Make or break factors in Somalia’s road to recovery

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As Somalia enters a new dawn in her economic recovery, certain factors will play a central role in her progress or otherwise
Somalia’s rise from the dust of conflict and poverty has attracted the attention of the World Bank, which, in a new series of economic analysis, paints a positive future for the country.

The situation may not be as bleak as often portrayed, according to World Bank’s inaugural series of economic analysis titled “Transition amid Risks”.

Somalia’s GDP in 2013 was estimated at about US$5.4 billion. In current dollar terms, Somalia’s economy is larger than the economies of the Central African Republic, Djibouti, Burundi, Eritrea, and Malawi. Out of 46 sub-Saharan African countries, Somalia’s economy ranks 16th from the bottom in terms of size, the World Bank report states.

However, the country’s total GDP estimates imply a per capita GDP of US$435, making Somalia the fifth-poorest country in the world (after Malawi, Burundi, the Central African Republic, and Niger). Somalia’s per capita income is 20-40 per cent higher than GDP per capita because massive inflows of remittances allow households to top up own-generated income (used to measure GDP per capita).

In this analysis, The Somalia Investor Magazine combs through World Bank’s economic predictions about Somalia and brings you the make or break factors about her economic prospects.

Diaspora remittances
Money sent home from other parts of the world have a huge impact on Somalia’s economy. Most of the household incomes in the country rely on remittances that totalled more than US$1.3 billion in 2014. The amount is close to double the funds from development aid of US$642 million and five times the level of humanitarian aid of US$253 million availed in the same period.

Although there has been an increased return of Somali businessmen and some professionals will continue returning home from abroad, the remittances are expected to keep rising.

Diaspora remittances have played a vital role in sustaining the economy and supporting household incomes. The remittances account for about 24 per cent of GDP, far outweighing government revenues. They help to support livelihoods for an estimated 40 per cent of the population. The funds have been crucial in financing Somalia’s large trade deficit of more than 50 per cent of GDP, paying for about 40 per cent of total imports.

They fund direct consumption, including education and health, and some investment, mostly in residential construction, allowing Somalia to sustain its high consumption rates and to finance a large trade deficit.

Money sent home from other parts of the world have a huge impact for the Somalia economy. Most of the household incomes in the country rely on the remittances that totaled more than US$1.3 billion in 2014. The amount is close to double the funds from development aid of US$642 million and five times the level of humanitarian aid of US$253 million availed in the same period.

Livestock
Somalia’s livestock industry contributes the largest share of exports. It accounts for more than 80 per cent of total exports. According to FAO (2015), Somalia exported a record five million heads of livestock to markets in the Gulf of Arabia in 2014, most of them goats and sheep plus some cattle and camels, with an estimated total value of US$360 million.

The Country will benefit immensely through a revival of this industry, with exports of live animals on the increase at both the Berbera and the Bosaso ports.

The resurgence of the livestock industry reflects the large investments being made to help make it more competitive in international markets. With donor support, investments in livestock infrastructure, fodder production, and vaccination and treatment services are paying off. If well nurtured, the livestock industry will be a key driver in making an economic turnaround for the Horn of Africa nation.

Fishing and horticulture
Fisheries have been identified as the other key success factor in Somalia’s push for economic growth. The latest assessment by the World Bank points out, however, that the country will have to guard her fishing territories and meet the standards to realise her full potential in this area.

“The potential to increase revenues from fisheries and horticulture remain under-exploited.  Success will depend on the ability of producers to meet international standards for food safety and develop a quality control and sanitary and phytosanitary (SPS) certification system (USAID 2014),” notes the global lender’s report.

These three areas hold the magic economic key to brighter prospects in Somalia this year going forward. The sectors will add more to Somalia’s potential for mineral exploitation as highlighted last year.

The investment report recently released by Somalia’s Ministry of Foreign Affairs provides details of the rich undergrounds of the country. The publication detailed Somalia’s investment plans to fully capitalise on its vast minerals wealth.

“From Galmudug State to South West State, various minerals required for and by companies for everyday products globally, can be found. The diverse minerals sector and its enormous potential has remained unexplored in Somalia and is now ready for investors to partner with the Federal Government of Somalia (FGS) to bring this profitable industry to life,” stated the brief report.

Dark clouds
Still, a few dark clouds hang low and threaten these potentials for the country’s economic journey. One such challenge is Somalia’s growing isolation from the global financial system and the perceived exposure of money transfer businesses (MTBs) to terrorist financing. This will be a huge barrier for Somalia’s diaspora lifeline, which has been growing over time.

“The phenomenon of financial “de-risking” following enforcement actions against some international Banks has affected Somali MTBs in Australia, the United Kingdom, and the United States, prompting new initiatives by the FGS and its partners to redouble their efforts to address domestic oversight and regulatory gaps. The pending passage of the anti-money laundering and countering terrorist financing Bill is a critical priority if these initiatives are to become fully functional,” the World Bank noted.

Somalia has since then (Dec 2015) passed the Anti-Money Maundering and Terror Investment Law. The law, among other provisions, introduces different measures to stop money laundering by ways of tracing, freezing, and seizing illegally obtained funds.

Reforms in Somalia will also have to improve human development to sustain its transition from conflict to stability. With an estimated per capita GDP of US$435 in 2013, Somalia is the fifth poorest country in the world, reflecting two decades of sustained conflict.

During this time, physical infrastructure was destroyed or not maintained, and nearly two generations of Somalis went without education. Only 42 per cent of school-age children are estimated to be enrolled in primary school. Infant mortality rates of about 92 per 1,000 live births and under five mortality rates of 150 per 1,000 live births are higher than sub-Saharan averages.

The security situation in Somaliland and Puntland is adequate for economic activity. In contrast, problems in the South-Central region make growth difficult. The fight to eradicate militants has slowed economic activity, especially in Mogadishu, as most government resources go to the security sector. Given the precarious security situation, fundamental economic reforms are unlikely to receive the priority they deserve. Security challenges also discourage the private sector from investing in long-term production activities.

Any deterioration of the security situation will have an adverse impact on revenue by limiting the government’s ability to collect taxes and reducing growth prospects. If security declines, macroeconomic projections are unlikely to be realised in 2015-2017.

These are the factors at play in the year ahead. For a long time to come, they will be crucial determinants on the economic path Somalia takes.