## Somalia — Staff Report excerpts (cr1855)

## Source details

**Canonical URL:** [Somalia — Staff Report excerpts (cr1855)](https://www.imf.org/-/media/files/publications/cr/2018/cr1855.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2018/cr1855.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2018/cr1855.pdf.json)

---

### Economic developments and macroeconomic performance
- Inflation:
  - Year-on-year inflation increased to 5.2 percent at the end of December 2017 (compared to a 4 percent annual average).
  - CPI (e.o.p., percent change): 2014: 1.3; 2015: -1.5; 2016: 1.3; 2017: 5.2; 2018 (Proj.): 2.8; 2019 (Proj.): 2.6; 2020 (Proj.): 2.6.
- Real GDP (annual percentage change):
  - 2014: 2.4; 2015: 2.5; 2016: 2.4; 2017: 1.8; 2018 (Proj.): 2.5; 2019 (Proj.): 2.8; 2020 (Proj.): 3.1.
- Nominal GDP (millions of U.S. dollars):
  - 2014: 6,528; 2015: 6,739; 2016: 6,887; 2017: 7,382; 2018 (Proj.): 7,781; 2019 (Proj.): 8,210; 2020 (Proj.): 8,688.
- Per capita GDP (U.S. dollars):
  - 2014: 515; 2015: 517; 2016: 513; 2017: 535; 2018 (Proj.): 548; 2019 (Proj.): 562; 2020 (Proj.): 577.
- Outlook:
  - Growth expected to recover gradually in 2018–2020 and stabilize at around 2.5–3.5 percent.
  - Inflation expected to decline to 2.8 percent in 2018 and remain low thereafter.

### Fiscal performance and public finances
- 2017 outturns and surpluses:
  - A small budget surplus of $3.8 million was achieved by the end of September 2017.
  - For end-December 2017, preliminary information indicates a budget surplus of about $1.8 million.
  - The fiscal position ended the year with a surplus of $2.7 million (text summary).
- Central government finances (percent of GDP):
  - Revenue and grants: 2014: 2.2; 2015: 2.1; 2016: 2.5; 2017: 3.1; 2018 (Proj.): 3.2; 2019 (Proj.): 3.5; 2020 (Proj.): 3.9.
  - Grants (of which): 2014: 0.9; 2015: 0.4; 2016: 0.8; 2017: 1.3; 2018 (Proj.): 1.2; 2019 (Proj.): 1.3; 2020 (Proj.): 1.4.
  - Expenditure: 2014: 2.3; 2015: 2.0; 2016: 2.5; 2017: 3.1; 2018 (Proj.): 3.2; 2019 (Proj.): 3.5; 2020 (Proj.): 3.9.
  - Compensation of employees: 2014: 1.2; 2015: 0.8; 2016: 0.8; 2017: 1.6; 2018 (Proj.): 1.7; 2019 (Proj.): 1.7; 2020 (Proj.): 1.8.
  - Purchase of non-financial assets: 2014: 0.0; 2015: 0.0; 2016: 0.1; 2017: 0.1; 2018 (Proj.): 0.1; 2019 (Proj.): 0.2; 2020 (Proj.): 0.2.
  - Overall balance: 2014: 0.0; 2015: 0.1; 2016: 0.0; 2017: 0.0; 2018 (Proj.): 0.0; 2019 (Proj.): 0.0; 2020 (Proj.): 0.0.
  - Stock of domestic arrears: 2014: 0.7; 2015: 1.0; 2016: 1.1; 2017: 0.9; 2018 (Proj.): 0.8; 2019 (Proj.): 0.6; 2020 (Proj.): 0.4.
- Revenue mobilization and fiscal measures:
  - Authorities agreed to implement tax measures expected to generate $17.5 million in 2018.
  - Text Table figures preserved (selected yields and measures):
    - Total projected yields from fiscal measures: 12.5 2.9 28.7 (as in source).
    - Initial fiscal measures 1/: 12.5 2.6.
    - Tax policy, increase in excise tax rate on: 3.0 0.3 1.6.
    - Petroleum products (+25%): 0.7 0.0 0.0.
    - Tobacco (+100%): 0.3 0.3 0.06.
    - Khat from $2 to $2.50 per kg: 2.0 0.0 1.5.
    - Tax administration measures: 9.5 2.3 8.8.
    - Departure fee on outbound airline passengers: 1.4 0.0 0.9.
    - Sales tax on Telecommunication companies: 5.7 2.3 6.5.
    - Sales tax on hotels: 0.8 0.0 0.6.
    - Personal income tax (hotels, electricity, telecoms, foreign workers and NGOs) 2/: 0.3 0.0 20.35.
    - Sales tax on consumer electricity companies: 1.3 0.0 0.45.
    - New fiscal measures 3/: 0.3 14.2.
    - Reverse tax exemption for Parliamentarians: 0.25 0.25.
    - Airlines sales tax and fees 4/: 0.0 3.9.
    - Fiscal measures included in the 2018 budget: 4.2 (corporate income tax 1.1; in-housing revenue collection 5/: 2.6; higher and increased progressivity rate of rental income tax from 5% to 15–22%: 0.5).
  - Unbudgeted grant pledges of $80 million received; $37.7 million disbursed; projected use in 2017: $35 million (with $5 million transferred to FMS and rest used for budget support).

### Monetary and financial sector developments
- Central bank balance sheet and assets:
  - Central bank total assets (thousands of U.S. dollars): end-2014: 83,796; end-2015: 86,838 (Est.); end-2016: 94,402 (Prel.); end-2017: 140,325 (Prel.).
  - Foreign assets (gross, thousands of U.S. dollars): end-2014: 63,167; end-2015: 64,867; end-2016: 72,466; end-2017: 97,035.
  - Cash and cash equivalent (U.S. dollar, thousands): e.g., end-2014: 6,195; end-2015: 8,219; end-2016: 18,824; end-2017: 18,463.
  - FGS total deposits (percent of GDP): 2014: 11.7; 2015: 19.1; 2016: 12.1; 2017: 32.2.
- Market exchange rate (SOS/USD, end of period):
  - 2014: 20,265; 2015: 22,285; 2016: 24,005; 2017: 23,605.
  - SOS/U.S. exchange rate: stable in 2017 at around an average of 23,100 (text observation).
- Banking sector and MTBs:
  - Commercial banks’ total assets at end-September 2017 about 4 percent of GDP; credit to the private sector about 1.3 percent of GDP.
  - Loan-to-deposit ratio: 40.1 percent (up from 33.3 percent in September 2016).
  - Credit to the private sector as share of total assets: 31.2 percent (up from 24.8 percent).
  - MTBs provided trade finance amounting to about $2.1 billion in 2017.
  - Regulatory change: In December 2017, the CBS Board increased the minimum capital requirement for commercial banks by $2.0 million to $7.0 million.

### External sector and balance of payments
- Current account balance (percent of GDP): 2014: -5.3; 2015: -4.7; 2016: -6.3; 2017: -6.7; 2018 (Proj.): -7.2; 2019 (Proj.): -6.5; 2020 (Proj.): -6.3.
- Trade balance (percent of GDP): 2014: -45.3; 2015: -44.5; 2016: -46.2; 2017: -50.5; 2018 (Proj.): -45.8; 2019 (Proj.): -44.5; 2020 (Proj.): -43.9.
- Exports of goods and services (percent of GDP): 2014: 14.5; 2015: 15.4; 2016: 14.8; 2017: 13.4; 2018 (Proj.): 13.9; 2019 (Proj.): 14.3; 2020 (Proj.): 14.1.
- Imports of goods and services (percent of GDP): 2014: 59.8; 2015: 59.9; 2016: 61.0; 2017: 64.0; 2018 (Proj.): 59.7; 2019 (Proj.): 58.8; 2020 (Proj.): 58.0.
- Remittances (percent of GDP): 2014: 20.2; 2015: 19.2; 2016: 19.6; 2017: 20.6; 2018 (Proj.): 19.5; 2019 (Proj.): 19.6; 2020 (Proj.): 19.7.
- Grants (percent of GDP): 2014: 20.4; 2015: 21.0; 2016: 20.8; 2017: 23.7; 2018 (Proj.): 19.5; 2019 (Proj.): 18.8; 2020 (Proj.): 18.3.
- Foreign Direct Investment (percent of GDP): 2014: 4.0; 2015: 4.5; 2016: 4.9; 2017: 5.2; 2018 (Proj.): 5.5; 2019 (Proj.): 5.7; 2020 (Proj.): 5.6.
- External public debt (total stock outstanding, millions of U.S. dollars): 2013: 5,122; 2014: 5,128; 2015: 5,155; 2016: 5,130; 2017: 5,279.
- External public debt (percent of GDP): 2013: 81.8; 2014: 78.5; 2015: 76.5; 2016: 74.5; 2017: 71.5.
- Arrears (millions of U.S. dollars): 2013: 4,752; 2014: 4,742; 2015: 4,860; 2016: 4,757; 2017: 4,900.
- Current account balance (millions of U.S. dollars): 2014: -343; 2015: -318; 2016: -435; 2017 (Prel.): -497; 2018 (Proj.): -563; 2019 (Proj.): -534; 2020 (Proj.): -546.
- Imports of goods and services (millions): 2014: 2,680; 2015: 2,710; 2016: 2,869; 2017: 3,271; 2018 (Proj.): 3,162; 2019 (Proj.): 3,273; 2020 (Proj.): 3,397.
- Exports of goods and services (millions): 2014: 608; 2015: 683; 2016: 647; 2017: 599; 2018 (Proj.): 675; 2019 (Proj.): 761; 2020 (Proj.): 799.

### Program implementation and SMP engagement
- SMP status and reviews:
  - Somalia completed the first 12-month SMP in April 2017 and entered a second SMP covering May 2017–April 2018. IMF management approved the second 12-month SMP on June 21, 2017.
  - Somalia received 87 TA and training missions between mid-2013 and December 2017.
  - Somalia’s overdue obligation to the IMF reached $340.5 million (540.9 percent of quota) in December 2017.
- Performance under the SMP:
  - End-June 2017: One out of two SBs not met; four out of six ITs met. Deviations: cash fiscal balance missed by $1.8 million; domestic revenue floor missed by $0.7 million.
  - End-September 2017: All but one of six ITs and all but one of five SBs met. Missed IT missed by $0.5 million. One missed SB: delay in cancellation/renegotiation of port and airport revenue contracts.
  - December 2017: One IT out of six met and (at least) four expected to be met; four out of six SBs met.
- Program monitoring and TMU:
  - Indicative targets evaluated at end-June 2017, end-September 2017, end-December 2017, and end-March 2018.
  - Indicative targets include cash fiscal balance floor, ceiling on new domestic expenditure arrears, floor on FGS revenue, ceilings on new domestic and external debt, and floors on CBS net foreign assets.
  - SMP Monitoring Committee to be reactivated; program includes reviews with test dates: September 30, 2017, and March 31, 2018.

### Key risks, challenges, and staff recommendations
- Main risks identified:
  - Insecurity and sporadic terrorist attacks.
  - Severe drought and limited capacity to deal with drought impacts.
  - Unresolved political consensus issues between the federal government and member states.
  - Weak capacity and institutions; poor economic and social infrastructure.
  - Significant economic data shortcomings.
- Annex I — Risk Assessment Matrix (selected entries and likelihoods):
  - Global Risks: Relative Likelihood: High; Impact if Realized: High (1) lower remittances; (2) influx of refugees; (3) lower growth.
  - Country-specific — Institutional Risk: Relative Likelihood: High; Impact if Realized: High (1) destruction of economic infrastructure; (2) possible reduction in donor support; (3) lower growth; (4) humanitarian crisis.
  - Country-specific — Fiscal Risks: Relative Likelihood: High; Impact if Realized: High (1) lower revenue; (2) domestic arrears accumulation; (3) policy slippages and SMP off-track.
  - Country-specific — Currency Reform Risks: Relative Likelihood: Medium; Impact if Realized: High (1) Delay in donor funding; (2) lack of credibility in new currency; (3) increased counterfeiting.
- Staff recommendations and policy priorities:
  - Keep up policy commitment to the SMP.
  - Continue improving domestic revenue mobilization and strengthening public financial management.
  - Carefully complete preparatory work for the launch of the new national currency.
  - Start implementation of the financial sector development roadmap and improve AML/CFT compliance.
  - Increase attention to governance and corruption problems and social spending needs.
  - Start addressing significant economic data gaps.

### Currency reform, financial sector development, and AML/CFT
- Currency reform roadmap and phases:
  - Authorities completed measures in the currency reform roadmap and prepared for launch of the new national currency.
  - Phase I: exchange counterfeit currencies currently in circulation with new small-denomination banknotes.
  - Phase II: injection of additional new Somali Shillings, including larger denominations, will require strengthening CBS capacity and developing monetary instruments and reserve management guidelines.
  - Authorities confirmed: no further injection of the new Somali Shillings beyond Phase I at this stage; they do not anticipate deciding on the choice of the future exchange rate regime until Phase II; they will not intervene in the foreign exchange market which will continue to float freely.
  - Note: Somalia is highly dollarized and is expected to remain so for the foreseeable future.
- Financial sector reform actions:
  - Preparation of a financial sector development roadmap; FRC operational and started reviewing suspicious transactions in December 2017.
  - With IMF TA, progress on developing regulations, building capacity in commercial bank licensing, regulation, and supervision; improving transparency and commercial banking practices.
  - CBS planning to finalize the Targeted Financial Sanctions Regulation law to implement UNSCRs 1267 and 1373.
- AML/CFT and remittances (Box 2 highlights):
  - Remittances make up nearly 40 percent of household income.
  - Remittance inflows averaged over $1.3 billion per year during 2015–2017.
  - Progress: CBS issued foundational regulations since 2014 for MTBs; in 2017 on-site inspections of the three largest MTBs (representing over 80 percent of transactions) were conducted for the first time.
  - Remaining gaps: reporting of suspicious transactions, cooperation between FRC and CBS, lack of reliable national identification and business registration systems limit KYC implementation.

### Governance, anti-corruption, and social inclusion
- Governance and anti-corruption measures:
  - Governance is weak and corruption remains high according to non‑IMF indicators cited.
  - Authorities’ actions: establishment of a “Delivery Unit” at the Prime Minister’s office; ministerial initiatives to strengthen internal audit; anti-corruption bill approved by Parliament; diminished cash payments and expanded electronic payment systems across FGS agencies; review/cancel/renegotiation of key government contracts.
  - Box 3 recommended focus areas: PFM, revenue collection points, treasury management, domestic arrears and cash management, AML/CFT.
- Social spending and inclusion:
  - Per capita GDP during 2014–2016 was $515.
  - FGS resources limited; budgetary social spending very low and no explicit national social safety net program at FGS level (aside from a small budget for orphans of military personnel and police officers).
  - Authorities and staff agreed on inclusion of social safety net programs in the budget and development of a medium-term fiscal framework.

### Data, statistics, and reporting requirements
- Data shortcomings and improvements:
  - Data provision has serious shortcomings that significantly hamper surveillance; gaps caused by institutional weaknesses, weak capacity, and poor source data.
  - Establishment of Somali National Bureau of Statistics (SNBS) and passage/submission of a new statistical law.
  - Revised national account data for 2013–2016 and new CPI series developed using the World Bank 2016 household survey.
  - Commitments to improve remittance data via MTB survey, initiate travel/primary transfers/FDI surveys in 2018, and provide banking sector financial data by residency starting in 2018.
- SMP data reporting requirements (selected frequencies and timings):
  - CBS balance sheet: Monthly; 3 weeks after the end of each month.
  - Monetary survey: Quarterly; 4 weeks after the end of each quarter.
  - Balance of payments: Quarterly; 2 months after the end of each quarter.
  - Revenue and expenditure (CBS cash): Quarterly; 3 weeks after the end of each quarter.
  - FGS budget operations: Monthly; 4 weeks after the end of each month.
  - Domestic arrears: Monthly; 4 weeks after the end of the month.
  - CPI and other indicators (SNBS): Monthly; 6 weeks after the end of each month.
- Participation in data standards: "Somalia does not participate in the enhanced General Data Dissemination System (e-GDDS)." Reporting to STA: "No data in the format of SRFs have been received by STA."

### Relations with creditors, debt relief, and DMU progress
- Debt-relief process and eligibility:
  - Somalia ineligible for IMF financial assistance due to pending clearance of longstanding arrears.
  - Debt-relief process to follow HIPC Initiative procedures: establish track record of economic management, cooperate with IMF on policies and payments, and outreach to creditors for timely support.
- Debt database reconstruction:
  - DMU, with African Development Bank TA, has reconstructed about two-thirds (67%) of Somalia’s external debt database.
  - Validation outreach: reached out to 21 bilateral creditors representing nearly 80 percent of Somalia’s external debt; 12 bilateral creditors have responded; once remaining nine respond, Somalia would have 99 percent of external debt confirmed.
- Overdue obligations to the IMF:
  - Overdue obligations and projections (SDR million): Total overdue (as of 12/31/2017): 239.09.
  - Projected annual payments 2018–2022: 1.96, 1.97, 1.97, 1.97, 1.97 respectively.
  - Principal: 111.55; Charges/Interest: 127.54.

### Executive Board messages and donor engagement
- Directors’ assessments and emphasis:
  - Directors commended authorities’ commitment to the SMP despite drought and terrorist attacks in 2017.
  - Welcomed improvement in budget execution, fiscal performance, and tax reforms.
  - Emphasized need to continue reforms to improve fiscal framework and strengthen the financial sector; enhance institutions and governance; increase budgetary allocation to social spending despite limited resources.
  - Welcomed progress toward launching the new national currency and stressed the importance of communication and accountability frameworks.
  - Encouraged finalizing the Targeted Financial Sanctions Regulation Law and improving AML/CFT compliance.
  - Urged focus on governance and corruption, particularly in PFM, revenue collection, treasury management, domestic arrears, and cash management.
  - Supported continued donor support and Fund role in helping Somalia reach HIPC debt relief within established procedures.

*Source: Somalia — Staff Report for the 2017 Article IV Consultation and First Review under the Staff‑Monitored Program (February 6, 2018); IMF Country Report extract (cr1855).*

### 2.2 percent in 2016). Driven by higher food prices, year-on-year inflation increased to

### cr1855 - 2.2 percent in 2016). Driven by higher food prices, year-on-year inflation increased to

### Economic developments and macroeconomic performance
- Year-on-year inflation increased to 5.2 percent at the end of December 2017 (compared to a 4 percent annual average).
- Real GDP, annual percentage change:
  - 2014: 2.4
  - 2015: 2.5
  - 2016: 2.4
  - 2017: 1.8
  - 2018 (Proj.): 2.5
  - 2019 (Proj.): 2.8
  - 2020 (Proj.): 3.1
- Nominal GDP in millions of U.S. dollars:
  - 2014: 6,528
  - 2015: 6,739
  - 2016: 6,887
  - 2017: 7,382
  - 2018 (Proj.): 7,781
  - 2019 (Proj.): 8,210
  - 2020 (Proj.): 8,688
- Per capita GDP in U.S. dollars:
  - 2014: 515
  - 2015: 517
  - 2016: 513
  - 2017: 535
  - 2018 (Proj.): 548
  - 2019 (Proj.): 562
  - 2020 (Proj.): 577

### Fiscal performance and public finances
- A small budget surplus of $3.8 million was achieved by the end of September 2017, partly due to slower-than-expected budget execution.
- For the period ending in December 2017, preliminary information indicates:
  - Implementation of critical tax measures and higher-than-programmed bilateral grants helped generate a budget surplus of about $1.8 million.
  - Domestic revenue is also estimated to have met the program target.
- Central government finances (percent of GDP):
  - Revenue and grants: 2014: 2.2; 2015: 2.1; 2016: 2.5; 2017: 3.1; 2018 (Proj.): 3.2; 2019 (Proj.): 3.5; 2020 (Proj.): 3.9
  - Grants (of which): 2014: 0.9; 2015: 0.4; 2016: 0.8; 2017: 1.3; 2018 (Proj.): 1.2; 2019 (Proj.): 1.3; 2020 (Proj.): 1.4
  - Expenditure: 2014: 2.3; 2015: 2.0; 2016: 2.5; 2017: 3.1; 2018 (Proj.): 3.2; 2019 (Proj.): 3.5; 2020 (Proj.): 3.9
  - Compensation of employees: 2014: 1.2; 2015: 0.8; 2016: 0.8; 2017: 1.6; 2018 (Proj.): 1.7; 2019 (Proj.): 1.7; 2020 (Proj.): 1.8
  - Purchase of non-financial assets: 2014: 0.0; 2015: 0.0; 2016: 0.1; 2017: 0.1; 2018 (Proj.): 0.1; 2019 (Proj.): 0.2; 2020 (Proj.): 0.2
  - Overall balance: 2014: 0.0; 2015: 0.1; 2016: 0.0; 2017: 0.0; 2018 (Proj.): 0.0; 2019 (Proj.): 0.0; 2020 (Proj.): 0.0
  - Stock of domestic arrears: 2014: 0.7; 2015: 1.0; 2016: 1.1; 2017: 0.9; 2018 (Proj.): 0.8; 2019 (Proj.): 0.6; 2020 (Proj.): 0.4

### Monetary and financial sector developments
- Central bank assets (total, millions):
  - Total assets, of which: 2014: 89.2; 2015: 90.6; 2016: 82.8; 2017: 140.3
  - Foreign assets (gross): 2014: 68.5; 2015: 68.6; 2016: 60.9; 2017: 97.0
  - Cash and cash equivalent, in vault (U.S. dollar): 2014: 6.2; 2015: 13.3; 2016: 8.2; 2017: 18.5
  - Domestic assets: 2014: 20.6; 2015: 22.0; 2016: 21.9; 2017: 43.3
  - FGS, total deposits: 2014: 11.7; 2015: 19.1; 2016: 12.1; 2017: 32.2
- Market exchange rate (SOS/USD, end of period):
  - 2014: 20,265
  - 2015: 22,285
  - 2016: 24,005
  - 2017: 23,605

### External sector and balance of payments
- Current account balance (percent of GDP):
  - 2014: -5.3; 2015: -4.7; 2016: -6.3; 2017: -6.7; 2018 (Proj.): -7.2; 2019 (Proj.): -6.5; 2020 (Proj.): -6.3
- Trade balance (percent of GDP): 2014: -45.3; 2015: -44.5; 2016: -46.2; 2017: -50.5; 2018 (Proj.): -45.8; 2019 (Proj.): -44.5; 2020 (Proj.): -43.9
- Exports of goods and services (percent of GDP): 2014: 14.5; 2015: 15.4; 2016: 14.8; 2017: 13.4; 2018 (Proj.): 13.9; 2019 (Proj.): 14.3; 2020 (Proj.): 14.1
- Imports of goods and services (percent of GDP): 2014: 59.8; 2015: 59.9; 2016: 61.0; 2017: 64.0; 2018 (Proj.): 59.7; 2019 (Proj.): 58.8; 2020 (Proj.): 58.0
- Remittances (percent of GDP): 2014: 20.2; 2015: 19.2; 2016: 19.6; 2017: 20.6; 2018 (Proj.): 19.5; 2019 (Proj.): 19.6; 2020 (Proj.): 19.7
- Grants (percent of GDP): 2014: 20.4; 2015: 21.0; 2016: 20.8; 2017: 23.7; 2018 (Proj.): 19.5; 2019 (Proj.): 18.8; 2020 (Proj.): 18.3
- Foreign Direct Investment (percent of GDP): 2014: 4.0; 2015: 4.5; 2016: 4.9; 2017: 5.2; 2018 (Proj.): 5.5; 2019 (Proj.): 5.7; 2020 (Proj.): 5.6
- External debt (percent of GDP): 2014: 78.5; 2015: 76.5; 2016: 74.5; 2017: 71.5

### Program implementation and IMF engagement
- Somalia completed the first 12-month SMP in April 2017 and entered a second SMP covering May 2017–April 2018. IMF management approved the second 12-month SMP on June 21, 2017.
- Somalia received 87 TA and training missions between mid-2013 and December 2017.
- Somalia’s overdue obligation to the IMF reached $340.5 million (540.9 percent of quota) in December 2017.
- Staff supported completion of the first review under the SMP given broadly satisfactory performance through end-June and end-September 2017 and stepped-up efforts toward December targets.
- The SMP is designed to help economic reconstruction, establish a track record of policy and reform implementation, and assist Somalia in reaching debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative within established HIPC procedures.

### Executive Board assessment and key messages
- Directors commended authorities’ strong commitment to the SMP and reform efforts despite severe drought and sporadic terrorist attacks in 2017.
- Directors welcomed improvement in budget execution and fiscal performance in 2017 and the authorities’ tax reforms that improved the fiscal outturn.
- Directors emphasized the need to:
  - Continue implementing reforms to improve the fiscal framework and strengthen the financial sector.
  - Enhance institutions and governance to lay foundations for sustained and inclusive growth.
  - Increase budgetary allocation to social spending despite limited overall budgetary resources.
- Directors welcomed progress toward launching the new national currency and stressed the importance of an appropriate communication strategy and accountability framework for a successful launch.
- Directors encouraged finalizing the Targeted Financial Sanctions Regulation Law and improving AML/CFT compliance.
- Directors urged focus on governance and corruption, particularly in PFM, revenue collection, treasury management, domestic arrears, and cash management.
- Directors supported continued donor support and the role of the Fund and international community in helping Somalia reach HIPC debt relief as soon as feasible within established procedures.

### Key risks, challenges, and staff recommendations
- Main challenges identified:
  - Insecurity and sporadic terrorist attacks.
  - Severe drought and limited capacity to deal with drought impacts.
  - Unresolved political consensus issues between the federal government and member states.
  - Weak capacity and institutions; poor economic and social infrastructure.
  - Significant economic data shortcomings.
- Staff encourages the authorities to:
  - Keep up policy commitment to the SMP.
  - Continue improving domestic revenue mobilization and strengthening public financial management.
  - Carefully complete preparatory work for the launch of the new national currency.
  - Start implementation of the financial sector development roadmap and improve AML/CFT compliance.
  - Increase attention to governance and corruption problems and social spending needs.
  - Start addressing significant economic data gaps.
- Authorities agreed with staff recommendations, renewed commitment to policy and reform implementation under the SMP, and called for acceleration of external public debt reduction and arrears clearance.

*Source: Somalia — Staff Report for the 2017 Article IV Consultation and First Review under the Staff‑Monitored Program (February 6, 2018).*

### 4.      Since the last Article IV Consultation, the FGS has pursued wide-ranging economic

### 4.      Since the last Article IV Consultation, the FGS has pursued wide-ranging economic

### Implementation of recommended reforms and measures
- The government implemented critical structural reforms in various sectors and in statistics, including:
  - Several critical reform measures in public financial management (PFM) and taxes.
  - Preparation of a financial sector development roadmap.
  - Passage of the long-standing statistical law.
  - Completion of the measures agreed on in the currency reform roadmap.
- Specific implementation status (Text Table 1 highlights):
  - Improve revenue administration and mobilization: Ongoing. Implemented several tax revenue measures in 2017; agreements with telecommunications companies to pay sales and payroll taxes and corporate income tax; agreement with an airline company to pay sales tax, arrival and departure fees arrears, and current obligations.
  - Strengthen the Treasury Single Account (TSA): Ongoing. Stock-taking of all bank accounts for budget transactions and closure of 133 bank accounts.
  - Improve cash management: Ongoing. Ministry of Finance established and staffed a Cash Management Unit (CMU) and empowered a Domestic Arrears Management Committee.
  - Strengthen fiscal federalism: Ongoing. FGS and federal member states agreed on harmonization of some selected taxes; discussions on harmonization of customs and drafted a common customs strategy roadmap for Somalia.
  - Implement the currency reform roadmap: Ongoing. CBS developed an anti-counterfeiting strategy, hired and trained qualified staff, established a currency reform management function, and prepared detailed conversion plans. CBS is finalizing (1) criteria for design and security features of new banknotes and will start procurement for currency printer(s); (2) the cost of the entire reform project; and (3) estimating the volume of banknotes to print.
  - Improve governance and transparency at the CBS: Ongoing. Progress on CBS core-banking, central banking operations, governance structure, and development of a bank licensing framework.
  - Strengthen oversight for licensed institutions: Ongoing. Improved financial reporting, re-licensing process, supervisorial capacity; CBS started on-site examinations of banks and money transfer businesses (MTBs).
  - Improve the legal and operational framework of AML/CFT: Ongoing. Established a Financial Reporting Center (FRC); drafted a law to implement targeted sanctions.
  - Adopt the new statistical law: Completed. Submitted to Parliament and established the Somali National Bureau of Statistics.
  - Improve GDP, CPI, balance of payments, and external public debt data quality: Ongoing. Considerable progress on GDP estimate and producing consumer price index data.

*Implementation categories in Text Table 1: Fiscal policy and reforms; Monetary institution reforms; Financial sector reforms; Data provision.*

### Economic developments (2017 and near term)
- Growth and inflation:
  - Real GDP growth: projected 1.8 percent in 2017 (down from 2.4 percent in 2016).
  - Inflation (CPI, end of period): 5.2 percent at the end of December 2017 (4 percent annual average).
  - Note: Since the last Article IV consultation, time series for GDP and CPI were revised to reflect the World Bank Household Survey and revised trade data.
- External sector:
  - Trade deficit expected to have widened by 4.3 percentage points of GDP in 2017 due to increased food imports and lower livestock exports.
- Fiscal outcomes:
  - At end-September 2017, a small budget surplus achieved: $3.8 million (small surplus due in part to slower-than-expected pace of budget execution).
  - For end-December 2017, preliminary information indicates a budget surplus of about $1.8 million and domestic revenue expected to achieve the program target (reflecting implementation of critical tax measures since September and higher-than-programmed bilateral grants).
- Central bank and exchange rate:
  - CBS balance sheet expanded in second half of 2017, mainly from a one-off revaluation effect of its property.
  - SOS/U.S. exchange rate: stable in 2017 at around an average of 23,100.

- Text Table 2 — Selected economic indicators (Percent of GDP, unless otherwise indicated):
  - Real GDP growth: 2015: 2.5; 2016: 2.4; 2017 Est.: 1.8; 2018 Proj.: 2.5
  - Inflation (CPI, e.o.p.): 2015: -1.5; 2016: 1.3; 2017 Est.: 5.2; 2018 Proj.: 2.8
  - Revenue and grants: 2015: 2.1; 2016: 2.5; 2017 Est.: 3.1; 2018 Proj.: 3.2
  - Grants (of which): 2015: 0.4; 2016: 0.8; 2017 Est.: 1.3; 2018 Proj.: 1.2
  - Total expenditure: 2015: 2.0; 2016: 2.5; 2017 Est.: 3.1; 2018 Proj.: 3.2
  - Compensation of employees: 2015: 0.8; 2016: 0.8; 2017 Est.: 1.6; 2018 Proj.: 1.7
  - Overall balance: 2015: 0.1; 2016: 0.0; 2017 Est.: 0.0; 2018 Proj.: 0.0
  - Current account balance: 2015: -4.7; 2016: -6.3; 2017 Est.: -6.7; 2018 Proj.: -7.2
  - Trade balance: 2015: -44.5; 2016: -46.2; 2017 Est.: -50.5; 2018 Proj.: -45.8
  - Remittances: 2015: 19.2; 2016: 19.6; 2017 Est.: 20.6; 2018 Proj.: 19.5
  - Grants: 2015: 21.0; 2016: 20.8; 2017 Est.: 23.7; 2018 Proj.: 19.5
  - External debt: 2015: 76.5; 2016: 74.5; 2017 Est.: 71.5
  - Memorandum items:
    - Treasury deposits at the CBS (percent): 2016: 19.1; 2017 Est.: 12.1; 2018 Proj.: 32.2
    - Stock of arrears: 2015: 67.7; 2016: 76.5; 2017 Est.: 68.8; 2018 Proj.: 64.2

### Financial sector developments
- The financial sector is underdeveloped but expanding:
  - At end-September 2017, commercial banks’ total assets about 4 percent of GDP; credit to the private sector about 1.3 percent of GDP.
  - Banks’ assets improved since 2015; capitalization remains broadly adequate.
  - Loan-to-deposit ratio: 40.1 percent (up from 33.3 percent in September 2016).
  - Credit to the private sector as share of total assets: 31.2 percent (up from 24.8 percent).
  - Mobile money and MTBs play crucial roles; in 2017 MTBs provided trade finance amounting to about $2.1 billion.
  - Regulatory change: In December 2017, the CBS Board increased the minimum capital requirement for commercial banks by $2.0 million to $7.0 million.

### Performance under the SMP
- Overall assessment: Performance under the SMP is broadly satisfactory. Staff supports the completion of the first review.
- End-June 2017 targets:
  - One out of two structural benchmarks (SBs) was not met due to a small technical delay.
  - Four out of six indicative targets (ITs) were met.
  - Deviations for the two missed ITs were small: cash fiscal balance missed by $1.8 million; domestic revenue floor missed by $0.7 million.
- End-September 2017 targets:
  - All but one of six ITs and all but one of five SBs were met.
  - The missed IT missed by $0.5 million, partly due to volatile security and delays in revenue measures.
  - One missed SB: two revenue-collection contracts (Port of Mogadishu and Mogadishu Airport) out of five due to be canceled and renegotiated were delayed.
  - Authorities plan to renegotiate the remaining two contracts by September 2018.
  - The World Bank is providing technical, financial, and legal advice on renegotiation.
- December 2017 targets:
  - Authorities accelerated implementation of revenue measures and adopted remedial fiscal measures.
  - Based on available information: one IT out of six has been met and (at least) four are expected to be met.
  - Four out of six SBs have been met; progress made on PFM reforms underpinning remaining two SBs.
- Additional notes:
  - Some deviations occurred in early 2017 as the new government took office.
  - Inland tax collection is described as a deadly job in Somalia; weak legal environment favors a non-tax-payment culture.
  - Banks’ data are preliminary and subject to revisions.

### Outlook and risks
- Medium-term outlook:
  - Economic activity expected to recover; fiscal outlook to improve gradually.
  - Growth is projected to recover gradually in 2018–2020 and stabilize at around 2.5–3.5 percent.
  - Inflation will remain low.
  - Fiscal framework expected to continue improving over the near term.
- Downside risks (Annex I - Risk Assessment Matrix):
  - Fragile security situation.
  - Weak institutional capacity that could cause poor fiscal management and new domestic arrears accumulation.
  - Inadequate efforts to tackle serious governance problems.
  - Lack of political consensus between federal government and federal member states that could slow critical reforms.
  - Slow progress in policy and reform implementation, particularly tax reform and domestic revenue mobilization.
  - Shortfalls in donor support to the FGS.
  - Mitigants: authorities' continued commitment to the program and sustained coordinated international support.

### Policy discussions and program prospects
- Overall focus: near-term policies to (1) improve the fiscal framework; (2) finish preparation for the launch of the new national currency; (3) develop the financial sector; and (4) establish foundations for sustained recovery and poverty reduction while strengthening institutions and governance.
- Program discussions:
  - Staff supports completion of the first review and modification of the missed SB for September 2017.
  - Completion of the second review (SMP expires in April 2018) depends on continuous, satisfactory progress in completing SBs and meeting ITs for end-December 2017 and end-March 2018, strength of policy commitments, and appropriateness of remedial measures.
  - Authorities likely to request a successor SMP; design will consider Somalia-specific fragility and capacity absorption, building on reform momentum since September 2017.
- Improving the fiscal framework and budget credibility:
  - Public finance management priorities: (1) reduce dependence on grants with sustained increase in domestic revenue; (2) enhance public wage bill management; (3) implement agreed PFM reforms under the SMP; (4) improve annual budget execution.
  - Recent steps:
    - From September 2017, decisive steps to accelerate implementation of critical tax measures.
    - Agreements with telecommunications companies to pay sales taxes retroactively from October 2017 and begin payroll tax collection in November 2017; telecoms started paying sales taxes based on self-reported sales figures subject to audit.
    - Unbudgeted grant pledges of $80 million received; $37.7 million disbursed. Projected use in 2017: $35 million (with $5 million transferred to FMS and rest used for budget support); balance allocated to 2018 budget.
  - Draft 2018 budget: broadly in line with SMP; provides for a zero-cash balance with no domestic arrears accumulation; includes fiscal measures to increase domestic revenue mobilization; envisages higher grants projections than under the SMP.
  - Remaining fiscal challenges:
    - High dependence on grants and slow progress broadening the tax base; need agreements on tax and customs harmonization with FMS to implement a unified tariff rate policy.
    - At around 2 percent of GDP, significant potential exists to increase domestic revenues.
    - Civil servant compensation absorbs about one-half of the government budget, partly due to increases in number of civil servants, including police and military; trend expected to continue given security objectives.

_International Monetary Fund. Somalia: Excerpts from 2018 Article IV Consultation staff report (content unit)._

### 18.      The 2018 budget is in line with the authorities’ overall fiscal strategy (MEFP ¶7). The

### 18.      The 2018 budget is in line with the authorities’ overall fiscal strategy (MEFP ¶7). The

### Fiscal strategy and 2018 budget
- The authorities will refrain from any expenditures that are not fully covered by realistic revenue projection or confirmed grants.
- Revenue windfalls (including additional grants for budgetary support) will be used to:
  - build up buffers (for contingent measures, including inflows of refugees and humanitarian aid), and
  - pay down domestic arrears.
- Authorities intend to implement reforms to enhance cash management practices, remain current on their bills, and continue to adhere to the sequestration provision in the 2016 Appropriation Law.
- Staff recommendation in the event of shortfalls:
  - reduce expenditure commitments, particularly on non-priority spending (MEFP ¶7, bullet #1), including annual budgetary fund for election and planned domestic expenditure arrears payments,
  - prioritize the use of any existing unearmarked cash buffers.
- Planned expenditures earmarked to be funded by grants would not occur in the event of shortfall in such grants.
- Note: staff projection of grants remains conservative to take into account risk of slower-than-planned disbursements.

### Structural fiscal measures and public financial management
- Domestic revenue measures and yields:
  - Authorities agreed to implement, at the beginning of 2018, the bulk of remaining tax measures initially planned for 2017, expected to generate $17.5 million.
  - Text Table 4 (Somalia: Projected Yields from Fiscal Measures, 2017–18) — figures preserved as in source:
    - 2018 Prog.    Proj.Proj. Total projected yields from fiscal measures12.52.928.7
    - Initial fiscal measures 1/12.52.6
    - Tax policy, increase in excise tax rate on:3.00.31.6
    - Petroleum products (+25%)0.70.00.0
    - Tobacco (+100%)0.30.30.06
    - Khat from $2 to $2.50 per kg2.00.01.5
    - Tax administration measures:9.52.38.8
    - Departure fee on outbound airline passengers1.40.00.9
    - Sales tax on Telecommunication companies5.72.36.5
    - Sales tax on hotels0.80.00.6
    - Personal income tax (hotels, electricity, telecoms, foreign workers and NGOs) 2/0.30.020.35
    - Sales tax on consumer electricity companies1.30.00.45
    - New fiscal measures 3/0.314.2
    - Reverse tax exemption for Parliamentarians0.250.25
    - Collect sales tax on imported goods by value at the port0.010.0
    - Airlines sales tax and fees 4/0.03.9
    - Fiscal measures included in the 2018 budget4.2
    - Corporate income tax 1.1
    - In-housing revenue collection 5/2.6
    - Higher and increased progressivity rate of rental income tax (from 5% to 15–22%) 0.5
  - Notes from table preserved: 4/ The 2018 projection includes full-year annual fees and taxes and clearance of fees and taxes arrears. 5/ Includes Visa and Passport fees; Ministry of Commerce, Ministry of Labour, notaries, and road tax. 3/ Proposed by the Somali authorities at the time of the September 2017 Staff Visit. 1/ As outlined in IMF Country Report No. 16/204 (Box 2, page 15). 2/ This measure relates only to telecoms in 2017. The majority of Somalis working in the private sector earn less than the minimum tax threshold.
- Public wage bill management:
  - Authorities initiated an audit of the FGS civil service and are developing a program to identify and remove absentee staff and underperformers across ministries, departments, and agencies (MDAs).
  - Staff encouraged development of a proper civil service database and making all salary payments through bank accounts.
- PFM, treasury, cash, and domestic arrears management:
  - Authorities updating the 2016–2020 PFM Action Plan and have implemented a commitment control system across MDAs.
  - Treasury management measures:
    - Reduce MDAs’ use of cash advances for procurement and channel payments through the treasury single account (TSA).
    - Incorporate bank account balances in the Somalia Financial Management Information System (SFMIS).
    - Prepared a roadmap for continued review of MDAs accounts, aiming to progressively close all noncritical accounts.
  - Cash and domestic arrears management:
    - Cash Management Unit (CMU) operationalized; started collecting daily cash balances from the Central Bank of Somalia (CBS).
    - Authorities expected to endorse terms of reference of the Cash Management Committee (CMC).
    - CMU’s main objective: cash-forecasting and management to help FGS remain current on payment obligations and avoid new domestic arrears.
    - Mandate of the Domestic Arrears Management Committee (DAMC) clarified and criteria for domestic arrears settlement eligibility drafted.
- Fiscal federalism:
  - FMS and FGS have reached agreements on harmonization of several tax measures and committed to take needed steps to achieve proper fiscal federalism.
- Fiscal coverage and reporting:
  - Steps to improve fiscal coverage and reporting following completion of the commitment system.
  - Progress toward achieving a TSA and GFS-compliant Chart of Accounts (MEFP ¶20).
  - Efforts to improve the civil service database (MEFP ¶7, bullet #3) and include social safety net programs into national budget (MEFP ¶13, bullet #3) are underway.

### Currency reform and monetary institutions
- Currency reform status:
  - Authorities completed all measures in the currency reform roadmap, paving the way for launch of the new national currency (Box 1 and MEFP ¶8).
  - FGS and heads of the FMS signed an agreement to support the reform project, including combating counterfeiting of the Somali shilling in their regions.
  - Preparations include an information campaign; a framework for an independent evaluation of the currency reform project; and the budget for the currency reform to be submitted to donors for funding.
- Policy stance for currency reform:
  - Reform limited to Phase I at this stage: exchanging counterfeit currencies in circulation with the new banknotes (Box 1, MEFP ¶9, and Informational Annex).
  - Authorities confirmed:
    - no further injection of the new Somali Shillings beyond Phase I,
    - additional injection of the new currency will only occur during Phase II,
    - they do not anticipate deciding on the choice of the future exchange rate regime until Phase II,
    - they will not intervene in the foreign exchange market which will continue to float freely.
  - Note: Somalia is highly dollarized and is expected to remain so for the foreseeable future.
- Box 1 (preserved points):
  - Phase I: exchange of counterfeit currencies currently in circulation with new small-denomination banknotes.
  - Phase II: injection of additional new Somali Shillings, including larger denominations, will require strengthening CBS capacity and developing monetary instruments and reserve management guidelines.
  - Roadmap elements preserved: (1) anti-counterfeiting strategy; (2) accounting and reporting module; (3) management function; (4) storage and distribution of new banknotes, and invalidation and destruction of old currency; (5) legal framework and accountability frameworks; (6) scope of exchange and conversion factor for the counterfeit SOS to the new currency.

### Financial sector development and AML/CFT
- Background on sector weaknesses:
  - Structural problems include:
    - absence of centralized payment and inter-bank payment systems;
    - weak re-licensing, supervision, and regulation of commercial banks and MTBs;
    - shortcomings in the Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) framework and weak compliance;
    - still-weak central bank capacity and widespread SOS counterfeiting.
- Policy progress and actions:
  - Authorities prepared a comprehensive financial sector roadmap (SMP benchmarks for end-2017) highlighting bottlenecks for financial development and inclusion, including issues related to withdrawal of correspondent banking relationships.
  - Financial Reporting Center (FRC) operational and started reviewing suspicious transactions in December 2017.
  - With continued IMF TA, progress on:
    - developing regulations for financial sector development;
    - building technical capacity in commercial bank licensing, regulation, and supervision;
    - improving transparency and sound commercial banking and financial intermediation.
- Further reform commitments (MEFP ¶11):
  - fully implement new accounting and financial reporting systems in line with international financial reporting standards (IFRS) and audit functions;
  - make tangible progress on strengthening governance and organizational structure of the CBS and its oversight authority;
  - continue development of necessary financial regulations and strengthen annual relicensing process of banks and MTBs;
  - expand on-site examinations of banks and MTBs;
  - address gaps and overlaps in the AML/CFT framework.
  - CBS planning to finalize the Targeted Financial Sanctions Regulation law to enable provisions to implement Somalia’s international obligations under UNSCRs 1267, and 1373, and enhance AML/CFT compliance by MTBs.
- AML/CFT Box 2 (preserved points and statistics):
  - Remittances make up nearly 40 percent of household income.
  - Remittance inflows averaged over $1.3 billion per year during 2015–2017.
  - Progress made:
    - CBS has issued foundational regulations since 2014, including Anti-Money Laundering, Customer Registration, and Operations for MTBs.
    - MTBs’ compliance improving; in 2017, on-site inspections of the three largest MTBs (representing over 80 percent of transactions) were conducted for the first time.
  - Remaining gaps:
    - Reporting of suspicious transactions needs improvement and regularization.
    - Cooperation between the FRC and the CBS needs strengthening.
    - Lack of reliable national identification and business registration systems limits implementing Know Your Customer (KYC).
    - Legal overlaps in counter terrorism and AML/CFT laws (definitions of “financial institution” and “property and funds”) need streamlining.
  - Authorities’ commitments:
    - strengthen renewal of MTBs’ annual licenses focusing on AML/CFT compliance and reporting requirements;
    - improve cooperation between the CBS and FRC, including on effective risk-based AML/CFT supervision;
    - consider a strategy for a national identification system with World Bank assistance; a business registry is under construction.

### Foundations for sustained economic recovery and social inclusion
- Background challenges:
  - Somalia’s per capita GDP during 2014–2016 was $515.
  - Four essential pillars:
    - Business environment: private sector role limited by structurally weak business environment; country ranks lowest in almost all key pillars of the World Bank Doing Business survey results.
    - Governance and corruption: weak administration and capacity hinder efforts to combat corruption.
    - Social spending and safety net: FGS resources limited; aside from a small budget for orphans of military personnel and police officers, there is no explicit social safety net program at FGS level; budgetary social spending is very low.
    - National Development Plan (NDP): current NDP has shortcomings—weak prioritization, lack of coherent safety net programs, limited sectoral consistency, poor mapping of costing and financing needs.
- Policy actions and reform agenda (MEFP ¶12–13):
  - Business environment:
    - passage of a foreign direct investment law and adoption of a procurement bill to accelerate private sector role.
    - Inclusion of Somalia in the Global Doing Business Survey in 2017 viewed as informative but some indicators should be treated with caution.
  - Governance and corruption:
    - Important measures taken but significant challenges remain: weak tax revenue collection; transparency on fiscal reporting; law enforcement; and compliance with AML/CFT framework.
  - Social spending and social programs:
    - Authorities and staff agreed inclusion of social safety net programs in the budget and development of a medium-term fiscal framework is essential for poverty alleviation, resilience to shocks, and job creation.
  - NDP update (MEFP ¶13, bullet #4):
    - Update will address weaknesses in current NDP, include social safety net and job creation programs, and programs on strengthening resilience to natural disasters.

*Source: IMF Country Report extract (cr1855) provided in the input.*

### Box 3. Tackling Governance and Corruption

### Box 3. Tackling Governance and Corruption

### Overview and diagnostic
- Governance is weak and corruption remains high. Both the corruption perception index of the Worldwide Governance Indicator Control of Corruption Index (WGI CCI) by Daniel Kaufman (Natural Resource Governance Institute and Brookings Institution) and Aart Kray (World Bank) and the Maplecroft Corruption Risk Index (CRI) point to the lowest ranking of Somalia in terms of corruption.
- The severity of corruption contributes to the weak economic performance.
- Somalia’s President was elected, in February 2017, on an anti-corruption platform.
- While there is a lack of data to adequately assess the scale and the impact of corruption on the Somali economy, the authorities have acknowledged how critical governance and corruption issues are to the country’s economic performance and social cohesion.
- Greater efforts to address these issues will improve the effectiveness of economic policies, the efficiency of institutions, and the country’s overall economic performance.

### Authorities’ recent actions and reforms
- Establishment of a “Delivery Unit” at the Prime Minister’s office to:
  - (1) monitor performance of the government’s programs,
  - (2) ensure proper public service delivery, and
  - (3) improve governance at ministers’ levels.
- Minister of Finance initiatives in 2018 to strengthen internal audit functions at the ministry.
- Anti-corruption bill approved by the Parliament.
- Cash payments have diminished, and electronic payment system has expanded across all FGS agencies.
- To improve procurement system and government effectiveness, all key government contracts with private enterprises are either under review, canceled, or being renegotiated.

### Interpretation of non‑IMF indicators
- Footnote on the indicators: The CCI is a governance indicator that serves to measure the perception of corruption, and the CRI measures the quality of anti-corruption institutions. The former can be influenced by media reporting and could fail to track actual patterns of corruption, especially for countries that undergo important structural transformations. The accuracy of the latter can be biased by experts’ views (instead of facts on corruption). These non-IMF indicators provide qualitative information about corruption. They do not represent the IMF’s assessment of the level of corruption in Somalia.

### Implications and recommended focus areas
- Addressing governance and corruption is timely and necessary to support economic recovery and institutional development.
- More granular attention is needed on governance and corruption at operational levels, specifically:
  - Public financial management (PFM),
  - Revenue collection points,
  - Treasury management,
  - Domestic arrears and cash management,
  - AML/CFT (anti–money laundering / countering the financing of terrorism).
- Continued adherence to international anti-corruption conventions (including UNCAC) is supported.

*Source: IMF country report content (Box 3).*

### 46.      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.

### Growth and inflation
- Real GDP growth: 2014: 2.4; 2015: 2.5; 2016: 2.4; 2017: 1.8; 2018 (Proj.): 2.5; 2019 (Proj.): 2.8; 2020 (Proj.): 3.1 (annual percentage change).
- Consumer prices (e.o.p., percent change): 2014: 1.3; 2015: -1.5; 2016: 1.3; 2017: 5.2; 2018 (Proj.): 2.8; 2019 (Proj.): 2.6; 2020 (Proj.): 2.6.
- Observations from the source:
  - Due largely to drought, growth is expected to decline and inflation to notch up in 2017.
  - Food inflation drove headline inflation higher in 2017.
  - Economic activity is projected to slow down in 2017.

### External account and remittances
- Current account balance (Percent of GDP): 2014: -5.3; 2015: -4.7; 2016: -6.3; 2017: -6.7; 2018 (Proj.): -7.2; 2019 (Proj.): -6.5; 2020 (Proj.): -6.3.
- Trade balance (Percent of GDP): 2014: -45.3; 2015: -44.5; 2016: -46.2; 2017: -50.5; 2018 (Proj.): -45.8; 2019 (Proj.): -44.5; 2020 (Proj.): -43.9.
- Remittances (Percent of GDP): 2014: 20.2; 2015: 19.2; 2016: 19.6; 2017: 20.6; 2018 (Proj.): 19.5; 2019 (Proj.): 19.6; 2020 (Proj.): 19.7.
- Grants (Percent of GDP): 2014: 20.4; 2015: 21.0; 2016: 20.8; 2017: 23.7; 2018 (Proj.): 19.5; 2019 (Proj.): 18.8; 2020 (Proj.): 18.3.
- Observations from the source:
  - Ample remittances and grants finance a large trade deficit.
  - The IMF has continued to intensify TA support since late 2013 and the country is among the largest beneficiaries of TA.

### External public debt
- External public debt (Total stock outstanding, Millions of U.S. dollars): 2013: 5,122; 2014: 5,128; 2015: 5,155; 2016: 5,130; 2017: 5,279.
- External public debt (Percent of GDP): 2013: 81.8; 2014: 78.5; 2015: 76.5; 2016: 74.5; 2017: 71.5.
- Arrears (Millions of U.S. dollars): 2013: 4,752; 2014: 4,742; 2015: 4,860; 2016: 4,757; 2017: 4,900.
- Observations from the source:
  - Somalia's external public debt data are incomplete and virtually all in arrears.
  - A certain portion of Somalia’s external debt is not in arrears (notably: Saudi Arabia maturity extension in 2016 of $106 million; World Bank loans $176 million; AfDB loans $34 million).

### Fiscal sector and budget execution
- Tax & non-tax revenue and grants (Percent of GDP, Table 1): Revenue and grants: 2014: 2.2; 2015: 2.1; 2016: 2.5; 2017: 3.1; 2018 (Proj.): 3.2; 2019 (Proj.): 3.5; 2020 (Proj.): 3.9.
- Grants (Percent of GDP, Table 1): 2014: 0.9; 2015: 0.4; 2016: 0.8; 2017: 1.3; 2018 (Proj.): 1.2; 2019 (Proj.): 1.3; 2020 (Proj.): 1.4.
- Tax-to-GDP (Percent of GDP, Table 1 and Table 2b): Tax-to-GDP remains very low (e.g., Tax revenue: 2014: 1.3; 2015: 1.5; 2016: 1.5; 2017: 1.5; 2018 (Proj.): 1.6; 2019 (Proj.): 1.7; 2020 (Proj.): 2.0).
- Central government expenditure composition (Percent of GDP):
  - Compensation of employees: 2014: 1.2; 2015: 0.8; 2016: 0.8; 2017: 1.6; 2018 (Proj.): 1.7; 2019 (Proj.): 1.7; 2020 (Proj.): 1.8.
  - Capital spending-to-total expenditure is low (Table 3 and charts show cap. spending around 0.1–0.2 percent of GDP in projections).
- Budget execution and arrears:
  - Budget execution rates are improving, in part due to progress on capacity development, PFM, grants disbursement.
  - A significant share of total expenditure is absorbed by compensation of employees.
  - Stock of domestic arrears (Percent of GDP, Table 2b, end of year): 2014: 1.1; 2015: 0.9; 2016: 0.8; 2017: 0.9; 2018 (Proj.): 0.8; 2019 (Proj.): 0.6; 2020 (Proj.): 0.4.
  - Observations from the source:
    - With a small tax base, the government relies heavily on volatile grants, making budget execution and priority spending difficult.
    - Tax revenue to GDP remains very low.

### Financial sector and banking
- Banking sector size and activity:
  - Commercial banks: total assets (Percent of GDP) and credit to private sector (Percent of GDP) are small but increasing (figures and charts indicate rising credit; Table 4 total assets grew from 168,484 in early 2015 to 305,817 by 2017:Sept, in thousands of U.S. dollars).
  - Credit to private sector (Thousands of U.S. dollars, Table 4): 2015: March 43,019; 2015: Sept 41,966; 2016: March 47,278; 2016: Dec 66,056; 2017: Sept 95,543.
  - Total loan-to-deposit ratio rising (chart and Table 4 suggest increases toward the high 30s to 40s percent).
  - Equity to total assets declined recently but “remains adequate” (chart values around 16.9–23.6 percent across periods).
- Microfinance and Money Transfer Businesses (MTBs):
  - MTBs provide financial services on a greater scale; financial inflows via MTBs are significant (chart shows 2015–2017 inflows as percent of GDP).
- Observations from the source:
  - The banking sector is relatively small and focused in key economic areas—trade and real estate, followed by car loans and construction.
  - Activity is increasing rapidly, especially credit to the private sector.
  - Loan-to-deposit ratios are increasing; low ratio reflects high liquidity.
  - Recently, banks' capitalization declined, but remains adequate.

### Central Bank balance sheet highlights (Table 3)
- Central Bank total assets (Thousands of U.S. dollars): end-2014: 83,796; end-2015: 86,838 (Est.); end-2016: 94,402 (Prel.); end-2017: 140,325 (Prel.).
- Foreign assets (gross, Thousands of U.S. dollars): end-2014: 63,167; end-2015: 64,867; end-2016: 72,466; end-2017: 97,035.
- Cash and cash equivalent (U.S. dollar, Thousands): e.g., end-2014: 6,195; end-2015: 8,219; end-2016: 18,824; end-2017: 18,463.
- FGS total deposits (Percent of GDP, Table 1): 2014: 11.7; 2015: 19.1; 2016: 12.1; 2017: 32.2.

### Balance of payments and forecasts (Tables 5a / 5b)
- Current account balance (Millions of U.S. dollars): 2014: -343; 2015: -318; 2016: -435; 2017 (Prel.): -497; 2018 (Proj.): -563; 2019 (Proj.): -534; 2020 (Proj.): -546.
- Exports of goods and services (Millions): 2014: 608; 2015: 683; 2016: 647; 2017: 599; 2018 (Proj.): 675; 2019 (Proj.): 761; 2020 (Proj.): 799.
- Imports of goods and services (Millions): 2014: 2,680; 2015: 2,710; 2016: 2,869; 2017: 3,271; 2018 (Proj.): 3,162; 2019 (Proj.): 3,273; 2020 (Proj.): 3,397.
- Capital account and financial account (Millions): 2014: 343; 2015: 318; 2016: 435; 2017 (Prel.): 497; 2018 (Proj.): 563; 2019 (Proj.): 534; 2020 (Proj.): 546.
- Foreign direct investment (Millions): 2014: 261; 2015: 303; 2016: 334; 2017: 384; 2018 (Proj.): 426; 2019 (Proj.): 467; 2020 (Proj.): 484.

### Off-budget aid and ODA (Table 7)
- Total estimated grants (Millions of U.S. dollars): 2014: 1,657; 2015: 1,741; 2016: 1,731; 2017 (Proj.): 2,090.
- Total Official Development Assistance (ODA) aid (Millions): 2014: 1,218; 2015: 1,172; 2016: 1,231; 2017 (Proj.): 1,590.
- Humanitarian aid (Millions): 2014: 672; 2015: 588; 2016: 613; 2017 (Proj.): 933.
- FGS budgetary grants (Memorandum): 2014: 61.0; 2015: 26.9; 2016: 58.4; 2017 (Proj.): 94.5.

### Key analytical observations and policy-relevant points from the source
- Fiscal and revenue stance:
  - The federal government has a small tax base; fiscal revenue continues to depend heavily on volatile grants.
  - Tax revenue to GDP remains very low, limiting resources for capital spending and priority programs.
  - Budget execution rates are improving due to capacity development and PFM reforms and increased grants disbursement.
- External vulnerabilities:
  - Large trade deficits are financed by remittances and grants.
  - External public debt data are incomplete and virtually all in arrears, posing challenges for debt management.
- Financial sector and institutions:
  - Banking sector remains small but is expanding rapidly; MTBs play a major role in financial intermediation.
  - The Central Bank's foreign assets and cash balances increased markedly through 2017.
- Capacity and TA:
  - The IMF has intensified technical assistance since late 2013; Somalia is among the largest beneficiaries of IMF TA.
- Implicit policy priorities noted in the source:
  - Continue capacity development and public financial management (PFM) reforms to improve budget execution.
  - Strengthen domestic revenue mobilization given the very low tax-to-GDP ratios.
  - Address data gaps and arrears in external public debt for improved debt management.
  - Support financial sector development while monitoring capitalization and liquidity dynamics.

*Sources: Somali authorities; and IMF staff estimates and projections.*

### Annex I. Risk Assessment Matrix 1/

### Annex I. Risk Assessment Matrix 1/

### Overview
- Based on the July 2017 Risk Assessment Matrix (RAM). The RAM shows events that could materially alter the baseline outlook (the scenario most likely to materialize in the view of Fund staff). The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability of 10–30 percent, and “high” a probability of 30 percent or more). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with authorities. Non-mutually exclusive risks may interact and materialize jointly.

### Global Risks
- Nature/Source of Risks: Intensification of the risks of fragmentation/security dislocation in the Middle East and some countries in Africa.
- Relative Likelihood: High
- Impact if Realized: High
  - (1) lower remittances
  - (2) influx of refugees
  - (3) lower growth.
- Policy Responses:
  - (i) improve business environment and national security;
  - (ii) greater revenue mobilization; and
  - (iii) strengthen social safety nets.

### Country-specific Risks — Financial Risks
- Nature/Source of Risks: Tightening regulatory and supervisory frameworks in advanced and emerging markets.
- Relative Likelihood: Medium
- Impact if Realized: Medium
  - (1) de-risking, prompting banks to forego money transfer business, leading to lower remittances.
- Policy Responses:
  - (i) upgrade capacity in licensing, supervision, and regulation of banks and MTBs;
  - (ii) adhere to AML/CFT law; and
  - (ii) strengthen governance structure of CBS.

### Country-specific Risks — Institutional Risk
- Nature/Source of Risks: Protracted insecurity, weak institutions, delay in reform implementation, persistent drought, and poor data availability.
- Relative Likelihood: High
- Impact if Realized: High
  - (1) destruction of economic infrastructure
  - (2) possible reduction in donor support
  - (3) lower growth
  - (4) humanitarian crisis.
- Policy Responses:
  - (i) continue institutional building;
  - (ii) improve national security; and economic statistics;
  - (iii) strengthen local capacity; and
  - (iv) seek continued donors’ support.

### Country-specific Risks — Fiscal Risks
- Nature/Source of Risks: Weak donor support; weak governance; weak policy commitment to collect tax.
- Relative Likelihood: High
- Impact if Realized: High
  - (1) lower revenue (including grants from donors)
  - (2) domestic arrears accumulation
  - (3) policy slippages and SMP off-track.
- Policy Responses:
  - (i) maintain reform momentum;
  - (ii) greater revenue mobilization; and
  - (iii) keep expenditure under control and improve PFM.

### Country-specific Risks — Currency Reform Risks
- Nature/Source of Risks: Inadequate fund for currency reform; weak regional supports, weak distribution of new currency.
- Relative Likelihood: Medium
- Impact if Realized: High
  - (1) Delay in donor funding
  - (2) lack of credibility in the new currency
  - (3) increased counterfeiting
- Policy Responses:
  - (i) follow through the currency reform agenda engaging potential donor community and mitigating other inherent risks.

### Country-specific Risks — Poor Financial System Supervision
- Nature/Source of Risks: Lack of credible supervision and AML/CFT.
- Relative Likelihood: High
- Impact if Realized: High
  - (1) reduction in remittance inflows, which support the livelihood of many Somalis.
- Policy Responses:
  - (i) upgrade capacity in licensing, supervision, and regulation of banks and MTBs (including for AML/CFT); and
  - (ii) strengthen governance structure of CBS.

*Based on Annex I. Risk Assessment Matrix (July 2017) as presented in the source PDF.*

### 4. The implementation of the program is broadly satisfactory (see Tables 1 and 2).

### cr1855 - 4. The implementation of the program is broadly satisfactory (see Tables 1 and 2).

### Program implementation: June–December 2017
- June 2017:
  - One out of two structural benchmarks (SBs) was not met due to a small technical delay.
  - Two out of six indicative targets (ITs) were not met: the cash fiscal balance and the revenue floor. The revenue shortfall occurred in early 2017 as the new government was taking office.
- September 2017:
  - All but one (out of six) ITs were met.
  - All but one (out of five) SBs were met.
  - Unmet SB required renegotiation of five revenue-collection contracts. Progress:
    - Three of five contracts canceled: road tax, property transfer tax, and vehicle licensing; government took over tax revenue collection for these.
    - Renegotiation of port and airport fee collection contracts delayed by complications.
  - Proposed modification to SB: “The FGS will continue renegotiation with the existing port and airport service providers and will sign new memoranda of understanding on more favorable terms.”
  - With improved Ministry of Finance capacity and legal/financial advisors’ support, aim to finalize renegotiation of the two contracts by the end September 2018.
- December 2017 SBs and additional reforms:
  - Four out of six SBs have been met.
  - For the remaining two SBs, substantial progress since September 2017 and efforts to complete required processes continue.
  - To meet eligibility criteria for achieving 100 percent of non-salary recurrent cost of the RCRF budget:
    - Payment processes and commitment control system made mandatory for all MDAs.
    - Streamlined eligible expenditures to include mainly utilities, stationary, and rent.
    - Intend to submit sufficient payment vouchers for eligibility assessment to achieve the benchmark.
  - Target of 50 percent of transactions of electronic vendor payments through SFMIS purchasing module:
    - Purchasing module fully operationalized.
    - At end-November approaching 40 percent, up from zero percent in late September.

### C. Economic and Financial Policies for 2018–20: macro outlook and anchors
- Growth and inflation projections:
  - Growth expected to recover to 2.5–3.0 percent in 2018–19.
  - Inflation expected to decline to 2.0–2.5 percent in 2018–19 as the drought abates.
- Fiscal policy anchors:
  - Maintain a zero-cash fiscal balance.
  - Avoid any new domestic arrears accumulation.
  - Continue to improve domestic revenue mobilization as committed under the SMP.
- Monetary policy and reserves:
  - Will not allow the net foreign assets of the Central Bank of Somalia, CBS (as defined in the Technical Memorandum of Understanding–TMU), to fall below a continuous floor.
  - Given very low foreign reserves, the CBS will use its portion of recovered CBS foreign assets to increase its net foreign reserves.

### Fiscal policy and reforms (measures implemented and planned)
- End-2017 critical measures:
  - Telecommunications companies agreed to pay tax obligations in line with existing tax laws (sales and payroll taxes, and corporate income tax) retroactively as of October 2017.
    - Agreement clarifies no more negotiated tax payments; enforcement of income tax (personal and corporate) law and sales tax law.
    - Telecoms started paying sales taxes based on self-reported sales figures; audits planned to ensure accuracy.
  - Agreement with an airline company to pay in full its sales tax and arrival and departure fees (“arriva partenze”) arrears and current obligations.
    - Airline recognized obligations to the FGS amounting to $3.6 million, expected to be paid no later than end-January 2018.
- 2018 budget and commitments:
  - 2018 budget passed in December 2017 and aligned with the SMP.
  - Commitments to ensure budget anchored by zero-cash balance, improved domestic revenue, and non-accumulation of new domestic arrears include:
    - Overall fiscal policy actions:
      - Refrain from any expenditures not fully covered by realistic revenue and pledged grants projections.
      - Ensure FGS remain current on obligations; cut non-priority spending if revenue or grant shortfalls occur, following sequestering rules.
      - Use revenue windfalls (including additional grants for budgetary support) to build buffers and pay down domestic arrears per Domestic Arrears Management Committee (DAMC) procedures.
    - Revenue measures:
      - Strengthen tax collection and improve compliance.
      - Continue implementation of recently agreed tax measures.
      - Continue discussions on harmonization of customs with federal member states and draft a common customs strategy roadmap.
      - Large-and-medium-taxpayer office (LMTO) expected to start enforcing tax compliance with identified taxpayers in early 2018.
    - Expenditure measures:
      - Civil service restructuring viewed as necessary to increase staff productivity and contain the public wage bill; World Bank conducting a study.
      - Contract signed with consulting firm to conduct an HR audit.
      - Pilot program (with National Civil Service Commission) to identify and remove absentee staff and underperformers after due diligence; pilot identified 32 such workers and will be extended to all MDAs after World Bank study results.
    - PFM, treasury, cash and arrears management:
      - PFM Action Plan for 2016–2020 being updated.
      - Commitment control system fully implemented across the government.
      - Committed to progress on achieving a Treasury Single Account (TSA), reducing cash advances to MDAs, and closing MDA bank accounts outside the TSA.
      - Cash Management Unit (CMU) operational and collecting daily cash balances from the CBS.
      - Draft terms of reference for Cash Management Committee (CMC) being prepared.
      - DAMC established; arrears settlement eligibility criteria drafted.

### Financial sector reforms
- Currency reform roadmap:
  - Nearly all benchmarks completed.
  - Political consensus across FMS to fight counterfeiting reached.
  - Finalizing package for storage and distribution of new currency and invalidation/destruction of old banknotes under supporting legal framework.
  - Preparing information campaign and framework for independent evaluation of currency reform program.
  - With these steps completed, will finalize budget for currency reform and prepare for launch of new currency with partner support.
- Currency reform phases and approach:
  - Phase I: limited to exchanging counterfeit currencies currently in circulation for new national currency.
  - After launch of new banknotes, no intervention in foreign exchange market; maintain current free-floating exchange rate system.
  - Accelerate efforts to strengthen CBS capacity and develop monetary and reserve management instruments prior to Phase II: injection of additional new Somali Shilling, including larger denominations of new banknotes.
- Financial sector development roadmap:
  - Draft prepared highlighting key bottlenecks for financial development and inclusion and reforms to address issues related to withdrawal of correspondent banking relationships (CBRs).
  - Plan to improve presentation and structure of roadmap in collaboration with the IMF and World Bank to guide sector reform policy.
- Ongoing capacity and supervisory improvements:
  - Over past two years, CBS improved capacity to supervise banks and money transfer businesses (MTBs); will continue efforts.
  - Established Executive and Audit Committees; implementing new accounting and financial reporting systems; improving accounting and audit functions.
  - Continue to strengthen governance and organizational structure of CBS and its oversight authority; improve commercial banks’ accounting and reporting standards in line with international financial reporting standards (IFRS).
  - CBS strengthening annual relicensing process and started on-site examinations of largest MTBs.
  - Financial Reporting Center (FRC) operational and in December 2017 began reviewing suspicious transactions; strengthening cooperation between FRC and CBS ongoing.
  - In line with Financial Action Task Force (FATF) standards, CBS will finalize the Targeted Financial Sanctions Regulation law to implement Somalia’s international obligations under UNSCRs 1267 and 1373, and enhance AML/CFT compliance by MTBs.
  - Will improve MTBs’ compliance with AML/CFT regulations and reporting of suspicious transactions to the FRC.

### Policies for accelerating economic recovery and social inclusion
- Broad-based reform agenda:
  - Focus on strengthening economic resilience and foundations for sustained inclusive growth.
  - May 2017 London Conference recommended establishment of a mutual accountability framework (MAF) with development partners.
  - Progress under MAF covers: (1) political settlement; (2) security; (3) rule of law; (4) human rights and gender; (5) youth empowerment; (6) financial and economic management; (7) growth, economic recovery, and resilience; and (8) social inclusion.
- Priority areas:
  - Combating corruption and improving governance:
    - Initiatives since early 2017 include passage of anti-corruption bill (in line with international best practices), establishment of a “Delivery Unit” to monitor government program performance, ministerial orders to fight civil servant absenteeism, improved transparency on monetary and fiscal reporting (including where possible off-budget support), and development of FGS budget website.
    - Anti-corruption law passed by lower house of Parliament and awaiting Senate approval.
    - Establishing an anti-corruption commission to improve governance and combat mismanagement and malpractice.
  - Improving the business environment:
    - Steps to increase private sector role; passed a foreign direct investment (FDI) law and adopted a procurement bill.
    - Continue public-private dialogue, improved financial governance and intermediation, new business regulations, and access to finance.
    - Access to financial services pursued via Financial Sector Development Roadmap, including better AML/CFT compliance.
    - Somalia entered the Global Doing Business Survey for the first time in 2017; will work on areas to raise Somalia’s position.
  - Social safety nets and social spending:
    - Develop and include social safety net programs in the budget and improve social spending to build resilience and support poverty reduction.
    - Progress on managing and facilitating refugees’ return to Somalia.
    - Under the UN Refugee Return and Reintegration project, increasing number of refugees placed in training institutions (mainly in Kenya) and trained in peace building and conflict resolution.
    - Plan to move orphan payments from Somali National Army and police budgets to the Disabled and Orphans Organization budget to improve visibility.
    - Improve budgetary allocations on social spending, including education, health, and humanitarian supports.
  - National Development Plan (NDP) update:
    - Update NDP to focus on accelerating economic recovery and social inclusion; promote recovery and growth, improve resilience through social safety nets, and enable financial and private sector inclusion.
    - Start preparing medium-term fiscal framework and link it to the NDP.
    - Improve realism of social program targets (poverty incidence, job creation, capacity and resilience programs) and identify/ensure adequate financing of the revised NDP.

### D. Institutions and statistics
- Institutional strengthening priorities:
  - Fiscal federalism and PFM legislation:
    - Fiscal federalism critical for development goals; progress on fiscal federalism discussions with FMS encouraging.
    - Agreement reached on harmonization of some selected taxes with federal member states.
    - FGS and states showing interest in modernizing customs approach by shifting from specific tariffs to an ad valorem tariff.
    - Expect agreement with regions on licensing for off-shore fishing, starting with tuna, by [end-March], in time for start of June tuna season.
    - Federal PFM Bill approved by cabinet and under discussion by Parliament; harmonization of FMS legislation with FGS underway.
  - Natural resource management and transparency:
    - Draft Federal PFM Bill includes clause governing natural resource revenue management principles as they relate to fiscal policy.
    - FGS will finalize revisions to legal framework for management of natural resources and establish necessary regulatory institutions before entering production-sharing agreements.
    - Ministry of Fisheries to propose framework for sharing federal offshore fishing.
    - Minister of Finance to work with Ministry of Petroleum to review revenue-sharing formula proposed in petroleum agreement and initiate new negotiations with all FMSs following Parliamentary approval of Petroleum Bill.
  - Procurement and concessions:
    - FGS committed to transparency in government contract concessions and renegotiation.
    - Several government contracts canceled, renegotiated, or under review; immediate positive impact includes improving FGS revenue collections.
    - Seek donor support on procurement, operational assistance, and capacity building within Ministry of Finance and line ministries.
- Statistics and data improvements:
  - Established Somali National Bureau of Statistics (SNBS) and submitted new statistical law to Parliament.
  - Building on Mogadishu business registry database to expand to FMS.
  - Revised national account data for 2013–2016 and developed a new consumer price index series.
  - Will continue to use partner data to collect trade in goods data by value and volume for Mogadishu in 2018.
  - Commitments to improve economic and financial database:
    - Expand and improve business registry data.
    - Continue to improve remittance data via MTB survey.
    - Initiate surveys on travel, primary transfers, and foreign direct investment in 2018.
    - Provide banking sector financial data by residency starting in 2018.
    - Accelerate ensuring CBS and commercial banks’ balance sheets are IFRS compliant.
    - Complete a civil service database.
    - CBS to formulate action plan for improving source data and for collecting financial and non-financial data.

### E. Relations with international creditors and debt relief
- Policy and objectives:
  - Continue efforts to normalize relations with international creditors to address external debt and arrears and facilitate access to concessional financing.
  - Substantial reduction in debt burden considered essential given urgency of meeting Somalia’s social and reconstruction needs.
  - Commit to establishing a sufficient track record of sound economic management, with successful completion of this and subsequent SMPs, as committed at the May 2017 donors’ conference in London.

*Source: cr1855 - 4. The implementation of the program is broadly satisfactory (see Tables 1 and 2).*

### 18. The April 20 Roundtable discussed the process for future debt relief. We understand

### 18. The April 20 Roundtable discussed the process for future debt relief. We understand

### Debt-relief process and eligibility
- Somalia is ineligible for financial assistance from the IMF, given the pending clearance of its longstanding arrears.
- External arrears clearance is highlighted as an important part of normalizing relations with the international financial community.
- With help from the international financial institutions (IFIs), Somalia will strive to implement reform measures necessary for achieving debt relief under the benchmark-based HIPC Initiative.
- The debt-relief process will involve:
  - establishing a track record of economic management;
  - cooperation with the IMF on policies and payments;
  - continuing outreach to creditors to secure their financial support in due time.
- The debt-relief process approach follows recommendations from the April 2017 Roundtable and endorsements at the May 2017 London conference.

### Debt database reconstruction and Debt Management Unit (DMU) capacity
- The FGS’ records on external debt were lost during the conflict and are being reconstituted.
- With technical assistance from the African Development Bank, the DMU has reconstructed about two-thirds of Somalia’s external debt database.
- Validation outreach and current status:
  - Reached out to 21 bilateral creditors, representing nearly 80 percent of Somalia’s external debt, to confirm loan-by-loan terms, principals, and interest outstanding.
  - The remaining 20 percent of external debt is primarily with multilateral creditors.
  - As of the report date, 12 bilateral creditors have responded to the validation exercise.
  - Once the remaining nine bilateral creditors respond, Somalia would have 99 percent of its external debt confirmed.
- Continued capacity improvement at the DMU is planned given its criticality for future debt sustainability assessment.

### Technical Assistance (TA) requests to the IMF
- During the program period, Somalia requests IMF TA in the following areas:
  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) natural resources sharing;
  7) licensing, supervision, and regulation of banks;
  8) currency reform;
  9) central banking operations and governance structure;
  10) banking operations; and
  11) macroeconomic statistics.

### Program monitoring and reviews
- The SMP Monitoring Committee will be reactivated to monitor program implementation.
- Monitoring will include preparing and assessing quarterly indicative targets (Table 1) and structural benchmarks (SBs) (Table 2).
- The program includes two reviews with test dates of:
  - September 30, 2017, and
  - March 31, 2018.
- The indicative targets are defined in the TMU (Attachment II).

### Indicative targets, definitions, and measurement (TMU highlights)
- SMP coverage and timing:
  - The TMU specifies indicative targets for end-June 2017, end-September 2017, end-December 2017, and end-March 2018.
  - Indicative targets are evaluated in terms of cumulative flows from the beginning of each calendar year.
- Indicative targets listed in the TMU:
  a) Floor on the fiscal balance (on a cash basis).
  b) Ceiling on accumulation of new domestic expenditure arrears of the Federal Government of Somalia (FGS).
  c) Floor on FGS revenue.
  d) Ceiling on new domestic debt contracted by the FGS.
  e) Ceiling on new external debt contracted or guaranteed by the FGS or the Central Bank of Somalia (CBS).
  f) Floors on CBS’s net foreign assets.
- Key definitions and computation rules:
  - Government for SMP purposes is defined as the FGS and excludes public entities with autonomous legal personalities whose budgets are not included in the federal government budget.
  - Government revenue includes all tax and nontax receipts transferred into the FGS general accounts at the CBS and excludes grants; measured on a cash basis and cumulative from January 1, 2017.
  - Fiscal balance (cash basis) = (central government revenue + budget grants) − (total current expenditure + capital expenditure, excluding foreign-financed off-budget investment).
  - New domestic expenditure arrears = budgeted FGS payments to residents determined by contractual obligations that remain unpaid 90 days after the due date.
  - Debt definition follows Executive Board Decision No. 15688-(14/107), Point 8(a) and 8(b), adopted on December 5, 2014, and includes loans, suppliers’ credits, and leases (debt equals the present value at inception of lease payments, excluding operation/repair/maintenance).
  - Domestic debt = 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 above. Temporary advances must be fully repaid within 90 days.
  - External debt benchmarks are cumulative ceilings on contracting or guaranteeing new nominal external non-concessional borrowing by the government from January 1, 2017; external debt is defined by creditor residency.
  - CBS net foreign assets = CBS gross foreign assets − CBS gross foreign liabilities, where gross foreign assets include:
    1) gold valued, over the program period, at the market price of December 31, 2016 ($1,157.10 per ounce);
    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, 2016 will be used to convert foreign assets and liabilities denominated in currencies other than U.S. dollars.

### Program-monitoring committee and reporting
- The Somali authorities shall maintain a program-monitoring committee composed of senior officials from:
  - the Ministry of Finance,
  - the Central Bank of Somalia, and
  - the Ministry of Planning, Investment and Economic Development.
- The IMF Resident Representative will have observer status on the committee.
- Committee responsibilities:
  - monitor program performance;
  - recommend policy responses;
  - inform the Fund regularly on program performance;
  - transmit supporting materials necessary for evaluation of benchmarks.
- Reporting requirement: the committee shall 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.

*Source: Somalia — Staff-Monitored Program, May 2017–April 2018 (Technical Memorandum of Understanding and MEFP excerpts).*

### 12.      To allow monitoring of developments under the program, the Ministry of Finance, the

### Somalia: SMP Data Reporting, May 2017–April 2018

### Data reporting requirements — Central Bank of Somalia (CBS)
- CBS balance sheet
  - Description: Detailed balance sheet of the CBS.
  - Frequency: Monthly
  - Timing (within period specified): 3 weeks after the end of each month
- Monetary survey
  - Description: Banking system balance sheet and consolidated balance sheet of commercial banks.
  - Frequency: Quarterly
  - Timing: 4 weeks after the end of each quarter
- Balance of payments
  - Description: Exports, imports, invisible transactions, remittances, and capital and financial account flows.
  - Frequency: Quarterly
  - Timing: 2 months after the end of each quarter
- Revenue and expenditure (CBS cash)
  - Description: The 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
- Disbursements and repayments
  - Description: (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
  - Description: 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
  - Description: Provide data on the amounts of on-budget grants.
  - Frequency: Monthly
  - Timing: 1 week after the end of each month
- Treasury Single Account
  - Description: A list indicating the operating user (MDA or otherwise) of all government bank accounts, including closing balances
  - Frequency: Monthly
  - Timing: 1 week after the end of each month

### Data reporting requirements — Ministry of Finance (FGS)
- FGS budget operations
  - Description: The 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
- Outstanding appropriation, allotment, commitment, vendor purchasing/payments, and bank balances for fiscal year 2017-18
  - Frequency: Monthly
  - Timing: 4 weeks after the end of the month
- Monitoring Agent reports for Recurrent Cost and Reform Financing non-salary reimbursement eligibility
  - Frequency: Monthly
  - Timing: 4 weeks after the end of the month
- Monthly cash plan
  - Frequency: Quarterly
  - Timing: 4 weeks after the end of each quarter
- Disbursements of loans
  - Frequency: Monthly
  - Timing: 4 weeks after the end of each month
- Domestic arrears
  - Description: A table providing the 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
- Domestic debt
  - Description: The amount of new domestic debt contracted by Government.
  - Frequency: Monthly
  - Timing: 4 weeks after the end of the month
- External debt
  - Description: The amount of new external debt contracted or guaranteed by Government.
  - Frequency: Monthly
  - Timing: 4 weeks after the end of the month
- Structural benchmarks
  - Description: A table with a 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

### Data reporting requirements — National Statistics Office (STA / SNBS)
- CPI and other economic indicators
  - Description: Indicators to assess overall economic trends, such as the consumer price index.
  - Frequency: Monthly
  - Timing: 6 weeks after the end of each month
- Trade data, production data
  - Frequency: Quarterly
  - Timing: 6 weeks after the end of each quarter

### Data adequacy, standards, and reporting to IMF STA (selected findings)
- General: "Data provision has serious shortcomings that significantly hamper surveillance. Data gaps are caused by institutional weaknesses and weak capacity, and poor source data."
- National Accounts: STA, MCD and the World Bank have re-estimated new GDP series for 2013–16. Government final consumption expenditure and public investment estimates derive from the FGS and five Federal Member States accounts.
- Price Statistics: New CPI series developed using the World Bank 2016 high frequency household; new series include basket of 419 items (312 items previously).
- Government Finance Statistics: FGS commenced use of an automated FMIS during 2015; mapping between chart of accounts and GFS items is being developed with IMF technical assistance.
- Monetary and Financial Statistics: CBS financial reporting is improving but balance sheet data is incomplete; commercial banks started reporting quarterly balance sheet data on a quarterly basis in 2017; neither is consistent with IFRS and both should be considered under construction.
- External sector statistics: Annual Balance of Payments compiled for 2013–15 based largely on third party data and qualitative assessments; customs administration reforms expected to improve trade data via the port of Mogadishu in 2018; remittance survey of MTBs initiated in 2017 expected to replace third-party data as it improves.
- Participation in data standards: "Somalia does not participate in the enhanced General Data Dissemination System (e-GDDS)."
- Reporting to STA: "No data in the format of SRFs have been received by STA."

### Key numeric and institutional points cited elsewhere in the document
- Resident Representative: Mr. Samba Thiam, resident representative for Somalia, has been posted in Nairobi since December 1, 2014.
- IMF membership and financial data (as of December 31, 2017):
  - Quota: 44.20 SDR Million, 100.00 percent quota
  - Net cumulative allocation (SDR Department): 46.46 SDR Million, 100.00 percent allocation
  - Trust Fund: 18.15 SDR Million, 39.06 percent
- Overdue obligations and projected payments to the IMF (SDR Million) — Total overdue (as of 12/31/2017): 239.09; projected annual payments 2018–2022: 1.96, 1.97, 1.97, 1.97, 1.97 respectively; Principal: 111.55; Charges/Interest: 127.54 with 2018–2022 payments listed as 1.96, 1.97, 1.97, 1.97, 1.97.
- Economic growth: "economic growth slowed down to 1.8 percent in 2017, from 2.4 percent in" (text truncated at source).

*Source: Somalia: SMP Data Reporting, May 2017–April 2018; IMF staff report content provided in the supplied document.*

### 2016. Steadfast implementation of economic policies supported by the Fund, moderated

### 2016. Steadfast implementation of economic policies supported by the Fund, moderated

### Economic outcomes and outlook
- Inflation increased to 5.2 percent in 2017 from 1.3 percent in 2016 on the back of high food prices.
- As the drought effects recede, inflation is expected to decline to 2.8 percent in 2018 and remain low thereafter.
- Economic growth is expected to recover and stabilize at 2.5–3.5 percent in 2018–20.

### Fiscal performance and revenue mobilization
- The fiscal position ended the year with a surplus of $2.7 million, owing to better than expected revenue collection, improved expenditure management, and unexpected donor budget support.
- Domestic revenue collection exceeded the program budget by $5.09 million (3.7 percent budgeted revenue).
- Domestic revenue collection increased by 88.2 percent between 2013 (the first full year budget) and 2017.
- Domestic revenue increased by 27 percent in 2017 despite the drought, security challenges and the political transition.
- Measures implemented in the last six months include:
  - Creation of a large tax-payers’ office.
  - Introduction of sales tax in hotels and commencement of sales tax collection on imported goods at ports of entry.
  - Agreement with telecommunications companies to move from negotiated taxes to sales tax based on transactions.
  - Commencement of payroll tax collection from employees of large NGOs and telecommunications companies.
  - Reduction in the number of tax exemptions on imported goods.
- Discussions are underway between the FGS and FMS to move from specific customs tax to ad valorem, recognizing scope to increase customs revenue.

### Program implementation under the SMP
- Program performance remains satisfactory, with most performance and structural benchmarks for June and September 2017 met.
- Missed targets:
  - Two out of four Indicative Targets (IT) due in June 2017 were missed by small margins.
  - One out of six ITs due in September 2017 was missed by a small margin.
  - Reasons: political transition, security incidents, and temporary delays in implementing some revenue measures.
- By end-September 2017, only one structural benchmark was still in progress due to difficulties in cancelling two out of five revenue collection contracts, which are currently being renegotiated.
- Authorities elevated monitoring of SMP progress to a weekly agenda item during Cabinet meetings to galvanize whole-of-government support.

### Public Financial Management, expenditure control and governance
- Commitment control system implemented across all MDAs; cash advances for procurement are being reduced.
- A civil service audit to improve public service efficiency is ongoing.
- Security expenditures accounted for 28% of total government expenditure in 2016; authorities are reviewing security expenditures as part of fiscal consolidation.
- Biometric registration of all security personnel to streamline the payroll is ongoing.
- Anti-corruption and governance measures:
  - High-profile public campaign against corruption led by the President, Prime Minister, and Minister of Finance.
  - Appointment of a new Auditor General and an Accountant General in the last six months.
  - Competitive recruitment process for Directors General and Permanent Secretaries for all MDAs is ongoing.
  - Rebuilding institutional integrity and instituting stringent measures to safeguard public funds.

### Financial sector, payment systems, and currency reform
- Central Bank of Somalia (CBS) actions:
  - Continued efforts to improve capacity to license, regulate and supervise financial institutions.
  - With World Bank support, launched a new payment system and reached general agreement with major financial institutions to create the first Somali inter-bank payment system to improve financial intermediation.
  - Completed a comprehensive currency reform road map and commenced preparatory work for phase one, which entails the introduction of a new currency; mobilized other branches of government and obtained agreement from FMS to support the process.
  - Developed a detailed financial sector road map to be implemented with support from international development partners led by the IMF and the World Bank.
  - Improved capacity to supervise banks and money transfer businesses with Fund support.
- AML/CFT and reporting:
  - Efforts underway to address regulatory and capacity gaps in the Anti-Money Laundering and Combating the Financing of Terrorist (AML/CFT) framework.
  - The Financial Reporting Centre for suspicious transactions is operational; efforts to develop critical regulations are continuing.
  - Authorities remain committed to further strengthen the regulatory framework.

### Private sector and statistical capacity
- Private sector measures:
  - Passage of a foreign direct investment law.
  - Adoption of a procurement bill to foster private sector development.
  - High-level dialogue between government and business leaders to support the reform agenda and improve the business environment is ongoing.
- Statistics and data capacity:
  - Establishment of the Somalia Bureau of Statistics.
  - Passage of a new Statistical Law is under parliamentary consideration.
  - Improved capacity of the CBS to collect financial data.
  - Technical assistance from the IMF and other development partners has been utilized to improve data collection, analysis and timely dissemination.

### Fiscal federalism, resource management, and fisheries
- Progress on fiscal federalism:
  - Since September, finance ministers agreed to harmonize selected taxes, update national sales tax regime, and create harmonized customs laws and administration with a goal of moving to ad valorem tax.
  - Discussions among national leaders on natural resources management and revenue sharing have gathered substantial momentum.
- Fisheries agreement:
  - On February 10, 2018, the FGS and FMSs leaders signed an interim agreement on the management and licensing of fisheries resources.
  - The agreement will allow Somalia to take advantage of the upcoming tuna fishing season and lead to the creation of Fisheries Management Authority.

### Debt relief, arrears clearance and re-engagement with IFIs
- Debt management progress:
  - The Debt Management Unit, with support from African Development Bank, has reconstructed 67% of the external debt database.
  - With cooperation of the remaining bilateral creditors, validation exercise will soon be completed.
- Authorities intend to produce a poverty reduction strategy paper within a short period of time using high frequency survey and poverty level data produced with World Bank assistance along with the National Development Plan.
- Authorities state that re-engagement with IFIs through accelerated arrears clearance could unlock grants, support security improvements, poverty reduction, rebuilding economic infrastructure, and deepen reforms.
- Authorities stand ready to work with the Fund to ensure speedy external debt relief and arrears clearance.

### Conclusion and commitments
- The authorities remain committed to successful completion of the current SMP, which has laid a foundation for macroeconomic stability and eventual resolution of the country’s debt burden.
- They look forward to a successor SMP to help address upcoming challenges, remain committed to sustaining reform momentum, and aim for accelerated re-engagement to reach the Decision Point of the HIPC process to unlock external resources required for sustained and inclusive growth.

*Source: cr1855 - 2016. Steadfast implementation of economic policies supported by the Fund, moderated*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2018/cr1855.pdf_