The impact of inflation on Somaliland’s Cost of Living

[Deeq A.]

Inflation is simply rise in prices of commodities and devalues of money. It directly influences the standard of living. The effect of inflation has made it very difficult for many households have to get their basic necessities which have gone beyond their purchasing power. This article is about the impact of inflation to the standard of living and its main objectives are to find out the riskiness of inflation to the purchasing powered of society and to determine the main factors those contribute the inflation of Somaliland. The purpose of this article is to give the impact of inflation on standard of living. This paper examines the dynamic interactions between inflation and standard of living in Somaliland, to see how the inflation affects standard of living, Somaliland people has been weakened by uncontrollable inflation and they need a long term solution which at least reduce the inflation or the rising prices of the commodities. Somaliland has no an effective economic system that works properly, therefore it is difficult to explain any component of the economic philosophy such as the rate of inflation and unemployment, which are the most important tools that drive the measurement of economic wellbeing of any country whether its developed or under developed one. This article therefore focuses on finding the impact of inflation on the standard of living of people Hargeisa and other additional cities of Somaliland.

 

Inflation is simply rise in prices of commodities and devalues of money. It directly influences the standard of living. This article dealt with the effects of inflation on standard of living in terms of expenses on food and non-food items, income, saving, loan and recreation in the city of Somaliland. The inflation rate of Somaliland still remains high in absolute terms and by comparison with many other countries in the sub-region and the world in general. There is some hard problems like high prices on goods and services because there is no government plans to address and determine the original prices of this products and services, the households in Hargeisa is so poor and some of them haven’t the basic needs. In this country there is allot of households which earns very low income and other basic needs like; Shelters, clean water and also food and clothes, so this Article will examine how the increasing rate of inflation in this country affects these households and their life. Rising inflation is one the unsolved problems in Somaliland and the political plans of the government aren’t success plans, therefore these people suffer enough for their life because of their affordability on high prices and the unemployment in all Somaliland, and there is no controlling inflation, especially when inflation is unexpected and catches people off guard or when it fluctuates widely from month to month or year to year. And also this Article will look into what are the main the sources of the inflation and what causes it repeatedly, why inflation in this country is uncontrollable.

TYPES OF INFLATION ON THE BASIS OF SPEED AND INTENSITY:

Creeping Inflation: This is also known as mild inflation or moderate inflation.

Galloping Inflation: If mild inflation is not checked and if it is uncontrollable, it may assume the character of galloping inflation.

Hyperinflation: It is a stage of very high rate of inflation.

CAUSES OF THE INFLATION

Demand Bull Theory

John Maynard Keynes (1883-1946) and his followers emphasized the increase in aggregate demand as the source of demand-pull inflation. The aggregate demand comprises consumption, investment and government expenditure. When the value of aggregate demand exceeds the value of aggregate supply at the full employment level, the inflationary gap arises.

Cost Push Theory

Cost-push inflation is caused by wage increases enforced by unions and profit increases by employers. The type of inflation has not been a new phenomenon and was found even during the medieval period.

Excess Demand

Excess demand is when the supply of goods and services falls short of the demand for them. Excess demand leads to rise in prices of goods and services because interested consumers engage in competitive bidding which result into higher prices.

Market Power and Inflation

Market power exercised by firms has become central to macroeconomics. Hall (1986, 1988) demonstrates how substantial market power and declining or flat marginal costs attenuate firms’ incentive to alter prices, thus contributing to aggregate fluctuations.

2. STANDARD OF LIVING

Standard of living is defined as the level of wealth, comfort, material goods and necessities available to a certain socioeconomic class in a certain geographic area. And quality of life is defined as the perception of ability to meet daily needs, physical activities, and well-being. In generally, Standard of living is related on the buying power of the household and the owning power of property in the country. So it is always related the income of people and the economic inflation rate. Quality of life is the general wellbeing of a society in term of health care, education, political freedom, a clean natural environment and any that can help to improve one’s satisfaction and happiness. Good in standard of living is always being first; and then we will able to have a high quality of life. A good standard of living had the characteristic of high income, low inflation and low unemployment happen in the country. From the perspective of business, standards of living in the country are important information that shown the level of consumption in the country.

Measurements of Standard of Living

Measuring living standards is very important for economic policy. However, in practice there are several difficulties in measuring living standards and therefore there are several different measures we could use.

GDP per Capita

GDP measures National Output / National Income. Per capita is the average income per person in the economy. This is a rough guide to living standards because it measures average incomes / the amount produced in an economy. However, income and average output is only a rough guide to living standards.

GDP – Purchasing Power Parity PPP

Another important factor in measuring living standards is GDP measured at Purchasing power parity. This means that the statistics take into account the actual cost of living. For example, some countries may have lower GDP, but the cost of living is much cheaper. PPP adjusts for these different costs of living.

Real GDP per Capita / Hours Worked

A more accurate guide to living standards is to take into account the number of hours worked. If you gain high GDP per capita but have to work a 12 hour day, then this is less desirable than same income for 6 hours work per today. (Measuring living standards / hours worked)

Household Expenditure / Consumption

Most measures of living standards focus on income. However, income is only a rough guide to the goods and services you can actually buy. Some people may have very high living costs (e.g. rent / council tax / transport costs). Therefore, the quantity of goods and services you can actually buy will give a better guide to living standards than just income. Another issue is that some people may receive benefits in kind.

Poverty and Living Standards

An important factor in measuring living standards for the economy is the number of people living below the poverty line.

The poverty line is defined as: The level of expenditure necessary to buy a minimum level of nutrition and other basic necessities. The World Bank say that the poverty line can vary somewhat from country to country, reflecting different costs of living for taking part in the everyday life of society.

Index of Human Development HDI

This is a measure which seeks to look at the available choices that people have. It is a composite indicator comprised of 3 basic factors affecting living standards – income, life expectancy and education. The three components are:

• Real GDP per Capita, adjusted for the local cost of living (PPP)
• Life expectancy
• Education – levels of literacy

The highest human development is given a value of 1. Low levels of Human development are given a value close to 0.

• In 1997, the country with the highest levels of HDI was Canada with 0.932
• The poorest country was Sierra Leone with an HDI of 0.254

Index of Human Poverty HPI

This was introduced by the United Nations Development Programme UNDP

It is similar to the Index of Human Development, but, the HPI gives a greater weighting to examining how economic development is distributed throughout society.

FINDINGS, CONCLUSIONS, RECOMMENDATIONS

Conclusion:

This Article is about the impact of inflation to the standard of living and its main objectives are to find out the riskiness of inflation to the purchasing powered of society and to determine the main factors those contribute the inflation of Somaliland. It also focuses the exact impact that inflation does exert the life of individuals and the real relationship between these variables.it also focuses on the reasons that the government wouldn’t interfere the impact of inflation on standard of living and why the inflation of Somaliland especially the capital city of Hargeisa is uncontrollable and why the prices are always rising not declining, and what is government’s policy recommendation towards inflation. This Article is a summarized research paper in 2016. Therefore after the analyze of the collected data the Article found that 91% of the society agreed that inflation worsens the purchasing power of society, which clearly decides that inflation has an negative impact to the purchasing power of Somaliland society and their standard of living which effects their basic necessities like sheltering and water and sanitation.

This Article also summarizes the most important factors those contribute the inflation of Somaliland are; the huge imports of goods from abroad and rises the prices of the commodities which effects the society, and lack of role of ministry of commerce or lack of government intervention to the market which is why the local merchants decide the determination of prices of the most commodities.

Recommendation:

In the conclusion of this Article we summarized the findings of the Article and confirmed that inflation hurts the standard of living and real purchasing power of society, we also discovered that inflation in Somaliland is worsening after time and the government of Somaliland must set a policy for controlling inflation or at least to slow its rate. We recommended the following points:

• The ministry of finance should impose heavy restrictions to the imported goods since they are causing inflation or taking a huge contribution this worsening situation.
• The government should encourage and improve the central bank in order to manage the exchange rate and take back the determination of exchange rate as well as supply of money to distribute efficiently.
• Since inflation is big disaster in here Somaliland the government must set policies towards that problem and the ministry of commerce should participate and also the ministry of planning should take part of planning this policy.
• The government must improve the standard of living of individuals in order to reduce the riskiness of inflation.
• Business community must use domestic produced goods rather than imported goods, this would help the infant industries to produce more commodities with lower prices and the purchasing power of the society will go up and the life style of the population will be better, this is will cause economic growth and the society will save money, which can create investment opportunities and new labor will be used and non-functioning resources will be used.
• Business community should improve their investment capacity for increasing employment activity in order to improve the standard of living.
• Business owners should give care their community and charge as low prices as possible, the people of Hargeisa and the other provinces are weakened by high prices of commodities, so the merchants or business community must think of their society and stop seeking high profits which effects the life style of the population and lower the prices as possible.

 

REFERENCE

• Mukhtar M. Aden., & Mohamoud A. & Rahma Abdi., (2016), the impact of inflation on standard of living, Hargeisa Somaliland, V.1.

Summarized By: Mukhtar Mahdi Aden

Tell: +252634056993

Email: Mukhtarmahdi10@gmail.com