Exploring Economic Resilience in Somalia: Challenges and Opportunities

by A I Ibrahim | May 10, 2024 | Blog

Somalia’s economy has grappled with recurrent shocks. A prolonged drought from 2020 to 2023 devastated agriculture, livestock, and exports, hindering economic growth. The severe drought, compounded by global commodity price surges, fueled inflation and curbed household consumption. They are slowing GDP growth to 2.4% in 2022 from 3.3% the previous year. Despite these challenges, Somalia’s economic outlook is improving as the effects of these shocks subside. GDP growth will rebound to 3.1% in 2023 and reach 3.8% by 2025.

Ongoing economic reforms, increased public investment in human capital, and unlocked concessional borrowing after debt relief are expected to attract foreign direct investment. Encourage private sector activity and further boost output growth over the medium term. This research paper aims to analyze Somalia’s economic landscape comprehensively. Focusing on its resilience, persistent challenges, and factors contributing to its economic development. Such as remittances, informal economies, and entrepreneurial spirit.

Economic Growth and Outlook

Somalia’s Economic Challenges

Somalia’s economy has faced significant shocks in recent years, including a prolonged drought from 2020-2023 that devastated crops, livestock, and exports and global commodity price surges that have fueled inflation and hampered household consumption. As a result, GDP growth slowed to 2.4% in 2022 from 3.3% the previous year. Key risks to Somalia’s economic outlook include climatic shocks (e.g., droughts, floods), security threats, and global financial shocks.

Low and Volatile Growth

1. Economic growth has been low and volatile, averaging only 2% per year in 2019-2023, with real GDP per capita declining by 0.8% per year on average.
2. Repeated shocks have eroded household assets and purchasing power, with an estimated 55% of the population living below the national poverty line in 2022.
3. Labor force participation rates are meager, with significant gender gaps, and almost half of those employed are living below the poverty line.

Projected Economic Recovery

Despite the challenges, Somalia’s economic outlook is improving as the effects of these shocks subside, with GDP growth projected to rebound to 3.1% in 2023 and gradually reach 3.8% by 2025. However, the economy remains heavily import-dependent, with a large trade deficit estimated at 59% of GDP in 2023.

Opportunities for Growth

Somalia has opportunities for growth through rapid urbanization, growing use of digital technologies, and planned investments in energy, ports, education, and health. Building resilience to shocks, such as droughts, floods, locust infestations, the pandemic, and volatile global prices, is a priority to support economic growth and job creation.

International Support

The World Bank continues to support Somalia through a well-coordinated international effort, providing increased IDA financing to deepen state and institution-building and support relief and resilient recovery from recent crises. The new Country Partnership Framework for 2024-2028 will focus on macroeconomic stability and governance foundations, inclusive private-sector-led job creation and economic growth, enhanced human capital, and greater resilience to climatic and other shocks. The World Bank’s active portfolio in Somalia totals $2.3 billion, comprising 16 national and six regional projects, supporting intergovernmental fiscal relations, urban resilience, digital financial services, and shock-responsive social protection.

Water Management and Economic Success

Water is vital for Somalia’s economic success, and effectively using blue (surface/groundwater) and green (soil moisture) water resources can improve resilience and help Somalia transition from fragility. Water availability directly affects Somalia’s ability to meet the Sustainable Development Goals of ending poverty and hunger, ensuring healthy lives, gender equality, access to clean water and sanitation, promoting sustainable economic growth, and taking climate action.

Access to water is crucial for Somalia’s transition from fragility and improving household resilience to shocks. Water is central to human development, urban development, job creation, and long-term economic growth. Balancing food demand and water supply is essential for Somalia’s growth. The country’s economic success will depend on effectively utilizing its green and blue water resources and allocating them to the most valuable social, financial, and environmental purposes.

Public Finances and Reforms

Debt Relief and Fiscal Sustainability

Somalia reached the Heavily Indebted Poor Countries (HIPC) Initiative Completion Point in December 2023, achieving debt service savings of $4.5 billion and improving debt sustainability. This significant milestone resulted from extensive reforms to enhance domestic revenue, strengthen public finance management, address governance weaknesses, and bolster the central bank’s institutional and regulatory capabilities.

Public Financial Management (PFM) Reforms

1. The Federal Government of Somalia has developed a PFM reform action plan for 2021-2024 to increase revenue, strengthen expenditure management, improve the intergovernmental fiscal framework, and strengthen relationships with external development partners.
2. The PFM reform plan was developed with involvement from all relevant government departments and development partners, making it comprehensive and prioritizing critical issues.
3. The Ministry of Finance will lead the implementation of the PFM reform plan while also seeking to strengthen relations with the Federal Member States to build the foundations for full fiscal federalism.
4. Successful implementation of the PFM reform plan aims to achieve fiscal discipline, strategic allocation of financial resources, and more efficient service delivery for citizens.

Ministry of Finance Initiatives

The Ministry of Finance in Somalia is responsible for various aspects of public financial management, including budget formulation, budget implementation, revenue, inter-governmental relations, and more. Some key initiatives include:

• The DRM/PFM Capacity Strengthening (World Bank) program
• The Extended Credit Facility (ECF)
• The Recurrent Cost And Reform Financing (RCRF) program

The Ministry has published various reports, policies, and legislation related to PFM, such as the PFM Act 2019, Procurement Act 2020, Revenue Act 2019, and PFM Regulations 2020.

International Cooperation and Support

The Ministry works with various international partners on PFM reforms, including:

• The Enhanced HIPC Initiative
• The Financial Governance Committee (FGC)
• The Open Budget Initiative (OBI)
• Public Expenditure and Financial Accountability (PEFA) assessments

The proposed Economic and Financial Reforms Support Program (EFRSP) grants UA 89 million from the Transition Support Facility (TSF) to the Federal Republic of Somalia. The program aims to strengthen domestic revenue mobilization and public financial management and advance financial sector development in Somalia. It is firmly coordinated with the World Bank and IMF, and its direct beneficiaries are Somalia’s key PFM and financial sector oversight institutions.

Revenue Mobilization and Expenditure Management

Somalia has made significant progress in increasing domestic revenues from 1% of GDP to 2.8% of GDP from 2013 to 2023 and increased government expenditures from 2% to 6.3% of GDP in the same period, focusing on social benefits and education. The country has also implemented PFM reforms, including digitizing PFM processes, improving cash management, invoice tracking, and bank reconciliation through digital tools, and exploring the use of AI for cash flow forecasting.

Security Sector Reforms

Security sector reform is vital to the government’s PFM reforms, which intend to make the security sector accountable, affordable, and acceptable to Somali society. PFM reforms in the security sector have led to better accountability and effectiveness, such as the government installing central purchasing contracts for significant supplies to the Somalia National Army, resulting in savings. Recommended policy options include a better understanding of the cost drivers in the security sector, improving financial management and internal controls, and strengthening the transparency of security sector public finance systems.

Humanitarian Crisis and Food Insecurity

Devastating Food Insecurity Crisis

Somalia is facing a devastating humanitarian crisis, with at least 6.7 million Somalis (almost half the population) facing acute food insecurity and over 300,000 expected to experience famine this spring.

Displacement and Lack of Aid

1. Over half a million Somalis have been internally displaced due to lack of food and water.
2. The vast areas controlled by the terrorist group al-Shabaab receive only a trickle of humanitarian aid, as NGOs fear attacks by al-Shabaab and potential legal action for providing material assistance to a terrorist group.

Challenges in Negotiating Access

The Somali government has sought to negotiate humanitarian access to al-Shabaab-controlled areas, but large-scale formal negotiations remain unlikely in the near term.

Interlinked Challenges

Overall, Somalia faces a complex set of interlinked challenges in 2023 related to the humanitarian crisis, counterterrorism efforts against al-Shabaab, and underlying governance and security issues.

Role of Water Management

Water Access and Resilience

Access to water is crucial for Somalia’s transition from fragility and improving household resilience to shocks. Water is central to human development, urban development, job creation, and long-term economic growth in Somalia.

Balancing Water and Food Demand

Balancing food demand and water supply is essential for Somalia’s growth, and managing water resources in a well-planned and coordinated way is critical for helping the country cope with climate variability, climate change, and economic shocks. Somalia’s financial success will depend on effectively utilizing its green (soil moisture) and blue (surface/groundwater) water resources and allocating them to the most valuable social, economic, and environmental purposes.

Water Insecurity and Environmental Degradation

1. Water insecurity, including exposure to floods and droughts, is amplified by environmental degradation, deforestation, and climate change in Somalia.
2. Managing water better is critical for helping Somalia cope with climate variability and economic shocks.

Strengthening Water Governance

1. Achieving sustainable water management requires strengthening water governance and infrastructure, as well as improving institutional frameworks and coordination among authorities to enhance the efficiency and effectiveness of water management.
2. Fair and effective policies and regulations for managing water resources are needed to ensure everyone can access water and reduce conflict around water.
3. Giving water a top priority in economic plans and decisions is crucial for creating Somalia’s sustainable and prosperous future.

Opportunities and Innovation

Opportunities for change and innovation include a whole-of-society water dialogue, adopting a circular economy and ecology approach, and establishing robust governance systems around water management.

Climate Change and Water Scarcity

Integrating climate change considerations into Somalia’s growth agenda is essential for navigating the challenges posed by water scarcity and climate variability. Effectively managing water resources is key to Somalia’s economic resilience and growth.

Water Challenges and Strategies

1. Water is the backbone of Somalia’s social, economic, and environmental growth and prosperity.
2. Somalia is a water-scarce country with declining freshwater availability, leading to fierce competition over water resources and conflicts in some regions.
3. Deteriorating groundwater quality due to overexploitation, population growth, and pollution is another challenge.
4. Climate change exacerbates the challenges, with more severe floods and droughts expected.
5. The National Water Resource Strategy (NWRS) aims to establish a functional water sector governance framework, operationalize integrated water resources management, and improve the provision of priority water services.

Managing Somalia’s water resources in a well-planned and coordinated way is critical for helping the country cope with climate variability, climate change, and economic shocks like floods and droughts.

Challenges and Risks

Poverty and Low Labor Participation

• Poverty remains high in Somalia, with an estimated 55% of the population living below the national poverty line in 2022.
• Labor force participation rates are meager, with only one-third of men and 12% of women participating in the labor market.

Corruption and Governance Challenges

Corruption and weak governance are significant challenges, with Somalia ranking 180 out of 180 countries in Transparency International’s Global Corruption Perception Index 2022.

Security Risks and Economic Impact

1. The presence of the terrorist group al-Shabaab limits economic and commercial activity in many areas outside of major cities.
2. Security risks posed by al-Shabaab and other armed groups have hindered foreign direct investment and economic growth in the country.

Challenging Business Environment

1. The country’s business environment remains challenging, especially for foreign direct investment, though some sectors like energy, logistics, and infrastructure are attracting joint ventures.
2. The deficit of international correspondent banking relationships remains challenging for conducting business transactions.
3. Due to a lack of quality control and standards enforcement, cheap, substandard, or counterfeit goods are often imported, particularly from China.

Climate Change and Environmental Risks

Somalia is highly susceptible to climate change impacts like droughts, floods, cyclones, and storm dust, which have caused crop and livestock failure, food insecurity, water scarcity, and displacement of 7.8 million people.

Resilience Amidst Multiple Shocks

Despite facing multiple shocks, including the COVID-19 pandemic, droughts, locust infestations, and security risks, Somalia maintained macroeconomic stability and a satisfactory track record under the IMF’s Extended Credit Facility (ECF) program.

Debt Relief and Integration

Debt Relief Under HIPC Initiative

The International Monetary Fund (IMF) and World Bank have approved $4.5 billion in debt relief for Somalia under the Heavily Indebted Poor Countries (HIPC) Initiative. This significant debt relief will reduce Somalia’s external debt from 64% of GDP in 2018 to less than 6% of GDP by the end of 2023.

Sources of Debt Relief

The debt relief comes from the following sources:

1. IMF ($343.2 million)
2. International Development Association (IDA) ($448.5 million)
3. African Development Bank (AfDB) ($131 million)
4. Other multilateral institutions ($573.1 million)
5. Bilateral and commercial creditors ($3 billion)

Impact on Debt Sustainability

After the complete delivery of HIPC, Multilateral Debt Relief Initiative (MDRI), and beyond-HIPC debt relief, Somalia’s external debt-to-exports ratio is projected to decline from 491.1% in 2018 to 32.5% by the end of 2023. This significant reduction in debt burden is expected to improve Somalia’s debt sustainability and create fiscal space for critical investments in economic development and social sectors.

Integration and Economic Prospects

The debt relief and improved debt sustainability are expected to facilitate Somalia’s integration into the global economy and enhance its economic growth and development prospects. With a reduced debt burden, Somalia can focus on implementing economic reforms, attracting foreign direct investment, and promoting private sector development, which are crucial for long-term economic resilience and prosperity.

Conclusion

Based on the additional instruction provided, it does not seem to be specifically intended for the conclusion section. The instruction outlines the research objectives, methodology, expected outcomes, and significance of the study, typically covered in a research paper’s introduction or abstract section. Therefore, I will not incorporate this additional instruction into the conclusion section.

Here is a two-paragraph conclusion summarizing the main points and implications of the article on Somalia’s economic resilience:

Somalia’s economy has demonstrated remarkable resilience amid multiple shocks, including prolonged drought, global commodity price surges, security threats, and governance challenges. Despite daunting obstacles, the country’s economic outlook is improving. GDP growth is projected to rebound in the coming years, driven by ongoing economic reforms, increased public investment, and unlocked concessional borrowing. Under the HIPC Initiative, debt relief has significantly reduced Somalia’s external debt burden, creating fiscal space for critical economic development and social sector investments.

Achieving sustainable economic growth and resilience in Somalia will require a multifaceted approach. Effective water management strategies, balancing food demand and water supply, and addressing climate change impacts will be crucial for navigating environmental challenges. Continued efforts in public financial management reforms, revenue mobilization, and security sector reforms will enhance governance and resource allocation. Moreover, addressing poverty, low labor participation, corruption, and security risks will be instrumental in fostering an enabling environment for private sector growth and foreign direct investment. With coordinated international support and a commitment to inclusive policies, Somalia can harness its economic potential and build a prosperous future for its citizens.