The primary objective of the monetary policy department of the CBSL will be to achieve domestic price stability and to maintain stability in the exchange rate of national currency against the foreign currencies by formulating and implementing prudent monetary and exchange rate policies. Achieving such objective would not be possible in the absence of a stable national currency. Therefore, the CBSL will strictly monitor the exchange rate behavior and intervenes in the market under the managed floating exchange rate regime to minimize the impacts of sharp exchange rate volatility on the level of commodity prices as well as other macro-economic indicators.
Monetary Policy Formulation:
According to the article 4 of the central bank act no.54/2012, the primary objective of the central bank is to achieve and maintain the domestic price stability. Achieving such objective is not possible in the absence of stability in the value of national currency.
Since Somaliland is a small open economy with a long-lasting trade deficit, the exchange rate volatility impacts the domestic price stability. Therefore, the CBSL will monitor the exchange rate behavior and maintains the managed floating exchange rate regime to harmonize monetary and exchange rate policies.
Monetary Policy Instruments:
The Central Bank of Somaliland currently uses foreign exchange auction as the sole monetary policy instrument and is planning to add the reserve requirement in the medium term.
Foreign Exchange Auction: Foreign exchange auction is conducted frequently in accordance to the relevant regulation. The selling of foreign exchange is done through an open and transparent auction process in which the licensed foreign exchange dealers participate.
Reserve Requirements: Meanwhile, the Central Bank of Somaliland is planning to implement the use of other monetary policy instruments such as the reserve requirements, not only for the precautionary and supervisory purpose, but also utilize it for monetary policy implementation.