Somaliland government must establish a good and effective central which is having its
power separately to control and make under the supervision of this crucial tasks toward the
dollarization, also to control inflation which is coming uses of foreign currencies.
42 | P a g e
 The use of foreign currencies has the most negative impact on local currency and losing a
huge weight of its value, so, the government should come a policy toward incentives
motivating uses of fervencies, like mobile money transfer which is spreading and
increasing the level of foreign currencies.
 There must be awareness’s toward the nations’ usage of local currency rather than other
currencies, i.e. Somaliland shillings 50 & 100 are already depleted from the country, so, to
avoid this increasing losing value, to reach a desired e economic growth within the country.
 Unstable exchange is the highest obstacle on local currency, exchange rate comes from
market of exchange which is separately from the central bank and some other specific
organizations which decreasing the value of local currency.
 After setting the exchange, there should many opportunities from the investors those are
investing many sectors and there should an automatic increase to job creations within the
country, so, the level of job opportunities will increase, and the level of the country’s
unemployment will decrease as much as employment increases.
 Creation of information center which enable the society access to important and current
relevant information about the usage of foreign currencies to access the level small scale
enterprises to increase investment opportunities, markets, partnerships, technology and
funding institutions is an important to create an economic growth.
 Those economic fluctuation comes from dollarization must decrease accordingly level of
productions as well as making importing dollarization less. To make level of production
higher and better than it has, so the gov’t must come a clear policy toward the effect of
dollarization and sustaining from this point or decreasing it.
 Lastly, gov’t of Somaliland must come a clear policy toward this kind of Semi-official
dollarization, also local community must abstain from all kinds of problems increasing
dollarization simultaneously inflation to reach higher income of person after recurring this
kind of problem.
 Those have an experience to dollarization, they must tell to the society the dangerous
impacts from the use of foreign currencies and its obstacle from it and supporting the local
society the usage of local currency to the desired economic growth within the country.
43 | P a g e
Appendix 1
Reference
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Trade: The Real Case for Currency Union”, American Economic Review; 91(2), 386-90.
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Modeling23(3), 267-77.
Frankel, J.A. (1999); “No Single Currency Regime is Right for All Countries at All.
Edwards, Gordon. "Rules, Discretion, and Reputation in Monetary Policy.”, 2006.
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Past?”Journal of Economic Issues 37(September): 643-663
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55-71.
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Exchange rate Pass-through. Journal of Monetary Economics, 57, 309-324.
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45 | P a g e
monetary indicators,” Journal of Monetary Economics, Vol 50, 1649-1672.
Barkhad, Dahir. (2016), Hargeisa retrieve, Hargeisa Sagaljet.
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Questionnaire
1. Age of the respondent

a. 18-25
b. 26-30
c. 31-40
d. Above 40
2. Gender of the respondent
a. Male
b. Female
3. Marital statutes
a. Single
b. Married
c. Widowed
4. Educational level
a. Universities
b. Secondary
c. Primary and intermediate
d. None
5. What is your occupation
a. Government staff
b. Business man
c. Self-employee
d. Student
e. Unemployed
6. The increase of the use of the foreign currencies are obstacles the side of
development:
a. Strongly Agree
b. Agree
c. Disagree
47 | P a g e
d. Strongly Disagree
7. Somaliland practices dollarization for many years, and it hinders the
process of economic development:
a. Strongly agree
b. Agree
c. Disagree
d. Strongly disagree
8. The major sources of dollarization come from are importing goods and services
through a private sector:
a. Strongly Agree
b. Agree
c. Disagree
9. Strong and effective central bank is not existing in Somaliland and that’s
why use of foreign currency couldn’t be stopped:
a. Strongly Agree
b. Agree
c. Disagree
10. The impact of dollarization on local currency is dangerous and losing huge
value of local currency for the near future economy.
a. Strongly Agree
b. Agree
c. Disagree
11. Unstable exchange rate and the dollarized economy have also remarkable effect to
the high price of the commodity:
a. Strongly Agree
b. Agree
c. Disagree
48 | P a g e
12. If there is a good commercial banking system working effectively the level
of dollarization would be less:
a. Strongly Agree
b. Agree
c. Disagree
13. The level of dollarization increasing is flowed by a high level of inflation
and less economic growth:
a. Strongly Agree
b. Agree
c. Disagree
14. As much as dollarization decreases the level of development and job
opportunities increases and economic growth also increases:
a. Strongly Agree
b. Agree
c. Disagree
15. Which level of community does the dollarization have the most negative
impact and less gaining results as economically:
a. Low income
b. Medium income
c. High income
d. Every one
49 | P a g e
16. If the prices of dollar is already decreased, the society will use for local
currency:
a. Minimally
b. On average
c. Totally
d. Every one
e. none
17. if the country practices dollarization, it will less and less economic growth
in that country:
a. Strongly agree
b. Agree
c. Disagree
18. The level of economic development is depending on how far from you are
away to the dollarization:
a. Strongly agree
b. Agree
c. Disagree
19. One of the challenges of economic growth is low productive in domestic
economic and devolution of local currency:
a. Strongly agree
b. Agree
c. Disagree
e. None
20. The dollarization has many economic risks according to its customized level. Include:
a. Low production
b. Unemployment
c. Inflation
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d. Underutilization of economic resources
e. All
f. Other,
Specify_____________________________
51 | P a g e

The Effect of Dollarization On Economic

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ADMAS UNIVERSITY

Supervisor: Mr. Zakaria Mouse.

A research proposal submitted to the department of Economics of

Name: Abdiweli Mahdi Mohamed

Name of advisor: Mr. Zakaria Moussa

Abdiweli Mahdi Mohamad

Table 2.1: Average exchange rate 2010-2016 …………………………………………………...17

1.1) Background of The Study

1.2) Problem Statement

1.3) Objectives of the Study

1. To determine the effect of dollarization on domestic consumption of goods and service

1.3) Research Questions

2.1.2) Types of Inflation

c) Wage Push Inflation.

2.1.3) Sources of Inflation

In developing countries, there are four frequently cited sources of inflation:

2.1.5) Types of Dollarization

2.2) Theoretical Review

2.3) Empirical Framework

2.3.3) Economic Growth in Ecuador Provided by Dollarization

2.3.4) Dollarization in Africa:

2.3.5) Dollarization and the Zimbabwe’s Economy

Table 2.1: Average exchange rate 2010-2016

Source: (Muse, 2015)

According to Investopedia dollarization is a situation where the citizens of a country officially or

3.1) Research Design

3.2.2) Sample Unit

3.2.3) Sample Size

Source: James Cridland, Sample size (The rough guide)

3.2.4) Sampling Techniques

Category of the Population Sample Size Sampling Method

Source: Primary data computed by authors

3.3 Data Collection Techniques

3.4.2) Secondary Data Sources

3.5) Data Presentation and Analysis (tools)

3.7) Limitations of the Study

Figure 4.2.1 Developmental obstacle comes from use of foreign currencies

Source: Primary data computed by authors

Source: Primary data computed by authors

Source: Primary data computed by authors

Source: Primary data computed by authors

Source: Primary data computed by authors

Source: Own Survey

Source: Primary data computed by authors

Source: Primary data computed by authors

Source: Primary data computed by authors

Source: Primary data computed by authors

Source: Primary data computed by authors

Source: Primary data computed by authors

Source: Primary data computed by authors

Source: Primary data computed by authors

Source: Primary data computed by authors

1. Age of the respondent

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