Somalia will have to re-assure its diaspora of existence of a robust fiscal framework-since bond repayments will flow out of the
fiscus. As I pointed out in one of my earlier articles, the country still lacks a federal fiscal framework (of fiscal federalism).
By George Bodo
Somalia is in the process of re-introducing its local currency – the Somali Shilling. But it seems the currency will be backed by nothing. Somalia doesn’t have any official usable foreign currency reserves-or Gold reserves. Somalia is also deep in arrears with both its multilateral and bilateral partners. Data from the Somali Finance Ministry shows that, at the close of October 2016, its total stock of outstanding debt stood at $5 billion-in principal, interest accrued as well as cumulative late-payment penalties (indeed, penalties account for 43% of the outstanding stock). A third of the outstanding stock is owed to multilateral lenders-the International Monetary Fund (IMF), World Bank and African Development Bank (AfDB) Group accounts for 65% of the multilateral portion-while nearly half of it owed to Paris Club members; and the balance owed to non-Paris club members. But as I pointed out in one of my earlier articles, Somalia will still need the support of the global creditors’ community in incubating a reserve bank. Organic build-up of reserves is virtually impossible at this stage of the country’s development.
Somalia, however, has one untapped asset — diaspora remittances. A report by the Aid Coordination Unit (ACU) in the Office of Prime Minister of the Federal Republic of Somalia (FRS) estimated remittance flows at USD 1.4 billion in 2016 (23% of Gross Domestic Product-GDP), with an additional $1.3 billion (21% of GDP) in Official development assistance (ODA)—however, according to the report, Only 8% of development aid was channeled through the Somali treasury in 2016. Diaspora remittances could actually be much higher than the $1.4 billion captured through official channels. Nonetheless, formal flows could easily hit $2 billion by 2020. With such loft projections, Somalia could issue a debt instrument to specifically target its large diaspora community.
The Somali diaspora community has continued to demonstrate sufficient willingness to participate in the economic rebuilding of their country — with a number of them already doing so explicitly via investments in real estate-especially in Mogadishu-and tourism. A debt issue specifically aimed at this diaspora population will open another hybrid venue for them to implicitly participate in the ongoing rebuilding exercise. Nigeria recently successfully raised some $300 million via a debut Diaspora Bond at coupon rate of 5.625%. The 5-year bond, which was 130 per cent subscribed, was targeted principally at Nigerians abroad, to provide the Nigerian diaspora with the opportunity to contribute to national development. Nigeria structured the bond as a retail instrument to appeal to a wide range of diaspora investors. It was offered through private banks and wealth managers as opposed to the usual choice of Goldman Sachs, Citi or JPMorgan who only target institutional investors.
Somalia, however, will have to re-assure its diaspora of existence of a robust fiscal framework; since bond repayments will flow out of the fiscus (the country still lacks a federal fiscal framework – of fiscal federalism). At the moment, the Federal Member States (FMS) collect and appropriate revenues within their collection jurisdictions leaving the Federal Government of Somalia (FGS) to finance federal expenditures from revenues collected in Banadir region only — of course, in addition to direct bilateral budgetary support from partners, most notably Turkey.
In 2016, FGS revenue collections amounted to $113 million last year-the equivalent of just 2% of GDP in the same year. Certainly there is more ground to be covered in as far as fiscal receipts are concerned. This also means Somalia must inspire confidence in its fiscal management by fast-tracking all the requisite fiscal reforms. Indeed, in its March 2017 edition of the Financial Governance Report, the Financial Governance Committee (FGC) reiterated four fiscal reforms approaches. First, the committee reiterated that both the FGS and FMS need to establish a framework on, among other things, a revenue collection regime. The FMS still collect revenues within their jurisdictions — and they need to handover the collection function to FGS-among other functions. In other words, the country needs to agree on a single revenue collection authority.
“Federal Government of Somalia revenue collections amounted to just $113 million last year-the equivalent of just 2% of GDP in the same year. Certainly there is more ground to be covered in as far as fiscal receipts are concerned.”.Author
Secondly, the FGC highlighted the need for an equitable sharing of natural resource revenues especially Oil and gas and deep-sea fishing licensing frameworks. The Committee, for instance, noted that foreign fishing vessels, at some point, were reported to be in negotiations with the Government of Puntland to receive licenses to fish in Somali waters. Indeed, these stand-alone licensing of foreign trawlers by individual FMSs doesn’t advance fiscal federalism, in addition to undermining the livelihoods of local fishermen. This also serves to show the continuing lack of trust between the two arms of Government and to restore it; FGS needs to advance an inter-governmental fiscal transfer system as a way of guaranteeing FMSs of their shares of revenues.
Thirdly, the FGC reiterates that FGS should conclude negotiations on the five revenue collection contracts between the Federal Government and FMSs. The FGC, in the report, further advised that the power to grant tax exemptions should solely sit with the Federal Minister of Finance. FGS should also elevate mechanisms to ensure tax compliance across board. Finally, FGC reiterates that expenditure management at the Federal level should be strengthened. At the close of first quarter 2017, FGS wage bill stood at 56 per cent of ordinary revenues (excluding grants). Indeed, this is quite elevated and calls for robust measures to contain the wage bill. FGC has reiterated that, among other things, FGS should audit its payroll to weed out ghost workers-especially within the Somali National Army.
It is evident that there is already an incubator for fiscal reforms which appear bankable enough. And in order to inspire confidence among its diaspora investors (and realize meaningful success in a diaspora bond issuance), the FGS must position its fiscal space as a bankable work-in-progress, with clear timelines. The investing diaspora need to be guaranteed on the safety of their investments. Eventually, proceeds of the bond can then be used for three purposes: (i) provide a seed for the establishment of foreign currency reserves to back the newly-printed currency; (ii) financing the requisite infrastructure-and especially in the security and transport systems; and (iii) partly refinancing some of the outstanding debts.
Mr. Bodo is a banking sector analyst. He can be Tweeted: @GeorgeBodo