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Economic Reforms in Somalia: A Recap of the Milestones So Far, the Persistent Challenges & Future Prospects
By Dr. Omar Ali Mohamed “Biikole”
Monday July 31, 2023

 

As things currently stand, the future is looking very bright for Somalia’s economy. This is a powerful statement to make, given our chequered past as a nation, and it spells exciting times for our country. But it is not an exaggeration or without merit— the strides of the current administration have been remarkable to say the least. It is not lost on me that during the last 12 months, the President of Somalia His Excellency Hassan Sheikh Mohamud has had more impact on Somalia’s economy than 5 years of Farmajo’s administration. This effort must be lauded both locally and internationally, even as we continue to hold the government accountable to ensure that the government maintains the course towards economic progress.

GDP growth in Somalia is projected to be 3.5% in 2024, and this is being driven by private consumption, external demand, and a relative improvement in political stability, which is expected to facilitate an increase in international donor support. This economic growth has been achieved in the midst of the numerous challenges the nation has been plagued by in recent years including the impact of very significant destabilizers such as the global impact of COVID-19 and the Russian-Ukraine war, as well as domestic drought, floods, armed conflict and political tensions.

Despite these challenges, the Somali government led by President Mohamud has fearlessly undertaken its reform agenda in the areas of security and finance sector, which have broadened the tax base as a result of participation in debt relief through the Heavily Indebted Poor Countries (HIPC) initiative.

What are these Economic Reforms?

The President has put in place a number of ambitious economic reforms characterized by reconciliation, a fight against terrorism, and macro-economic reforms. Among these have included ongoing efforts to improve domestic revenue mobilization. These include implementing reforms in customs, enacting a new income tax law, and increasing revenue collection from large businesses such as the telecom sector.
Public financial management has also been strengthened, with ongoing improvements in areas such as integrating employees into the payroll system, fiscal reporting, procurement, and managing non-financial assets. Progress has been made in establishing a legal framework for the petroleum sector. Additionally, steps will be taken to enhance the Inter-Ministerial Concessions Committee's role in overseeing government contracts and concessions.

The Central Bank of Somalia (CBS) is also working on institutional governance and financial sector reforms. Progress has been made in improving the infrastructure of the financial sector. The CBS will continue to strengthen the regulatory framework and enhance its capacity for risk-based supervision, including through legislation and the development of risk-based prudential regulations. Efforts have been made to address risks related to money laundering and terrorism financing, such as enacting the Targeted Financial Sanctions Law, with further actions planned.

Notably, the authorities in Somalia are steadily progressing towards the HIPC Completion Point. Notable achievements include the recent approval of important legislation by Parliament, covering areas such as electricity, extractive industries income tax, data protection, targeted financial sanctions, digital ID system, investment and investor protection, and fisheries. Debt relief agreements have been reached with most Paris Club members and the Kuwait Fund for Arab Economic Development (KFAED), while negotiations with other bilateral creditors are ongoing.

Impact of these Economic Reforms

Somalia has made significant progress across multiple sectors over recent months including security, investment, and the private sector. As his Excellency rightly pointed out, “the Somalia of 2023 is not the Somalia of 1992.” Just two months ago in may, the IMF even commended the government for being committed to advancing fiscal and institutional reforms, and normalizing relations with all external creditors. They noted that sustained efforts are needed to strengthen domestic revenue mobilization to make room for priority spending, while containing discretionary expenditure pressures. Improvements are ongoing on public financial management (PFM), including on payroll integration.

What is quite promising is the debt relief prospect. According to recent reports, by the end of the year, Somalia could potentially be eligible for debt relief, with over $5 billion owed to external creditors. The Executive Board of the IMF completed a crucial review that could lead to full debt relief, allowing Mogadishu back into eligibility to borrow for development projects. It is the latest step of several over the past five years, in which Somalia has to go through economic performance examination by IMF, generally referred as IMF Staff Monitoring Performance (SMP).

To be considered for relief, however, Somalia will be required to make a visible effort to tackle corruption and improve its financial institutions in line with economic reforms. The impetus for such a deal has driven the Somali government to announce an all-out war on corruption. In fact, President Mohamud has signed a series of anti-corruption directives, openly stating that his administration is committed to fighting the vice. The government’s directive to tackle the age-old problem includes combatting meritocracy, enhancing public financial management systems, strengthening accountability, and improving the efficiency and effectiveness of government. The president has also expressed that various individuals have already been arrested for corruption-related offenses and will be brought to justice soon. Prime Minister Hamza Abdi Barre, on his part, added that the trials for those already in custody would be publicly televised.

What the Future has in Store

For the remainder of 2023, the authorities in Somalia have expressed their commitment towards continued improvements to revenue collection and making room for priority spending, while containing discretionary expenditure pressures. They will submit to Parliament a Supplementary Budget for 2023 that presents a balanced fiscal position based on realistic revenues. The Supplementary Budget will accommodate expenditure that is supportive of growth, security, and development—including security sector compensation and provisions and the hiring of new teachers—while other discretionary spending will be scaled back. External budget support remains crucial.

Building on the progress and already laid down foundation for socio-economic and political development, 2023 will be a turning point for Somalia as it looks forward to reaching the completion point of the HIPC initiative whereby the government is expected to implement various milestones to inform economic growth and poverty reduction through the development of policies and strengthened institutional capacity with the subsequent outcome of debt relief for on the forecast.

Word of Caution

Very real and significant challenges still exist, and this must not be glossed over. Somalia continues to experience severe food insecurity in certain regions due to ongoing drought conditions. The government has responded by identifying the most affected areas, securing external funding, and collaborating with the UN system to deliver humanitarian aid. Thanks to support from donors, approximately 7.3 million individuals are receiving some form of assistance. However, if the rains are disappointing and there is insufficient funding for humanitarian aid, half of the population could face severe food insecurity in the very near future. The drought and sluggish global economic growth have also hindered economic activity, and risks remain high.

Going forward, timely financial support and capacity development from development partners will be crucial for the successful implementation of the government’s reform strategy. Contributions to the Somalia Country Fund by Somalia's partners are vital to ensure the smooth delivery of IMF technical assistance, supporting the goals of the ECF-supported program and the HIPC Initiative. Furthermore, the private sector, which has had to face the hardships of insecurity, climate shocks and the COVID-19 pandemic, needs to be better networked with international businesses for its long-term growth.

Hope for the Future

Nonetheless, even in the face of these challenges, we can remain hopeful because Somalia is making progress in implementing the ECF-supported program and working towards meeting the triggers for the HIPC Completion Point. It is anticipated that the HIPC Completion Point will be achieved by the fourth quarter of 2023. I have the utmost confidence in the ability of the President and his government to do the right thing. By consistently implementing and enforcing his ambitious economic reforms, I have no doubt that Somalia will make even greater strides towards not only recovering from decades of instability, but also emerging as one of the major economic powerhouses in East Africa and Africa as a whole.

Dr Omer Biikolo
[email protected]


 





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