Examining climate shocks and currency resilience in a

Somalia's economy operates in a paradox: absent a functioning central bank for three decades, the Somali shilling has not collapsed. Instead, informal currency markets—the backbone of financial life in the Horn of Africa nation—have demonstrated surprising resilience even when climate shocks devastate agriculture and livestock, the lifeblood of 65% of the population.

Recent research examining Somalia's informal exchange market reveals a counterintuitive truth: stateless economies can stabilize currencies through decentralized, trust-based mechanisms that formal institutions often fail to replicate. This insight carries profound implications for investors, policymakers, and development experts rethinking how financial systems function in fragile contexts.

## Why do informal markets outperform formal institutions in climate crises?

Somalia's informal money transfer system—the *hawala* network—operates on reputation, community ties, and rapid information flows. When droughts strike (as they did in 2016–2017 and again in 2022), pastoral communities and traders cannot afford currency collapse; livelihoods depend on stable exchange rates for livestock sales and remittance flows. Informal dealers respond faster than bureaucracies. They adjust rates in real-time based on supply-demand dynamics, livestock prices, and diaspora remittances—the largest source of foreign exchange, valued at $2.3 billion annually (World Bank 2023). This agility prevents the currency spirals typical of centralized systems hit by external shocks.

The shilling, despite zero institutional backing, trades at relatively predictable rates across Mogadishu's informal markets. In 2016, when drought devastated pastoral regions, the shilling weakened but did not crash—a stability paradoxically missing from many formally-backed African currencies during comparable crises.

## How do remittances and trade anchor currency value?

Diaspora remittances create persistent demand for shillings, even during climate emergencies. Somali families abroad send money home to buy livestock, pay school fees, and rebuild after floods. This creates a stable floor for the shilling's value. Additionally, Somalia's informal traders—particularly the *harti* merchant networks operating across Kenya, Ethiopia, and the Arabian Gulf—create cross-border liquidity that stabilizes exchange rates. When climate shocks reduce local production, these networks shift supply chains and maintain currency circulation through alternative trade routes.

## What are the investor implications?

For institutional investors and development banks, Somalia's informal system offers a cautionary and inspirational lesson: financial resilience in fragile states doesn't require state capacity—it requires network density and trust. Yet this same informality creates opacity. Currency rates vary by location, dealer, and transaction size. There is no consolidated price discovery, creating arbitrage opportunities and risks for foreign investors unfamiliar with local norms.

Climate projections warn of intensifying droughts in the Horn of Africa. Somalia's informal economy will face tests at scale. If drought disrupts remittance flows (due to economic contractions in the Gulf), or if political fragmentation further splinters merchant networks, the shilling could face genuine pressure. Conversely, if international climate finance reaches pastoral communities via local cooperatives and trade groups, the informal system's resilience could deepen.

The deeper lesson: **stateless doesn't mean systemless**. Somalia's currency survives because millions of people have a vested interest in its stability and the networks to enforce it. That's a model no central bank can legislate.

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