Even with all its security challenges and the fact that a few years ago, the country’s economy was all but non-existent and all that remained was in the hands of warlords and militants, Somalia is a source of a new hope, its GDP expanded by 4 percent and is a source for new found hope and the African union mission works on securing the rest of the country from Alshabaab- Militants.
According to the IMF’s Rogerio Zandamela “Economic activity is estimated to have expanded by 3.7 percent in 2014, driven by growth in agriculture, construction, and telecommunications. CPI inflation was 1.3 percent.
For 2015, real growth is projected at 2.7 and inflation should remain subdued at about 4 percent. With modest progress on the security front and an absence of drought, medium-term annual growth should be about 5 percent. Nevertheless, growth will remain inadequate to redress poverty and gender disparities.
According to the IMF, the Somali government is undertaking an ambitious reform program. Progress toward good governance—with sound and accountable institutions—is important for the restoration of public confidence in government.
Somalia has large potential for revenue from natural resources, effective concession management and a suitable fiscal regime are critical for peace and prosperity. The natural resource management strategy should incorporate best practices while facilitating private sector participation and ensuring transparency. Somalia also needs consensus regarding fiscal federalism, including responsibilities for service delivery, and revenue collection and sharing.
The IMF also says that “While notable progress has been made in strengthening fiscal institutions, significant reform is required to bring public financial management systems closer to international standards. Somalia also needs to adopt comprehensive and properly sequenced budget reforms, which will require steps to improve budget preparation and execution, arrears control, treasury management, and accounting and reporting.
The country’s 2015 federal budget was prepared on a zero cash balance basis with optimistic revenue forecasts and weak commitment control. Deficiencies in revenue mobilization, considerable expenditure pressure, and unfulfilled pledges of donor support have led to extraordinary difficulties in budget execution. The funding shortfall has led the federal government to ration cash and incur arrears to the defense forces, civil servants, and suppliers.
“An expansion in the number of ministries and government entities has left Somalia with a payroll-centric budget, with the share of wages about 45 percent of spending. The dependence on foreign grants remains over 40 percent of the budget, exposing it to uncertainties in donor disbursements. International assistance outside the budget is significantly higher than direct budget assistance.
In light of lower domestic revenue and shortfalls in donor support, The IMF projects a significant budget deficit in 2015. Accordingly, Somalia needs to boost revenue and revise the budget to align spending commitments with available resources. Going forward, Somalia should adopt policies to address important budget vulnerabilities. Fiscal rules, such as targets for the share of wages and capital, can help ensure fiscal sustainability and a desirable composition of spending. These rules should be accompanied by a medium-term fiscal framework to guide their realization.
Somalia’s economy is predominantly dollarized and cash is scarce, particularly in lower denominations. Somali banknotes are not readily available, creating problems for the poorest. Public and political pressure is mounting for currency reform. Nevertheless, currency reform should be delayed until necessary conditions are in place. Failed efforts would create significant direct losses, as well as reputational costs, so currency reform should adhere to a well-designed roadmap, including building adequate technical and human capacity.
