Abstract
KEY ISSUES Context: Somalia is a fragile state emerging from a protracted civil war. In 1991, the government was toppled by armed opposition groups, leading to implosion of the central government and devolution of power to administrative regions. The Fund recognized the Federal Government of Somalia on April 12, 2013, paving the way for staff to provide policy advice and technical assistance. 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. The political and security situation remains challenging. Complex clan politics and high turnover in the members of the economic team have undermined policymaking. A new government took office on February 18, 2015, and presidential elections are planned for September 2016. Key policy issues: The Article IV discussions focused on immediate and medium-term actions for building institutions and policy frameworks for fiscal and financial management. Specifically, • Capacity building and governance. Concerted action is needed to build institutions and improve governance in order to support sustainable, inclusive growth, and poverty reduction. In particular, urgent efforts are required to set in place sound mechanisms and institutions to ensure that prospective natural resource wealth, notably hydrocarbons, is well managed. Considerable donor assistance is required for helping Somalia to meet these daunting challenges. • Fiscal. Decisive steps are necessary to build fiscal discipline, underpinned by realistic budgeting and effective implementation systems, including commitment controls. The 2015 budget needs to be revised in light of revenue shortfalls. An emergency revenue mobilization plan and an expenditure review are warranted. • Financial sector. Efforts are needed to develop the currently rudimentary financial system. Swift action is required so that remittances can be channeled through the international banking system. Currency reform should not be implemented until prerequisites are in place. Given the extent of dollarization and the absence of monetary policy instruments, the central bank is unable to conduct monetary policy. Past IMF advice: The latest Article IV consultation was on November 13, 1989, and focused on the low priority attached by the government in place then on the need for better controlling unproductive spending, and on the need for better economic and social services.
Context
Somalia is a country in a fragile situation as a result of years of civil war, coupled with the still challenging political and security situation. The government and the people of Somalia have started a rebuilding process, with invaluable support by the international community. Against this backdrop, the authorities view the reengagement with the Fund as a pivotal aspect of their efforts to rebuild their institutions, infrastructure and the human resource capacity, to give the Somali people hope for a better future.
While Somalia’s relations with the IMF have been restored, the country is still facing tremendous challenges. Arrears accumulated during years of conflict have impaired Somalia’s ability to service its external debt, while rendering the country ineligible for the much needed IMF financial assistance. In addition, the political and security environment has slowed the rebuilding progress. As a result, the country’s recovery process is not expected to be easy. However, with support from the international community, our Somali authorities are determined to forge ahead with the necessary reforms.
Against this background, the Somali authorities highly appreciate the Fund’s efforts in the form of technical assistance (TA) and policy advice extended to Somalia since 2013. In the context of the current Article IV Consultation, the first since 1989, the authorities welcome the constructive dialogue with the Fund staff. They remain hopeful that this marks the beginning of increased engagement that would culminate in arrears’ clearance and, ultimately debt relief. They see a Staff Monitored Program (SMP) as a possible avenue, not only to give hope to the Somali people but also help to change perceptions about the country; and demonstrate the authorities’ commitment to address the challenges they are facing.
Recent Developments
Analysis of economic activity remains severely constrained by lack of data. However, this area is receiving due attention through TA by the Fund under the “Trust Fund for Capacity Development in Macroeconomic Policies and Statistics for Somalia” that was launched in February 2015. In the meantime, the authorities appreciate staff’s assessment of the Somali economic developments based on incomplete information, indicating some expansion in real GDP and low inflation.
Policy Issues and Challenges
Given the unique challenges facing Somalia, the authorities share the staff’s assessment that concerted efforts are needed to build capacity and institutions for sustainable and inclusive growth. Despite improvements in some of the state institutions, more still needs to be done, especially, to strengthen capacity in the key macroeconomic areas including fiscal and public financial management; central banking, and financial sector regulation and supervision; and statistics. The authorities remain committed to changing Somalia’s fortunes. With the support they are receiving from the international development partners, including the African Development Bank, the IMF, and the World Bank, they are confident of achieving their goal.
Fiscal policy: The authorities acknowledge the importance of strengthening the budget process by ensuring that expenditure commitments are in line with available resources. However, it is important to note that while the authorities engage in rebuilding their capacity to mobilize domestic revenues, Somalia continues to rely crucially on donor funding. In this context, the authorities and the development partners have expressed the need to improve coordination, to ensure that all financial assistance is channeled through the Ministry of Finance. In the meantime, Somalia is receiving invaluable TA support from the IMF and the World Bank in public financial management and various aspects of fiscal policy, including budget preparation and execution, and tax policy, which are expected to provide a lasting solution in this area.
Monetary and exchange rate policy framework: The Somali authorities agree that, despite progress made through previous TA and training, more needs to be done to capacitate the Central Bank of Somalia to carry out its mandate. One of the key critical areas is currency issuance. Although the CBS is by law responsible for issuing the national currency, no bank notes have been issued since 1991, leaving the economy predominantly dollarized and in an unregulated environment as a legacy of the decades’ long civil conflict. This has created a shortage of currency, to the detriment of the majority of Somalis. In turn, it is increasing pressure for the CBS to undertake currency reforms, despite capacity constraints that are being addressed with IMF TA support. In this context, the Fund has an important role to play in assisting the CBS to develop a roadmap towards reforms, in addition to the ongoing training and capacity building.
External Debt: Somalia’s external debt, estimated at more than 90 percent of GDP at end-2014, has become a binding constraint to the country’s development agenda. The authorities agree with the staff’s assessment that Somalia lacks the ability to service its debt in the medium term. With the help of the Technical Working Group (TWG) on Somalia’s Debt, the Somali authorities are working towards a pathway to arrears’ clearance and eventual debt relief. The TWG on Somalia’s Debt was established after the Federal Government of Somalia agreed with the international partners at the Brussels Conference in 2013 to create a forum to discuss issues related to Somalia’s debt. It is open to all major official creditors to Somalia and is co-chaired by the IMF mission Chief, the World Bank’s Country Director, and Somalia’s Minister of Finance.
Conclusions
The Somali authorities remain committed to changing Somalia’s fortunes. They have earnestly started the process of rebuilding their institutions, infrastructure and the human resource capacity, in an effort to revive Somalia’s economy and improve the lives of its nationals. With the highly appreciated assistance from the international community, notably, the African Development Bank, the IMF and the World Bank, much progress has been achieved to date. However, more still needs to be done. In this context, continued support by the international community remains critical.