Somalia's financial system is facing a severe test as the country experiences a shortage of cash in circulation. The crisis began when the global oil supply disruption in early 2026 led to increased fuel and freight costs, affecting an economy that heavily relies on imports. A dispute over the federal government's mandate and armed clashes in Mogadishu have added to the instability, causing investors to become reluctant to commit new capital. As a result, a significant amount of money has left the country, exacerbating the cash shortage.
The Somali economy has been dollarized for over three decades, and the Central Bank cannot issue the currency in which most deposits, prices, and debts are denominated. The supply of physical dollars depends on various channels, including diaspora remittances, humanitarian and development assistance, export earnings, and foreign investment. However, each of these channels is under pressure, with exports contracting in 2025 and imports continuing to grow. The World Bank estimates that the trade deficit averages close to 60% of GDP, and the current-account deficit stood at 9.6% of GDP in 2025.
The cash shortage has significant implications for Somalia's financial system. With physical dollars scarce, a gap can open between the value of an electronic balance and the same amount in banknotes, leading to a loss of confidence in institutions holding money. The banking sector, which has grown substantially since the collapse of the state in 1991, is poorly placed to absorb the shock. Somalia's 13 licensed commercial banks held total assets of about $1.8 billion and customer deposits of about $1.43 billion at the end of 2023, with deposits equal to around 5% of GDP, one of the lowest ratios in Africa.
The global financial crisis of 2007-08 provides valuable lessons for Somalia's current situation. The crisis showed that institutions can appear sound shortly before they collapse and that a loss of liquidity can bring down a bank within days. The disorderly failure of one connected institution can damage an entire economy, as seen in the cases of Northern Rock in the UK and Lehman Brothers in the US. Somalia's financial system must navigate these risks to prevent a similar collapse.
The Central Bank of Somalia, which has been substantially rebuilt since 1991, plays a crucial role in maintaining financial stability. However, the bank's ability to respond to the cash shortage is limited by its lack of authority to issue dollars. The Deputy Governor of the Central Bank estimated that the direct cost of the June disruption alone was $3.8 million in lost business and services. The larger cost is indirect, with uncertainty about the government's continuity and property security leading businesses to postpone investment and hold assets in a form that can be quickly moved.
The Somali government's actions will be critical in restoring confidence in the financial system. The government's dispute over the federal mandate and the rejection of constitutional amendments by two federal member states have raised questions about policy continuity and property security. To address the cash shortage, the government must work with the Central Bank and financial institutions to implement measures that stabilize the system and encourage investment.
Restoring stability to Somalia's financial system will require a multifaceted approach. The Central Bank, financial institutions, and the government must work together to address the structural trade deficit, reduce reliance on imports, and promote economic growth. By learning from the global financial crisis and taking proactive steps, Somalia can mitigate the risks associated with the cash shortage and build a more resilient financial system.
Key points
- Somalia's cash shortage poses significant risks to its fragile financial system.
- The country's dollarized economy and reliance on imports exacerbate the crisis.
- The Central Bank, financial institutions, and government must collaborate to stabilize the system and promote economic growth.
