World Bank predicts a brighter economic prospect for Somalia

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By: Abdikariim Jama Barre

Somalia is set for an economic breakthrough amidst the tough transitional challenges before it, according to the latest assessment by the World Bank.

The global lender’s first edition of an economic analysis on Somalia, titled, Transition amid Risks, paints a picture of a country in reform gear, but one that also needs to address the various institutional frameworks to stay on the recovery rail.

World Bank says the country has the potential to overcome what it described as “immense challenges” to attain meaningful reforms towards sustainable development.

“So far, there are positive signs that the economy is responding: Somalis are returning from abroad, shops are opening, new financial institutions have been licensed, and property markets are booming. Somalia is at a turning point. Creating a workable system of government will be central to its recovery,” notes the report.

The document also points out the optimism that has followed the adoption of the Provisional Constitution in 2012, which foreshadowed a final constitutional process expected to culminate in 2016.

Security is expected to improve as the interim state administrations lay the foundations of a new system of government. This, according to the analysis, makes the ultimate hope regarding the possibility of forming a legitimate and functioning state.

However, World Bank Country Director for Somali Bella Bird says the country will need continuous support to stabilise its macro-fiscal management, revenue mobilisation, and the enactment of key legislations.

Bird said the businesses, as vibrant and as central as they have been in Somalia’s story, may soon reach the limits of their growth if the state fails to provide the public goods that any private sector needs: physical security, security of contracts, and regulation that ensures fair competition, a level playing field, and the basis for investment.

“It is timely that Somalis engage in a structured and technically informed debate about the nature of economic and fiscal relations within Somalia. At its heart, intergovernmental fiscal relations is about economic solidarity. Like any country, Somalia will have natural inequities across regions and among people. The response to these inequities will lay the foundations for longer-term development,” Bird said.

Emerging from a two decade long legacy of sustained conflict and fragility, Somalia is now making a substantial progress, which will largely rely on her huge diaspora citizens, livestock and fishing industries, according to the World Bank report.

The country’s rapidly expanding small businesses and the booming property market drive the International Monetary Fund (IMF) and the World Bank to estimate its GDP at about $5.7 billion in current dollar terms in 2014.

The private sector, which throughout the years of conflict and fragility helped maintain economic activity, is also said to be in need of regulation to weed out the emergence of monopolistic or anticompetitive behaviours that may be discouraging new businesses from entering the market and small and medium-size business from growing. This will however need sometime according to World Bank.

“The reform of public institutions takes 20 years, even in the fastest-reforming countries. The Federal Government of Somalia and sub-national governments are prioritising the establishment of credible public finance institutions for macro-fiscal management. Revenue mobilisation of additional business turnover taxes is a critical priority if the state is to increase its fiscal capacity and extend services to the population. In parallel, the authorities are trying to attract new talent into reformed civil service institutions at the federal and sub-federal levels, in line with fiscal space,” notes the report.

In 2016, diaspora remittances, which have played a vital role in sustaining the economy and supporting household incomes, are expected to be among the key pillars of the growth ladder. Somalia’s diaspora is estimated to have sent more than $1.3 billion home in 2014, nearly twice the level of development aid ($642 million) and five times the level of humanitarian aid ($253 million).

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. Remittances help finance Somalia’s large trade deficit of more than 50 per cent of GDP, paying for about 40 per cent of total imports.

“Diaspora remittances are central to Somalia’s economy, providing a lifeline to large segments of the population. Remittances are estimated at US$1.2 to US$2.0 billion, equivalent to 23 to 38 per cent of GDP. Remittances have been important in cushioning household economies, creating a buffer against shocks (drought, trade bans, inter-clan warfare),” the World Bank states in the report.

Another key driver, the livestock sector, which is the largest employer in rural areas with nomadic cultures and the largest export product, will boost the country’s recovery efforts going forward.

While engaging much of the population nationally, livestock is concentrated in the arid and semi-arid north (Somaliland and Puntland). It accounts for more than 80 per cent of total exports.

According to FAO (2014), Somalia exported a record five million heads of livestock to markets in the Gulf of Arabia in 2014 (4.6 million goats and sheep, 340,000 cattle, and 77,000 camels), with an estimated total value of $360 million. The livestock industry has been recovering following the lifting of a nine-year ban on livestock from Somalia (aimed at preventing the spread of Rift Valley fever). Today, exports of live animals keeps rising at both the Berbera and the Bosaso ports.

The resurgence of the livestock sector reflects the large investments being made to help make the sector more competitive in international markets. With donor support, investments in livestock infrastructure, fodder production, and livestock vaccination and treatment services are paying off.