The Federal Government of Somalia aims to raise US$12.6 million from domestic indirect taxes in 2016, a 97 per cent jump from the US$6.4 million raised in 2015. Higher revenue collections will enable the state to improve its external debt profile
Abdikariim Jama Barre
The Federal Government of Somalia (FGS) targets to widen its tax base to finance a bigger 2016 budget as it weans itself from bilateral donor grants to support key operations.
It has drawn up a US$246.3 million budget for 2016, a sizeable increase from last year’s US$199 million. An analysis of the 2016 expenditure and financing plans shows that the FGS targets to double collections from domestic indirect taxes – those levied on goods and services rather than on persons and organisations.
The indirect taxes comes in diverse forms, such as a sales tax or value-added tax (VAT) levied on goods or services, and are paid by consumers in the form of higher prices. Budget appropriations by the Ministry of Finance show that the FGS aims to raise US$12.6 million from domestic indirect taxes in 2016. This will mark a 97 per cent jump from the US$6.4 million raised in 2015. The plan marks a radical shift in the government revenue model. Over the years, Somalia has heavily relied on revenues from taxes charged on imports. The new policy is consistent with a recent disclosure by Finance minister Mohamed Adan Fargeti that his ministry targeted to generate about 64 per cent of the 2016 budget from local revenues.
“The Ministry of Finance will strive to make as much revenue as possible,” Mr Fargeti told fellow ministers at a meeting chaired by Prime Minister Omar Abdirashid Sharmarke in October last year. “If the revenue exceeds our expectations, the ministry will review the budget and adjust accordingly to increase disbursements to the ministries,” he added
The FGS plans to cut donor bilateral assistance to US$30 million in 2016. This would be a drastic drop from the 2014 figure of US$59 million. In 2015, bilateral assistance to the Somalia budget was US$35.4 million. The Somalia 2016 budget will give special attention to security, health care and repayment of arrears and advances.
The country’s Police Force will, for instance, be funded for US$13.94 million in 2016, a 106.2 per cent jump from the funding it received in 2015. This signifies the FGS’ resolve to continue consolidating gains in the ongoing campaigns to restore order in the Horn of Africa nation after decades of lawlessness.
“The ministry of Finance will strive to make as much revenue as possible. If the revenue exceeds our expectations, the ministry will review the budget and adjust accordingly to increase disbursements to the ministries”
– Somalia Finance minister Mohamed Adan Fargeti
POLISHING DEBT PROFILE
The FGS is also keen on polishing its debt profile in 2016 with increased disbursements towards offsetting arrears and advances in an attempt to woo back the support of the international community and multilateral donors.
In its 2016 budget, the Somalia government has notably also made provisions for US$32 million towards repayment or arrears and advances, representing a 174 per cent increase from US$11.7 million in 2015. Over the years, Somalia budget preparation and implementation has been fraught with difficulty due to deficiencies in revenue mobilisation and expenditure pressures that outpaced available resources. The Horn of Africa nation’s budget has over time consisted largely of salary and security expenditures with deficits being financed mostly through arrears accumulation.
The pile-up of arrears has dented Somalia’s image – denying it access to direct budgetary funding opportunities by the international community amid concern over imprudent management of resources.
The International Monetary Fund (IMF) is one such institution that still does not offer funding to Somalia, nearly three years after the country resumed relations with it on April 12, 2013.
“While Somalia has been welcomed back as an active member of the Fund, it remains ineligible for financial assistance pending the clearance of its longstanding arrears. Arrears clearance will be an important part of normalising relations with the international community and establishing a roadmap to debt sustainability,” the IMF stated in July, perhaps indicating why Somalia is keen to offset its arrears.
Statistics show that Somalia’s external debt was estimated at US$5.3 billion, an equivalent of 93 per cent of GDP at end of 2014. The debts consists of US$1.5 billion owed to multilaterals, US$2.3 billion to Paris Club members and US$1.5billion to non-Paris Club members.
“In due course, the establishment of a track record of cooperation with the Fund on policies and payments in the context of a well-designed staff-monitored programme (SMP) would be a key step in the process of arrears clearance and normalisation of relations with the international community as a whole,” the IMF further said.
Clearing Somalia’s arrears will however take time because of the huge amounts of obligations accumulated over time and the piling expenditure to restore normalcy in security and rebuild the country after decades of turmoil. “Based on a preliminary assessment, Somalia lacks the ability to service its debt in the medium term,” stated the IMF, urging Somalia to continue working towards offsetting debt.
Besides resolving the arrears, Somalia will have to address the concerns over widespread graft, to restore confidence and support among members of the international community who have poured billions of dollars into the economy to help it rebuild its infrastructure and institutions.
Western donors presently largely fund the Somali National Army and the African Union peacekeeping force (AMISOM), but have been reluctant to offer direct budget support to Mogadishu due to concerns over corruption. The donors have accused the FGS of not doing enough to tackle corruption, and say the theft of scarce government resources has frustrated efforts to build a functioning state.
An annual ranking by the Transparency International (TI) released in January 2016 listed Somalia, North Korea and Afghanistan as the most highly corrupt nations in the world. “The 2015 Corruption Perceptions Index clearly shows that corruption remains a blight around the world. But 2015 was also a year when people again took to the streets to protest against corruption. People across the globe sent a strong signal to those in power. It is time to tackle grand corruption,” said José Ugaz, the chairperson of Transparency International.
In March 2015, Somalia’s Auditor General Nur Jumale Farah promised to release a report showing financial irregularities in government ministries. This is yet to happen.