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IMF Executive Board Concludes 2015 Article IV Consultation with Somalia

Author(s):
International Monetary Fund. Middle East and Central Asia Dept.
Published Date:
July 2015
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On July 27, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Somalia. 1

Since 1991, Somalis have suffered greatly from civil war. The economy deteriorated as the physical infrastructure was destroyed. In addition to the loss of lives, the war worsened the population’s living conditions, now among the lowest in the world. Even though the political and security situations remain challenging, Somalia has made tremendous progress since resuming relations with the IMF on April 12, 2013. The IMF has been actively involved in providing technical assistance and policy advice in its key areas of expertise, which laid the groundwork for this Consultation. While Somalia has been welcomed back as an active member of the Fund, it remains ineligible for financial assistance pending the clearance of its longstanding arrears. Arrears clearance will be an important part of normalizing relations with the international community and establishing a roadmap to debt sustainability.

As a result of the civil war, all Somali state institutions are severely impaired. Improving governance in key state institutions is critical for progress on economic reconstruction and development. The federal government, working with the international community, has taken steps to improve governance based on the rule of law and the application of international good practices for fiscal and financial operations. IMF technical assistance is largely devoted to enhancing governance in the ministry of finance and the central bank. Rebuilding critical infrastructure and delivering basic social and economic services will be crucial for the new government to gain the trust of the Somali people, advance the process of national reconciliation, and to extend federal government authority over all parts of the country.

Economic activity is estimated to have expanded by 3.7 percent in 2014, driven by growth in agriculture, construction, and telecommunications. Consumer price inflation was 1.3 percent. For 2015, real growth is projected at 2.7 and inflation should remain subdued at about 4 percent. With modest progress on the security front and an absence of drought, medium-term annual growth should be about 5 percent. Nevertheless, growth will remain inadequate to redress poverty and gender disparities.

Budget preparation and implementation is fraught with difficulty due to deficiencies in revenue mobilization and expenditure pressures that exceed available resources. The budget consists largely of salary and security expenditures contained by strict cash rationing. Deficits have been financed mostly through arrears accumulation. Similarly, the 2015 budget was prepared on a zero cash balance basis with optimistic revenue forecasts and weak commitment control, leading the federal government to ration cash and incur arrears to the defense forces, civil servants, and suppliers. On July 19, an extraordinary session of the Cabinet, chaired by the President, approved and sent to Parliament a revised budget for 2015.

The formal financial sector consists of the central bank, six banks with provisional licenses, and nine licensed money transfer firms. The sector is small and nascent while there is reportedly a large informal sector. The central bank of Somalia (CBS) faces challenges in building financial sector supervision due to technical and human resource constraints. The economy is predominantly dollarized and cash is scarce, particularly in lower denominations. Somali banknotes are not readily available, creating problems for the poorest.

The 2014 current account deficit is estimated at US$644 million (11.3 percent of GDP). Trade consists mostly of exports of livestock to Gulf Cooperation Council countries and imports of foodstuffs from neighboring countries and the Indian subcontinent. The trade and income deficits were US$2,663 million and US$450 million, respectively, partially covered by remittances of US$1,333 million and other transfers of US$1,137 million. The deficit was financed by foreign direct investment of US$434 million, especially in telecommunications, electricity, and hotels, and donor capital transfers of US$150 million.

External debt was estimated at US$5.3 billion (93 percent of GDP) at end-2014, preponderantly arrears. Debt data covers most creditors, excludes commercial debt, and shows obligations to: (i) multilaterals (US$1.5 billion); (ii) Paris Club creditors (US$2.3 billion); and, (iii) Non-Paris Club creditors (US$1.5 billion). Based on a preliminary assessment, Somalia lacks the ability to service its debt in the medium term.

Executive Board Assessment2

Executive Directors welcomed Somalia’s reengagement with the Fund, setting the stage for its first Article IV consultation since 1989. Directors agreed with the thrust of the staff appraisal. They noted that, following the protracted civil war, the country is facing daunting challenges. The first priority is to continue building institutions and administrative capacity, while undertaking key structural reforms to spur inclusive growth and reduce poverty. Directors underscored the importance of continued assistance from the international community to support the authorities’ efforts. They welcomed the launch of the Trust Fund for Capacity Development, and highlighted the important role of Fund policy advice and technical assistance.

Directors stressed the need for decisive steps to build fiscal discipline, underpinned by realistic budgeting and effective implementation systems. They welcomed cabinet approval of a revised budget for 2015 that will avoid new arrears by raising revenues and rationalizing wages and services and other recurrent spending. Going forward, Directors stressed the importance of budgeting within a medium-term fiscal framework, based on sound fiscal principles and transparent reporting, and a public expenditure review to promote the allocation of resources towards investment in human capital and infrastructure.

Directors encouraged the adoption of sound mechanisms to ensure effective and transparent management of prospective natural resource wealth. They recommended building institutions consistent with international best practices to ensure that natural resource exploitation maximizes benefits for Somalis. They also stressed the need for clarity regarding the delineation of authority between the federal government and sub-national entities.

Directors supported ongoing efforts to strengthen the Central Bank of Somalia’s capacity and governance structure, with support from the Fund and development partners. They cautioned that currency reform should not be implemented until all prerequisites are in place, in order to safeguard policy credibility.

Directors stressed that elaboration of a financial sector roadmap will be a critical first step to build credibility in licensing and supervising money transfer firms, in order to help channel remittances through the international banking system. They also recommended bringing the AML/CFT framework in line with international standards. Other priorities include preparing and approving additional prudential regulations, and strengthening compliance.

Directors encouraged the authorities to improve statistical capacity, in order to enhance the scope, quality and timeliness of economic data compilation, with technical assistance from the Fund and development partners.

Directors noted Somalia’s longstanding arrears to the Fund and other creditors, and encouraged the authorities to continue to work towards a pathway for arrears clearance and eventual debt relief. They noted that, in due course, the establishment of a track record of cooperation with the Fund on policies and payments in the context of a well-designed staff-monitored program (SMP) would be a key step in the process of arrears clearance and normalization of relations with the international community as a whole. Directors stressed the need for sustained international support and cooperation, and welcomed the formation of the Technical Working Group on Somalia’s Debt.

Selected Economic and Financial Indicators, 2013–17
(IMF Quota = SDR 44.20 million)
(Population: 14 million, 2015 estimate)
(Per Capita GDP: US$425, 2015 estimate)
(Poverty Rate: n.a.)
(Main Export: Livestock)
EstimatedProjected
20132014201520162017
National income and prices
Nominal GDP in millions of U.S. dollars5,3525,7065,9536,3897,044
Real GDP, annual percentage change3.72.73.44.3
Per capita GDP in U.S. dollars402418425445479
Consumer Price Index (CPI), annual percentage change4.51.34.03.22.9
(In percent of GDP)
Central government finances 1/
Revenue and grants, of which:2.12.53.13.73.5
Grants 2/0.81.11.41.61.4
Expenditure, of which:2.22.63.13.73.5
Wages and salaries0.91.41.41.71.5
Capital expenditures0.00.00.20.30.3
Overall balance−0.1−0.10.00.00.0
Stock of domestic arrears0.60.81.10.90.6
(In millions of U.S. Dollars)
Central bank assets
Total assets, of which:158.5151.1
Foreign assets, of which:130.7124.3
IMF99.893.9
Cash and cash equivalent including U.S. dollars in vault7.46.2
(In millions of U.S. Dollars; unless otherwise specified)
Balance of payments
Exports of goods and services7798198619241,019
Imports of goods and services3,3223,4823,6513,9194,320
Net factor income−425−450−467−501−553
Current transfers, of which:2,3122,4692,5312,6962,902
Remittances 3/1,3001,3331,3661,4001,435
Current account balance−656−644−726−800−952
(In percent of GDP)−12.3−11.3−12.2−12.5−13.5
Overall balance00000
External debt5,2595,294
Exchange rate
Market exchange rate (SOS/USD, period average)19,27620,227
Market exchange rate (SOS/USD, end of period)20,14920,265
Sources: Somali authorities; and IMF staff estimates and projections.

Budget data for the federal government. GDP data covers the territory of Somalia.

Includes only donor support provided through local treasury systems.

2013 data from Barclays Bank, PLC.

Sources: Somali authorities; and IMF staff estimates and projections.

Budget data for the federal government. GDP data covers the territory of Somalia.

Includes only donor support provided through local treasury systems.

2013 data from Barclays Bank, PLC.

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.

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