Courtesy of The Financial Times, an interesting article on the Somali shilling:

Here’s a pecuniary peculiarity to rival Bitcoin – the world strongest currency over the past 12 months belongs to a small, war-torn African state without foreign currency reserves or any discernible monetary policy and a central bank of only three years’ standing.

Yet the Somali shilling, Somalia’s official currency, has overcome such disadvantages to appreciate against the US dollar by just under 60 per cent since March last year, becoming the strongest among global 175 currencies tracked by Bloomberg. Its surge has been so pronounced that the second most robust currency over the same period – the Icelandic Krona – could only manage a measly 10.2 per cent rise.

So what lies behind the shilling’s gravity-defying performance?

Improving security over the past year has encouraged native Somalis to return to the country, bringing foreign currency with them, said Ben Payton, senior Africa analyst at London-based risk analysis company Maplecroft.

Somalia is recovering from decades of civil war and also faces an Islamist insurgency from al-Qaeda-linked jihadis who mount regular attacks on the capital and claimed responsibility for the terrorist attack on a Nairobi shopping mall in October last year.

Donors have pledged billions of dollars to help secure and rebuild Somalia at recent conferences in the hope that it can make good on recent military gains against the militants.

The inflows and modest levels of foreign investment have been largely responsible for the appreciation of the Somali shilling, Payton said.

“As a result, the supply of US dollars in relation to the Somali shilling has increased. With shillings in comparatively short supply, the value of the currency has appreciated.”

The shilling’s story stands in sharp contrast to the weakness of many other emerging market currencies hit by the US Federal Reserve’s unwinding of monetary stimulus since the start of this year.

On Wednesday, the Fed continued on this path, announcing that it will reduce its monthly purchases of Treasury and mortgage-backed securities to $55bn from $65bn because of confidence that the four-year-old US recovery is becoming self-sustatining. In addition, Janet Yellen, the new chairwoman, appeared to suggest the Fed may start raising interest rates.

The appreciation of the Somali Shilling is an anomaly as remittances (hawalas) from abroad constitute the economic lifeline for many of its people. These are mostly received in dollars, with some then converted into local currency.

As the rates between the dollar and the shilling are determined by black market traders, “there are considerable variations in the rates offered by different operators,” Payton said.

Somalia’s central bank was re-established in 2011, but remains powerless to set monetary policy in the country situated in the horn of Africa and it isn’t backed by any hard currency reserves.

One of the strategic goals of the Somali Central Bank’s five-year strategic plan from 2013-2018 released in August was to expand its monetary instruments including the introduction of new currency.

“…this is not likely to be feasible for the foreseeable future, as the embryonic federal government would have difficulty in rolling out a new currency across the country, given that large areas are still outside its control,” Payton says.