Jan.13, 2010, 11:24am GMT

Somalia's central bank governor says rebel groups are using informal money transfers to fund their operations and that people in the war-torn country risk starvation if it is hit by Zimbabwe-style inflation.

Bashir Isse Ali told Reuters in an interview that al Shabaab -- which Washington considers as al Qaeda's proxy in the failed Horn of Africa state -- sends and receives funds via money transfer firms and urged more transparency to combat money laundering.

"Al Shabaab sends and receives money through this system using individuals, not as an organisation," Ali said. "Money transfer firms should know their customers and share information with authorities."

On inflation, the governor said Finance Minister Sharif Hassan Sheikh Aden planned to print money in Sudan and said this risked sparking runaway inflation that would cause people to starve.

Insurgents control most of Somalia, and the Western-backed administration is in charge of only a few streets of the capital.

The largely ineffectual central bank reopened in 2007, 16 years after it collapsed in 1991, the year military dictator Siad Barre was overthrown.

"The government's lack of control of the whole country cannot be translated to mean that there are no laws. Transparency in the system is important because we have security concerns that money can go into the wrong hands," Ali said.

The governor said it was hard for the firms to identify money laundering if it occurred, but they did not deal with foreigners sending money to Somalis or the other way round.

An estimated $1 billion in remittances by Somalis abroad makes its way into the country through informal transfers, Ali said in the capital of neighbouring Kenya, where many top officials and elite Somalis live.

RUNAWAY INFLATION

On inflation, Ali said the finance minister plans to print notes with a face value of between 2,000 shillings and 50,000 shillings. Currently, the highest value note is for 1,000 shillings.

"This move will increase the inflation rate to incredible figures ... The country will be another Zimbabwe," he said, referring to that country's inflation peak of 500 billion percent in 2008, according to IMF figures.

"On one hand, the leaders cannot claim they are protecting people, and become part of a plot to kill them. If you shoot them or force them to starve to death, it is the same."

In 2000, 14,000 Somali shillings purchased a dollar, but the rate deteriorated to 45,000 in 2001 when the government printed more money, Ali said.

It has since appreciated to the current 33,000 shillings per dollar after note issue dried up when printing costs exceeded the value of the notes.

Ali said the central bank should manage the country's funds and not private companies contracted by government as is the case.

The United Nations Development Programme has managed donor money since the central bank's collapse in 1991 and charged 8-14 percent for its services, Ali said.

The government contracted PricewaterhouseCoopers (PWC) to take over the U.N. body's services in mid-2009.

"The only monetary agent for the government is the central bank. Therefore it is unconstitutional for private financial institutions to be involved in the management of government money," Ali said.

"Private companies can be employed as auditing firms, not management."