Glaring Business gaps Somalia needs to address to attract investors

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Business potential in Somalia is big. The country with a long coastline a largely youthful population and many underdeveloped structures could be a setback but a huge business opportunity as well.

Business is already booming at the major ports although major data collected in physical quantities are not reliable. More reliable aggregate trade data reported by trading partner countries show that imports reached USD 3.3 billion in 2013 and are projected to reach USD 3.7 billion in 2015.

The largest recorded imports through the Berbera and Bosaso ports are food (sugar, khat, wheat and wheat flour, rice, and cooking oil); building materials; and fuel. Khat, a mild narcotic, is the second top import product after sugar. Exports almost tripled during the past six years, reaching USD 779 million in 2013. Livestock continues to dominate exports (and did so even during the years when Somali livestock to Saudi Arabia was banned), followed by charcoal, fish, and hides and skins.

 In 2013 Somalia ran a trade deficit of 39 percent of GDP, after importing goods and services worth 62 percent of GDP and exporting goods worth just 14 per cent.

The huge deficit now stands from being abridged after the country got a set back by the country’s derisking. The Financial Action Task Force (FATF) defines derisking as “the phenomenon of financial institutions terminating or restricting business relationships with clients or categories of clients to avoid, rather than manage, risk.” Banks in Australia, the United Kingdom,and the United States, among others, have closed the accounts of money transfer operators because of perceived legal and regulatory problems, sanctions, and anti–money laundering/combating the financing of terrorism (AML/CFT) risks.

Account closures have caused changes in how the market works in the United Kingdom and the United States, but anecdotal evidence collected by the World Bank and data from Remittance Prices Worldwide indicate that costs to consumers have not changed significantly. Costs could rise if competition in the remittance market in Somalia falls substantially.

However, derisking is not the only barrier for development of Somalia as Somalia Investor Magazine now outlines six   points of weaknesses in the Somali Business environment that needs to be addressed as soon as possible

1. Business regulations
Several bottlenecks exist in the formalising a business set up in the country, Somalia will need to simplify licence acquisitions and reduce the costs associated with these processes to attract investors by making the company registration licenses a one time.

A businessman in Mogadishu told the Somalia Investor Magazine that it is hard to comprehend why companies which have been licensed have to pay the same amounts as in the initial process when the end year renewal time comes.

“This is simply encouraging the illegal operators since it is only in Somali where such a thing is done. I have never heard it elsewhere and I know many Somalis in the diaspora are equally shocked when told about this. Our government can do better by changing this to what is internationally reasonable because we want private sector to be key drivers in our economic growth and we need to encourage them,” he said.

Many businesses whose monopoly have gone overboard are known to engage in anti-competitive behaviours as well as collusion to fix prices and lock new entrants.

2. Financial Sector
In 2014 the Federal Government of Somalia took measures to formalize Somalia’s financial sector. The Central Bank of Somalia licensed and registered six banks and nine Money Transfer Businesses   (MTBs) under the registration and licensing regulations passed by the banking regulator in 2014, developed with the support of the World Bank.

Six banks for the vast country is still a drop in the ocean as far as development of the financial sector crucial for an economic turnaround. Somalia does not yet have a system in place for knowing your client (KYC) or customer due diligence (CDD) requirements. Some money transmitters are considering using biometric identification to meet KYC requirements but this is still far from realisation.

This means it is hard to get loans as the few banks enjoy monopoly and conduct business in laxity. Banks don’t have to open early and customer experiences are not any standardised because options are limited. The interest rates are not regulated leaving businessmen at the mercy of banks.

3. Power and Energy
Power supply is scarce and selective. Electricity remains a preserve of few while its costs is way beyond reach for start-ups. As long as power distribution and access remains a preserve of the few and many businesses remain locked out of the grid then it will not be easy to have the many investors who are yearning to set up investments in the country actualise their intentions.

4. Security  and political conflicts
Security is crucial for the Business environment. The world is nowadays a global village and the aspect of perception regarding the society has to be addressed as well. Like all countries developing the post conflict economy, Somalia has to embark on a rapid path of promoting secure environments for business and manage any lapses to protect its image in the international arena.

Local conflicts and political competition have weakened formal trade integration between Somalia and the wider Horn of Africa. The Horn of Africa is home to 140 million people, many of whom depend on pastoralism and earnings from livestock. The region has weak formal trade integration but intensive informal trade, facilitated by interlinked communities.

Fluid social and economic patterns amid scarce resources lead to frequent local conflicts over rangeland, water points, and trade routes, which create instability and political tension. Despite the considerable economic benefits that would result, these factors, combined with broader interstate competition over access to markets and resources, have stalled formal economic integration.

Sustained peace in Somalia, which is strategically located as a trade gateway, could help reshape wider relations within the Horn of Africa, unlocking the region’s trade potential. Many will be watching how this year’s election turns out.

5. Communication Technology
The world is a network and 2016 going forward is going to be defined by the quality and presence of the network. With data still scarce and expensive, the government authorities are better focused on easing the situation or risk keeping thousands of investors out of the recovering Nation.

Telcos have to be regulated as well to unlock their networks and save customers the frustration of carrying multiple SIM Cards because Africa is driving the global mobile revolution and Somalia cannot be left behind.

6. Transport and Infrastructure
The cost and ease of moving commodities in Somalia will continue deterring or encouraging investors willing to set up shops in the country. It will be important to have the country focus on improving transport networks in its post conflict recovery agenda as the World Bank paints a rosy picture of possible economic turnaround in Somalia. The roads are in urgent need of maintenance and many more need to be built.