## cr1761 ## Source details **Canonical URL:** [cr1761](https://www.imf.org/-/media/files/publications/cr/2017/cr1761.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr1761.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr1761.pdf.json) --- ### Background, institutional progress, and IMF relations - Somalia emerged in 2012 from a two decade-long civil war; post-war conditions include widespread poverty and more than half the working-age population unemployed. - Security remains fragile; Al-Shabaab continued sporadic attacks despite gains by the Somali national army and AU troops. - Presidential elections postponed four times between September 2016 and January 2017 (originally scheduled for August 2016). - IMF relations and program: - IMF recognized the FGS in April 2013. - Somalia completed its 2015 Article IV Consultation on July 27, 2015 (first Article IV since November 18, 1989). - Somalia is in arrears to the IMF: $319.4 million, 537.6 percent of quota, as of the end of December 2016. SDR237.6 million (US$/SDR=0.743864 of December 30, 2016) cited. - IMF management approved a 12-month Staff-Monitored Program (SMP) in May (May 2016–April 2017, Country Report No. 16/136). - Reform implementation highlights under the SMP and prior actions: - Adoption of an Appropriation Bill consistent with a zero-cash balance. - Institutional framework for fiscal data reporting established. - Adoption of an arrears-management strategy and approval of key principles for currency reform. - Completion of 66 IMF TA missions from June 2013 to December 2016 (including 14 to the Financial Governance Committee). ### Macroeconomic situation, outlook, and key statistics - Growth and inflation: - Real GDP growth: 3.4 percent in 2016 and 2–2.5 percent in 2017. - Real GDP annual change series: 2013: 2.8; 2014: 3.6; 2015: 3.6; 2016: 3.4; 2017: 2.5; 2018: 3.5; 2019: 3.5. - Inflation (CPI, eop): 1.5 percent in 2016; projected 2.7–3 percent in 2017. Consumer prices (e.o.p., percent change) series: 2013: 4.5; 2014: 1.3; 2015: 1.4; 2016: 1.5; 2017: 2.7; 2018: 1.9; 2019: 1.9. - Nominal GDP (millions of U.S. dollars): 2013: 5,723; 2014: 5,950; 2015: 6,111; 2016: 6,336; 2017: 6,548; 2018: 6,833; 2019: 7,084. - Per capita GDP (U.S. dollars): 2013: 429; 2014: 436; 2015: 436; 2016: 442; 2017: 445; 2018: 453; 2019: 458. - External sector and compositional indicators (selected) - Trade balance (percent of GDP): 2014: -54.2; 2015: -57.0; 2016: -55.0; 2017: -56.3 (Text Table 1 and projections). - Current account balance (percent of GDP): 2014: -8.1; 2015: -9.1; 2016: -6.4; 2017: -7.2. - Remittances (percent of GDP): 2014: 22.9; 2015: 23.3; 2016: 23.5; 2017: 24.2. - Grants (percent of GDP): 2014: 23.8; 2015: 25.1; 2016: 25.6; 2017: 25.4. - Net foreign assets (SMP definition): reported as 21.6, 21.6, 21.6... - External debt (percent of GDP): 2014: 85.1; 2015: 81.8; 2016: 79.9. - Fiscal aggregates (Federal Government, cash basis; percent of GDP unless noted) - Revenue and grants: 2014: 2.5; 2015: 2.3; 2016: 3.0; 2017: 3.8. - Grants (of the above): 2014: 1.0; 2015: 0.4; 2016: 1.1; 2017: 1.5. - Total expenditure: 2014: 2.5; 2015: 2.2; 2016: 3.0; 2017: 3.8. - Wages (of which): 2014: 1.3; 2015: 0.9; 2016: 1.2; 2017: 1.9. - Overall balance (cash basis): 2014: 0.0; 2015: 0.1; 2016: 0.0; 2017: 0.0. - Fiscal execution and arrears - Treasury deposits at the CBS: 4.5; 11.4 (memorandum items). - Stock of arrears (Text Table 1 memorandum items for 2014–17): 45.3; 67.7; 36.3; 36.3. - Arrears and delayed payments reported in Text Table 2 memorandum items (Millions of U.S. Dollars): 10.8; 24.0; 31.4; 32.0; 31.4; 31.8. - New arrears reported (Millions of U.S. Dollars): 33.1; 0.0; 10.0; 0.0; 0.0; 0.0. - Stock of domestic arrears (Millions of U.S. Dollars): 67.7; 43.6; 46.3; 35.6; 36.3; 36.3. - New estimated arrears of approximately $10 million accumulated by end-September (paid in November). - Balance of payments and external flows (Millions of U.S. dollars, selected) - Current account balance: 2013: -327; 2014: -480; 2015: -555; 2016 Prel.: -404; 2017 Proj.: -472; 2018 Proj.: -595; 2019 Proj.: -667. - Exports of goods (f.o.b.): 2013: 80; 2014: 181; 2015: 1,012; 2016: 1,052; 2017: 1,114. - Imports of goods (f.o.b.): 2013: 2,779; 2014: 3,046; 2015: 3,552; 2016: 3,555; 2017: 3,754. - Foreign direct investment (Millions of U.S. dollars): 2013: 258; 2014: 283; 2015: 306; 2016: 339; 2017: 373. - Exchange rate and central bank indicators - Somali Shilling/U.S. dollar exchange rate stable at about SOS 23,000 per U.S. dollar since April 2016 (table series shows end-of-period values including 2016 Sept.: 22,286; 2017 June: 23,030). - CBS total assets (Thousands of U.S. Dollars): 2013 Dec. Act.: 86,980; 2014 Dec. Act.: 83,834; 2015 Dec. Act.: 84,064; 2016 Sept. Prel.: 90,636. - CBS cash in vault (US$): 2015 Dec.: $13,296 (table shows series with 2016 June Prel.: 9,781). - A theft of $530,000 occurred in August 2016. ### SMP implementation, program performance, and monitoring - SMP implementation through end-September 2016: - Performance broadly satisfactory. - Six out of seven quantitative benchmarks (set for end-September) were met. - All structural benchmarks for the first review were met. - One target was missed; remedial measures were identified; staff supported completion of the first review. - Program modalities and vulnerabilities: - Somalia remains ineligible for IMF financial support while in arrears. - The SMP (May 2016–April 2017) aims to establish a track record and support institutional rebuilding. - Second review expected to be completed by June 2017; completion hinges on authorities’ commitment to policy implementation. - Future IMF Upper Credit Tranche eligibility contingent on establishing track record, clearing arrears, reconciling external debt, preparing a poverty reduction strategy, and mobilizing donor resources for HIPC Initiative debt relief. - Program monitoring arrangements: - SMP Monitoring Committee composed of senior officials from MoF, CBS, and MoPIC; IMF Resident Representative observer. - Quantitative benchmark categories include: floor on fiscal balance (cash basis); ceiling on new domestic expenditure arrears; ceiling on new domestic debt; ceiling on new external debt contracted or guaranteed; floors on CBS net foreign assets. - Monthly reporting timetable specified for CBS balance sheet, monetary survey, balance of payments, revenue and expenditure, disbursements/repayments, CBS temporary advances, budget grants, MoF budget operations, domestic arrears, and structural benchmark status. ### Central Bank, currency reform, and financial sector revival - CBS status and balance-sheet indicators: - Gross assets declined slightly between December 2015 and September 2016 largely due to a drop in cash held in vaults from $13.3 million in December to $9.8 million (period cited). - No scope for monetary policy: CBS has no control over the exchange rate or SOS supply; CBS has not issued banknotes since 1991; Somalia largely dollarized. - Net foreign assets definition excludes CBS cash in vault denominated in foreign currency; gross foreign liabilities under SMP set at zero; gold valued at $1,060.80 per ounce for program purposes. - Currency reform and safeguards: - CBS reconstituted a fully staffed cash management department and prepared a draft anti-counterfeit strategy and roadmap for currency reform. - Two quantitative benchmarks on banknote issuance were rescheduled to after July 2017; new structural benchmark: “finalize the anti-counterfeit strategy by the end of March 2017.” - Roadmap milestones to be completed by July 2017 include finalizing counterfeit strategy, deciding on exchange scope and conversion factors, phasing in legal framework, and preparatory work for storage/distribution/collection. - Adequate donor financing required; IMF to provide TA. - Financial sector structure and trends: - Six licensed commercial banks and 12 Money-Transfer Businesses (MTBs); 4 registered MTBs also operating. - Total assets of six licensed banks: $214 million in June 2016, up from $170 million 12 months prior (an increase of 26 percent). - Bank capitalization increased by an average of 24 percent; all but one bank meet the minimum capital requirement of $5 million. - Two banks (about 12 percent of total assets) reported negative income. - Bank loans increased to $51.4 million in June 2016 from $42.2 million in June 2015 (22 percent increase). - MTBs found not fully implementing AML/CFT policies per Trusted Agent assessments; MTBs function as international money transfer providers and often as quasi-banks. - CBS governance incident and responses: - August 17, 2016 incident: high- and mid-level CBS staff substituted $530,000 with counterfeit currencies (about 5 percent of total CBS cash in the vault). - Measures: tightened internal procedures; removed Director of Operations and two clerks from cash operations; appointed new Director of Operations; tightened vault operations; introduced new supervision layer. Criminal investigation ongoing. - Incident to be reflected as a capital loss in CBS financial statements; staff note incident does not affect Net Foreign Assets definition under SMP. ### Fiscal policy, tax measures, and revenue projections for 2017 - Fiscal framework and objectives: - 2017 budget targets a zero-cash balance with no accumulation of new domestic arrears. - Revenue and grants projected to reach 3.8 percent of GDP in 2017 (up from 3.0 percent in 2016). - Any revenue windfalls to be used to build buffers and pay down arrears. - Key revenue and expenditure projections: - Tax revenue projected to reach $127.7 million (2.0 percent of GDP) in 2017, up from projected $89 million (1.4 percent of GDP) for 2016. - Tax policy and administration measures expected to generate $43.0 million. - Grants projection based on confirmed grants from traditional donors. - Wage bill projected at $121.8 million (full-year payment of civil servants, security forces, and salaries for new Senate members). - Expenditure projection aligned with revenue and accommodates a buffer for deferred salary payments from 2016 amounting to $22.9 million. - Detailed projected yields from Tax Revenue Measures in 2017 (Text Table 3; Million of U.S. Dollars) - Total Tax revenue measures 2/: 43.0 - Tax rate increase: 7.3 - on petroleum products (+25%): 1.0 - on tobacco (+100%): 0.3 - on khat from $2 to $3 per kg: 6.0 - New tax: departure tax on outbound airline passengers: 3.6 - Improve tax collection: 32.1 - Tax on telecom companies: 24.5 - Fees on vehicles’ registration: 3.0 - Sales tax on electricity companies: 1.3 - Sales tax on hotels 2/: 1.5 - Sales tax on consumer water industries 2/: 0.3 - Income tax on employees of hotels and electricity companies: 1.5 - Notes: Projected yields to be collected in 2017. Implementation to start in April 2017. Projection conservatively assumes a telecom sector revenue base of $96 million. - Telecom sector potential and assumptions (Box 3) - Current contribution from negotiated fees and taxes: about $5 million (about 5.6 percent of 2016 projected tax revenue). - Authorities estimate sector total annual revenues could exceed $220 million (3.5 percent of projected 2016 GDP). - Expert report estimated annual potential revenue: Low 81; High 119 (Millions of U.S. Dollars). Total market revenue Low 162; High 221. - Tax composition (Millions of U.S. Dollars; Low/High): corporation income tax 10; 10. payroll tax 17; 17. VAT 24; 33. Others 30; 58 (including licensing & spectrum 20; 21). - Assumptions: population 10 million; penetration rates 22%–52%; average revenue per user $2.50–$8.00 per month; pre-tax profit margin 30%; corporate income tax 30%; VAT 15%; sector employment 14,000; average tax rate 12%. - Authorities target $24.5 million in taxes from telecoms in 2017 including $12–14 million from corporate profits and remainder from sales taxes. - Revenue administration and PFM reforms (MEFP, ¶13–15) - Lift FGS tax level (currently about 1.5-1.7 percent of GDP). - Introduce modern taxpayer registration; strengthen audit and enforcement; expand tax base; harmonize customs entry points; harmonize Inland Revenue Department and Customs administration. - Strengthen TSA; improve cash management; operationalize commitments and arrears management; complete electronic payments. - Improve central-subnational fiscal coordination and reach state-level consensus on revenue sharing and harmonize FGS and state PFM systems. ### Risks, Risk Assessment Matrix, and contingency measures - Risk environment (external and domestic) - External: spillovers from protracted conflicts in the Middle East could weaken demand for exports, reduce donor support, and decrease remittances; tighter international regulatory frameworks could slow remittances. - Domestic: loss of expenditure control and reform slowdown in run-up to presidential elections; weak institutional capacity; drought conditions in Northwest and Northeast pastoral zones; repeated electoral delays; fragile security; poor financial system supervision and weak AML/CFT compliance. - Selected Risk Assessment Matrix items (relative likelihood / impact; staff policy responses) - Weaker-than-expected global growth: High/Medium likelihood; Medium impact. - Policy responses: greater revenue mobilization; adopt World Bank social safety net reform. - Heightened risk of fragmentation/state failure/security dislocation in Middle East/Africa: High likelihood; High impact. - Policy responses: improve business environment and national security; greater revenue mobilization; strengthen social safety nets. - Poor financial system supervision / Weak AML/CFT: Medium likelihood; Medium impact. - Policy responses: upgrade capacity in licensing, supervision, and regulation of banks and MTBs; ensure effective AML/CFT implementation; strengthen CBS governance. - Institutional risks (protracted insecurity, weak institutions, election delays): High likelihood; High impact. - Policy responses: improve national security and statistics; strengthen local capacity; seek donors’ support; maintain election dates. - Fiscal risks (loss of expenditure control, weak revenue collection): High likelihood; High impact. - Policy responses: maintain reform momentum; greater revenue mobilization; keep expenditure under control and improve PFM. - Failed currency reform (inadequate preparation): Medium likelihood; High impact. - Policy responses: follow through on currency reform agenda, improve communication, mitigate risks. - Drought conditions (spread to Northwest and Northeast pastoral livelihood zones): High likelihood; High impact. - Policy response: FGS to better coordinate and monitor humanitarian aid distribution focusing on most affected regions. - Contingent fiscal measures if downside risks materialize: - Cut non-priority spending on goods and services. - Use buffers from improved PFM to safeguard against revenue shortfalls. - Include deferred amounts in the 2017 budget and pay fully to avoid new arrears. ### Debt reconstitution, external debt statistics, and debt policy - External debt reconstitution: - With AfDB TA, the Debt Management Unit reconstituted the bulk of external debt database. - Based on information through end-October 2016 from more than two-thirds of creditors: outstanding public debt estimated over $5 billion (nearly 80 percent of GDP); of which $4.7 billion in arrears (74 percent of GDP). - Composition of 2016 debt (percent of GDP): - Multilateral creditors: $1.4 billion or 22.9 percent of GDP. - Paris Club creditors: $2.3 billion or 36.6 percent of GDP. - Some non-Paris Club creditors: $1.3 billion or 20.5 percent of GDP. - External public debt stock (Millions of U.S. Dollars; estimates through end-October 2016): Total stock outstanding: 2013: 5,110; 2014: 5,066; 2015: 4,996; 2016: 5,063. Of which arrears: 2013: 4,752; 2014: 4,742; 2015: 4,702; 2016: 4,688. - Debt policy guidance: - Staff advised refraining from external and domestic borrowing (including from CBS) while re-establishing relationships with external creditors. - Continue strengthening DMU capacity and completing public debt statistics with AfDB TA. - Authorities committed to reconstructing debt records and requested training for DMU staff on debt management and CPIA/DeMPA/PEFA ratings. ### Financial sector development, AML/CFT, remittances, and correspondent banking - MTBs and remittances: - Remittances about 23 percent of GDP (average, 2013–15), received by about 40 percent of the population. - MTBs represent more than 45 percent of all financial sector assets and channel remittance inflows widely. - Trusted Agent assessments found MTBs not fully implementing AML/CFT policies and practices. - Withdrawal of correspondent banking relationships could significantly disrupt formal remittance inflows and MTBs’ balance sheets; anecdotal evidence suggests remittance costs to Somalia increased. - AML/CFT and correspondent banking actions: - Authorities approved the AML/CFT law on December 26, 2015; implementation expected to limit threat of CBR withdrawal. - Plan to improve customer due diligence via a ‘trusted third party agent’ with World Bank assistance to monitor transaction flows and provide independent third-party audits of MTBs. - Recommended: bring AML/CFT law in line with FATF standards and ensure risk-based implementation to secure access and safeguard remittances. - Financial sector bottlenecks and reforms: - Absence of financial sector laws, weak payment systems, absence of inter-banking systems, lack of credit bureau and consumer protection, and inconsistent accounting/reporting. - Authorities to prepare roadmap for inclusive financial sector revival by end-April 2017, improve accounting/reporting to IFRS, endorse regulation for commercial bank branches and asset classification, continue onsite bank examinations, and strengthen CBS oversight. - World Bank support noted for competitive hiring of skilled bankers and work on pensions and severance. ### National Development Plan (NDP) 2017–19, inclusive growth, and refugees - NDP overview and objectives (Box 5) - Draft three-year NDP for 2017–19 to replace the New Deal Compact; focus on poverty reduction, comply with interim Poverty Reduction Strategy Paper, and progress toward SDGs. - Stated objectives: (1) Consolidate peace, security, and rule of law; (2) Build institutions; (3) Lay groundwork for rapid, inclusive and sustainable growth; (4) Restore and protect strategic infrastructure. - Key challenges for finalizing the NDP: - Clarify vision and mission to avoid clashing priorities among member states. - Modalities of fiscal federalism still under discussion; development needs of different states unclear. - Ensure medium-term strategy consistency with sectoral strategies and inclusive preparatory work. - Draft lacks costing and funding sources and needs greater focus on mobilizing tax revenue. - Policy recommendations and follow-up actions: - Maintain momentum for finalizing the NDP; increase consultation and political buy-in; build peer review structure and international support. - NDP should target growth by mobilizing productive sectors, enhancing private sector, and increasing fiscal capacity. - Set procedures for assessment and monitoring given data weaknesses. - Refugees and IDPs: - Over 1.1 million internally-displaced people due to insecurity and drought. - Largest Somali refugee camp in Kenya housed about 425,000 people; planned closure in May 2017 will pose repatriation challenges. - Repatriation could boost skilled workers and entrepreneurs, benefiting fishing, farming, and livestock sectors if managed. - Social safety nets: - NDP to include a coherent safety net program; staff recommended adopting World Bank social safety net reforms. ### Key policy recommendations and authorities’ commitments - Authorities urged to: - Pass the 2017 Appropriation Bill to endorse the tax code and step up tax revenue mobilization. - Improve fiscal management and budget execution; adhere to agreed plans to avoid arrears and limit delayed payments. - Follow through with the currency reform roadmap and revive the financial sector. - Revise the NDP with more focus on required funding, social safety net program, capacity development, and humanitarian needs. - Authorities’ stated commitments: - Stronger fiscal discipline, avoiding new arrears, raising tax revenue, and implementing structural reforms. - Priority on currency reform and reviving the financial sector, recognizing preconditions for issuing new currency. - Plan to revise the NDP to focus on funding needs, institution building, and developing social safety nets—including for Somali refugees—and supporting humanitarian programs with donors. - Emphasized need for continued progress under the SMP and coordinated international support (security, peace, capacity building). ### PFM and structural benchmarks (SBs) and financial-sector SBs (deadlines) - PFM SBs and deadlines: - Reach 100 percent of non-salary Recurrent Cost and Reform Financing reimbursement by end-December 2016. - Complete report on electronic payment system design for Somali National Army and Police with biometric screening by end-December 2016. - Complete action plan to improve cash management by end-March 2017. - Complete plan to modernize revenue and customs administration by end-March 2017. - Two new SBs agreed: - Fiscal reform SB: pass the 2017 Appropriation Bill to endorse tax code rates for Income and Sales Taxes (by end-March 2017). - Currency reform SB: finalize the anti-counterfeit strategy by end-March 2017. - Financial sector package (2017) highlights: - Identify bottlenecks and define roadmap for financial sector reform by end-April 2017. - Endorse new regulation for commercial bank branches and asset quality classification; continue onsite examinations. - Prepare monthly CBS financial statements by March 2017. - Strengthen CBS governance (establish Executive Committee and Audit Committee), implement new accounting/reporting, and complete Core Banking project with World Bank support. ### IMF technical assistance, capacity support, and data limitations - IMF TA intensification: - Somalia among largest beneficiaries of IMF TA since 2013; over 60 TA missions and workshops 2014–16; cumulative 66 TA missions through December 2016. - Completed TA across FAD, LEG, MCM, STA covering budget diagnostics, PFM, central bank governance, currency reform, bank supervision, and statistics (consumer price index, national accounts, balance of payments). - New TA requests by authorities: - Tax policy and revenue mobilization; fiscal federalism; PFM (GFS, chart of accounts); cash and arrears management; national accounts and trade statistics; legal aspects of currency reform and CFT; central bank accounting and operations; bank licensing/supervision; macroeconomic statistics. - Data limitations and constraints: - Database remains weak: national accounts, price, balance of payments, monetary, and social statistics. - Many tables and figures are based on rudimentary or preliminary data through end-October 2016 or through September 2016 and subject to change. _Italic: Source: IMF staff report (cr1761) as presented in the provided content._ ### 2016. Despite a very difficult political environment and complex clan politics, the FGS ### cr1761 - 2016. Despite a very difficult political environment and complex clan politics, the FGS ### Background and context and institutional progress - Somalia emerged in 2012 from a two decade-long civil war; post-war conditions include widespread poverty and more than half the working-age population unemployed. - The security situation remains fragile; Al-Shabaab has continued to launch sporadic attacks despite recent gains by the Somali national army and African Union (AU) troops. - The presidential elections were postponed for the fourth time in a row; elections originally scheduled for August 2016 were postponed four times between September 2016 and January 2017. - IMF relations and program: - The IMF recognized the FGS in April 2013. - Somalia completed its 2015 Article IV Consultation on July 27, 2015 (first Article IV since November 18, 1989). - Somalia is in arrears to the IMF: $319.4 million, 537.6 percent of quota, as of the end of December 2016. - SDR237.6 million (US$/SDR=0.743864 of December 30, 2016) cited. - IMF management approved a 12-month Staff-Monitored Program (SMP) in May (May 2016–April 2017, Country Report No. 16/136). - Reform implementation highlights under the SMP and prior actions: - Adoption of an Appropriation Bill consistent with a zero-cash balance. - Institutional framework for fiscal data reporting established. - Adoption of an arrears-management strategy and approval of key principles for currency reform. - Completion of 66 IMF TA missions from June 2013 to December 2016 (including 14 to the Financial Governance Committee). ### Macroeconomic situation, outlook, and risks - Growth and inflation projections and drivers: - Real GDP growth: 3.4 percent in 2016 and 2–2.5 percent in 2017. - Inflation (CPI, eop): 1.5 percent in 2016; projected to pick up to 2.7–3 percent in 2017. - Projected slower growth reflects a looming drought affecting agriculture (agriculture share >25 percent of GDP); partially offset by construction, telecommunications, and services. - External sector, financing, and composition: - The Somali economy is expected to be sustained by donors' grants, remittances, and foreign direct investment mostly by the Somali diaspora. - Trade balance: around -54.2, -57.0, -55.0, -56.3 percent of GDP for 2014–17 (Text Table 1). - Current account balance: -8.1, -9.1, -6.4, -7.2 percent of GDP for 2014–17 (Text Table 1). - Remittances: 22.9, 23.3, 23.5, 24.2 (percent of GDP for 2014–17 as in Text Table 1). - Grants: 23.8, 25.1, 25.6, 25.4 (percent of GDP for 2014–17). - Net foreign assets (SMP definition): 21.6, 21.6, 21.6... - External debt: 85.1, 81.8, 79.9... (2014–16). - Fiscal performance and risks: - Fiscal aggregates (Federal Government, cash basis) — Revenue and grants: 2.5, 2.3, 3.0, 3.8 (2014–17). - Of which: grants: 1.0, 0.4, 1.1, 1.5 (2014–17). - Total expenditure: 2.5, 2.2, 3.0, 3.8 (2014–17). - Wages (of which): 1.3, 0.9, 1.2, 1.9 (2014–17). - Overall balance (cash basis): 0.0, 0.1, 0.0, 0.0 (2014–17). - Fiscal strains in 2016: revenue and grants projected to fall short (delayed disbursement of grants; weak tax performance); expenditures on goods and services increased partly due to presidential elections and security spending. - To maintain the fiscal balance at zero (cash basis), authorities delayed some salary payments for November and December 2016. - Treasury deposits at the CBS: 4.5, 11.4 (Text Table 1 memorandum items). - Stock of arrears: 45.3, 67.7, 36.3, 36.3 (Text Table 1 memorandum items for 2014–17). - Risks to outlook and program: - Risks are tilted to the downside: fragile security, expenditure overruns in the lead-up to presidential elections, weak revenue collection and administrative capacity, repeated electoral delays that could weaken donors’ support, and delays in pledged donor support. - Staff notes risks from weak institutions and fiscal performance and the fragile security situation. ### Review under the SMP and program performance - SMP implementation through end-September 2016: - Performance broadly satisfactory. - Six out of seven quantitative benchmarks (set for end-September) were met. - All structural benchmarks for the first review were met. - One target was missed; remedial measures were identified. - Because of broadly satisfactory implementation, remedial measures, and authorities’ commitment, staff support completion of the first review of the SMP. - Program modalities and vulnerabilities: - Somalia remains ineligible for IMF financial support while in arrears (see above). - The SMP (May 2016–April 2017) is intended to establish a track record of policy implementation and to support institutional rebuilding. ### Central Bank, currency reform, and financial sector revival - Central Bank of Somalia (CBS) status and balance-sheet indicators: - Gross assets of the CBS declined slightly between December 2015 and September 2016, largely reflecting a drop in cash held in vaults from $13.3 million in December to $9.8 million (period cited). - There is no scope for monetary policy: the CBS has no control over the exchange rate or the supply of the Somali shilling (SOS). - The CBS has not issued any banknotes since 1991; Somalia is largely dollarized. - Somali Shilling/U.S. dollar exchange rate stable at about SOS 23,000 per U.S. dollar since April 2016. - A theft of $530,000 occurred in August 2016 (noted as contributing to decline in CBS vault cash over the period). - Currency reform and financial sector measures: - CBS has reconstituted a fully staffed cash management department and prepared a draft anti-counterfeit strategy and roadmap for currency reform. - The authorities emphasize that preconditions for issuing a new currency must be in place first. - Financial sector structure and trends: - The sector is rudimentary with limited intermediation. - Six licensed commercial banks and 12 Money-Transfer Businesses (MTBs); 4 registered MTBs also operating. - Total assets of six licensed commercial banks reached $214 million in June 2016, up from $170 million 12 months prior (an increase of 26 percent). - Bank capitalization increased sharply by an average of 24 percent; all but one bank meet the minimum capital requirement of $5 million. - Two banks (about 12 percent of total assets) reported negative income, indicating potential solvency pockets. - Bank loans (Islamic investment and traditional) increased to $51.4 million in June 2016 from $42.2 million in June 2015 (a 22 percent increase). - Banking activity geographically concentrated in Mogadishu; additional 13 applications for commercial bank licenses are pending. - MTBs: recent assessments by the Trusted Agent found MTBs are not fully implementing compliance and AML/CFT policies and practices; MTBs act as international money transfer providers and often as quasi-banks. ### Focus of Article IV consultation and policy discussions - Main discussion areas: - (1) Fiscal policy and reforms to improve fiscal discipline, budget execution, revenue mobilization, and contingent measures to avoid arrears. - (2) Currency reform and reviving the financial sector. - (3) The national development plan (NDP), inclusive growth and social safety net. - (4) Economic implications of repatriating Somali refugees from Kenya. - (5) Institutional capacity building. - (6) Remittances and money transfer businesses. ### Key policy recommendations (authorities urged to) - Pass the 2017 Appropriation Bill to endorse the tax code and step up efforts to mobilize tax revenue. - Improve fiscal management and budget execution. - Adhere to agreed plans to avoid arrears and limit delayed payments. - Follow through with the currency reform roadmap and revive the financial sector. - Revise the NDP with more focus on required funding, social safety net program, capacity development, and humanitarian needs. ### Authorities’ views and priorities - Authorities agreed with staff’s assessment and balance of risks and acknowledged that without remedial measures fiscal risks could be higher. - Commitments expressed: - Stronger fiscal discipline, avoiding new arrears, raising tax revenue, and implementing structural reforms. - Priority placed on currency reform and reviving the financial sector, with recognition that preconditions for issuing a new currency must be in place. - Plan to revise the NDP to focus on funding needs, institution building, and developing social safety net programs—including for Somali refugees—and supporting existing humanitarian programs in coordination with donors. - To mitigate program risks, authorities emphasized the need for continued progress under the SMP and political, sustained, and coordinated international support (security, peace, capacity building). *Approved by Adnan Mazarei (MCD) and Jan Sun (SPR); discussions held in Nairobi, Kenya during September 21–27, 2016 and November 14–21, 2016. Staff team and meetings with Somali authorities and donors described in source.* ### 9. The authorities agreed that the outlook is subject to significant domestic and ### 9. The authorities agreed that the outlook is subject to significant domestic and ### Risks: external and domestic (¶9; Box 2) - External risks - Spillovers from protracted conflicts in the Middle East could: weaken demand for Somali exports; reduce donor support; decrease remittances. - Tighter international regulatory and supervisory frameworks could further slow remittances. - Domestic risks - Loss of expenditure control and slowdown in reform implementation in the run-up to the presidential elections, which could weaken the fiscal position, in particular revenue collection. - Weak institutional capacity, undermining reforms to mobilize revenues and public financial management (PFM). - Drought conditions in some key regions of Somalia (mostly in the Northwest and Northeast pastoral livelihood zones, leading to shortages of water and food, and livestock deaths and migration). - Repeated delays in the electoral process, which could compromise donors’ support to the FGS. - Fragile security. - Poor financial system supervision, including the need to strengthen compliance with anti-money laundering and combating the financing of terrorism (AML/CFT) in line with international standards. ### Risk Assessment Matrix (Box 2) — selected items (relative likelihood / impact if realized; staff policy responses) - Global Risks - Weaker-than-expected global growth: High/Medium likelihood; Medium impact. - Effects: (1) lower demand for exports; (2) possible reduction in donor support; (3) lower remittances. - Policy responses: (1) greater revenue mobilization; (2) swiftly adopt the ongoing World Bank reform on social safety nets. - Heightened risk of fragmentation/state failure/security dislocation in the Middle East and some African countries: High likelihood; High impact. - Effects: (1) lower remittances; (2) influx of refugees; (3) lower growth. - Policy responses: (1) improve business environment and national security; (2) greater revenue mobilization; (3) strengthen social safety nets. - Country-Specific Risks - Poor financial system supervision / Tightening regulatory frameworks / Weak AML/CFT standards: Medium likelihood; Medium impact. - Effects: (1) global banks may forego money transfer business leading to higher remittance costs and lower formal remittances; (2) reduction in remittances supporting livelihoods. - Policy responses: (1) upgrade capacity in licensing, supervision, and regulation of banks and MTBs; (2) ensure effective implementation of the AML/CFT framework; (3) strengthen governance structure of CBS. - Institutional risks (protracted insecurity, weak institutions, election delays, poor data): High likelihood; High impact. - Effects: (1) destruction of economic infrastructure; (2) possible reduction in donor support; (3) lower growth. - Policy responses: (1) improve national security and economic statistics; (2) strengthen local capacity; (3) seek donors’ support; (4) maintain election dates. - Fiscal risks (loss of expenditure control, slowdown in reform, weak revenue collection): High likelihood; High impact. - Effects: (1) lower revenue (including donor grants); (2) arrears accumulation; (3) policy slippages and SMP off-track. - Policy responses: (1) maintain reform momentum; (2) greater revenue mobilization; (3) keep expenditure under control and improve PFM. - Failed currency reform (inadequate preparation): Medium likelihood; High impact. - Effects: (1) increase in US dollar and SOS counterfeits; (2) further depreciation of SOS; (3) continued absence of monetary policy. - Policy responses: (1) follow through on currency reform agenda, while improving communication and mitigating other inherent risks. - Drought conditions (spread to Northwest and Northeast pastoral livelihood zones): High likelihood; High impact. - Effects: (1) shortage of water and food; (2) livestock deaths and migration. - Policy response: FGS to better coordinate and monitor humanitarian aid distribution across regions with focus on most affected regions. ### Program performance, implementation slippages, and corrective measures (¶10–¶13, ¶14) - SMP performance - Performance under the SMP is broadly satisfactory. - All the structural benchmarks (SBs) and six out of seven quantitative benchmarks (QBs) set for the first review were met. - Two new SBs agreed to be introduced. - Arrears and cash management - New estimated arrears of approximately $10 million were accumulated in payments of wages and allowances at the end of September (due mainly to delayed disbursement of budgetary grants by two bilateral donors); these were subsequently paid in full as part of donors’ grants received. - The QB on non-accumulation of new domestic arrears set for the end of September was missed. - Staff view: a temporary slippage that does not jeopardize program implementation. - Staff support authorities’ corrective measures in the absence of a program adjustor for shortfall in grants. - Remedial measures to avoid new arrears: - Improve budget execution by prioritizing payment of salaries in December to MDAs. - Strict adherence to the new arrears management strategy. - Realistic revenue and grant forecasts and stronger enforcement of tax collections. - Include deferred amounts in the 2017 budget and pay fully to avoid new arrears. - Improve Treasury Single Account (TSA), cash management, and arrears management as high priorities for the 2017 budget. - Effective start of the new payment process reforms and implementation of the commitment system roll-out in January 2017 to enable realtime tracking of payment obligations of all line MDAs. - Evaluate existing bank accounts to close non-critical accounts and consolidate the rest to strengthen TSA. - Structural benchmarks and reforms - Completed or advanced SBs: issuance of commercial bank and MTB licenses requires CBS Board approval; report on electronic payment system for Somali National Army and Police with biometric screening completed. - One December 2016 SB (achieving 100 percent of non-salary Recurrent Cost and Reform Financing reimbursement) delayed but expected to be completed by March 2017. - A prime ministerial decree requiring all foreign grant agreements to be cosigned by the Minister of Finance (set for March 2017) has been completed. - Action plans to improve cash management and to modernize revenue and customs administration (SBs for March 2017) are being developed. - Business registry technically completed (SB set for end-September 2016) but needs improvement and consolidation to operationalize; passage of new Statistical Law is critical. ### Fiscal outlook and 2017 fiscal framework (¶15; Text Table 2; Text Table 3 references) - Fiscal framework assumptions - Projections based on a zero-cash balance and no accumulation of new domestic arrears (as required under the SMP). - Revenue and grants projected to reach 3.8 percent of GDP (up from 3 percent in 2016). - Key revenue and expenditure projections (figures as reported) - Tax revenue projected to reach $127.7 million (2.0 percent of GDP), up from a projected $89 million (1.4 percent of GDP) for 2016. - Tax policy and administration measures are expected to generate $43.0 million. - Grants projection is conservative and based on confirmed grants from traditional donors. - Revenue from the telecommunication sector - Authorities aim to collect about $24.5 million in tax revenues from the telecommunication sector in 2017 (19.2 percent of tax revenue), up from the negotiated tax of $5.0 million collected in 2016. - The projection comprises about $12–14 million from taxes on corporate profits and $10–12 million from sales taxes. - Revenue from income taxes on telecom employees’ salaries is not accounted for at this point but could come on stream later in 2017, representing upside potential. - Expenditure and wages - Expenditure projection aligned with revenue; allows for a zero-cash balance and accommodates a buffer to absorb deferred payments of salaries from 2016 amounting to $22.9 million. - The wage bill projected at $121.8 million, accounting for full-year payment of civil servants and security forces and salaries for new Senate members. - Arrears and delayed payments (from Text Table 2 memorandum items) - Arrears and delayed payments reported as: 10.8; 24.0; 31.4; 32.0; 31.4; 31.8 (Millions of U.S. Dollars) across the table columns shown. - New arrears reported as: 33.1; 0.0; 10.0; 0.0; 0.0; 0.0 (Millions of U.S. Dollars) across the table columns shown. - Stock of domestic arrears reported as: 67.7; 43.6; 46.3; 35.6; 36.3; 36.3 (Millions of U.S. Dollars) across the table columns shown. - Revenue upside and downside considerations - Upside potential: enforcement of a Cabinet resolution imposing fees on the telecommunications sector could raise significant revenue (up to 10–12 percent of tax revenue). FGS expected to generate fiscal savings from the new payment process. - Downside risks: weak security and governance conditions could negatively affect revenue collection. - Contingent measures if downside risks materialize: (1) cut non-priority spending on goods and services; (2) use any buffers arising from improved PFM to safeguard against revenue shortfalls. ### Currency reform and related benchmarks (¶13) - Modification of SB on currency reform - CBS endorsed a new roadmap for currency reform in which two QBs—a ceiling on issuance of banknotes other than the SOS 1,000 and a ceiling on issuance of SOS banknotes that are not backed by foreign assets—are scheduled to be completed after July 2017 (beyond the SMP period). - Authorities and staff proposed a new SB: “finalize the anti-counterfeit strategy by the end of March 2017,” part of the currency reform roadmap. - Progress on anti-counterfeit measures includes drafting regulation to establish a National Anti-Counterfeit Center and drafting a MoU on cooperation between CBS and Somali police. ### Program prospects, second review, and IMF engagement (¶14) - Program prospects - SMP ends in April 2017; discussions laid groundwork for a successor SMP. - Authorities and staff agreed to fiscal and financial sector measures outlined in ¶18 and MEFP ¶13; and ¶21 and MEFP ¶15, respectively. - Repeated delays in elections have affected the 2017 budget schedule (expected approval by March 2017). - Completion of the second review hinges on new authorities’ commitment to policy implementation and Somalia’s capacity to enforce existing laws, particularly tax administration and tax collection. - The second and final review of the SMP is expected to be completed by June 2017. - Somalia’s future engagement with the IMF - Staff explained that only after establishing a strong economic track record (successfully completing this, and subsequent, SMPs) and the clearance of arrears to the Fund will Somalia be eligible for an IMF Upper Credit Tranche (UCT) facility. - Clearance of arrears process will involve: (1) establishing a track record of cooperation with the Fund on policies and payments, including in the context of SMPs; (2) reconciling external debt; (3) preparing a poverty reduction strategy; and (4) mobilizing donor resources to finance debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative. _Italic: Based on the July 2016 Risk Assessment Matrix (RAM) and SMP discussions as presented in the source content._ ### 16. Significant progress has been made toward rebuilding Somalia’s external debt ### 16. Significant progress has been made toward rebuilding Somalia’s external debt ### External debt statistics and reconstitution efforts - With technical assistance from the African Development Bank (AfDB), the Debt Management Unit (DMU) has reconstituted the bulk of the country’s external debt database either lost or destroyed during the conflict. - Based on information through-end October 2016, from more than two-thirds of Somalia's creditors: - Outstanding public debt was estimated to be over $5 billion (nearly 80 percent of GDP). - Of the total, $4.7 billion in arrears (74 percent of GDP). - Composition of 2016 debt: - Multilateral creditors: $1.4 billion or 22.9 percent of GDP. - Paris Club creditors: $2.3 billion or 36.6 percent of GDP. - Some non-Paris Club creditors: $1.3 billion or 20.5 percent of GDP. ### Fiscal policy objectives and measures for 2017 - Authorities agreed on the need to: - Strengthen fiscal discipline and improve budget execution. - Implement strong reform measures to tax law enforcement and improve revenue collection. - Follow through with expenditure prioritization rules. - Budget strategy: - Set a more realistic budget underpinned by a broader revenue base, conservative grants, and a prudent expenditure policy. - Revenue windfalls (including additional grants for budgetary support) to be used to build up buffers and pay down arrears. - Priorities (MEFP, ¶12) include tax policy/reforms and expenditure policy/reforms. ### Projected yields from Tax Revenue Measures in 2017 (Text Table 3) - Proj.1/ — Projected yields to be collected in 2017. - Total Tax revenue measures 2/: 43.0 (Million of U.S. Dollars) - Tax rate increase: 7.3 - on petroleum products (+25%): 1.0 - on tobacco (+100%): 0.3 - on khat from $2 to $3 per kg: 6.0 - New tax: departure tax on outbound airline passengers: 3.6 - Improve tax collection: 32.1 - Tax on telecom companies: 24.5 - fees on vehicles’ registration: 3.0 - sales tax on electricity companies: 1.3 - sales tax on hotels 2/: 1.5 - sales tax on consumer water industries 2/: 0.3 - income tax on employees of hotels and electricity companies: 1.5 - Notes: - 1/ Projected yields to be collected in 2017. - 2/ Implementation to start in April 2017. - The projection conservatively assumes a revenue-base of the telecommunication sector of $96 million. ### Telecoms sector potential (Box 3) - Current contribution to the budget in absence of formal taxation: about $5 million in negotiated monthly fees and taxes (about 5.6 percent of 2016 projected tax revenue). - Authorities’ estimate of sector total annual revenues: could amount to over $220 million (3.5 percent of projected 2016 GDP). - An expert report estimated annual revenue generation could range between $81 and $119 million (Table). - Total market revenue 1/: Low 162; High 221. - Estimated potential revenue: Low 81; High 119. - Taxes and fees: Low 51; High 61. - Corporation income tax 2/: 10; 10 - Payroll tax 3/: 17; 17 - VAT 4/: 24; 33 - Others: 30; 58 - Licensing & spectrum: 20; 21 - Other /5: 10; 37 - Assumptions and specifics: - Assumes a population of 10 million and penetration rates from 22% to 52% and average revenue per user of $2.50 and $8.00 per month. - Assumes pre-tax profit margin of 30% and a corporate income tax rate of 30%. - Assuming a VAT rate of 15%, the African average. - Assuming total sector employment of 14,000 and an average tax rate of 12%. - Authorities target to collect about $24.5 million in taxes from the telecom sector, including $12–14 million from corporate profits and the rest from sales taxes. - Authorities’ new revenue measures are based on an annual telecom sector revenue estimate of $96 million, a sales tax of 15 percent and implementation of the new measures by April 1, 2017. - The 2017 Appropriations Bill will endorse the tax code rate for sales tax (15 percent) and income tax (6, 12, and 18 percent). ### Strengthening fiscal capacity and PFM reforms - Recognized needs (MEFP, ¶13–15): - Improving revenue administration and mobilization: - Lift the FGS tax level (FGS’s tax level is among the lowest in the world: about 1.5-1.7 percent of GDP). - Introduce a modern system of taxpayer registration; strengthen audit and enforcement; improve tax compliance. - Expand the tax base; harmonize customs’ entry point across the country; harmonize Inland Revenue Department and Customs administration. - Improving treasury management: - Strengthen the TSA. - Improve cash management. - Operationalize the management of commitments and arrears. - Complete electronic payments. - Strengthening fiscal federalism (Box 4): - Improve central-subnational fiscal coordination and achieve state-level consensus on revenue sharing and harmonizing FGS and state PFM systems, including revenue policies and expenditure responsibilities. ### Debt policy and DMU capacity - Staff advised continued refraining from external and domestic borrowing—including from the CBS—while re-establishing relationships with external creditors. - Encouraged continuing to strengthen the DMU’s capacity and completing public debt statistics with AfDB TA. - Authorities have reconstituted about two-third of their external debt database and initiated efforts to improve DMU management and monitoring capacity (MEFP ¶25). - Authorities preparing a request for training of the DMU’s staff on debt management and understanding CPIA, DeMPA, and PEFA ratings. ### Fiscal federalism: challenges and opportunities (Box 4) - Fiscal federalism can reduce inter-regional inequity, avoid duplication, and improve service delivery; heavy dependence on trade taxes disadvantages landlocked states and those without major ports. - Key challenges: - Political: need for strong political support; undecided emphasis between federal vs. local authority; potential difficulties resolving pre-existing differences across states. - Economic: low tax base tied to geography; absence of overarching legal architecture; administrative systems at different development stages; risk of balkanization (competition in revenue collection, increased domestic trade barriers). - Recommended actions: - Swift establishment of a federal system with agreements on allocation of spending responsibilities and revenue authority between FGS and state governments. - Develop reporting framework between central and subnational governments; formalize and operationalize central-subnational dialogue on expenditure assignments and transfer options. ### Central Bank of Somalia (CBS) capacity, safeguards, and financial sector reforms - Recent milestones in reform implementation: CBS safeguards and governance; currency reform; financial sector reforms (MEFP ¶7–8 and Box 1). - Near-term challenges: - CBS safeguards and governance: - Incident on August 17, 2016: high- and mid-level CBS staff substituted $530,000 with counterfeit currencies (about 5 percent of the total CBS cash in the vault). - Measures taken: tightened internal procedures; removed the Director of Operations and two clerks from cash operation department; appointed a new Director of Operations; tightened vault operations procedure; introduced a new layer of supervision. - Incident does not affect the Net Foreign Assets definition under the SMP (which excludes CBS cash in vault denominated in foreign currency). - Authorities indicated the incident will not bear any fiscal cost and will be reflected in the CBS financial statement as a capital loss. Criminal investigation ongoing. - Currency reform: - Progress: fully-staffed cash management department reconstituted; draft anti-counterfeit strategy prepared; Board of Directors attended currency reform seminar in May 2016. - Roadmap focus: finalizing counterfeit strategy; deciding on scope of exchange and conversion factors; properly phasing in the legal framework; initiating preparatory work for storage, distribution, and collection (including exploring alternative distribution channels and considering geographical distribution). - Adequate donor financing needed; IMF stands ready to continue providing TA. - CBS will need to decide on: exchange rate regime to be adopted; reserve management strategy; development of monetary policy instruments. - Financial sector: - Key bottlenecks: absence of financial sector laws (including outdated contract and property laws); poor payment system and clearance house; absence of inter-banking system; absence of a credit bureau and consumer protection laws; absence of basic consistent CBS and commercial banks accounting and reporting. - Authorities intend to improve CBS and commercial bank accounting and reporting standards in line with IFRS; strengthen oversight to achieve full banking legislation, regulation, and supervisory rules; prepare a roadmap to revive an inclusive financial sector by end of April 2017. - IMF and World Bank support noted (World Bank providing support for competitive hiring of skilled bankers, including work on pensions and severance packages). ### Inclusive growth, NDP, refugees, and remittances - Near-term priority actions to foster inclusive growth: - Revise the NDP to underpin FGS development strategy; address shortcomings in current draft (MEFP ¶16 and Box 5): sectoral consistency; prioritization of development needs; mapping of costing and financing; a coherent safety net program; a capacity development program; and a financial sector development roadmap. - Return of Somali refugees: - Over 1.1 million internally-displaced people due to insecurity and drought. - Large numbers of refugees, mainly from Yemen. - Planned closure of the largest Somali refugee camp in Kenya (currently home to about 425,000 people) in May 2017 will pose challenges for the FGS. - Repatriation could increase number of skilled workers and small business entrepreneurs, potentially boosting fishing, farming, and livestock sectors. - Correspondent banking relationship (CBR) withdrawals and remittances (Box 7): - Remittances amounted to about 23 percent of GDP (average, 2013–15) and were for the most part received by about 40 percent of the Somali population. - Money Transfer Businesses (MTBs) represent more than 45 percent of all financial sector assets and channel inflows of remittances to the wider population. - Withdrawal of Somalia’s CBR could significantly disrupt formal remittance inflows and the balance sheets of MTBs. - Anecdotal evidence suggests the cost of transferring funds to Somalia has increased. *Source: IMF staff report (excerpts as provided).* ### Box 5. National Development Plan, 2017–19 ### Box 5. National Development Plan, 2017–19 ### Overview - The authorities are finalizing a draft three-year National Development Plan (NDP) for 2017–19. - The NDP will replace the New Deal Compact and serve as the new vehicle for boosting growth and reducing poverty for the period of 2017–19. - The NDP focuses on poverty reduction with the aim to comply with the interim Poverty Reduction Strategy Paper and make progress toward the Sustainable Development Goals (SDGs). - The NDP provides a comprehensive diagnose of the Somalia economic and social conditions and its broad objectives are well identified. ### Stated objectives of the NDP - (1) Consolidate peace, security, and rule of law. - (2) Build institutions. - (3) Lay the groundwork for the foundation for rapid, inclusive and sustainable growth. - (4) Restore and protect Somalia’s strategic infrastructure–transport, water, energy and sanitation. ### Key challenges identified for finalizing the NDP - On policy and strategy: - (1) The vision and mission should be clearly stated to avoid clashing priorities among member states. - (2) Modalities of fiscal federalism still under discussion; the development needs of different states are still unclear. - (3) Ensure that the medium-term strategy is consistent with sectoral strategies. - (4) Ensure that the preparatory work is inclusive. - On financing: - The draft NDP lacks discussions on costing and sources of funding and the need to mobilize more tax revenue to support development and reduce heavy reliance on external grants. ### Policy recommendations and follow-up actions - Maintain momentum for finalizing the NDP; stronger policy support for the NDP will be critical. - The FGS is encouraged to increase consultation and engage in political buy-in for its development agenda. - Efforts should be made toward building a peer review structure and generating international community support to ensure the process is consistent with addressing poverty and the wider promotion of SDGs. - The NDP should target economic growth through: - Mobilizing traditionally productive sectors. - Enhancing the private sector. - Increasing the country’s fiscal capacity (including mobilizing more tax revenue). - With weaknesses in data sources in Somalia, set appropriate procedures to ensure assessment and monitoring of the NDP. *International Monetary Fund — Box 5. National Development Plan, 2017–19* ### 33. Improving fiscal management will be critical. To improve the credibility of fiscal policy, ### 33. Improving fiscal management will be critical. To improve the credibility of fiscal policy, ### Fiscal management and budget execution - Greater fiscal discipline and enhancing budget execution will be critical to improve the credibility of fiscal policy. - Required actions: - Adhere to agreed measures to avoid arrears and limit delayed expenditure payments. - Keep expenditures in check. - Develop a commitment control system. - Improve the TSA system. - Improve revenue forecasting and prepare a realistic budgeting of grants. - Staff welcome the authorities’ efforts on the commitment control system, TSA improvements, revenue forecasting, and realistic budgeting of grants. ### Tax revenue mobilization - There is significant potential to raise tax revenue, notwithstanding the security uncertainties and poor governance. - Over the medium term, higher revenue collection will: - Provide buffers against the volatility of budgetary grants. - Support the country’s development needs. - Staff welcome the authorities’ plan to introduce new tax measures in 2017. - Critical legislative step: - Passage of the 2017 Appropriation Bill to endorse the tax code will be critical. ### Central Bank of Somalia (CBS) and financial sector challenges - Swift resolutions to address critical challenges at the CBS and the financial sector will be essential. These include: - Currency reform: - High priority to limit the widespread prevalence of counterfeiting and restore the credibility of the national currency. - Credible and successful implementation hinges on careful preparation and planning. - Important that the authorities follow through on the currency reform roadmap agreed on with staff. - CBS safeguards and governance: - Authorities’ responses to avoid repeated theft incidents and resolve to accelerate improvement of CBS governance, transparency, and organization are welcome. - Establishing an Executive Committee and an Audit Committee would be essential. - Financial sector: - Reviving the nascent financial sector of Somalia will support inclusion and economic growth. - Staff welcome the authorities’ plan to prepare a roadmap to overhaul the financial sector and improve the CBS and commercial bank accounting and reporting standards. ### Access to the international financial system and AML/CFT - Improving access to the international financial system will be critical. - Key measures: - Bring the AML/CFT law in line with the FATF standards. - Ensure an effective risk-based implementation to secure access and safeguard remittances into Somalia. - Strengthen collaboration between the FGS and the private sector, as well as international partners. ### National Development Plan (NDP) and refugees - The authorities’ plan to revise the NDP is welcome: - Will highlight the FGS policy intention for inclusive growth and social justice. - Will build confidence and reinforce donors’ support. - NDP will become the FGS’ key development policy tool. - Somali refugees’ issues add to the country’s many challenges: - Staff welcome the FGS strategy to strengthen collaboration with donors and Somali federal member states and to design a voluntary repatriation program to mitigate risks and humanitarian consequences. - The FGS should continue to seek political consensus and donor support for successful return and orderly resettlement of displaced persons. ### Institutional rebuilding, governance, and data - Steadfast effort to rebuild key institutions and governance is required: - Authorities are urged to swiftly adopt the long-delayed statistical law. - Reforms to build economic and financial data will be tailored to institutions and capacity development. - The role of the FGC will be essential. - Progress in institution building, governance, and organization at the Ministry of Finance and the CBS needs to be accelerated. - Data provision shortcomings: - The database remains weak, particularly in national account, price, balance of payment, monetary, and social statistics. - Data provision will continue to improve and TA delivery will intensify under the SMP. - Authorities’ sustained efforts to upgrade institutional capacity and legal framework will be instrumental to filling the data gap. ### Staff support, SMP review, and medium-term objectives - Staff support completion of the first review of the SMP given broadly satisfactory program implementation so far, remedial measures to address the missed target, and the authorities’ strong commitment to policy implementation under the SMP. - Staff support corrective measures to avoid new arrears in the future and recommend the proposed two SBs to help improve tax collection and strengthen the currency reform process. - Continued IMF support: - Staff will continue to support Somalia through policy advice and technical assistance, particularly in the context of the SMP. - SMPs are designed to build a track record of policy and reform implementation, achieve debt relief, and allow Somalia to graduate to the IMF Upper Credit Tranche facility. - This process will require a concerted effort and continued policy commitments on policy and reform implementation, along with continued donor support. *Source: cr1761 - 33. Improving fiscal management will be critical. To improve the credibility of fiscal policy,* ### 43. It is proposed that the next Article IV Consultation with Somalia be held on the ### It is proposed that the next Article IV Consultation with Somalia be held on the standard 12-month consultation cycle. ### Economic developments and outlook - Growth and inflation: - Real GDP, annual percentage change: 2013: 2.8; 2014: 3.6; 2015: 3.6; 2016: 3.4; 2017: 2.5; 2018: 3.5; 2019: 3.5. - Consumer prices (e.o.p., percent change): 2013: 4.5; 2014: 1.3; 2015: 1.4; 2016: 1.5; 2017: 2.7; 2018: 1.9; 2019: 1.9. - Note: “Due largely to drought, growth is expected to decline and inflation to notch up in 2016–17.” (graphic text) - Nominal GDP (millions of U.S. dollars): 2013: 5,723; 2014: 5,950; 2015: 6,111; 2016: 6,336; 2017: 6,548; 2018: 6,833; 2019: 7,084. - Per capita GDP in U.S. dollars: 2013: 429; 2014: 436; 2015: 436; 2016: 442; 2017: 445; 2018: 453; 2019: 458. - Consumer-facing external flows: - Remittances (percent of GDP): 2013: 22.7; 2014: 22.9; 2015: 23.3; 2016: 23.5; 2017: 24.2; 2018: 24.4; 2019: 24.9. - Grants (percent of GDP): 2013: 21.0; 2014: 23.8; 2015: 25.1; 2016: 25.6; 2017: 25.4; 2018: 24.2; 2019: 23.8. - Current account balance (percent of GDP): 2013: -5.7; 2014: -8.1; 2015: -9.1; 2016: -6.4; 2017: -7.2; 2018: -8.7; 2019: -9.4. - Trade balance (percent of GDP): 2013: -48.9; 2014: -54.2; 2015: -57.0; 2016: -55.0; 2017: -56.3; 2018: -56.9; 2019: -57.6. ### Central government finances and budget execution - Small tax base; heavy reliance on grants: - Revenue and grants (percent of GDP): 2014: 2.5; 2015: 2.3; 2016: 3.9; 2017: 3.0; 2018: 3.8; 2019: 4.3; 2020 (proj in table labeled 2019): 4.7. - Grants (percent of GDP): 2014: 1.0; 2015: 0.4; 2016: 1.9; 2017: 1.1; 2018: 1.5; 2019: 1.6; 2020: 1.7. - Tax revenue (percent of GDP): 2014: 1.2; 2015: 1.3; 2016: 1.5; 2017: 1.4; 2018: 2.0; 2019: 2.1; 2020: 2.4. - Federal government operations (Millions of U.S. Dollars, selected years and items): - Revenue and grants (2016 Prel.): 246.3; 2016 Sept. (Est.): 123.2; 2016 June (Est.): 141.2. - Revenue (2016 Prel.): 125.3; Revenue (2016 Sept. Est.): 62.6; Revenue (2016 June Est.): 84.3. - Grants (2016 Prel.): 121.0; Grants (2016 Sept. Est.): 60.5; Grants (2016 June Est.): 61.0. - Total expenditure (2016 Prel.): 246.3; Current expenditure (2016 Prel.): 223.2; Capital (2016 Prel.): 23.1. - Wages and salaries (2016 Prel.): 94.9. - Arrears and delayed payments (2016 Prel.): 32.0. - Stock of domestic arrears (end of year, Millions of U.S. Dollars): 2014: 45.3; 2015: 67.7; 2016 (Sept. based): 35.6; 2016 Prel.: 51.6; 2017 Initial Est.: 39.1; 2018 Prev.: 43.6; 2019 Proj.: 46.3; later years 36.3; 28.3; 20.3 (as listed). - Fiscal execution and volatility: - Graphic text: “With small tax base, government relies heavily on grants, which are volatile... ...making budget execution and priority spending difficult.” - Memorandum: “The fiscal operations are recorded on cash basis.” and “Includes only donor support provided through local treasury systems.” ### External sector and public debt - External public debt stock (Millions of U.S. Dollars; estimates through end-October 2016): - Total stock outstanding: 2013: 5,110; 2014: 5,066; 2015: 4,996; 2016 (est based on end-October): 5,063. - Of which: arrears: 2013: 4,752; 2014: 4,742; 2015: 4,702; 2016: 4,688. - External public debt (percent of GDP): - Total stock outstanding: 2013: 89.3; 2014: 85.1; 2015: 81.8; 2016: 79.9. - Of which arrears (percent of GDP): 2013: 83.0; 2014: 79.7; 2015: 76.9; 2016: 74.0. - Multilateral creditors (percent of GDP): 2013: 27.2; 2014: 25.3; 2015: 24.0; 2016: 22.9. - Bilateral creditors (percent of GDP): 2013: 62.1; 2014: 59.8; 2015: 57.7; 2016: 57.0. - Paris Club creditors (percent of GDP): 2013: 39.0; 2014: 37.6; 2015: 36.5; 2016: 36.6. - Balance of payments (Millions of U.S. dollars, selected items): - Current account balance: 2013: -327; 2014: -480; 2015: -555; 2016 Prel.: -404; 2017 Proj.: -472; 2018 Proj.: -595; 2019 Proj.: -667. - Exports of goods (f.o.b.): 2013: 80; 2014: 181; 2015: 1,012; 2016: 1,052; 2017: 1,114; 2018: 1,173; 2019: 1,230. - Imports of goods (f.o.b.): 2013: 2,779; 2014: 3,046; 2015: 3,552; 2016: 3,555; 2017: 3,754; 2018: 3,941; 2019: 4,119. - Foreign direct investment (Millions of U.S. dollars): 2013: 258; 2014: 283; 2015: 306; 2016: 339; 2017: 373; 2018: 409; 2019: 439. - Exchange rate: - Market exchange rate (SOS/USD, e.o.p.): 2014: 20,600; 2015: 20,265; 2016 (through September): 22,286; 2016 (table shows 23,030 for a period). ### Central Bank of Somalia summary accounts (selected figures, Thousands of U.S. Dollars) - Total assets (Dec. 2013 to Sept. 2016 series): 2013 Dec. Act.: 86,980; 2014 Dec. Act.: 83,834; 2015 Dec. Act.: 84,064; 2016 March Est.: 82,384; 2016 June Est.: 87,472; 2016 Sept. Prel.: 90,636; 2016 Dec. Prel.: 94,426; 2016 March Prel.: 88,401; 2016 June Prel.: 86,838. - Foreign assets (Thousands of U.S. Dollars): 2013 Dec.: 66,213; 2014 Dec.: 63,199; 2015 Dec.: 62,998; 2016 March: 61,238; 2016 June: 66,203; 2016 Sept.: 68,639; 2016 Dec.: 71,939; 2016 March Prel.: 66,605; 2016 June Prel.: 64,867. - Cash and cash equivalent (US$): 2013 Dec.: 7,020; 2014 Dec.: 6,195; 2015 Dec.: 7,575; 2016 March Est.: 5,472; 2016 June Est.: 11,442; 2016 Sept. Prel.: 13,296; 2016 Dec. Prel.: 15,096; 2016 March Prel.: 10,512; 2016 June Prel.: 9,781. - Reserve money (Thousands of U.S. Dollars): 2013 Dec.: 2,221; 2014 Dec.: 2,392; 2015 Dec.: 711; 2016 March Est.: 733; 2016 June Est.: 608; 2016 Sept. Prel.: 1,044; 2016 Dec. Prel.: 1,843; 2016 March Prel.: 2,419; 2016 June Prel.: 1,644. - Memorandum: Somali shillings per US dollar (end of period): 2013 Dec.: 20,600; 2014 Dec.: 20,265; 2015 Dec.: 22,211; 2016 March: 22,218; 2016 June: 22,269; 2016 Sept.: 22,286; 2016 Dec.: 22,779; 2017 Mar.: 22,994; 2017 June: 23,030. ### IMF engagement, technical assistance, and capacity support - IMF TA delivered and demand: - Graphic text: “The IMF has continued to intensify TA support to Somalia since 2013 and the country is among largest beneficiaries of TA.” - IMF Technical Assistance (TA) Delivered, 2013–16 (cumulative number of TA; graphic axis shown from 0 to 90). - Completed TA (2013–16) – selected activities and departments: - FAD: Budget diagnostics; Budget preparation and execution; Public financial management; General tax policy; Developing a Medium-term PFM Reform Strategy; Fiscal reporting, cash forecasting, and PFM legal framework; Workshops on taxation of extractive industries and fiscal decentralization; Budget execution control, cash and arrears management; Budget execution and preparation. - LEG: Procedures for CBS Management Committee; Amendment CBS rules of conduct and ethics; Administrative procedures for CBS supervisory decisions and supervisory penalties; Central bank governance. - MCM: Advisory on currency reform; Central bank accounting and financial reporting workshops; Support to the FGC Advisory Committee; Supervision and regulation; Central bank modernization; Currency reform; Training on Bank Supervision and Regulations. - STA: Real sector statistics training; Consumer price index; National accounts; Multisector statistics; Balance of Payments (Jul-15, Dec-15, Jul-16); National accounts and business register; Consumer price index Oct-16; National account Nov-16. - Completed TA list based on information through November 2016. - New TA requested by Somali authorities (topics listed): - FAD: Roadmap/strategy for revenue mobilization; Tax policy development; Fiscal Federalism, specifically on fiscal regimes for extractive industries. - PFM: GFS and chart of accounts; Follow up on cash and arrears management; Development of medium-term fiscal framework; Preparation of credible annual budget; Strengthening fiscal reporting. - STAT: Trade statistics; National accounts assistance to estimate GDP at current and constant prices using expenditure approach. - LEG: Legal aspects of currency reform and currency management; Legal drafting on CFT; Strengthening the CFT framework. - MCM: Central bank accounting (Chart of Accounts, IFRS reporting, regular Balance Sheet and Income Statement); Central bank operations (payment system training); Supervision and regulation follow-up; Internal audit; Currency reform follow-up. - Note: “New TA requested by the Somali authorities and not yet included in the Trust Fund.” (table note) ### Key risks and constraints highlighted - Macroeconomic vulnerability drivers: - “Due largely to drought, growth is expected to decline and inflation to notch up in 2016–17.” (graphic text) - “Ample remittances and grants finance a large trade deficit and limit the size of the current account deficit.” (graphic text) - “Somalia external public debt remains large and virtually all in arrears.” (graphic text) - “With small tax base, government relies heavily on grants, which are volatile... ...making budget execution and priority spending difficult.” (graphic text) - Off-budget aid and fiscal implications: - Total aid (Millions of U.S. Dollars): 2014 Act.: 1,218; 2015 Act.: 1,177; 2016 Proj.: 1,197. - Total estimated grants (Millions of U.S. Dollars): 2014: 1,657; 2015: 1,801; 2016: 1,797. - Total federal budget expenditure (Millions of U.S. Dollars): 2014: 151; 2015: 135; 2016: 190. - Percent of federal budget expenditure to total grants: 2014: 12.4; 2015: 11.5; 2016: 15.9. - Data limitations: - Multiple notes: “The above are based on rudimentary data and subject to changes.”; “The CBS' account data are still preliminary and incomplete.”; several tables note data are based on information through end-October 2016 or through September 2016. *Sources: Somali authorities; and IMF staff estimates and projections.* ### Appendix I. Letter of Intent ### Appendix I. Letter of Intent ### Background - Somalia is identified as a fragile state emerging from decades-long civil war; a provisional constitution was adopted in August 2012 and the Federal Government of Somalia (FGS) formed in October 2012. - The SMP covers the period May 2016–April 2017 and supports Somalia’s efforts to rebuild economic institutions and reengage with international financial institutions. - Key institutional progress since 2012 includes formation of a functioning Cabinet, FGS agencies, and completion of the formation of all federal member states in October 2016. - Remaining constraints: weak state institutions, severely underdeveloped economy, pervasive poverty, limited human and technical capacity, and shortages in accurate and timely statistics hampering policy formulation and implementation. ### Recent economic and financial developments - Macro stability: economic growth recovered to about 3.5 percent in 2014–16 and inflation remained low. - Fiscal execution difficulties: mainly reflecting revenue shortfalls and delays in pledged budget support. - Institutional and legal progress: - Fiscal: training of tax-collecting staff; approval of new PFM law; electronic salary payments; submission of the 2015 financial statements to the auditor general; phased implementation of the Somalia Financial Management Information System (SFMIS); commitment system and Treasury Single Account (TSA) well advanced. - Financial sector and CBS governance: Board-approved by-laws and regulations; establishment of an audit committee reporting to the Board; establishment of an Internal Audit Department reporting to the Governor; auditing of the 2014 CBS financial statements in progress; reconstitution of a fully staffed cash management department; prepared draft anti-counterfeit strategy. - Governance and AML/CFT: passage of Foreign Investment Law, Anti-Money Laundering (AML) Law, Audit Law, and Procurement Law; National Anti-Money Laundering Committee (NAMLC) established; Financial Reporting Center established; National Interim Procurement Board established. - Capacity development: more than 60 IMF technical assistance missions and workshops over the past two years; intensified staff training at MOF, CBS, and MOPIC. ### Program performance under the SMP - Overall assessment: program performance has been satisfactory. - Quantitative and structural targets: - All SMP indicative quantitative targets for June 2016 met. - The structural benchmark (SB) target (Minister of Finance to approve the 2016–20 PFM reform action plan) was met. - Six out of seven quantitative performance indicator targets for the first review (end-September) were met. - New budgetary arrears of $10 million were accumulated through the end of September due mainly to delayed disbursement of budgetary grants by two bilateral donors; these arrears were settled in November. - Measures to avoid future arrears: - Continue to improve budget execution, prioritizing payment of salaries to Ministries, Departments, and Administrations (MDAs). - Adhere strictly to the new arrears management strategy. - Increase realism of revenue and grant forecasts and take steps to improve domestic revenue mobilization, including greater tax collections. - Structural benchmark achievements and actions: - All SBs set for the first review (end-September) met. - SMP Committee newly established to monitor implementation of MEFP measures. - Ministry of Finance prepared a plan to identify existing domestic arrears and a payment schedule. - MOPIC strengthening business registry to support macroeconomic statistics; completion contingent on passage of the new Statistical Law. - Progress on cash management action plan and a plan to modernize revenue and customs administration (both SBs for March 2017). - Completed structural measures for the second review (test date: end-March 2017), including an electronic payment system design report for the Somali National Army and Police with biometric screening (set for December) and a Prime Ministerial decree requiring all foreign grant agreements to be cosigned by the Minister of Finance (set for March 2017). - Pilot program underway involving approximately ten MDAs to modernize payment processes; commitment control to be mandatory for all MDAs starting January 2017; sufficient cash reserved to meet pilot MDAs’ payment claims. ### Economic and financial policies for 2017–19: objectives and macro outlook - Program objectives: establish building blocks for macroeconomic stability and economic recovery by strengthening PFM, creating modern tax and customs administration, following through on arrears management, continuing national currency reform, and improving licensing, supervision, and regulation of financial institutions and MTBs; capacity building is an essential component. - National development plan (NDP): preparing a NDP compliant with the Interim Poverty Reduction Strategy Paper for 2017–19 to guide aid delivery. - Economic projections: - Growth is projected to decelerate to 2.0–2.5 percent and inflation to tick up to 2.7–3.0 percent in 2017. - Thereafter, growth is expected to recover to 3.5–4.5 percent in 2018–19. - The weak growth rate in 2017 reflects mainly the impact of the drought on the agriculture sector; construction, telecommunications, and service sectors expected to remain engines of growth. - Balance sheet and reserves: - The Central Bank of Somalia (CBS) will not allow net foreign assets (as defined in the TMU) to fall below a continuous floor. - Given very low foreign reserves, the CBS will use recovered CBS foreign assets to increase its net foreign reserves. - Trade balance is projected to remain large; remittances and grants are expected to continue to cover the deficit. ### Fiscal policy and reforms (2017–19) - Fiscal framework: 2017 budget will target a zero-cash balance; any revenue (including budgetary grants) windfall will be used to build buffers for contingent measures, including paying down arrears. - Financing stance: continue to require donor grants (on budget) while abstaining from domestic and external borrowing; projected budgetary grants for 2017 will be based on confirmed and committed pledges. - Tax revenue projection: - Tax revenue in 2017 is projected to reach $126 million, up from $89 in 2016 (representing a 0.5 percent of GDP increase). - Increase underpinned by a reform agenda to replace negotiated taxes with existing tax law and strengthen tax administration. - Specific tax policy measures: - Increase khat tariff from $2/kg to $3/kg. - Double the tariff on imported tobacco products. - Harmonize visa charges and introduce a departure tax. - Increase the tariff rate on petroleum products by 25 percent. - In telecommunications, replace negotiated taxes by adherence to the existing sales tax law. - By end-March 2017, pass the 2017 Appropriation Bill to endorse the tax code rate for income and sales taxes. - Tax administration measures: - Tax compliance efforts on income tax for hotels, telecommunication firms, financial institutions, electricity companies. - Sales tax measures on telecommunication services, electricity and water companies. - Introduce a bed tax on hotels and increase road tax compliance. - Modernize tax and customs administration (SB for end of March 2017), introduce a modern system of taxpayer registration, and strengthen audit and enforcement. - Expenditure-side rules: - Execute the budget in conformity with the Appropriation Law. - In event of revenue or grant shortfalls, cut spending in conformity with sequestering rules and, if required, submit a revised budget to Parliament. - Where possible, direct revenue windfalls to payment of arrears; provisions for arrears to be carefully managed to prioritize settlement of current liabilities. - Near-term structural measures to strengthen fiscal institutions: - Pass the PFM Bill; improve expenditure management, cash management, payment processes, and public procurement. - Provide quarterly allotment ceilings for MDAs in line with revenue outlook. - Improve preparation of credible annual budgets, accounting, fiscal reporting, and external auditing. - Treasury management: - Commitment control system developed with mandatory roll out planned in January 2017. - TSA strengthening: stock-taking of existing bank accounts of MDAs, closing non-critical accounts, consolidation under the TSA. - Drafted action plan for the electronic payment system for Somali National Army and Police with biometric screening (PFM, SB #4). - Arrears management: - Update the arrears management plan to reflect developments since October 2016 and establish plans to settle outstanding arrears. - Revenue and customs reforms (medium term): - Harmonize customs entry points across the country. - Reform the Inland Revenue and Customs administration in line with prepared roadmaps. - Consider introducing a pre-shipment inspection regime for customs. - Fiscal federalism: - Continue discussions with federal member states to harmonize taxes across sub-national governments, establish channels for intergovernmental transfers, and define basic principles for a national fiscal framework. *Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding (attachments) dated Mogadishu, December 27, 2016.* ### 13. We will implement the remaining PFM and any additional reform measures agreed to ### 13. We will implement the remaining PFM and any additional reform measures agreed to ### Public Financial Management (PFM) and Structural Benchmarks (SBs) - Implement the remaining PFM and any additional reform measures agreed to under the SMP, by end of March 2017 (Table 2). - Specific SBs and deadlines: - (1) Reach 100 percent of non-salary Recurrent Cost and Reform Financing reimbursement by the end of December 2016. - (2) Complete a report on the process and design of an electronic payment system for the Somali National Army and Police, complete with biometric screening capability, by the end of December 2016. - (3) Complete an action plan to improve the policy and processes for cash management function by the end of March 2017 (this action will involve taking stock of the reforms and changes introduced with the assistance of development partners, including the IMF, identifying weaknesses, and proposing an action plan to address them). - (4) Complete a plan to modernize the revenue and customs administration by the end of March 2017 (this SB will be achieved by establishing a modern system of tax registration and tax administration, including assessment, audit, and enforcement). ### Fiscal and Currency Reform SBs added to lay foundations for revenue and currency credibility - Two new SBs agreed with IMF staff: - Fiscal reform SB: - Pass the 2017 Appropriation Bill to endorse the tax code rates for Income and Sales Taxes (by end March 2017) to implement existing tax law for Payroll (Income) Tax and Sales Taxes. - Currency reform SB: - “Finalize the anti-counterfeit strategy” (by the end of March 2017) in line with the ongoing currency reform roadmap. ### Financial Sector Reforms (2017 package) - Objectives: restore financial institutions and the credibility of the Somalia national currency; focus on commercial banks, CBS governance, transparency, organization, and currency reform. - Financial sector development actions and deadlines: - Identify bottlenecks to inclusive financial sector development and financial intermediation and define a roadmap for financial sector reform by end-April 2017. - Endorse new regulation governing commercial bank branches and the commercial banks asset quality classification and provision regulation. - Continue banks’ onsite examination. - Improve commercial bank accounting and reporting standards in line with the provision of international financial reporting standard (IFRS), and strengthen CBS oversight. - Specific CBS actions: - (1) Prepare monthly financial statements of the CBS by March-2017. - (2) Continue to strengthen the organizational and governance structure of the CBS (establish an Executive Committee and an Audit Committee, finalize the terms of reference for main departments and the competitive recruitment with the World Bank Capacity Injection Project, and completion on the “Core Banking” project with the World Bank support). - (3) Implement new accounting and financial reporting systems and practices at the CBS. - Currency reform milestones (roadmap completed in November 2016; milestones to be completed by July 2017): - (1) Finalizing the counterfeit strategy. - (2) Deciding on the scope of exchange and conversion factors. - (3) Properly phasing in the legal framework. - (4) Initiating the preparatory work for storage, distribution, and collection. - Financing and support: - IMF committed to provide considerable near-term technical assistance. - CBS and the government lack funds to finance currency reform; grants from international donors will be critical for procurement of new banknotes and implementation. - Government will reach out to other central banks for additional technical support and advice. - Other CBS short-term priorities: - Focus on governance, transparency, and overall CBS re-organization. - Initiate internal audit, risk management, compliance, and oversight procedures. ### Policies for Growth and Social Inclusion - Ultimate goal: attain inclusive and sustainable growth and reduce poverty. - Prepare National Development Plan (NDP) for mid-2017–2019 to underpin medium-term strategy. - Commitments for the NDP: - Complete preparation of the NDP and submit it for Cabinet approval. - Address identified deficiencies and focus on: - (1) Ensure the underlying medium-term macroeconomic framework is coherent and fully consistent with sectoral strategies. - (2) Ensure preparatory work is inclusive; intensify consultation and cooperation with member states and international partners. - (3) Design a comprehensive safety net program to support the most vulnerable, including IDPs and returnees; coordinate with the World Bank and the UN. - NDP will discuss social and economic implications of repatriation of Somali refugees (from Kenya) and Yemeni refugees living in Somalia. - (4) Outline updated plans to continue rebuilding economic and financial data, and institutions; assess current poverty outcomes based on the recently published World Bank and MoPIC Household survey; discuss strategies to achieve the Sustainable Development Goals (SDGs). - (5) Outline the critical role of fiscal federalism, including a plan to achieve it. - (6) Discuss objectives of ongoing currency reform, need to restore the CBS and its monetary instruments, and development of the financial sector. - (7) Discuss NDP costing and funding in coordination with donor communities; discuss ways to safeguard Somali diaspora remittance inflows to support economic development and social inclusion. ### Governance and Statistics - Reorganize key institutions: MoF, MOPIC, and CBS; strengthen legislative and regulatory frameworks. - Re-enforce economic units and departments (with donor assistance): domestic arrears management committee, national statistics, debt management unit, Customs, inland revenue, and the Treasury. - Establish the anti-corruption commission as stipulated in the Anti-Corruption Commission Establishment Act (currently undergoing public consultations). - Continue introducing appropriate private sector regulations (example: telecommunications law) and formalize administrative procedures. - Strengthen fiscal governance: - Financial Governance Committee to continue reviewing large procurements and concessions and to play an enhanced role in reviewing progress in public financial management reforms; provide advice on asset recovery, and management and disposal of Government assets. - Rebuilding economic and financial statistics: - Submit new Statistical Law to Parliament for approval to establish institutional framework for data compilation, reporting, dissemination, and sectoral regulation. - Specific actions to improve statistics: - (1) Complete the list of business enterprises that will form the basis for conducting statistical surveys to collect critical economic statistics that will support broadening the tax base and developing FDI statistics. - (2) Collect data on the value and volume of exports and imports using internationally recognized systems and improve coordination among statistical agencies at the Ministries of Finance, Commerce, Transportation, and the CBS and MOPIC. - (3) Start collecting remittance data from money transfer businesses (MTBs). - (4) Re-establish cooperation with the Immigration Department to collect traveler data. ### Technical Assistance (TA) - TA has addressed weak capacity constraints and supported policymaking; 2014–16 TA helped MoF prepare a realistic 2016 budget. - Remaining needs include improvements in consumer price index, gross domestic product, and external sector statistics. - With financial statements preparation, the CBS is gradually restoring credibility and capacity for managing monetary policy; IMF TA started enhancing banking regulation and supervisory regime. - Government-identified TA priorities: - (1) Internal controls, payments, and commitments. - (2) Cash management and the treasury single account (TSA). - (3) Procurement. - (4) Accounting and reporting. - (5) Modernization of tax and customs administration. - (6) External auditing. - (7) Natural resource and concessions management. - (8) Advancing central banking operations. - (9) Building capacity for the production and dissemination of macroeconomic statistics. - Specific IMF TA requests during the program period: - (1) Tax policy, revenue, and customs administration. - (2) Budget preparation and execution. - (3) Reforms in cash management and forecasting, and the TSA. - (4) Planning and implementing Treasury management and reforms, including a GFS compliant Chart of Accounts. - (5) Internal controls. - (6) Fiscal federalism. - (7) Bank licensing, supervision, and regulation. - (8) Currency reform. - (9) Banking operations. - (10) Macroeconomic statistics. - Emphasis that TA increasingly needs to be provided on the ground with access to expert advice and implementation support. ### Relations with International Creditors and Debt Relief - Priority to normalize relations with international creditors to address external debt and arrears burden. - Substantial debt reduction is essential for meeting social and reconstruction needs. - Commit to establishing a sufficient track record of sound economic management with successful completion of this and subsequent SMPs to help move towards debt relief under the HIPC Initiative. - Somalia currently ineligible for IMF financial assistance pending clearance of longstanding arrears; arrears clearance is important for normalizing relations with the international financial community. - Government records on external debt were lost or destroyed during the conflict but are being reconstituted: - With African Development Bank TA, the Debt Management Unit (DMU) has reconstructed about two-thirds of the external debt database and awaits additional creditors’ information to finish reconstruction. - Commit to continue improving the DMU’s debt management and monitoring capacity. - Will monitor Somalia rating on the Country Policy and Institutional Assessment (CPIA), Public Expenditure and Financial Accountability (PEFA), and the Debt Management Performance Assessment (DeMPA). ### Program Monitoring - SMP Monitoring Committee will monitor program implementation with quarterly quantitative benchmarks (Table 1) and SBs (Table 2). - Program reviews based on test dates: - First review test date: September 30, 2016. - Second review test date: March 31, 2017. - Quantitative benchmarks are defined in the TMU (Attachment II) and are cumulative from January 1, 2016. - Quantitative benchmark categories (as specified in the TMU): - a) Floor on the fiscal balance (on a cash basis). - b) Ceiling on accumulation of new domestic expenditure arrears of the FGS. - c) Ceiling on new domestic debt contracted by the FGS. - d) Ceiling on new external debt contracted or guaranteed by the FGS or the CBS. - e) Floors on CBS’s net foreign assets. - Government and revenue definitions in TMU: - Government is defined as the Federal Government of Somalia (excludes autonomous public entities whose budgets are not included in the Federal Government budget). - Government revenue includes all tax and non-tax receipts transferred into the FGS general accounts at the CBS and excludes grants; measured on a cash basis and cumulative from January 1, 2016. *Source: IMF staff and Somali authorities, as presented in the original SMP documentation.* ### 6. The fiscal balance, on a cash basis, is defined as the difference between: (a) the sum of ### cr1761 - 6. The fiscal balance, on a cash basis, is defined as the difference between: (a) the sum of ### Definitions and Fiscal Accounting - Fiscal balance (cash basis) is the difference between: - (a) the sum of central government revenue (as defined in paragraph 4) and grants; and - (b) total current expenditure plus capital expenditure (excluding foreign-financed off budget investment). - New domestic expenditure arrears of the government: - Defined as budgeted federal government payments to residents determined by contractual obligations that remain unpaid 90 days after the due date. - "Due date" refers to the date payments are due according to the relevant contractual agreement, taking into account any contractual grace periods. ### Debt Definitions (Program Purposes) - Debt is defined in accordance with Executive Board Decision No. 15688-(14/107), Point 8(a) and 8(b), adopted on December 5, 2014. - For program monitoring, “debt” means a current (not contingent) liability, created under a contractual arrangement through provision of value in the form of assets (including currency) or services, which requires the obligor to make one or more payments in the form of assets (including currency) or services at some future point(s) in time; these payments discharge principal and/or interest liabilities. - Primary forms of debt: - (i) Loans: advances of money (including deposits, bonds, debentures, commercial loans, buyers’ credits), and temporary exchanges equivalent to fully collateralized loans (repurchase agreements, official swap arrangements). - (ii) Suppliers’ credits: contracts permitting deferred payments after delivery of goods or services. - (iii) Leases: arrangements where property is provided for use; debt is the present value (at lease inception) of all lease payments expected during the agreement, excluding payments that cover operation, repair, or maintenance. - Under this definition, arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are debt. Failure to make payment on an obligation not considered debt under this definition (e.g., payment on delivery) will not give rise to debt. ### Domestic and External Debt, CBS Net Foreign Assets - Domestic debt: - Defined as short-term and medium-to-long-term borrowing from residents of Somalia, including the CBS. - Excludes temporary advances for liquidity management from the CBS, and domestic expenditure arrears as defined in paragraph 6. - Temporary advances will be fully repaid within 90 days. - External debt benchmarks: - Cumulative ceilings on contracting or guaranteeing of new nominal external non-concessional borrowing by the government from January 1, 2016. - External debt defined by the residency of the creditor. - CBS net foreign assets: - Defined as the difference between the CBS’s gross foreign assets and gross foreign liabilities. - Gross foreign assets defined as: - (1) gold valued, over the program period, at the market price of December 31, 2015 ($1,060.80 per ounce); - plus (2) foreign exchange (including recovered CBS assets, non-earmarked budget and earmarked donor grants); - minus (3) government budget grant deposits at the CBS in foreign currency; - minus (4) other earmarked foreign currency deposits by residents of Somalia. - Somalia’s net position to the IMF is excluded from the definition of net foreign assets. - Gross foreign liabilities under the SMP are set at zero. - Relevant exchange rates against the U.S. dollar at December 31, 2015 will be used to convert foreign assets and liabilities denominated in currencies other than U.S. dollars. ### Program Monitoring and Reporting Arrangements - Program-Monitoring Committee: - Composition: senior officials from the Ministry of Finance, the Central Bank of Somalia, and the Ministry of Planning and International Cooperation; the IMF Resident Representative has observer status. - Responsibilities: monitor program performance, recommend policy responses, inform the Fund regularly on program performance, transmit supporting materials for benchmark evaluation. - Reporting: provide the Fund with a monthly progress report on the program within four weeks of the end of each month, using the latest available data. - Data reporting to the Fund: - The Ministry of Finance, the CBS and the Ministry of Planning and International Cooperation will provide information contained in the data reporting table. - Selected reporting requirements and timing (as specified): - Central Bank of Somalia — CBS balance sheet: Detailed balance sheet of the CBS. Frequency: Monthly. Timing: 3 weeks after the end of each month. - Central Bank of Somalia — Monetary survey: Banking system balance sheet and consolidated balance sheet of commercial banks. Frequency: Quarterly. Timing: 4 weeks after the end of each quarter. - Central Bank of Somalia — Balance of payments: Exports, imports, invisible transactions, remittances, and capital and financial account flows. Frequency: Quarterly. Timing: 2 months after the end of each quarter. - Central Bank of Somalia — Revenue and expenditure: Detailed reports on CBS cash revenues and expenditures in U.S. dollars, and on aggregated basis (including both recurrent and capital spending). Frequency: Quarterly. Timing: 3 weeks after the end of each quarter. - Central Bank of Somalia — Disbursements and repayments: (1) scheduled; and (2) actual interest and principal on debt of the Government and the CBS, by creditor. Frequency: Monthly. Timing: 30 days after the end of each month. - CBS temporary advances to the FGS: Provide monthly amounts and terms of the temporary advances to the Ministry of Finance. Frequency: Monthly. Timing: 1 week after the end of each month. - Budget grants: Provide data on the amounts of on-budget grants. Frequency: Monthly. Timing: 1 week after the end of each month. - Ministry of Finance — FGS budget operations: Detailed revenue and expenditure by budget line and a completed summary table on Government operations. Frequency: Monthly. Timing: 4 weeks after the end of each month. - Ministry of Finance — Outstanding appropriation, allotment, commitment, and Recurrent Cost and Reform Financing non-salary reimbursement for fiscal year 2016-17. Frequency: Monthly. Timing: 4 weeks after the end of the month. - Ministry of Finance — Monthly cash plan. Frequency: Quarterly. Timing: 4 weeks after the end of each quarter. - Ministry of Finance — Disbursements of loans. Frequency: Monthly. Timing: 4 weeks after the end of each month. - Ministry of Finance — Domestic arrears: End-of-period stock of domestic arrears accumulated during the program period by charts of accounts. Frequency: Monthly. Timing: 4 weeks after the end of the month. - Ministry of Finance — Domestic debt: Amount of new domestic debt contracted by Government. Frequency: Monthly. Timing: 4 weeks after the end of the month. - Ministry of Finance — External debt: Amount of new external debt contracted or guaranteed by Government. Frequency: Monthly. Timing: 4 weeks after the end of the month. - Ministry of Finance — Structural benchmarks: Table with description of the status of implementation of the structural benchmarks in Table 2 of the MEFP. Frequency: Monthly. Timing: 4 weeks after the end of the month. - National Statistics Office — CPI and other economic indicators: Indicators to assess overall economic trends, such as the consumer price index. Frequency: Monthly. Timing: 6 weeks after the end of each month. - National Statistics Office — Trade data, production data. Frequency: Quarterly. Timing: 6 weeks after the end of each quarter. ### Statement by Executive Director — Key Findings and Policy Positions - Background and context: - Somalia continues to rebuild from two decades of civil conflict; security remains fragile. - External debt burden estimated at about 80 percent of GDP, comprising mostly arrears, is a key constraint. - Approval of the Staff-Monitored Program (SMP) in May 2016 was a key milestone toward normalization with IFIs and eventual debt relief. - Institutional progress and capacity: - Significant progress in building institutional framework and preparing basic macroeconomic statistics, but more human and technical capacity needed. - State institutions remain weak; underdevelopment and pervasive poverty persist; lack of consensus on fiscal federalism complicates revenue mobilization. - Program performance: - All SMP indicative targets for end-June 2016 were met, including a structural benchmark requiring approval of the 2016–20 PFM reform action plan by the Minister of Finance. - Six out of seven quantitative benchmarks set for the first review, end-September 2016, were met. - Delayed disbursement of pledged budgetary grants resulted in accumulation of new budgetary arrears amounting to $10 million through the end of September; these arrears were settled in November. - All structural benchmarks set for the first review were met; two out of three SBs for end-December 2016 have been completed. - Policy responses to prevent slippages: - New committee established to monitor progress in implementation of planned reforms under the SMP. - Authorities will use conservative revenue and grant forecasts and maintain tight controls on expenditure. - New arrears management plan is expected to help avoid future buildup of arrears. ### Recent Economic Developments, Outlook, and Risks - Growth and inflation: - Economic activity projected to have decelerated from 3.6 percent in 2015 to 3.4 percent in 2016. - Further deceleration to about 2.5 percent is projected in 2017. - Slowdown attributed to drought impact on the agricultural sector; construction, telecommunications, and service sectors expected to be stronger. - Inflation has remained under control, though higher food prices due to drought likely to exert upward inflationary pressure. - Fiscal execution and external balance: - Government budget execution complicated by delays in pledged budget support, resulting in cutting of non-priority spending and delays in salary payments. - Trade deficit projected to remain large and financed by remittances and grants. - Risks: - Significant downside risks from global uncertainties and domestic factors. - External risks could reduce donor support and remittances. - Domestic fragile security situation, including terrorist attacks, remains a major threat. - Authorities committed to improving national security with international support. ### Fiscal Policy and Structural Reforms - Fiscal discipline and budget management: - Authorities intend to strengthen fiscal discipline, improve budget execution, continue PFM reforms, improve revenue collection, and maintain expenditure prioritization rules. - Budget process to be strengthened to ensure expenditure commitments align with available resources. - A realistic budget, based on a broader revenue base, conservative grants, and prudent policy consistent with a zero-cash balance, will be set. - Aim to avoid arrears accumulation; any revenue windfalls will be used to build buffers and pay down arrears. - Revenue measures: - Authorities commissioned a study estimating up to $119 million potential revenue from the telecommunications sector, compared to $5 million in negotiated monthly fees and taxes currently collected. - Plan to collect additional revenue from the telecommunications sector in the form of corporate and sales taxes, departing from the system of negotiated tax payments. - Progress requires significant improvements in revenue administration and tax collection, and improved security for telecommunication operators. - Expenditure measures: - Cap on the number of civil servants. - Task force led by the Prime Minister to review recruitment policies and disparities in compensation levels. - Line ministries’ spending to be aligned with the budget; off-budget grants to be published in an addendum to the budget. ### Central Bank Capacity, Currency Reform, and Governance - CBS governance and capacity building: - Considerable progress in strengthening capacity and governance of the CBS; corrective measures following a theft in August 2016 include accelerating reforms on governance, transparency, and organizational guidelines. - Measures include internal auditing, risk management, compliance, and oversight. - Currency reform: - Key priority is currency reform against a predominantly dollarized environment stemming from the civil war. - Authorities emphasize careful preparation and planning for currency reform and note adequate donor financing would be needed for successful completion. ### Inclusive Growth, Refugee Return, and Remittances - National Development Plan (NDP) 2017–19: - Revised NDP 2017–19 will serve as vehicle to boost growth and reduce poverty for 2017–19, addressing staff-identified weaknesses. - Focus areas include absorbing return of Somali refugees from Kenya, remittances, and impact of withdrawal of correspondent banking relationships (CBR). - Refugee return risks: - Closure of Kenya’s largest Somali refugee camp announced for May 2017 will result in repatriation of more than 400,000 refugees, raising concerns about increased unemployment and poverty. - Political consensus and international community support will be critical to mitigate risks. - Remittances and correspondent banking: - Remittances via money transfer businesses (MTBs) are a major source of funding for households and businesses. - Correspondent bank closures of some Somali remittance companies occurred due to legal and regulatory weaknesses and alleged money laundering/CFT risks. - Authorities approved the AML/CFT law on December 26, 2015; implementation expected to limit threat of CBR withdrawal and account closures. - Customer due diligence to be improved via a ‘trusted third party agent’ with World Bank assistance to monitor transaction flows and provide independent third party audits of MTBs. - Efforts underway to introduce new CFT legislation consistent with Financial Action Task Force standards. ### Capacity Development and Governance - Capacity development: - Progress in restoring key economic and financial institutions with IMF TA funded from a multi-donor trust fund. - Capacity development activity has intensified over the past two years; need for TA remains large. - Increased Fund TA, coordinated with other providers, is essential for further improving capacity and strengthening program monitoring. - Institutional reorganization: - Authorities plan to reorganize the Ministry of Finance, Ministry of Planning and International Cooperation, and the CBS, and to strengthen key legislative and regulatory frameworks. ### Conclusions and Commitments - Authorities’ commitments: - Firm commitment to implementing the reform program to advance the country’s development agenda, create opportunities for citizens, and counteract potential radicalization of youth. - Determination to establish a sufficient track record of sound economic management, supported by successful completion of current and subsequent SMPs. - Recognition of the important role of the international community and continued appeal for a speedy process towards debt relief. *Statement by Maxwell Mkwezalamba, Executive Director for Somalia, Dumisani Herbert, Alternate Executive Director, and Tanka Tlelima, Advisor to Executive Director — February 3, 2017* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr1761.pdf_