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Growing but with challenges, which way for Somalia economy?

Amidst growing environmental challenges and political difficulties, Somalia’s economy is showing signs of growth, at least according to the latest findings by the World Bank.

In its Somalia Economic Update published August, this year, the global lender signals that the country is beginning to reap the dividends of relative peace and successful political transition but cites lack of data to accurately tell the real wealth in Gross Domestic Product (GDP).

“Nominal GDP is estimated to have grown by 5 per cent in 2015 and by 6 per cent in 2016. As in the recent past, Somalia’s GDP growth continues to be urban-based, consumption driven and fuelled by remittances and donor support. Over 70 per cent of GDP is estimated to be generated in the urban areas,” World Bank wrote.

Somalia’s national wealth measured in nominal values which now stands at $6.2 billion having grown from $ 5.9 billion in 2015 and $5.6 billion in 2014 remains under serious threats of persistent fragility especially in some parts of the country.

The growth prospects this year are however expected to remain bearish and decelerate to 2.5 per cent in nominal terms although it is expected to pick pace in subsequent years.

The   medium term, nominal annual growth rate of about 5-7 per cent for Somalia’s economy is expected to be driven by aggregate demand driven by a vibrant private sector, remittances, lower oil prices and improved security. Reconstruction of the war-torn country will underpin growth as the new government consolidates peace and security.

Real values are usually more preferred because they are adjusted for inflation, while nominal values are not. As a result, nominal GDP will often appear higher than real GDP.

But the horn of Africa nation does not have a national accounts statistical framework leaving the economist with no option but to use prevailing estimates of nominal GDP which are based on sparse expenditure side information, notably a survey-based estimate of household consumption and trade partner exports and imports. Thus, macroeconomic statistics are not comprehensive enough to capture growth of the economy accurately.

The country, according to WB data has also shown improvements in the consumer price inflation which fell from 4.5 per cent in 2013 to 1.5 percent in 2016   although big spatial variation in prices remains.

Food process in the country remains very, overturning any benefits created by lower oil prices and the dollarization of the economy. Just as in other famines, prices have to be seen in the context of affordability of food for vulnerable groups whose livelihoods have been eroded by agricultural collapse.

The WB says the country’s revenue mobilisation remains weak and poses a higher threat to meaningful growth in the near future.

Domestic revenue (taxes plus fees) as a share of GDP remains very low, at just 2.7 per cent of GDP in 2016, making it difficult to provide services.

Despite the growth recorded by certain sectors of the economy including energy dealers and Telephone service providers, the government barely collected any revenues. Revenue growth in 2016 was flat, reversing the growth in earlier years.  The government in the past has made high forecasts which largely remain unrealised (as the differences between budgeted and actual revenues), a problem that led to ad hoc cash rationing.

In fact, the government tax revenue remained just over 2 per cent of GDP in 2016, leaving investment to rely heavily on official development assistance, which focuses on the social sectors and security apart from remaining highly unpredictable.

Sustainable and reliable domestic revenue is critical for Somalia to implement the strategy laid-out in the National Development Plan and achieve the state-building, sustained rapid economic growth and poverty reduction.

 Moreover, the basic norms of fiscal management remain weak according to the report which also faults the government’s heavy expenditure of the meagre earnings on recurrent expenditures and less on investments.

The government is said to be using almost half of the money collected on recurrent expenditure, with capital spending accounting for just 3 per cent of total spending in 2016. The reliance on development partners’ contributions to the budget which have been critical in recent years, remain highly unpredictable, making it difficult to execute the budget as planned amidst the thin revenues collected.

With the thin collections and in a country largely dependant on imports, Somalia’s current account deficit, at around 15 per cent of GDP remains worrying.

“The current account deficit is largely driven by imports, estimated at 62 per cent of GDP, and larger than exports by a factor of more than four. Exports of goods and services remain low largely because of the cost of conflict, including damage to vital infrastructure, security checks, roadblocks and the shutdown of trade routes—all of which constrain exports,” WB economists said.

Somalis living abroad who have been significant contributors to the country’s economy remain critical to the domestic wealth with their remittances—estimated at 24 per cent of GDP in 2015—remaining a lifeline for the economy. This, combined with other Foreign Direct Investments (FDI) which accounts of 12 per cent of GDP and ODA in recent years.

Not all is lost though, the country has certain quick wins that can streamline its financial channels and boost growth further. One of these key influencers include the payments systems which are the key driver of financial sector deepening, with the state still playing a small role.

The country needs an immediate shift from the use of multiple currencies, including airtime, which are used as mediums of exchange. The fact that Somalis still, in addition to the Somali shilling and the U.S. dollar, regularly use the currencies of Djibouti, Ethiopia, and Kenya as mediums of exchange in border areas makes the system had to harmonise and boost growth.

The good news is that with some technical assistance from IMF, the Central Bank of Somalia (CBS) has begun to engage in currency reform prior to a planned issuance of a limited volume of thousand-shilling notes for circulation in an initial phase to restore the credibility of the domestic currency as a first step toward allowing the CBS to engage in effective monetary policy.

Economic resilience, and improvement of the business environment over the medium term will be key for Somalia as key reforms in public financial management (including strengthened domestic revenue mobilization), and strengthened governance help in giving the much need financial bloodline for development and ensure that the increased resources are used wisely and efficiently.

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