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This is a joint post with Ross Thuotte.

Last week, lawmakers in Somaliland (Somalia's northern, semi-autonomous region) reportedly established Somaliland’s first central bank.  The measure will pave the way for foreign commercial banks to start operating in Somaliland by 2013, providing much-needed financing support for Somaliland’s private sector businesses.  Simultaneously, the donor community (represented by multilateral institutions and both Danish and US aid agencies) has expressed a strong interest in Somaliland.  Two questions arise: How can international donors further support Somaliland’s businesses and what can they learn from the parliament’s new central bank?

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Somaliland claimed independence from Somalia in 1991 and has since formed its own parliament, government, schools, infrastructure, and healthcare systems.  Certain sectors have flourished even in the vacuum of a strong central government presence, including telecommunications, mobile banking and money transfer services, and livestock trading.  Despite Somalia’s problems, Somaliland’s private sector has grown and prospered.  A 2010 CGD working paper highlighted how businesses made major contributions to Somaliland government and non-government institutions – despite the lack of international intervention.

But as the international community enters the scene, how can they most effectively support private sector businesses in Somaliland and relatedly, in other African fragile states?  In a forthcoming report entitled “Supporting Private Business Growth in African Fragile States” we present a three-pronged framework to increase the effectiveness of private sector assistance in Africa’s most challenging environments.  The framework defines three criteria:

  1. Identify and target the most severe constraints to business growth. In African fragile states, the most frequently cited constraints to businesses are electricity, roads, and access to finance.
  2. Invest in sectors with proven track records. Successful sectors vary widely across African fragile states.
  3. Align project goals with stated aims of the host government. Government priorities also vary widely, but often parallel the needs of private business.

Applying this framework to Somaliland’s central bank, we find that the parliament’s intervention aligns with all three targets.  The central bank will 1) help alleviate business’ need for finance, 2) promote a successful sector via mobile banking and money transfer services, and 3) help achieve government priorities.  The impact of the new central bank may already be evident – investors are taking risks in Somaliland, and their actions can pay large dividends.  Stay tuned!