A sustained period of political and institutional progress reflects a country transitioning out of fragility and protracted crisis. The 2011 Provisional Constitution, the 2012 establishment of the federal government, and the subsequent formation of four new Federal Member States are re-drawing Somalia’s new federal map and creating the space for a political settlement.
Although key constitutional questions remain open, federalism offers a new means to negotiate power and resources, and to manage developmental imbalances between the more stable northern regions and those in the south still emerging from conflict. Somalia’s private sector remains a source of resilience and innovation and political relations in the Horn of Africa and Red Sea regions are experiencing dynamic change, with potential new opportunities for Somalia to benefit from its proximity to the Ethiopian market for trade and regional integration.
Heavily-Indebted Poor Countries (HIPC) Decision Point
Somalia reached the Decision Point of the Heavily Indebted Poor Countries (HIPC) initiative on March 25, 2020, restoring the country’s access to regular concessional financing and launching the process toward debt relief. It cleared its arrears to the African Development Bank (AfDB), the International Monetary Fund and the International Development Association, and reduced its external debt to $3.9 billion (78% of the revised 2020 gross domestic product (GDP) from $5.3 billion.
On March 31, 2020, Somalia reached agreement with the Paris Club on terms of debt relief, and it is working with remaining creditors to reach similar agreements. Somalia also resumed servicing its outstanding debt to the AfDB and IDA. To receive irrevocable debt relief, Somalia must maintain sound macroeconomic policies, implement its poverty reduction strategy—the Ninth National Development Plan (NDP9)—for at least one year, and complete a set of policy measures known as Completion Point triggers that are aimed at promoting inclusive growth and poverty reduction.
Years of conflict and fragility have left Somalia’s economy with a range of challenges, including population growth outstripping economic growth, acute poverty and vulnerability, recurrent external trade and climate shocks. Weak fiscal space and institutions, active insurgency and an incomplete political settlement have also affected the country’s economic strength.
Somalia also has several opportunities, as the economy is transitioning from traditional, rural pastoralism to urban, trade and services. Somalia’s economy has remained resilient and is realizing moderate growth despite recurrent shocks and crises, including drought and insecurity. Somalia’s growth in 2019 was estimated at 2.9%, following slow recovery from a prolonged drought in 2016/17. Somalia’s exposure to multiple types of shocks such as climate and water related changes, the locust infestation, conflict and insecurity and more recently, the COVID-19 global health pandemic, presents numerous challenges to a country at a nascent stage of state-building. The effects of COVID-19 are projected to have substantial headwinds on the economy, with growth downgraded from 3.2% before the onset of the health pandemic to potentially negative 2.5 to 3.0% , as consumption falls due to lower remittances and job losses, and exports of livestock decline. A shock of this magnitude is likely to result in structural changes in the economy, with potential job losses in the formal sector and informality further increasing.
The government is also committed to institutional reforms and reengagement with the region, including opportunities to rebuild human capital and chart a pathway toward economic resilience and growth.
Last Updated: Jul 17, 2020