Inflation in Somalia causes and consequences

Dr. Abdiaziz Ahmed Ibrahim

Assistant professor of economics
cabdicasis@gmail.com
+252612224440
Abstract
The first purpose of this research is to examine factors that cause inflation in Somalia in 2022.
The causes include droughts in the country, COVID19 and Russian Ukraine war. The second
purpose is to analyze the effect of inflation on households’ standard of living. In order to assess
the causes and consequences of inflation on Somali economy, the researcher adopted an
analytical descriptive approach. To collect primary data questionnaire is conducted with different
groups of people (e.g. merchants, household, and bankers). The research reveals that droughts in
the country, COVID19 and Russian Ukraine war contributed to the increase of inflation in
Somalia, and also concluded that inflation has a negative impact on many aspects of Somali
economy the most important of which is its impact on purchasing power, commodity price and
economic condition of the households and hampering the business activity of Somali people by
creating uncertainty among savers and investors. The researcher recommended that the
government should work hardly to prevent stop the continuous rise of rates of inflation in
Somalia by introducing economic policies that aim at increasing the productivity, inducing
public saving, as well as providing the necessary basic needs to those affected by droughts.

1. Introduction
Inflation is one of the most important macroeconomic variables and the most feared by the
economic actors, including the Government, because it can bring bad influence on the structure
of production costs and the level of welfare. And the wider effects such as instability, economic
growth, the declining of competitiveness, the interest rate, uneven income distribution and
unemployment is increasing. Some of the countries that have experienced hyperinflation showed
that poor inflation would lead to social and political instability, and did not create the economic
growth (Yolanda, 2017).
In Somalia, the inflation rate measures a broad rise or fall in prices that consumers pay for a
standard basket of goods. The most important categories in the Somali consumer price index are
Food & Non-Alcoholic Beverages (46 percent of the total weight) and Housing, Water,
Electricity & Gas (23 percent), followed by Clothing & Footwear (5 percent), Health (5 percent),
Transport (4 percent), Furnishing, Households & Maintenance (3 percent), Communication (3
percent), Tobacco & Narcotics (1 percent), and Recreation & Culture (1 percent).
The annual inflation rate in Somalia rose to 6.98% in June of 2022, from 6.67% in the previous
month. It was the highest inflation rate since December 2005, amid an acceleration in prices of
food & non-alcoholic beverages (16.86% vs 14.74% in May). Meanwhile inflation eased for
transport (1.03% vs 1.35%); and housing and utilities (1.34% vs 3.81%). On a monthly basis,
consumer prices fell by 0.06% after declining 1.47% in the preceding month. source: Directorate
of National Statistics, Somalia

The COVID-19 pandemic has highlighted the interrelationships between disease emergence and
spread, different actors and segments of the agrifood system, and the multifaceted effects of the
crisis. These complexities require policy responses grounded in solid evidence and supported by
systemic research. Increased constraints on fiscal resources — in part a consequence of the
continuing crisis — demand that such policies be informed, smart, and effective, contributing to
agrifood system resilience and protecting the most vulnerable. Responses must be coordinated,
linking health, environmental, social, and financial objectives, and their implementation should
minimize unintended harms. In addition to emergency response measures such as income
support programs, policies focused on the most vulnerable groups must target their basic needs,
including sanitation and nutrition, to improve their ability to cope (Swinnen, 2022).
Since the rates of inflation is very high but its causes and consequences are not defined. For that
reason, this study will investigate the challenge facing household livelihood, factors which
caused the inflations and gab which needs to be solved in the study.

1.1 Objectives of the Study

This article investigates two main objectives, the main factors contribute to the inflation in
Somalia and the effect of inflation on Somali economy.
The specific objectives of this study are to:
1) Estimate how droughts effected the inflation in Somalia during 2022.
2) Evaluate how COVID19 effected the inflation in Somalia during 2022.
3) Analyze how Russian Ukraine war effected the inflation in Somalia during 2022.
 4) Analyze the effect of inflation on purchasing power. In Somalia 2022.
5) Know the effect of inflation on commodity price in Somalia 2022.
6) Find out the effect of inflation on economic condition in Somalia 2022.
1.2 Conceptual Framework

Causes Consequences

Droughts Purchasing
power

Commodity
COVID 19 Inflation price

Russian Economic
Ukraine war condition

2. Articles Review
This paper analyzes the macroeconomic effects of the Covid-19 epidemic on Euro Area (EA)
GDP and inflation, using a stylized New Keynesian model. Covid is interpreted as a combination
of aggregate demand and aggregate supply disturbances. Offsetting aggregate demand and
supply changes are shown to account for the stability of EA inflation, in the face of Covid. The
evidence presented here indicates that Covid-induced aggregate demand and supply shifts were
persistent. An aggregate supply contraction is identified as the dominant force driving the sharp
fall of EA GDP in 2020 (Kollmann, 2021).
This paper analyzes the evolution and drivers of inflation during the pandemic and the likely
trajectory of inflation in the near-term using an event study of inflation around global recessions
and a factor-augmented vector auto-regression (FAVAR) model. The paper report three main
results. First, the decline in global inflation during the 2020 global recession was the most muted
and shortest-lived of any of the five global recessions over the past 50 years and the increase in
inflation since May 2020 has been the fastest. Second, the decline in global inflation from
January-May 2020 was four-fifths driven by the collapse in global demand and another one-fifth
driven by plunging oil prices, with some offsetting inflationary pressures from supply
disruptions. The subsequent surge in inflation has been mostly driven by a sharp increase in
global demand. Third, both model-based forecasts and current inflation expectations point to an
increase in inflation for 2021 of just over 1 percentage point. For virtually all advanced
economies and one-half of inflation-targeting emerging market and developing economies
(EMDEs), an increase of this magnitude would leave inflation within target ranges. If the
increase is temporary and inflation expectations remain well-anchored, it may not warrant a
monetary policy response. If, however, inflation expectations risk becoming unanchored, EMDE
central banks may be compelled to tighten monetary policy before the recovery is fully
entrenched (Ha, 2021).
This paper gives a comprehensive assessment of drought economic impacts provides critical
information to rational decisions supporting drought mitigation policies and programs. The
objective of this paper is to increase the understanding of the full scope of drought economic
impacts and the associated quantitative assessment methodologies. To accomplish this, the paper
reviews the literature of drought economic impact studies in both agricultural and non-
agricultural sectors, summarizes the methods and data employed, compares the various results,
and investigates the problems and limitations of previous studies. The paper concludes with a
discussion of the challenges and directions of future improvement on drought economic impact
assessment (Ya Ding, 2010).

The motivation of the study was to understand the severity of drought on agriculture as well the
impact on the whole economy (to quantify the economy-wide effects/losses emanating from the
drought). To quantify these effects a single-country computable general equilibrium (CGE)
model was used. Four scenarios were developed: Impact of field crops losses; impact of
livestock losses; impact of aggregated agriculture losses; and impact of aggregated agriculture
losses plus drought relief. The analysis shows that all scenarios led to a negative impact on GDP,
employment and exports while the drought relief was found to have saved some jobs, albeit not
significantly (Sifiso Ntombela1, 2017).
This study was carried out using secondary data to review food price crisis and food insecurity in
Kenya. Food prices have been increasing in Kenya since 2006 to date. Prices of staple foods such
as maize, wheat and milk among others have been rising progressively diminishing access to
food for the poorer sections of the population leading to food insecurity in many households.
Underlying causes of food price crisis and food insecurity include both demand side and supply
side factors. Demand side factors include: rapid population growth, rapid urbanization, low
income, poverty and increasing demand for food products for biofuel production in developed
nations. Supply side factors include: declining agricultural productivity, high input prices,
decline in world food stocks, underinvestment in rural infrastructure, climate change and climate
variability, underinvestment in agriculture, poor markets and market access by small holder
farmers.
The impacts of food price crisis manifest as high food prices, political instability, food
insecurity, increasing poverty, and declining agricultural productivity. Both short-term and long-
term policies have been enacted by the government and other stakeholders to address the
problem. Short term coping strategies include provisions of emergency food assistance by the
government and donors, adoption of food policy nets (food subsidies, cash transfers, food for
work and school feeding programs), adjustment of trade and tax measures, enhancement of
agricultural production by providing agricultural input subsidies and administered prices for
producers. Long term policy measures include investment in agricultural research and extension,
investment in rural infrastructure (irrigation, marketing infrastructure etc.), investment in
financial services and agro-processing. The study concluded that food price crisis and food
insecurity are a reality in Kenya and necessary interventions are required to deal with it
(Emongor, 2016).
This article shows that both the Russian war in Ukraine and the subsequent trade restrictions
have become a powerful trigger, significantly increasing the level of inflation and exacerbating
the existing issues of economies. As a result, the confrontation between the West and Russia has
greatly escalated, which will have a long-term, large-scale negative impact on most European
companies and economies. There could also be a lasting restructuring of world trade. The article
notes that not only the end date of the war in Ukraine may be important for business and
economies, but also which of the trade and financial restrictions can be lifted from Russia, and
when. The article also makes recommendations that may help company leaders plan, in a timelier
and more accurate fashion, the changes necessary to maintain company sustainability
(Prohorovs, 2022).
This study has the objective to analyze the effect that occurs between Indonesian Bank (BI)- rate,
Foreign Exchange Rates, Money Supply, oil price and gold prices on Inflation, its impact on
human development Index (HDI) and poverty in Indonesia for the period 1997 up to 2016.
This study used secondary data with purposive sampling method. Methods of data analysis using
multiple regression analysis, Model 1: Results of this study indicate that there are significant
variables simultaneously at BI Rate, Foreign Exchange Rates, Money Supply, oil price and gold
prices to the level of inflation in Indonesia.
The results also showed variable BI rate, money supply, oil price and gold prices partial effect on
the level of inflation positively and significantly, while the exchange rate variable does not affect
the rate of inflation.
The results determinant coefficient of 0.9497means the ability of independent variables to
explain the dependent variable of 94.97 %, while the remaining 5,03 % is influenced by other
variables and are not included in this study. Model 2: inflation on HDI is significant and positive
and model 3: Inflation on poverty is significant and positive (Yolanda, 2017).

3. Research Methodology
The researcher adopted an analytical descriptive approach for the second objective; and depicted
regression models for the first objective. primary data was used through questionnaire conducted
with different groups of people (e.g. merchants, household, and bankers, teachers, etc).
The target population of the study will be 120 as case study resident in Mogadishu, Somalia
without concerning their position, experience, education and gender etc.
4. DATA ANALYSIS AND DISCUSSION
4.1 Findings of research objective one
For the effectiveness of this study, both descriptive and analytical techniques were
employed. For the analysis of the time series data, certain statistical techniques were
employed. This includes multiple regression analysis of a single – equation model based on
method of Ordinary Least Squares (OLS).
Model Summary
Table 1 shows the Model
Summary

As shown in the previous slide, the coefficient of determination R-squared R2 is 0.801. This
result implies that on the average about 80.1% of variations in inflation in Somalia within the
period under review is systematically explained by changes in these explanatory variables. Thus,
about 19.9% variations in inflation in Somalia remain unexplained by these explanatory
variables. The unexplained variations are attributed to other external factors not included in the
model.
The Durbin – Watson (DW) value of 1.102 suggests that there is no presence of
autocorrelation.
The null hypothesis of this study is stated that the model is not significant. The decision rule
follows that if the computed F-value is greater than the tabulated F – value, we reject the null
hypothesis, otherwise accept. Since our computed F-statistics (54.855 is greater than the F-
tabulated value (2.96) at 5% levels, therefore, we reject the null hypothesis. Thus, we
conclude that the model is statistically significant and reliable.

Table 2 Regression Analyze

Model Standardized T Sig.
Coefficients
Beta
(Constant) 9.843 .000
DROUGHTS .542 6.387 .000
COVID 19 .222 2.403 .021
RUSSIAN – UKRAINE WAR .359 3.363 .002
 Table summarized those results obtained from regression analysis and it revealed that,
droughts, COVID 19 and Russian – Ukraine war have positive and significant relationship
on inflation in Somalia.
However, the t – statistics value when compared with the tabulated t – value at 5%, shows that the coefficients of
droughts, COVID 19 and Russian – Ukraine was significant in explaining upward variations in the
inflation.

4.2 Findings of research question two

a) Power purchasing
TABLE 3
No. Variables Mean Interpretation
Power of purchasing
1. Power of purchasing differentiates among
the income of household 3.33 Very High
2. Power purchasing of household depends on
the currency fluctuation in the market 3.14 High
3. Power purchasing indicates the consumption
growth and of household. 3.00 High
4. Purchasing power should be possible to purchase
the same basket of goods and services anywhere
in the Mogadishu 2.85 High
Grand mean 3.08 High
Results indicate that the extent of differentiates among the income of household is generally high and this is
indicated by the overall mean (overall mean=3.08), this implies differentiates among the income of household in
Somalia.
b) Commodity price
TABLE 4
No. Commodity price Mean Interpretation
1. Commodities price in the market
Are important to the household s’ economy 3.24 Very High
2. As the world becomes increasingly connected
By technology, the international commodities
Market is also growing in volume and value 3.17 Very High
3.Exchange rate movements as a tool for
Predicting commodity price movements
&
Utilize the house hold 2.93 High
4. When market participants foresee a
commodityPrice shock, their expectations
will be priced
Into the current exchange rate, because of its
Anticipated impact on future exchange rate values 2.97 High .
Grand mean 3.08 High
Results indicate that the extent of Commodity price in the market is important to the household s’ economy and
generally high, this is indicated by the overall mean (overall mean=3.24), this implies importance of household s’
economy in Somalia.
c) Economic condition
TABLE 5
No. Economic condition Mean Interpretation
1. A good economic condition of house hold
Improves the style of household 3.38 Very High
2. A good economic condition of
household Increases social cultures
decreases
Unemployment rate 2.85 High
3. A good economic condition
shows On political stability in
the county
And helps the household 2.85 High
4. Lack of well economic conditions cause
Instability, unemployment and anarchy 3.21 Very High

Grand mean 3.09 High

Results indicate that the extent of A good economic condition of house hold improves the style of household and
generally high, this is indicated by the overall mean (overall mean=3.24), this implies importance of A good
economic condition of house hold improves the style of household in Somalia.

5. Conclusions and Recommendations

This study investigated the causes of Inflation and its influence of Household livelihood in
Somalia.
The results obtained in this study showed that droughts, COVID19 and Russian Ukraine war
were most factors contributed to the increase the level of inflation in Somalia, and also
concluded that inflation has a negative impact on many aspects of Somali economy, which
means an increase in the inflation results in a decrease in power of purchasing and high price
of commodity and violation the economic condition of households.
6. Recommendations
The researcher recommended that the government should work hardly to prevent and stop
the continuous rise of rates of inflation in Somalia by introducing economic policies that aim
at increasing the productivity, inducing public saving, as well as providing the necessary
basic needs to those affected by droughts.
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