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Skewed expenditure Plan: Slippery path to Somalia new Development Plan

The Somalia government has come with an ambitious development road map which is supposed to the key template in addressing the biting poverty and insecurity in the Horn of Africa Nation.

Abdikariim A. Jama

The ninth National Development Plan which is largely to be financed by the local revenues, as well as donor funding, is structured to strengthen the country’s macro-economic framework and complete Public Finance Management.

A closer examination of the country’s economic fundamentals, however, leaves a lot of concern whether the trend will help the country rebuild its environment for investment and keep the narrow path of progressive economic growth.

The latest Economic update released by the World Bank depicts an expenditure trend devoid of development and the economic enablers the country would need to climb the ladder of economic growth.

A significant share of the wage bill consists of allowances, mainly to the armed forces, police, security forces, and members of parliament, which averaged 57 percent in 2015–18. Security accounts for the highest share of goods and services, 47 percent in 2018, followed by consulting and professional services at 10 percent, and utilities, bank commissions, training and travel, and fuel at 6 percent each. Administration and security account for almost all spending on goods and services, 94 percent in 2015–18.

The World Bank Note.

Almost all the Federal Government Spending is consumed in compensating employees and in the purchase of goods and services according to the report.

“A significant share of the wage bill consists of allowances, mainly to the armed forces, police, security forces, and members of parliament, which averaged 57 percent in 2015–18. Security accounts for the highest share of goods and services, 47 percent in 2018, followed by consulting and professional services at 10 percent, and utilities, bank commissions, training and travel, and fuel at 6 percent each. Administration and security account for almost all spending on goods and services, 94 percent in 2015–18” the World Bank wrote.

Although transfers to subnational jurisdictions have been rising to 2018, the figure of 0.6 percent of GDP—up slightly from 0.5 percent in 2017 the transfers which make an important contribution to state activities and help to promote national unity have mostly fallen under the consumption trap, leaving key development enablers out of the equation and complicating Somalia’s future growth.

The Lack of capital spending continues to stifle potential growth with the government not granting any fiscal space to fund public investment projects and severely limiting Somalia’s capacity to invest in its dilapidated infrastructure to enhance transportation, water supply, and electricity—services important for both growth and the well-being of the population.

The spending is also said to be badly skewed towards security and administration services as the country engages effort to recover from decades of conflict and state fragmentation. The report details that for the last five years, the administration has averaged 45 percent of total spending and security 36 percent; economic spending averaged only 8 percent and social services spending 3 percent.

The situation is further complicated by Somalia’s external public debt which in 2018 was an estimated USD 4.7 billion, equivalent to about 99.5 percent of GDP. The Debt Management Unit (DMU) records show arrears on the principal and interest account for 96 percent of this debt; just over half is owed to Paris Club members, followed by multilateral institutions.

Arrears to International Finance Institutions have discouraged their financial assistance in the short run and their full re-engagement with Somalia. Although Somalia’s participation in the Highly-Indebted Poor Countries Initiative (HIPC) is expected to relieve the debt burden, help restore public debt sustainability, and unlock resources to support poverty reduction, this remains to be seen. This too is largely dependent on the revenue and expenditure pattern analysis.

“For that to happen, the country will need to demonstrate at least six months satisfactory performance in an Upper Credit Tranche-quality IMF Staff-Monitored Program; adopt at least an interim poverty reduction strategy; and clear arrears to the IFIs and mobilize adequate financial support from its creditors for debt relief,” World Bank analysts wrote.

The country must, therefore, start deliberate efforts to ensure more is allocated for development as it re-establishes the functions of core economic institutions and fosters financial development, inclusion, and stability while strengthening compliance with anti-money laundering and combating the financing of terrorism.

The key fundamentals to making development possible will include efforts to lay the foundation for sustainable financial sector development and strengthen compliance with Anti Money Laundering standards which have been underway albeit at a slower pace.

Some significant effort has been made though, the Central Bank of Somalia is improving its inspection capacity, and regulations to supervise mobile money with IMF assistance with regulations for the Targeted Financial Sanctions Bill having been drafted already.

CBS has also licensed five new banks at the end of 2018 (one a money transfer bureau), doubling the number of licensed banks. In 2015–18, from a low base, total banking sector assets grew by 94 percent, from $194 million to $377 million, and annual growth in credit to the private sector averaged 53.8 percent.

The banking sector is not only sufficiently capitalized, but it is also very liquid: in 2018 the total loans to assets ratio were 15 percent and the loans to deposits ratio was 50 percent. Financial sector reforms are giving the private sector confidence to increase deposits and banks’ confidence to increase lending as the CBS builds up its supervisory capacity. This will be key in financing development, without which the detailed development plan will fail to translate into tangibles.

The country must, therefore, start deliberate efforts to ensure more is allocated for development as it re-establishes the functions of core economic institutions and fosters financial development, inclusion, and stability while strengthening compliance with anti-money laundering and combating the financing of terrorism.

Abdikariim A. Jama, TSIM Managing Editor

The Somalia economy was estimated to have grown at 2.5 percent in 2017, while in 2018, Somalia’s GDP growth was estimated at 2.8 percent despite years of conflicts and devastating drought of 2016-2017. The economy was propped up in part by remittances after the large-scale emigration of skilled Somalis. Remittances grew from a negligible amount in 1990 to approximately US$1.4 billion or over 25 percent of Somali GDP in 2018. However, the modest GDP growth is not keeping pace with population growth (2.9 percent) reducing per capita income during the same time period.

Diaspora remittances provide a lifeline for large segments of the population, exceeding both international aid flows and foreign direct investment (FDI).

Another key enabler to growth will be successful containment of the Conflict in Somalia which is complex and in the eyes of many observers, it has tended to define the country’s recent history.

Al Shabaab (AS), the terrorist group plaguing Somalia for more than a decade now has been capitalizing on local conflicts and uses them to inject new energy into its waning campaign against the emerging formal institutions in Somalia. The impact of AS on the security situation in Somalia is substantial, with more than half of all incidents connected to AS. Indeed, the increase in AS related incidents outpaces the overall decline in security incidents seen since 2013.

These are critical factors that will help external investors build the confidence that they need to assure them that they can invest funds in Somalia and realize a return. Equally, the financial services industry must be capable of handling transactions while meeting the standards of anti-money-laundering and anti- terrorist-funding legislation. Mobile money, tied to developments in ICT, has provided support to Somali households through remittances, as well as some investment in small businesses.

The country’s heavy expenditure on private consumption and largely imports also remains a cause for concern as more development capital becomes a priority in the long run. In 2014 household consumption, financed by remittances, was equivalent to over 100 percent of nominal GDP, with food and beverages accounting for about 60 percent. The ratio of exports to GDP is about 14 percent but imports account for more than 67 percent of GDP, creating a large trade deficit, financed mainly by remittances and international aid, a very shaky ground to set development pillars on for a revival economy like Somalia’s.

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