MOGADISHU, Tuesday November 10, 2015 – Job creation through private sector led investment will be critical for sustainable and inclusive growth and to lift Somalis out of poverty over the medium term. However, the country will need to deepen and accelerate the current reform agenda if it is to ensure a level playing field for Somalia’s vibrant private sector, according to a new World Bank report.
The first in a new series of Somalia Economic Updates, entitled ‘Transition Amid Risks’, warns that the absence of appropriate regulations is responsible for the emergence of the anti-competitive behavior currently hindering the emergence of new Somali enterprises as well as prospects for smaller and medium sized enterprises. Continued commitment to the reform process will create the opportunity for broader participation in the economy; improved regulatory frameworks will encourage investment, generate better services and create the jobs much needed by Somalia’s youthful population.
In particular, the private sector is constrained by the lack of a mature and well-regulated domestic financial sector, combined with the financial “derisking” action against some international banks. De-risking threatens the remittances channeled by Somali money transfer operators which make up about 24 percent of the GDP and have hitherto constituted a crucial source of funding for the private sector as well as households.
Besides these impediments, the report warns that the occupation of available tax bases by newly forming state administrations will limit what it is possible to achieve in the short term, in designing new federal fiscal arrangements. Emerging inequality between states is a critical issue the federal government will need to address, but its capacity to do so is substantially reduced for as long as revenue streams are captured by state governments.
“Somalia has made important strides over the past three years in trying to establish priorities even as it continues to work towards improving peace and security,” says Bella Bird, the World Bank Country Director. “Somalia’s private sector has many assets on which to build – to expand further into Somali and international markets and create badly needed economic opportunities - for young Somalis in particular - then embracing regulatory international norms and standards will be critical.”
After twenty years of conflict, Somalia is ranked the fifth poorest country in the world with an estimated GDP of about US$ 5.7 billion in 2014 and a GDP per capita of US$ 435. It is estimated that only 42 percent of its school-age children are enrolled in primary school, with girls making up just 36 percent of these. About 67 percent of youth aged between 14 and 29 are believed to be unemployed, which makes them vulnerable to recruitment into militia or radicalized groups.
“Even though it inherited a dysfunctional economy, the Federal Government of Somalia is undertaking structural, legislative, and institutional reforms which have already started to yield results with the economy starting to respond,” says John Randa, Senior World Bank Economist and author of the report, “Somalis are returning from abroad to invest, shops are opening, and the property market is booming.”
Since 2012, Somalia has been going through a considerably more peaceful phase and this has facilitated the progress of several nation-building initiatives including a constitution-making process which is expected to be concluded in 2016 when the country also undergoes elections. A provisional constitution is currently in place, while the formation of states and their administrations, including the fiscal is also proceeding.
“There has been little discussion of the intergovernmental system that defines the interactions between the Federal Member States and the Federal Government.” says Kathleen Whimp, Senior Public Sector Specialist. “If the state formation process proceeds faster than the development of intergovernmental institutional arrangements, it may reinforce the division of functional responsibilities and revenue bases along geographic lines rather than across levels of government.”
The Somalia Economic Update proposes five key principles derived from international experience to support the continuing dialogue over the Intergovernmental Fiscal Relations, recommending that the focus for Somali stakeholders should be on developing “a sustainable fiscal bargain incrementally” rather than finding a final fiscal arrangement now.
Beyond intergovernmental fiscal arrangements, the economic update also proposes several key reforms to support the country’s economic development, including: support export growth through actions towards the establishment of a viable and regulated banking sector and making a decision on the country’s HIPC status; reforms to enhance budget credibility; operationalization of the 2011 Financial Institutions Act; and the development of reliable statistics to support policy formulation, planning, budgeting and service delivery.