The foundation Somalia must lay down to restore economic stability

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Somalia needs to attract the kind of domestic and international investment that will make a sustainable contribution to the economy. Coherent regimes for investment are central to creating this enabling environment. Center-state “tax jungles” or tax competition among states is to be avoided at all cost.

“We aim to improve security, create economic opportunities and open the political and social space for the inclusion of the people in the decisions that will determine their future. To achieve these objectives, the Somali Government will create an enabling environment in order to encourage domestic, diaspora and foreign investors,” Somalia President Hassan Sheikh Mohamud said while giving his statement on the launch of the country’s foreign policy.

“Without investment” he continued, “the desired growth will not take place and without growth our national goals for achieving a secure, stable and economically prosperous Somalia will be even more challenging.”

The statement indeed captured the true spirit of revival for a country that has suffered two decades of instability. The government however needs to walk the talk in ensuring that these investments are attracted and nurtured in an environment that supports growth. In an increasingly competitive and interconnected world, words alone cannot translate to investments and revenues.

The first critical investment infrastructure the government needs to work on is the banking sector. The poor banking availability in Somalia is a huge binding constraint to businesses. Lack of financial intermediation in Somalia has constrained business growth, as businesses are forced to use their own funds or borrow from friends or family members to expand.

Lack of credit facilities perpetuates elite culture, as people with resources or access to resources remain in a better position to invest while those in the lower end of the ladder continue to be poor. The poverty figures for Somalia are already alarming.

“Most business owners use their own funds, borrow from friends and family, or rely on remittances for Investment funds .Access to finance is a major binding constraint to growth for small and medium-size enterprises in Somalia, with less connected businesses and businesses owned by women at a particular disadvantage,” World Bank report on Somalia released in December, last year, said.

The missing crucial links created by banks also mean limited access to foreign capital which in turn limits Somalia’s current account financing options mostly to foreign direct investment (FDI), heightening exposure to unpredictable project finance.

The current account deficit was 7.2 percent of GDP in 2013 and 6.6 percent in 2014. It comprised a trade deficit of 38.7 percent of GDP, net income of –8.9 percent of GDP, and net current transfers (including remittances, off-budget grants, and direct donor support) of 40 percent of GDP. The size of the current account deficit is associated with external vulnerability Somalia faces in the very.

In January 1991 all state institutions that provided and regulated financial services, including the Central Bank of Somalia (CBS) and the entire banking system, collapsed. The collapse of the commercial banks in the 1990s—and the loss of depositors’ money—eroded public confidence in government and banks.

During the long conflict, private money transfer businesses (MTBs, or Hawalas)—and more recently, mobile money operators—emerged and flourished in an unregulated environment, but they provided neither deposit-taking nor banking services. With no functioning commercial banks in Somalia, the monetary stock consisted exclusively of cash.

Investors eying to grow wealth in Somalia will definitely want to be assured of a reliable banking mechanism for a fiscally stable environments. The CBS is gradually starting to reestablish its authority and institutional capacity. After ceasing to exist at the outset of the civil war in January 1991, the Transitional Government of Somalia reopened the CBS in 2009.

Despite serious capacity gaps and high turnover of governors (three in 2013 alone), new reform efforts are gaining momentum.

The government needs to ensure the governor and board of directors appointed in 2014 are operating in line with requirements of the Central Bank of Somalia Act, structures and policies are in place to improve core transaction processes.

Good signs have been seen with the first set of financial statements   produced in 2013, and the CBS is now starting to act as the fiscal and financial agent for the FGS.

While the country is a net importer of several commodities, the fact that no financial institutions in Somalia can issue letters of credit (the standard trade financing instrument) to banking institutions abroad is a huge set back to the trade.

“Exporters and importers must work through banks in their countries to process letters of credit, which adds costs and takes time. The situation is expected to improve as the CBS continues to implement much-needed reforms in the financial sector by modernizing the licensing, regulation, and supervision of banks,” African Development Bank noted it is 2015 report on Somalia business.

Streamlining the banking sector will relieve Somalia’s economy from its highly dollarized,

State giving the CBS   capacity to manage the national currency. With all major transactions in Somalia are undertaken in US dollars, the monetary authorities cannot directly affect the volume of foreign currency in circulation.

As long as there is little or no bank credit outstanding, they cannot influence interest rates or affect the money supply by changing bank reserve requirements.

The last official Somali shilling note was printed during the Siad Barre regime. The stock of Somali shillings consists of a mix of official and counterfeit bank notes accumulated over the years; 95 percent of the local currency in circulation maybe counterfeit.

Local currency is used only for transactions under the value of $1. The largest Somali shilling note (1,000) is worth just $0.05. To introduce a new currency to replace the counterfeit or old currency, the CBS would need to substantially enhance its capacity to manage the financial sector and monetary policy. In Somalia regions, Somaliland state has adopted the Somaliland shilling (SlSh), which is used only in Somaliland state.

In Summary

  1. Regional States of Somalia should also be discouraged from erecting economic barriers to the free flow of goods and commerce within Somalia or complicating the investment environment in other ways
  2. Streamlining the banking sector will relieve Somalia’s economy from its highly dollarized, tate giving the CBS   capacity to manage the national currency
  3. Political dialogue with the upcoming general elections later this year has to prevail to ensure foreign assistance is maintained as this may decline if political stability is not maintained.
  4. Business competition in different sectors must maintain fair competition to allow for the thriving of various industries. Chief among these are the Telcos where one is still not allowed to call across network.
  5. The government need to begin investing in digital monitoring of trade volumes and various income generations in Somalia which largely go untaxed. Many industries are not well engaged in revenue mobilization including those with lucrative sources like oil and telecommunications industry.
  6. Reliance on taxation at the points of entry with the inland trading largely remaining a free market for all will not be beneficial to the government which is badly in need of revenues for reforms and reconstruction.