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The cream in the Croissant of Africa – Somalia

Mihr Thakar

An extremely vibrant entrepreneurial spirit has become one of the defining characteristic of Somali people; this is just one thing… Somalia has more to offer

A cool sea breeze blows from the east onto the crowd gathered upon the shore of a smooth patch of Lido Beach, Mogadishu. Carefree children swim and play as the boys throw a ball between each other and (often large) families tittle tattle. Most noteworthy is the lack of unmarried couples and the dressing of the women; head to toe clothing, often an abaya and niqab.

However, the men are relatively less encumbered; the characteristic thobe and hutra, quite synonymous with men’s clothing in Saudi Arabia is relatively rare, perhaps an inkling of African roots in this highly conservative society. The sand is soft and fine, moon colored and the sea is blue and beckoning, a reflection of the spotless sky.

Security

Turkey offers training to some of Somalia’s security units.

Terrorism has been a major determinant of investor hesitancy in Somalia. The country’s terrorism index increased to 8.02 in 2017 from a record low of 3.14 in 2003.

However, it is still lower than Afghanistan’s at 9.39. According to data provided by Trading Economics, the US is also relatively high at 6.07, Kenya at 6.11 and India cracking the top (worst) ten at 7.57. A large number of African countries are at zero in 2017 including Gambia, Togo, Botswana and Equatorial Guinea. The Global Terrorism Index measures the direct and indirect impacts of terrorism.

The Government of Somalia must increase surveillance and security operations together with regional partners, in order to allow the extremely vibrant entrepreneurial spirit that has become associated with the Somali people, to flourish. Another major problem for Somalia is persistent drought.

While 2018 saw record levels of rainfall and the number of people facing severe food insecurity decrease by 52% from 3.1 million people in September 2017 to 1.5 million in September 2018, the situation is on the cusp of becoming dire once again, as the effects of poor rainfall hit like a heavy hailstorm.

The rise of the construction industry.

The statistics are indicative of worsening food insecurity. CPI rose 5.88% in May 2019 (weighed down by weakening housing index) from May 2018.However, the price index for fruits has increased 30.62% over the same period, while projections suggest that c. 1 million children will be malnourished in 2019. Out of 5.4 million people expected to be acutely food insecure by July, 2.2 million will be in conditions of severe acute food insecurity, a 40% increase from January this year.

The situation becomes aggravated as aid agencies fall behind collection targets and the shortfall in funds augments ballooning desperation. Local and international private investors will have to join in the fight against hunger, selecting it as their corporate social responsibility theme. Somalia’s foreign investors stare at a corruption perception index of 180/180 and the worst possible score of 10/100 on Transparency International’s list. This is surprising as the country’s Islamic society frowns upon unethical behavior and the government must leverage religious belief to slay the dragon of corruption by putting up Islamic themed anti-corruption campaigns all across the country and entrenching a culture of ethical business practices.

The country has been weighed down by weak and non-existent institutions and has ranked at the bottom of the index every year since 2006. Informal practices must be curbed and structure and adherence to the law will make the fabric of a happy, healthy environment for citizens and investors.

Weak institutions

Nonetheless, the relatively informal method of operation can yield very handsome profits to risk takers and customs and familiarity often weigh down progressive thinkers. While economists have always argued that industrialization and superstition follow two separate paths, Somalia’s only hope to becoming a modern society is to use the strong institution, community spirit, completeness and rigidity of a religion that is over a thousand years old, sort of like Karl Marx considered capitalism a necessity on the path to communism.

Somalia’s population is estimated at 14.74 million (2017) and its surface area is 637,655 km². Compare that to Kenya’s surface area of 580,367 km² (90% of Somalia’s) and then reconcile that with Kenya’s population which is more than three times Somalia’s population and you can see the immense potential for early investors in this esoteric terra firma. Approximately 10.14% of Somalia is forested, dispelling the myth that it’s a barren wasteland and a desert. In fact, Kenya’s forest cover is c. 7%!

Somalia’s life expectancy of 56.29 years (2016) is low due to malnutrition, poor food security and almost ethereal healthcare access; the ephemerality of life in deplorable conditions. However, it will surprise you to learn that Nigeria’s life expectancy is even lower, at 53.43 years (2016)! Somalia’s GDP per capita was estimated at $499.82 in 2017, while Nigeria’s was at $1,968.56 (2017).

Growing economy?

Activity at the port.

Somalia’s economy grew at about 2.90% in 2018, under performing the inflation rate. The economy could easily grow at a double-digit rate but is weighed down by its relative rigidity to reform and inability to spend as a result of debt constraints.

American Friends Service Committee is part of the consortium of NGO’s lobbying to cancel Somalia’s external debt of $4.6 billion. Its GDP was just $7.369 billion in 2017, meaning that the external debt is about 62% of that GDP figure. Domestic revenue as a % of GDP remains below 3%, implying rampant tax evasion. However, the IMF is currently in discussions with Somalia on adequate reforms to solve the problems within the governance structure and a positive outcome is anticipated in the near future.

Economic development

Literacy is a very important component in the machine of economic development. Somalia’s literacy rate was estimated at 37.8% by UNESCO. However, AFSC points an even grimmer picture, with the country representative

Zaina Kisongoa stating, “80% of Somalis are illiterate. Only 10% have access to education.” Charlie Robertson, Chief economist at Renaissance Capital has  promulgated that you need 40% literacy to grow sustainably and 70-80% to industrialise. The government should consider tapping into Islamic NGO’s by commencing the journey into literacy.

USAID and other donor agencies [currently formulating funds for the sector] should harmonise their interventions in the education sector in order to close the gap.

The electricity access rate in Somalia is estimated at a paltry 15%. There exists immense potential for onshore wind and solar power within the country. According to the World Bank, generating capacity was just 103 MW in 2015, one of the lowest in the world, with prices reaching now $0.5 per kWh, still costly for a country that needs to industrialise.

The major limitation in the electricity generation sector is the lack of industrial off-takers, with the majority of the economy running on agriculture and livestock. Private Diesel generators are the norm in most residential and officer areas.

Mihr Thakar is a financial risk management and investment analyst based in Mombasa, Kenya. He mainly analyses macro and individual stocks at the Nairobi Securities Exchange. You can reach him on twitter @MihrThakar

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