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Economic Recovery bounces back despite significant risks

A strong rainy season and continued strong performance in the telecommunication, construction and service sectors, and growth is projected to increase to 3.1 percent from an estimated 2.3 percent in 2017

The International Monetary Fund (IMF) has lauded the strong economic rebound from the 2007 slowdown as it gave a nod for the printing of new currency.

The economic recovery which started in 2018 is expected to continue and fiscal performance is projected to improve through the medium term.

“Overall security is improving, and the 2016–17 drought is receding. Given these developments and with the favorable rainy season in 2018, growth is projected to recover gradually in 2019–20 and stabilize at around 3.0-3.5 percent. Inflation is expected to ease in the medium term and the fiscal framework to continue to improve as reform implementation continues”, said IMF in the report released on June 20th 2008.

On the downside, risks are significant. They stem from a number of factors: fragile security; continued vulnerability to droughts; weak institutional capacity that could result in poor fiscal management and new domestic arrears accumulation; slow reform implementation; and volatility in donor support.

The increasing risk of regional conflict and a lack of political consensus among the federal member states (FMS) could slow critical reform measures. The authorities’ continued engagement with donors—including on security, peace, and capacity building, and implementation of reforms under SMP III—should help mitigate these risks.

IMF observed that   a strong rainy season and continued strong performance in the telecommunication, construction and service sectors, and growth is projected to increase to 3.1 percent from an estimated 2.3 percent in 2017.

“The Central Bank of Somalia (CBS) balance sheet improved slightly through March2018 (Table 5). CBS’s foreign assets holding increased to $105.5 million in March 2018 (from $89.2 million in December 2017). Meanwhile, the Somali shilling exchange rate has remained stable at about 23,000 shillings per U.S. dollar as of March 2018”

However, recent floods in central and southern Somalia could lead to food insecurity in some areas. As a result of the recovery in agriculture sector, inflation is expected to ease to under 3 percent in 2018 from about 5.3 in 2017

External trade also bounced back from the trade deficits as a result of the 2017 drought resulted in a widening of the trade deficit, which was financed through humanitarian relief and increased remittances from the Somali diaspora.

The recovery in agricultural exports and easing of humanitarian assistance are expected to narrow the trade deficit. Public external debt, which remains high at 65 percent of GDP in 2017, is expected to stay broadly stable as the country has no capacity to repay its external debt service obligation and no access to international credit.

The Central Bank of Somalia (CBS) balance sheet improved slightly through March

2018 (Table 5). CBS’s foreign assets holding increased to $105.5 million in March 2018 (from $89.2 million in December 2017). Meanwhile, the Somali shilling exchange rate has remained stable at about 23,000 shillings per U.S. dollar as of March 2018.

Commercial banks remained well capitalized and their activities are expanding reflecting mainly a surge in banks’ assets, their capital-to-assets ratio declined to 16 percent in March 2018 from 20 percent in March 2017. Meanwhile, banks’ loans to the private sector continue to increase rapidly from a low base and are concentrated in trade financing and construction sectors.

“IMF supports the authorities’ ongoing efforts to launch a new national currency. After nearly two years of the IMF’s technical assistance support, the pre-conditions for the launch of the new Somali Shilling have been nearly completed”, said the global lender in a press release.

In March 2018, IMF staff prepared an assessment letter supporting the CBS’s initiative to issue a new national currency. In which it encouraged the authorities to continue to reach out to donors to raise the needed funds for the operation, finalize the establishment of the accountability framework, and to fully staff the team that will manage the process.

The new currencies will replace the old ones that were largely out of circulation. The moss readily available of the current notes is 1000 shillings denomination that has been in use for the past two decades.

Successive Somali governments have tried to introduce new currencies, but are always hindered by the debt relief conditions imposed by the international financial institutions.

On June 20, the management of the IMF completed the second and final review under the second 12-month Staff-Monitored Program (SMP II) with Somalia, and the Managing Director of the IMF approved a third 12-month SMP (SMP III) covering the period May 2018–April 2019.

The SMPs for Somalia are designed to help maintain macroeconomic stability, rebuild key economic institutions, and build track record on policy and reform implementation.

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