## 1somea2019002

## Source details

**Canonical URL:** [1somea2019002](https://www.imf.org/-/media/files/publications/cr/2019/1somea2019002.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2019/1somea2019002.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2019/1somea2019002.pdf.json)

---

### BACKGROUND AND CONTEXT
- Political and security environment
  - Continued efforts to solidify security and peace; environment remains challenging with heightened political tensions between the Federal Government (FGS) and Federal Member States (FMS).
  - Five FMS have entered their states’ presidential elections periods and national elections are expected in late 2020.
  - Authorities, with international partners, have taken steps to reinforce peace and security; region remains fragile despite improvements.
- Economic situation
  - Favorable weather led to a modest economic recovery; growth remains too low to significantly address poverty and unemployment, particularly among youth.
  - Somalia remains vulnerable to natural disasters and food insecurity.
  - Authorities developed the Somalia Recovery and Resilience Framework as a long-term response; projects will take time to be in place.
  - Fiscal challenges remain significant; authorities do not yet have the capacity to make any payments on Somalia’s large external debt ($ 4.7 billion, about 66 percent of GDP), which is almost all in arrears.
- Fund and international relations
  - FGS completed SMP I and SMP II; SMP III approved in June 2018 covering a 12-month period through April 2019.
  - Three Article IV consultations completed starting July 2015, then February 2017, and February 2018.
  - Somalia’s overdue obligation to the IMF were $335.2 million (equivalent to SDR 241 million and 545 percent of quota) at end-December 2018.
  - Biannual Somalia Partnership Forum (SPF) and Mutual Accountability Framework (MAF) established with donors.
  - World Bank approved pre-arrears clearance grants totaling $60 million and $20 million; EU approved a three-year budget finance grant of about $115 million to be disbursed over three years.
  - World Bank grants approved September 25, 2018; EU approved September 26, 2018.

### RECENT ECONOMIC DEVELOPMENTS
- Macroeconomic performance and prices (2018, projections and comparators)
  - Real GDP growth: 3.1 percent (2016: 4.9; 2017: 2.3; 2019 proj.: 3.5).
  - End-year inflation (CPI, e.o.p.): 3.5 percent (2016: 0.7; 2017: 5.3; 2019 proj.: 3.0).
- Trade and external sector
  - Trade deficit expected to have narrowed to 50.9 percent of GDP (from 55.3 percent of GDP in 2017).
- Fiscal performance
  - Domestic revenue through November 2018 reached $161 million (31 percent higher than the same period in 2017).
  - Overall cash fiscal position in surplus by $8 million.
  - Additional grants amounting $17 million were disbursed in December.
  - Fiscal reforms completed: stocktaking of domestic arrears; reducing use of cash advances and recording them into SFMIS; direct payment of employees’ compensation through bank accounts; operationalizing the Large and Medium-term Taxpayers’ Office (LMTO); registering more large and medium taxpayers; biometric registration of Somalia National Army (SNA) personnel commenced.
- Financial sector
  - Banks' lending to the private sector has grown by an average of 60 percent year-on-year since end-2016.
  - Financial inflows via money transfer bureaus (MTBs) remain relatively stable.
  - Banking system remains liquid and well capitalized; supervision strengthening (LSD enhanced off-site analysis; new asset classification regulations).
  - Cabinet approved draft Targeted Financial Sanctions Bill and sent to Parliament for approval (AML/CFT progress).

### PERFORMANCE UNDER SMP III
- Overall assessment
  - Performance broadly satisfactory (Memorandum of Economic and Financial Policies, MEFP ¶4, Tables 1 and 2).
  - Authorities stepped up reforms ahead of second and final review.
- Compliance and benchmarks
  - All structural benchmarks (SBs) and indicative targets (ITs) for June 2018 and September 2018 were met, including over-performance on domestic revenue, fiscal balance, and net foreign assets.
  - Preliminary data suggest authorities are broadly on track to meet December 2018 and March 2019 targets.
  - Completed SBs include submitting the Revenue Bill to Parliament and takeover by the Ministry of Finance of non-tax revenue from MDAs.
  - Seven remaining SBs noted as well on track including preparation of the National Development Plan for 2020–2024 (NDP9) intended as interim Poverty Reduction Strategy Paper (iPRSP).
  - Risk: renegotiations of the airport and port contracts advancing but likely delays put the related SB at risk.

### OUTLOOK AND RISKS
- Baseline outlook (medium-run)
  - Growth expected to stabilize and inflation to stay low, assuming gradual security improvement and absence of weather shocks.
  - Consumption anticipated to continue to drive growth, supported by grant funding and remittances.
  - Production-side assumptions: continued agricultural growth and expansion in transport, construction, and telecommunications, boosting investment and maintaining a persistently large trade deficit.
  - Performance contingent on continued fiscal discipline and gradual expansion of financial services.
- Downside risks
  - Political tensions between FGS and FMS or deterioration in security could weaken economic activity and slow program implementation.
  - Weather-events could increase humanitarian needs.
  - Fiscal risks from poor revenue collection, lower-than-pledged grants, lack of fiscal discipline, weak governance, and corruption.
  - Technical or financial problems in the mobile money sector (large and currently unregulated) could impede payments and put household savings at risk.
- Mitigating factors
  - Authorities’ strong commitment to the program and donor support, including efforts to strengthen FGS–FMS relations and maintain security.

### POLICY DISCUSSIONS — NEAR-TERM PRIORITIES
- Five agreed near-term policy priorities:
  1. Improving the fiscal framework.
  2. Strengthening PFM and revenue mobilization.
  3. Finalizing key elements of the currency reform project.
  4. Reviving the financial sector, including improving AML/CFT compliance.
  5. Promoting economic recovery and resilience programs.

- A. Continue Improving the Fiscal Framework
  - Revised 2018 budget
    - Targets budget envelope of $297.1 million, up from $261.9 million in the program.
    - Upward revision reflects additional grants and increased domestic revenue mobilization from new measures: (1) sales tax on imports of goods; (2) sales taxes and license fees from telecommunication companies; (3) increased tax rate on khat; and (4) transferring collection of certain fees from line ministries to the Ministry of Finance.
  - 2019 budget
    - Approved in December; envisages total domestic revenues and grants of $340.1 million compared to $288.3 million in the program (Table 2a).
    - Budget relies on domestic revenues of $189.9 million and grants of $150.2 million (budgetary and project grants).
    - Staff and authorities agreed to a more ambitious revenue target of $196.3 million (in line with recent trends and supporting measures; MEFP ¶8).
    - Staff urged a more conservative estimate of grants: $140.4 million.
    - Given uncertainty, a supplementary budget will be issued later in 2019 to reflect revenue yields and grant disbursement experience.

### REVENUE POLICY, MEASURES, AND STAFF RECOMMENDATIONS
- Text Table 2 — New and ongoing revenue measures (Million of U.S. Dollars)
  - Total projected yields from fiscal measures: 43.6 (2018) and 68.4 (2019).
  - Revenue measures previously implemented: 43.6 (2018) and 44.6 (2019).
  - Tax policy, increase in excise tax rate on khat from $2 to $2.50 per kg: 18.0 (2018) and 18.0 (2019).
  - Khat: 13.0 (2018) and 12.0 (2019).
  - Airlines sales tax and fees: 3.3 (2018) and 3.3 (2019).
  - Higher and increased progressivity rate of rental income tax (from 5% to 15–22%): 0.5 (2018) and 0.5 (2019).
  - Corporate income tax: 1.2 (2018) and 2.2 (2019).
  - Tax administration measures: 25.6 (2018) and 26.6 (2019).
  - Personal income tax (hotels, electricity, telecoms, foreign workers and NGOs): 5.5 (2018) and 6.4 (2019).
  - In-housing revenue collection: 1.4 (2018) and - (2019).
  - Sales tax on Telecommunication companies: 6.5 (2018) and 6.5 (2019).
  - Sales tax on hotels: 0.2 (2018) and 0.2 (2019).
  - Collect sales tax on imported goods by value at the port: 12.0 (2018) and 13.0 (2019).
  - Sales tax on consumer electricity companies: - (2018) and 0.5 (2019).
- New revenue measures in SMP III projected yields
  - Annual tuna licence fees: 3.0.
  - Airspace fees collected by ICAO: 12.0.
  - Telecommunication licensing and spectrum fees: 2.0.
  - Visa charges: 4.8.
  - Airport fees-Favori: 2.0.
- Notes from Text Table 2
  - These are ongoing yields from measures introduced in 2017 and 2018.
  - The 2018 projection includes full-year annual fees and taxes and clearance of fees and taxes arrears.
  - Approximately 150-200 flights fly over Somali airspace daily, generating ICAO fees of about US$1.5 million per month.
  - The Million of U.S. Dollars unit applies to the table figures.
- Staff recommendations on revenue
  - Increase registration of large and medium taxpayers and assign unique taxpayer identification numbers.
  - Continue customs reform roadmap with DFID assistance focusing on front-end declaration and auditing processes.
  - Start reporting on revenue mobilization for the whole country to capture comprehensive tax-to-GDP ratio.

### EXPENDITURE POLICY AND PFM REFORMS
- Budget plans for large increases in employee compensation, capital investment, and transfers to sub-national governments financed by expected increase in grants.
- Given past uncertainty on grant disbursements, agreed to maintain tight expenditure control, especially on non-priority spending.
- In event of revenue or grant shortfalls, authorities will cut spending in line with rules for sequestration (prioritizing expenditures).
- Revenue windfalls will be used first to pay down domestic arrears and then to build up a fiscal buffer; fiscal buffer will only be used to cover wages and salaries, non-salary spending will follow sequestration rules.
- Staff recommended swift progress on PFM reforms including:
  - Implement the Treasury Single Account (TSA) by closing unnecessary MDAs bank accounts and mapping them to the SFMIS.
  - Urgently implement a proper cash-forecasting framework and fully adopt the commitment control system.
  - Further reduce the use of cash advances.
  - Effect direct bank payments for employees, vendors and contractors; eliminate cash payments.
  - Require more accountability from FMS by reporting on uses of transfers.
  - Speed up biometric registration of national army forces and civil servant database.
  - Reinforce monitoring activities of the Domestic Arrears Management Committee’s (DAMC) and Debt Management Unit (DMU).
  - Implement the national procurement policy and establish a procurement authority.

### FINANCIAL SECTOR, AML/CFT, AND CURRENCY REFORM
- Financial sector structure and capacity
  - Six banks, 11 money transfer businesses (MTBs), and numerous mobile money operators (MNOs).
  - Total banking sector assets amount to just over 5 percent of GDP.
  - Financial inflows through the MTBs amount to well over $2 billion per year.
  - World Bank report estimates monthly transaction value at about $2.7 billion per month, and over 70 percent of Somali households use mobile money regularly.
  - Capacity at the central bank remains relatively weak; supervisory regime still basic despite recent progress.
- Financial Sector Reform Roadmap (FSR) near-term priorities
  - Reshape CBS organizational and governance structure (IMF TA; approved by CBS Board on November 25).
  - Introduce supervisory oversight over MNOs; finalize mobile money regulations in early 2019; seek World Bank assistance to operationalize reforms.
  - CBS appears on track to make its balance sheet compliant with IFRS by the end of 2019.
- AML/CFT framework: status, gaps, and planned actions
  - Basic legal and operational framework in place but critical gaps remain: poor MTB reporting and compliance; weak Financial Reporting Center (FRC) capacity; poor coordination between operational agencies; lack of a national identification card.
  - LSD conducting on- and off-site inspections of MTBs; annual relicensing applied.
  - Draft Targeted Financial Sanctions Bill submitted to Parliament; staff urged rapid enactment and implementation via regulation.
  - Staff and authorities, with donors, agreed to develop an AML/CFT action plan.
- Currency reform (Phase I)
  - Phase I limited to exchanging the counterfeit Somali shilling notes currently in circulation with new currency.
  - Key outstanding items: finalize communication strategy; prepare Phase I project timeline; set up project management and project fund administration; operationalize accountability framework.
  - Donor financing status: some donors indicated willingness to support Phase I, but further work needed to secure the full $41 million.
  - Preparatory documents in progress with IMF assistance: communication strategy framework; currency reform project timeline; tender document.
  - Accountability framework committee associated with Phase I endorsed by the CBS Board; committee members identified in June 2018.
  - Expectation: IMF to assist with a currency expert based in Nairobi once funding and administrative framework are in place.

### GOVERNANCE, ANTI-CORRUPTION, AND INSTITUTIONAL REFORMS
- IMF engagement
  - Staff explained the new IMF framework for assessing governance and corruption risks to be conducted during the Article IV.
  - Staff urged passing an audit bill ensuring the independence of the Auditor General and consistent with the Somali constitution.
- Authorities’ anti-corruption actions and commitments
  - Passage in the lower house of the Anti-Corruption Bill; Bill approved by the House of the People and awaiting Senate approval.
  - Plans to form an Anti-Corruption Commission upon parliamentary approval and presidential signature.
  - Reform Implementation Unit (“Delivery Unit”) to monitor reform priorities.
  - Biometric pilot programs to track civil servant attendance.
  - Improve transparency on monetary and fiscal reporting and strengthen MoF website including Budget information.

### PATH TOWARD UCT-QUALITY SMP AND HIPC DECISION POINT
- Sequence and requirements
  - Establish a track record via consecutive SMP completions; satisfactory completion of SMP III could support design of successor SMP meeting UCT standards and pave way for arrears clearance and HIPC DP.
  - Reaching HIPC DP requires coordination of international community, donor commitments to finance debt relief, and completion of at least an iPRSP.
  - Somalia must reconcile external debt data, prepare a full debt sustainability analysis (DSA), and put in place an arrears clearance strategy.
- External debt progress and magnitude
  - Twenty out of the 21 bilateral creditors have validated their claims.
  - Somalia’s external debt about $4.7 billion or 66 percent of GDP as of end-2017; nearly 94 percent is in arrears.
  - Government does not have capacity to service its debt; situation unsustainable.
- National Development Plan (NDP9)
  - Concept note for NDP9 approved by the Cabinet; donors supporting preparation; TA planned by World Bank and IMF.
  - Authorities intend NDP9 to be iPRSP compliant, fully costed, and based on broad consultations.
  - Staff recommended early support for developing the macro-fiscal framework of NDP9.

### SMP MONITORING, INDICATIVE TARGETS, AND STRUCTURAL BENCHMARKS
- SMP monitoring cadence
  - One more review to assess performance based on test date of March 31, 2019.
  - SB2 monitored every six months; SB3 monitored monthly starting September 2018.
  - Program-monitoring committee to provide monthly progress reports within four weeks of the end of each month.
- Selected indicative targets (Millions of U.S. dollars) — sampled statuses
  - Fiscal balance (cash basis; floor): 0.0; 2.3; Met; 0.0; 8.6; Met; 0.0; 0.0; 0.0.
  - Domestic revenue floor: 75.7; 82.9; Met; 116.1; 127.2; Met; 165.0; 47.0; 49.1.
  - CBS – Net foreign assets of the CBS (floor) 4/5/: 24.0; 27.7; Met; 24.0; 29.0; Met; 24.0; 24.0.
- Structural benchmarks (selected met and on-track examples)
  - Met: Minister of Finance orders to pay salaries via bank accounts and record SNA payroll into SFMIS (Jun-18); FMS reporting on utilization of FGS transfers (Sep-18); record cash advances in SFMIS (Sep-18); submit Revenue Bill to Parliament (Dec-18); submit draft Targeted Financial Sanctions Act (Sep-18).
  - On-track: Design and implement cash-forecasting system (Dec-18); conclude renegotiation of port and airport contracts (Dec-18); close unnecessary MDA accounts and map to SFMIS (Mar-19); prepare draft National Development Plan 2020–24 (Mar-19); CBS regulation on credit classification and provisioning (Mar-19).

### TMU DEFINITIONS, DATA REPORTING, AND TECHNICAL ASSISTANCE
- TMU highlights
  - Indicative targets evaluated at end of June 2018, end of September 2018, end of December 2018, and end of March 2019; cumulative from beginning of calendar year.
  - Indicative targets include floors on fiscal balance and FGS revenue, ceilings on new domestic arrears and new external non-concessional borrowing, and a floor on CBS net foreign assets.
  - CBS net foreign assets calculation includes gold valued at $1,302.80 per ounce (market price of December 31, 2017).
- Data reporting obligations (selected items and timing)
  - CBS monetary survey: Quarterly — 3 weeks after quarter end.
  - Consolidated commercial banks’ balance sheet data: Quarterly — 4 weeks after quarter end.
  - Balance of payments items and MTB survey: Quarterly — 4 weeks after quarter end.
  - CBS temporary advances to the FGS: Monthly — 1 week after month end.
  - Ministry of Finance — FGS budget operations and TSA balances: Monthly — 4 weeks after month end.
  - Regional Member States’ budget operations reporting on utilization of FGS transfers: Semi-annually — 4 weeks after end of Q1 and Q3.
  - National Statistics Bureau — CPI and other indicators: Monthly — 6 weeks after month end.
- Technical assistance requests to IMF/partners (selected)
  - Tax policy, revenue, and customs administration; budget preparation and execution; cash forecasting and TSA; Treasury management; internal controls; debt sustainability analysis; banking licensing and supervision; currency reform; CBS accounting and governance; macroeconomic statistics.

*International Monetary Fund — Somalia: Country Report content unit 1somea2019002.*

### 2018. The staff team consisted of Messrs. Elhage (Head), Kohler,

### 1somea2019002 - 2018. The staff team consisted of Messrs. Elhage (Head), Kohler,

### BACKGROUND AND CONTEXT
- Political and security environment
  - Continued efforts to solidify security and peace; environment remains challenging with heightened political tensions between the Federal Government (FGS) and Federal Member States (FMS).
  - Five FMS have entered their states’ presidential elections periods and national elections are expected in late 2020.
  - Authorities, with international partners, have taken steps to reinforce peace and security; region remains fragile despite improvements.
- Economic situation
  - Favorable weather led to a modest economic recovery, but growth remains too low to significantly address poverty and unemployment, particularly among youth.
  - Somalia remains vulnerable to natural disasters and food insecurity.
  - Authorities developed the Somalia Recovery and Resilience Framework as a long-term response; projects will take time to be in place.
  - Fiscal challenges remain significant; authorities do not yet have the capacity to make any payments on Somalia’s large external debt ($ 4.7 billion, about 66 percent of GDP), which is almost all in arrears.
- Fund and international relations
  - FGS completed SMP I and SMP II; SMP III approved in June 2018 covering a 12-month period through April 2019.
  - Three Article IV consultations completed starting July 2015, then February 2017, and February 2018.
  - Somalia’s overdue obligation to the IMF were $335.2 million (equivalent to SDR 241 million and 545 percent of quota) at end-December 2018.
  - Biannual Somalia Partnership Forum (SPF) and Mutual Accountability Framework (MAF) established with donors.
  - World Bank approved pre-arrears clearance grants totaling $60 million and $20 million; EU approved a three-year budget finance grant of about $115 million to be disbursed over three years. Additional context: World Bank grants approved September 25, 2018; EU approved September 26, 2018.

### RECENT ECONOMIC DEVELOPMENTS
- Macroeconomic performance and prices
  - For 2018, projected:
    - Real GDP growth: 3.1 percent (2016: 4.9; 2017: 2.3; 2019 proj.: 3.5).
    - End-year inflation (CPI, e.o.p.): 3.5 percent (2016: 0.7; 2017: 5.3; 2019 proj.: 3.0).
  - Trade and external sector
    - Trade deficit expected to have narrowed to 50.9 percent of GDP (from 55.3 percent of GDP in 2017).
- Fiscal performance
  - Domestic revenue through November 2018 reached $161 million (31 percent higher than the same period in 2017).
  - Overall cash fiscal position in surplus by $8 million.
  - Additional grants amounting $17 million were disbursed in December.
  - Several fiscal reforms completed: taking stock of domestic arrears; reducing use of cash advances and recording them into SFMIS; direct payment of employees’ compensation through bank accounts; operationalizing the Large and Medium-term Taxpayers’ Office (LMTO); registering more large and medium taxpayers; biometric registration of Somalia National Army (SNA) personnel commenced.
- Financial sector
  - Banks' lending to the private sector has grown by an average of 60 percent year-on-year since end-2016.
  - Financial inflows via money transfer bureaus (MTBs) remain relatively stable.
  - Banking system remains liquid and well capitalized; supervision strengthening (LSD enhanced off-site analysis; new asset classification regulations).
  - Cabinet approved draft Targeted Financial Sanctions Bill and sent to Parliament for approval (AML/CFT progress).

### PERFORMANCE UNDER SMP III
- Overall assessment
  - Performance broadly satisfactory (Memorandum of Economic and Financial Policies, MEFP ¶4, Tables 1 and 2).
  - Authorities stepped up reforms ahead of second and final review.
- Compliance and benchmarks
  - All structural benchmarks (SBs) and indicative targets (ITs) for June 2018 and September 2018 were met, including over-performance on domestic revenue, fiscal balance, and net foreign assets.
  - Preliminary data suggest authorities are broadly on track to meet December 2018 and March 2019 targets.
  - Completed SBs: (1) submitting the Revenue Bill to the Parliament; (2) takeover by the Ministry of Finance of non-tax revenue from MDAs.
  - Well on track on seven remaining SBs including preparation of the National Development Plan for 2020–2024 (NDP9) intended as interim Poverty Reduction Strategy Paper (iPRSP).
  - Risk: renegotiations of the airport and port contracts advancing but likely delays put the related SB at risk.

### OUTLOOK AND RISKS
- Baseline outlook (medium-run)
  - Growth expected to stabilize and inflation to stay low, assuming gradual security improvement and absence of weather shocks.
  - Consumption anticipated to continue to drive growth, supported by grant funding and remittances.
  - Production-side assumptions: continued agricultural growth and expansion in transport, construction, and telecommunications, boosting investment and maintaining a persistently large trade deficit.
  - Performance contingent on continued fiscal discipline and gradual expansion of financial services.
- Downside risks
  - Political tensions between FGS and FMS or deterioration in security could weaken economic activity and slow program implementation, especially reforms linked to fiscal federalism and revenue sharing.
  - Weather-events could increase humanitarian needs.
  - Fiscal risks from poor revenue collection, lower-than-pledged grants, lack of fiscal discipline, weak governance, and corruption.
  - Technical or financial problems in the mobile money sector (large and currently unregulated) could impede payments and put household savings at risk.
- Mitigating factors
  - Authorities’ strong commitment to the program and donor support, including efforts to strengthen FGS–FMS relations and maintain security.

### POLICY DISCUSSIONS
- Near-term policy priorities agreed with mission
  1. Improving the fiscal framework.
  2. Strengthening PFM and revenue mobilization.
  3. Finalizing key elements of the currency reform project.
  4. Reviving the financial sector, including improving AML/CFT compliance.
  5. Promoting economic recovery and resilience programs.
- A. Continue Improving the Fiscal Framework
  - Revised 2018 budget
    - Targets budget envelope of $297.1 million, up from $261.9 million in the program.
    - Upward revision reflects additional grants and increased domestic revenue mobilization from new measures: (1) sales tax on imports of goods; (2) sales taxes and license fees from telecommunication companies; (3) increased tax rate on khat; and, (4) transferring collection of certain fees from line ministries to the Ministry of Finance.
    - Taxes to be extended to wider sectoral activities over time.
  - 2019 budget
    - Approved in December; envisages total domestic revenues and grants of $340.1 million compared to $288.3 million in the program (Table 2a).
    - Budget relies on domestic revenues of $189.9 million and grants of $150.2 million (budgetary and project grants).
    - Staff and authorities agreed to a more ambitious revenue target of $196.3 million (in line with recent trends and supporting measures; MEFP ¶8).
    - Staff urged a more conservative estimate of grants: $140.4 million.
    - Given uncertainty, a supplementary budget will be issued later in 2019 to reflect revenue yields and grant disbursement experience.
- Revenue policy and reforms (Text Table 2 highlights)
  - New and ongoing revenue measures projected yields (Million of U.S. Dollars)
    - Total projected yields from fiscal measures: 43.6 (2018) and 68.4 (2019).
    - Revenue measures previously implemented: 43.6 (2018) and 44.6 (2019).
    - Tax policy, increase in excise tax rate on khat from $2 to $2.50 per kg: 18.0 (2018) and 18.0 (2019).
    - Khat: 13.0 (2018) and 12.0 (2019).
    - Airlines sales tax and fees: 3.3 (2018) and 3.3 (2019).
    - Higher and increased progressivity rate of rental income tax (from 5% to 15–22%): 0.5 (2018) and 0.5 (2019).
    - Corporate income tax: 1.2 (2018) and 2.2 (2019).
    - Tax administration measures: 25.6 (2018) and 26.6 (2019).
    - Personal income tax (hotels, electricity, telecoms, foreign workers and NGOs): 5.5 (2018) and 6.4 (2019).
    - In-housing revenue collection: 1.4 (2018) and - (2019).
    - Sales tax on Telecommunication companies: 6.5 (2018) and 6.5 (2019).
    - Sales tax on hotels: 0.2 (2018) and 0.2 (2019).
    - Collect sales tax on imported goods by value at the port: 12.0 (2018) and 13.0 (2019).
    - Sales tax on consumer electricity companies: - (2018) and 0.5 (2019).
  - New revenue measures in SMP III projected yields
    - Annual tuna licence fees: 3.0.
    - Airspace fees collected by ICAO: 12.0.
    - Telecommunication licensing and spectrum fees: 2.0.
    - Visa charges: 4.8.
    - Airport fees-Favori: 2.0.
  - Notes from Text Table 2
    - These are ongoing yields from measures introduced in 2017 and 2018.
    - The 2018 projection includes full-year annual fees and taxes and clearance of fees and taxes arrears.
    - Approximately 150-200 flights fly over Somali airspace daily, generating ICAO fees of about US$1.5 million per month.
    - As outlined in IMF Country Report No. 17/204 (Box 2, page 15).
    - The majority of Somalis working in the private sector earn less than the minimum tax threshold.
    - The Million of U.S. Dollars unit applies to the table figures.
  - Staff recommendations on revenue
    - Continue to build on LMTO progress by increasing registration of large and medium taxpayers and assigning unique taxpayer identification numbers.
    - Continue customs reform roadmap with DFID assistance focusing on front-end declaration and auditing processes.
    - Start reporting on revenue mobilization for the whole country to capture comprehensive tax-to-GDP ratio.
- Expenditure policy and PFM reforms
  - Budget plans for large increases in employee compensation, capital investment, and transfers to sub-national governments financed by expected increase in grants.
  - Given past uncertainty on grant disbursements, agreed to maintain tight expenditure control, especially on non-priority spending.
  - In event of revenue or grant shortfalls, authorities will cut spending in line with rules for sequestration (prioritizing expenditures).
  - Revenue windfalls will be used first to pay down domestic arrears and then to build up a fiscal buffer; fiscal buffer will only be used to cover wages and salaries, non-salary spending will follow sequestration rules.
  - Staff recommended swift progress on PFM reforms including:
    - Implement the Treasury Single Account (TSA) by closing unnecessary MDAs bank accounts and mapping them to the SFMIS.
    - Urgently implement a proper cash-forecasting framework and fully adopt the commitment control system.
    - Further reduce the use of cash advances.
    - Effect direct bank payments for employees, vendors and contractors; eliminate cash payments.
    - Require more accountability from FMS by reporting on uses of transfers.
    - Speed up biometric registration of national army forces and civil servant database.
    - Reinforce monitoring activities of the Domestic Arrears Management Committee’s (DAMC) and Debt Management Unit (DMU).
    - Implement the national procurement policy and establish a procurement authority.
  - Combined measures aim to address governance vulnerabilities and reduce scope for corruption.

*International Monetary Fund — Somalia: Country Report content unit 1somea2019002, 2018 (staff mission and policy summary).*

### 16. Fiscal federalism. Given the importance of fiscal relationships between the FGS and FMS to

### 16. Fiscal federalism

### Fiscal federalism and intergovernmental relations
- The mission urged the authorities to continue using the Fiscal Federalism Forum to foster strong country-wide fiscal administration and policies, including for tax, customs, and natural resource management.
- Authorities indicated they are concluding discussions at the Forum’s technical level on a draft policy paper on intergovernmental fiscal transfers that will inform policies related to the budgeting timetable, reporting, and disbursement conditions.
- Progress has been made in implementing quarterly reporting by the FMS on the use of FGS budgetary transfers.

### Enhancing financial and monetary policies through reform
- The underdeveloped financial sector faces several structural constraints that limit its support for growth and poverty reduction.
- The central bank structure, governance, and operations need improvement.
- Basic supervisory and AML/CFT frameworks are in place but gaps remain.
- Preparations for currency reform are advancing.

### Financial sector structure and capacity
- The financial sector is composed of six banks, 11 money transfer businesses (MTBs), and numerous mobile money operators (MNOs).
- Total banking sector assets amount to just over 5 percent of GDP.
- Financial inflows through the MTBs amount to well over $2 billion per year.
- The mobile money sector dominates the payments landscape.
- A World Bank report estimates monthly transaction value at about $2.7 billion per month, and over 70 percent of Somali households use mobile money regularly.
- Capacity at the central bank, while improving, remains relatively weak, with constraints in both personnel and information technology.
- The financial sector supervisory regime is still basic, despite recent progress.
- There is a lack of financial infrastructure, including a central payments system.

### Financial Sector Reform Roadmap (FSR) and near-term priorities
- Implementation of a Financial Sector Reform Roadmap (FSR) that prioritizes and sequences key reforms to support financial sector development is underway.
- The FSR aims to strengthen financial stability, enhance intermediation, and improve governance in the sector.
- Authorities have focused on two urgent near-term priorities:
  - Reshaping the current CBS organizational and governance structure, based on IMF TA and approved by the CBS Board on November 25.
  - Introducing supervisory oversight over MNOs.
- Authorities are expected to finalize mobile money regulations in early 2019 and will seek World Bank assistance to implement these regulations and to operationalize the central bank reorganization plan.
- The CBS appears to be on track to make its balance sheet compliant with International Financial Reporting Standards (IFRS) by the end of 2019.

### AML/CFT framework: status, gaps, and planned actions
- A basic AML/CFT legal and operational framework is in place, but critical gaps remain a key priority to address.
- The LSD is conducting on- and off-site inspections of MTBs, and annual relicensing helps provide AML/CFT regulations some traction.
- Staff welcomed the submission to Parliament of the Targeted Financial Sanctions Bill, consistent with United Nations Security Council Resolutions 1267 and 1373 and Financial Action Task Force recommendation 6, and urged its rapid enactment and implementation via regulation.
- Key gaps in the AML/CFT framework include:
  - poor MTB reporting and compliance,
  - weak Financial Reporting Center (FRC) capacity,
  - poor coordination between operational agencies,
  - lack of a national identification card.
- These factors contribute to the challenge of normalizing correspondent banking relationships and to the rising costs of Somali remittance inflows, a life-line for the economy.
- To take stock of the legal and operational gaps, and outline a sequence of key reforms, staff and the authorities, in conjunction with other donors, agreed to develop an AML/CFT action plan.

*Source: 1somea2019002 - 16. Fiscal federalism.*

### 20. While the preparatory work for the currency reform is advancing, staff highlighted

### 1somea2019002 - 20. While the preparatory work for the currency reform is advancing, staff highlighted

### Currency reform (Phase I) — outstanding preparatory items
- Phase I limited to exchanging the counterfeit Somali shilling notes currently in circulation with new currency.
- Key outstanding items for Phase I:
  - Finalizing a communication strategy between the CBS and key stakeholders.
  - Preparing the Phase I project timeline.
  - Setting up the project management framework, as well as the project fund administration.
  - Operationalizing the accountability framework.
- Donor financing status:
  - Some donors have indicated willingness to support Phase I, but further work is needed to secure the full $41 million.

### SMP-related macroeconomic and statistical issues
- Data improvements and coverage:
  - Estimation of expenditure-based GDP is nearly complete.
  - CPI is reported monthly.
  - Financial sector data is being reported regularly; data quality is steadily improving.
  - A monetary survey is under construction.
  - Statistics on external debt, international trade, and remittances from MTBs have advanced.
  - Preliminary steps taken to improve data on other current transfers and income, and foreign direct investment.
  - Fiscal data reporting for the central government is complete.
- Capacity building priorities (listed):
  - (1) Budget preparation, execution, and control.
  - (2) PFM, including treasury, arrears, and debt management.
  - (3) Tax policy and administration.
  - (4) National accounts and government financial statistics.
  - (5) AML/CFT and correspondent banking relationships.
  - (6) Banking licensing and supervision.
  - (7) Central bank accounting and audit.
  - (8) Central bank organization and currency reform.

### Governance, anti-corruption, and institutional reforms
- IMF engagement:
  - Staff explained the new IMF framework for assessing governance and corruption risks, to be conducted during the Article IV.
  - Staff has started engaging authorities and development partners, including the World Bank, on issues to be covered.
- Legislative recommendation:
  - Staff urged passing an audit bill that ensures the independence of the Auditor General and is consistent with international best practices and the prevailing Somali constitution.
- Authorities highlighted recent efforts, including some high-profile investigations and arrests.

### Path toward UCT-quality SMP and HIPC decision point (DP)
- Sequence and requirements:
  - Establishing a track record via successive completions of SMP I and II; satisfactory completion of SMP III could support design of a successor SMP that meets UCT standards and pave the way for arrears clearance and debt reduction under the HIPC Initiative.
  - Reaching the HIPC DP requires coordination of the international community, commitments from donors to finance debt relief, and completion of at least an iPRSP.
  - Somalia must reconcile external debt data, prepare a full debt sustainability analysis (DSA), and put in place an arrears clearance strategy.
- Progress on external debt database:
  - Twenty out of the 21 bilateral creditors have validated their claims, enabling progress in determining key inputs for the DSA.
- External debt magnitude and sustainability:
  - Somalia’s external debt is high (about $4.7 billion or 66 percent of GDP as of end-2017).
  - Nearly 94 percent is in arrears.
  - The government does not have the capacity to service its debt, rendering the situation unsustainable.
- International engagement:
  - Topic of Somalia’s debt relief raised in international fora including the Paris Club meeting and the Fourth Arab Economic and Social Development Summit in January 2019.
  - This should help mobilize resources to finance HIPC debt relief, including the IMF portion for Somalia, the cost of which was not included in the original estimates of the HIPC initiative.

### National Development Plan and donor support
- NDP9:
  - The concept note for NDP9 has been approved by the Cabinet.
  - Donors are supporting preparation; TA is planned by the World Bank and IMF.
  - The note was circulated to stakeholders; plan is to undertake broad-based and multiple rounds of consultations.
  - Authorities indicated they intend NDP9 to be iPRSP compliant, fully costed, and reflecting development priorities based on broad consultations.
  - Authorities agreed to staff’s recommendation to seek early support for developing the macro-fiscal framework of NDP9.

### Authorities’ commitments and intentions
- Authorities reaffirmed full commitment to meeting objectives of the SMP.
- Upon satisfactory completion of current SMP, authorities plan to request a successor SMP of UCT-quality (SMP IV) to pave the way for arrears clearance and HIPC DP.
- Emphasized continued need to address poor governance and corruption.

### Staff appraisal, findings, and recommendations
- Program implementation and capacity:
  - Staff supports completion of the first review under SMP III.
  - Program implementation has been satisfactory; capacity continues to strengthen despite a challenging environment.
- Macroeconomic outlook and risks:
  - Since 2017, growth has rebounded, inflation has slowed, and the trade deficit has narrowed; exchange rate has remained stable.
  - Further efforts needed to improve economic conditions, increase employment, and reduce poverty.
  - Development and humanitarian partners working with authorities on resilience; risks to outlook and program remain.
- Revenue and fiscal management:
  - Efforts to improve domestic revenue mobilization have strengthened revenue performance through broadening the tax base and developing tax policy and administrative capacity.
  - New budget support grants from the EU and the World Bank are increasing grant revenues and supporting reforms and social transfers.
  - Staff commends authorities for efforts to improve domestic revenue mobilization.
  - Bold steps to strengthen PFM need to continue; reforms ongoing and authorities implementing regular monthly fiscal operations reporting.
- Financial sector and supervision:
  - Stepped-up efforts to develop the financial sector are welcome.
  - Staff encourages continued progress on implementing the FSR.
  - Staff urges rapid implementation of planned changes to the organizational and governance structure of the CBS.
  - Staff urges the authorities to bring the mobile money sector under supervisory and regulatory umbrella as soon as possible.
  - Compliance with AML/CFT regulations must be improved and identified gaps addressed.
- Specific actions needed before launching Phase I of currency reform:
  - Secure the needed funds and operational support.
  - Operationalize the accountability framework.
  - Complete the detailed project timeline and communications strategy.
- Broader recommendations:
  - Sustain reform momentum—successful completion of the first two 12-month SMPs (May 2016 to April 2018) and satisfactory performance under SMP III reflect strong policy and reform commitment.
  - Begin process of securing necessary financial assurances for both HIPC and clearing arrears to the international financial institutions.

*Source: IMF staff report text (1somea2019002 - 20).*

### Appendix I. Letter of Intent

### Appendix I. Letter of Intent

### Background and Context
- IMF support under the Staff-Monitored Programs (SMPs) since May 2016 is helping strengthen the Somali economy.  
- The economy withstood the 2016–17 severe drought and sporadic terrorist attacks; sustained international support avoided a humanitarian crisis in 2017.  
- The Federal Government of Somalia (FGS) has developed a Somalia Recovery and Resilience Framework (RRF) as a long-term economic and social response to vulnerability and humanitarian crisis caused by natural disasters.  
- Preparatory work to launch the new national currency is satisfactory despite some delay in fund-raising efforts to finance the currency reform.  
- Security: improvements noted, but situation remains fragile; United Nations Security Council re-authorized the African Union peacekeeping mission and delayed Somali forces taking lead in security to December 2021.  
- Development planning: preparing the ninth National Development Plan (NDP9) to serve as an interim PRSP document building on the 2017–19 NDP (NDP8).  
- Debt and financing: external public debt is high and Somalia lacks capacity to service obligations; achieving development goals will require debt relief and access to substantial development financing.  
- Program sequencing: FGS envisages that satisfactory completion of SMP III (expiring Spring 2019) would enable a successor IMF program meeting the Upper Credit Tranche (UCT) standard and pave the way toward the Decision Point under the HIPC Initiative as soon as possible.  
- Request: the FGS requests completion of the first review of the current SMP (SMPIII) and authorizes IMF publication of the letter, MEFP, TMU, and related staff report, subject to removal of market-sensitive information.

### Key Economic Outlook and Indicators (2018 projections and recent performance)
- Real GDP growth projected at 3.1 percent in 2018 (from 2.3 percent in 2017).  
- Inflation projected at 3.5 percent in 2018 (from 5.3 percent in 2017).  
- Trade deficit expected to narrow to 50.9 percent of GDP (from 55.3 percent of GDP in 2017).  
- Fiscal performance through September 2018: fiscal balance at end-September recorded a surplus of $8.6 million (up from $2.3 million in June).  
- Domestic revenue collection through September 2018 totaled $127.2 million (program floor $116.1 million).  
- For September, overall fiscal balance at end-September stood at $8 million (up from $2.3 million in June), against a zero-cash-balance floor.  
- Net foreign assets of the Central Bank of Somalia (CBS) exceeded the program floor by $5 million.

### Program Performance under SMP III
- Overall assessment: performance under SMP III is satisfactory.  
- Structural benchmarks (SBs): all SBs through September were met. Examples include:
  - Minister of Finance issued orders to fulfill SB1, SB2, and SB9.
  - Recording cash advances in SFMIS in accordance with agreed accounting treatments (SB3) commenced, with some payments in August recorded correctly.
  - Staffing and structure of the fully-operational LMTO shared with IMF staff (SB8).
  - Increased number of registered large and medium taxpayers to more than 50 (SB10).
  - Draft Targeted Financial Sanctions Bill submitted to parliament (SB17).
- Indicative targets (ITs): all ITs met; exceeded floors for fiscal balance, domestic revenue, and net foreign assets with increased margins from June to September. Zero ceilings on domestic expenditure arrears, contracting of new domestic debt, and contracting or guaranteeing of new nominal external non-concessional borrowing were met.
- Forward-looking assessment: preliminarily on track for seven out of ten SBs for December 2018 and March 2019 with two already completed. Specifics:
  - Ministry of Finance has taken over all non-tax revenue collections from 10 MDAs (SB13).
  - CBS issued a regulation on credit classification and provisioning and review reporting requirement for banks (SB18).
  - Unexpected delay on two contract renegotiations targeted for end-December 2018 (SB6) due to lengthy legal discussions.

### Economic and Financial Policies for 2018–20
- Program objectives:
  - Support NDP9 and SDGs.
  - Consolidate macroeconomic framework and fiscal position.
  - Reduce vulnerability through implementation of the RRF and a budgetary social safety net program.
  - Improve capacity and institutions, macroeconomic statistics, and develop a debt sustainability framework and debt management capacity.
- Policy anchors:
  - Fiscal: maintain a zero-cash-based fiscal balance; avoid new domestic arrears; continue to improve domestic revenue mobilization.
  - Monetary: do not allow CBS net foreign assets (as defined in the TMU) to fall below a continuous floor.
  - Structural reforms: deepen PFM reform (expenditure control, minimize cash advances, arrears, cash and treasury management), accelerate Phase I of currency reform (donor outreach to confirm pledged grants), implement financial sector roadmap (CBS reorganization, mobile money regulations, strengthen AML/CFT compliance), upgrade macroeconomic and financial data production and reporting.

### Fiscal Policy and Reforms (remainder of 2018 and 2019 specifics)
- Overall fiscal strategy:
  - Refrain from expenditures not fully covered by realistic domestic revenue and conservative pledged grants projections.
  - Remain current on obligations; cut spending in line with sequestering rules if revenue or grants shortfall.
  - Use revenue windfalls first to pay down domestic arrears and then build fiscal buffers.
  - Keep expenditure under control given volatility in grants in 2018, focusing on non-priority goods and services.
- Fiscal strategy 2018: expand domestic revenue mobilization, including gains from new tax measures.
- Fiscal strategy 2019: issue a supplementary budget to reflect revisions in domestic revenue to reach $196.3 million (compared with $189.9 million in the budget). Expect to receive $150.2 million in budgetary and project grants. If budgetary grants shortfall occurs: cut discretionary expenditures and apply $15 million buffer in deposits; supplementary budget will include downward revision in budgeted grants if needed.
- Revenue measures:
  - Remainder of 2018: reach revenue targets by improving collection efficiencies; focus on sales tax on imports of goods; sales taxes and license fees from telecommunication companies; tax rate on khat; transfer collection of certain fees from remaining MDAs to the Ministry of Finance.
  - 2019: upward revision in domestic revenue to reflect yields from new and ongoing measures and additional measures on hotels, telecommunication and electricity companies. New measures include expanding large and medium taxpayer coverage beyond 80 currently registered and follow-up on potential tax arrears in Mogadishu; assessing income taxes and sales taxes from telecommunications companies.
  - Airspace fees: anticipate new revenue from collecting airspace fees following takeover of Somali Airspace from ICAO last October, once pending legal issues with ICAO and technical issues with IATA are resolved.
  - Other measures: roll out tax measures beyond Mogadishu with adoption of the Revenue Bill; follow-up on Customs Roadmap and submission of an amended National Customs Act to Parliament (SB15); reactivate Somalia’s membership in the World Customs Organization.
- Expenditure measures:
  - Civil service productivity and database: preparatory work to restructure civil service and build a database to increase staff productivity and contain public wage bill; biometric registration of SNA personnel progressing (4,950 registered as of end-September 2018, all in Mogadishu, Banadir region, and being paid through SFMIS directly into personal bank accounts); target to register all SNA personnel and complete process by June 2019.
  - Domestic expenditure arrears: update arrears database through end-December 2018 and maintain monthly; develop coherent and transparent domestic arrears clearance program as capacity to repay improves.
- Public Financial Management (PFM) measures:
  - Fiscal governance and accountability: ensure all FMS report back to FGS on utilization of budgetary transfers on a semi-annual basis.
  - Treasury Single Account (TSA): progress by closing unnecessary MDA bank accounts and mapping them to SFMIS (SB7).
  - Cash advances: commenced recording cash advances in SFMIS in August under agreed accounting procedures; commit to ensuring all cash advances are properly recorded and acquitted.
  - Cash-forecasting framework: updated monthly cash-forecast for 2018 and completed preliminary forecast for 2019 based on draft budget; commit to implementing cash forecasting framework to inform monthly allotments in SFMIS.
  - Domestic arrears management: reinforce and monitor activities of the Domestic Arrears Management Committee (DAMC).
- Fiscal federalism:
  - Progress strong despite tensions with FMS related to states’ presidential elections starting November 2018.
  - Commit to implementing Revenue and PFM Bills once approved by parliament; implement petroleum and fisheries revenue sharing agreements.
  - Concluding technical discussions on a draft policy paper on intergovernmental transfers to guide budgeting timetable, reporting and disbursement conditions.
- Budgetary and off-budget grants: by end-March 2019, FGS will write to donors recommending that all grants to Somalia be reported to the CBS, Ministry of Finance, and Ministry of Planning.
- Procurement and concessions:
  - Implement national procurement policy and establish procurement authority and guidelines.
  - Review government contracts that exceed $5 million each; empower Interim Procurement Requirement in line with the Procurement Act to review these contracts and enforce regulations.
  - Propose adjustments to the Procurement Law to enable third party approval of high-value contracts and non-standard bidding procedures.

### Financial Sector Reforms
- Ongoing priorities (as reflected in program SBs and actions):
  - Accelerate implementation of the financial sector roadmap, focusing on CBS reorganization and implementing mobile money regulations in the short term.
  - Strengthen compliance with AML/CFT standards.
  - CBS has issued a regulation on credit classification and provisioning and review reporting requirement for banks (SB18).

_Appendix I. Letter of Intent (Mogadishu, February 6, 2019) — Federal Government of Somalia; attachments: Supplemental MEFP and TMU summarized above._

### 9.      We plan to launch Phase I of currency reform as soon as preparations are completed.

### 1somea2019002 - 9.      We plan to launch Phase I of currency reform as soon as preparations are completed.

### Currency reform (Phase I)
- Funding target: $41 million to be raised from donors.
- Status: Endorsement letter received from the IMF in early March 2018; outreach to donors stepped up; World Bank contacted for assistance on project fund administration.
- Preparatory documents in progress with IMF assistance:
  - communication strategy framework between the central bank and key stakeholders;
  - currency reform project timeline;
  - tender document.
- Governance and implementation:
  - Accountability framework committee associated with Phase I endorsed by the CBS Board of Directors; committee members identified in June 2018.
  - Project fund administrative framework must be set up and project funding fully covered before launch.
  - Expectation: IMF to assist with a currency expert based in Nairobi to provide direct support to the CBS and the currency reform project manager once funding and administrative framework are in place.

### Financial sector development roadmap — priorities and reforms
- Overall: Roadmap highlights bottlenecks for financial development and inclusion and outlines reforms to improve financial intermediation and stability. Priorities over the next twelve months include:

- CBS organization
  - CBS Board approved reorganization recommendations based on IMF technical assistance.
  - Next step: reach out to the World Bank for assistance on operationalization and financing (including staffing needs) of the proposed CBS organization framework.

- Prudential supervision (Licensing and Supervision Department, LSD)
  - Commercial banks:
    - Expand and improve financial reporting requirements.
    - Continue strengthening on-site inspection and supervision manuals.
    - Expand scope of on-site inspections; finalize an off-site inspection manual.
    - Develop a plan for dealing with problem institutions.
    - Develop plan to address staffing and organizational needs of LSD and provide adequate IT resources.
    - Conduct validation exercise of financial data submitted by banks.
    - Give supervisors needed time to conduct on-site inspections.
  - Money Transfer Businesses (MTBs):
    - Improve MTBs licensing process and enhance compliance with existing regulations via increased enforcement through the annual relicensing process.
    - Enhance standards for disclosing Inspection Reports to MTBs and improve communication and address gaps in the AML/CFT framework.
  - Mobile money:
    - Priority to properly regulate and supervise mobile money services by end-March 2019.
    - Accelerate issuance of necessary regulations to license and supervise mobile money providers under the current legal framework.
    - Build operational requirements into the LSD structure in the context of CBS reorganization and capacity building.
    - National Communications Authority (NCA) to build licensing and reporting requirements for telecommunications sector and mobile network operators (MNOs).
    - Future regulations will require MNOs that provide mobile money services to fulfill reporting requirements and cooperate with the CBS to receive and maintain licenses.
    - In coordination with international partners, look to update the Financial Institutions Act to address legal gaps.

- CBS accounting and audit
  - Appointment of a Director of Internal Audit completed.
  - Actions:
    - Issue an exit report and recommendations from the recent external audit.
    - Develop a multi-year audit plan and draft an annual audit report for the Audit Committee.
    - Finalize the draft accounting manual.
    - Agree on the recognition of IMF positions on the CBS balance sheet and on treatment of investment properties.
    - Clarify process to achieve full IFRS compliance.
    - Start accrual accounting for the 2018 financial statement.
    - Aim to begin implementing IFRS in 2019.

- Financial infrastructure
  - With World Bank assistance, developing a plan to introduce a digital identification for Somalis to support collateral-based lending and Know Your Client (KYC) objectives.
  - Developing an automated transfer system and national switch, tentatively planned to be operational in 2019.
  - Exploring options for developing a collateral registry and credit bureau.

### AML/CFT strengthening and institutional capacity
- Develop an AML/CFT roadmap with external partners to identify gaps and reforms to support correspondent banking relationships and remittance flows.
- Targeted Financial Sanctions Regulation Bill submitted to Parliament; move quickly to finalize and issue regulations to implement targeted sanctions with IMF TA.
- Improve MTBs’ compliance with AML/CFT regulations and reporting of suspicious transactions to the Financial Reporting Center (FRC) by implementing the MTB compliance and licensing plan.
- Expand FRC capacity in cooperation with international partners by addressing personnel and IT gaps.
- Prepare for a comprehensive review of the AML/CFT Act and associated regulations; clarify roles and responsibilities of agencies in the National Anti-Money Laundering and Countering the Financing of Terrorism Committee (NAMLC) to improve operationalization.

### Policies for accelerating economic recovery and social inclusion
- Broad agenda to strengthen resilience and foundations for sustained inclusive growth; development challenges significant after decades of civil war.
- Somalia Recovery and Resilience Framework (RRF) developed as a long-term response to vulnerability and humanitarian crises; integrated into preparation of the 2020–24 NDP.
- Priority areas identified:
  - Combating corruption and improving governance:
    - Passage in the lower house of the Anti-Corruption Bill (aligned with international best practices); Bill approved by the House of the People and awaiting Senate approval.
    - Operations of a Reform Implementation Unit (“Delivery Unit”) to monitor government reform priorities.
    - Orders by ministers to fight civil servant absenteeism; pilot program using biometric technology to track attendance.
    - Improving transparency on monetary and fiscal reporting, including where possible on off-budget support.
    - Strengthening the MoF website including Budget information.
    - Audit Bill submitted to Parliament to ensure independence of the Auditor General function.
    - Upon parliamentary approval and presidential signature of the Anti-Corruption Bill, quick formation of the Anti-Corruption Commission planned.
  - Improving the business environment:
    - Passed a foreign direct investment (FDI) law and adopted a procurement bill.
    - Continue public-private sector dialogue, improved financial governance and intermediation, new business regulations, and improved access to finance.
    - Access to financial services to be advanced via the Financial Sector Development Roadmap, including better AML/CFT compliance.
    - Somalia entered the Global Doing Business Survey for the first time in 2017; continue to address areas identified in the report.
  - Preparation of the 9th NDP for 2020–2024:
    - Intend to make the plan compliant with an interim Poverty Reduction Strategy Paper (PRSP).
    - Will start preparing a medium-term fiscal framework and link it to the NDP.
    - Special attention to social program targets: poverty reduction, job creation, capacity and resilience programs for drought, flooding, and social safety nets.
    - Seek adequate financing for the NDP.
  - Increasing social spending:
    - Started allocating more resources to social sectors in the annual budget starting in 2019; aim to increase allocation in subsequent budgets.
    - Increase budgetary allocations on social spending, including education, health, and humanitarian support.
    - Progress on managing and facilitating return of refugees; under the UN Refugee Return and Reintegration project, increasing numbers of refugees placed in training institutions (mainly in Kenya) for training in peace-building and conflict-resolution.

### Institutions and statistics
- Natural resource management and transparency:
  - Draft PFM Bill includes clause on principles for governing PFM of natural resource revenues.
  - Discussions with FMS in Fiscal Federalism Finance Ministers Forum on natural resource revenue sharing well advanced.
  - Many issues addressed in the Revenue Bill, which is being finalized.
- Statistical data strengthening:
  - Press Parliament to adopt the Statistical Law submitted in September 2017.
  - MOPIED, Ministry of Finance, and CBS to strengthen the existing roadmap for statistical data production and dissemination by end of March 2019.
  - Critical tasks identified:
    1. Complete reconstitution of the public debt database.
    2. Update, on a regular basis, the statistical business register across FGS and FMS.
    3. Launch a capital expenditure survey based on the existing one and strengthen Somalia’s export and import data by collecting trade in goods data by value and volume.
    4. Implement IFRS-based accounting at the CBS.
    5. Improve remittance data mainly with the MTB survey.
    6. Start conducting surveys on travel, and primary current transfers related to embassies and NGOs.
    7. Finalize the survey form for foreign direct investment and coordinate with the Ministry of Trade and Commerce to begin surveying the 20 largest companies.
    8. Complete a civil service database.
  - Compiled and applied GFSM2014 to the federal government for the period of 2013–18 and the draft 2019 budget.
  - Aim to prepare a consolidated government budget for the FGS and FMS during 2019 using the 2019 budgets as a pilot exercise.
  - CBS to implement the action plan for improving source data and for collecting financial and non-financial data.

### Relations with international creditors and debt relief
- Normalization of relations with international creditors is underway.
- Expect budget support and debt relief from bilateral creditors following the Fourth Arab Economic and Social Development Summit on January 2019.
- Plan to intensify outreach to multilateral and Paris Club creditors to address external debt and arrears and facilitate access to concessional financing.
- HIPC Initiative qualifying conditions noted:
  1. Establish a satisfactory track record of cooperation with the Fund on policies.
  2. Normalize relations with creditors, including mobilizing donor agreement and resources to finance debt relief.
  3. Prepare a poverty reduction strategy.
- Expectation: following satisfactory completion of the current SMP, SMP IV would be developed to meet standards associated with IMF financing support and staff would seek endorsement of the IMF’s Board to move Somalia towards the Decision Point under the HIPC Initiative in due course.

- Debt database and Debt Management Unit (DMU) capacity:
  - Outreach to 21 bilateral creditors representing nearly 70 percent of Somalia’s external debt to confirm loan-by-loan terms, principals, interest and outstanding penalties (remaining 30 percent primarily with multilateral creditors).
  - Responses: 20 out of 21 bilateral creditors have responded to the validation exercises.
  - Confirmation: nearly all of Somalia’s external debt confirmed — about $4.7 billion or 66 percent of GDP as of end 2017, with nearly 94 percent in arrears.
  - Support requested for IMF and World Bank to provide training for DMU staff on the LIC-DSF as soon as possible.
  - Support IMF and World Bank in developing Somalia’s first debt sustainability analysis (DSA).

### Technical assistance requests
- During the program period, IMF TA requested in:
  1. tax policy, revenue, and customs administration;
  2. budget preparation and execution;
  3. reforms in cash forecasting, and the TSA;
  4. planning and implementing Treasury management and reforms;
  5. internal controls;
  6. natural resources revenue sharing;
  7. licensing, supervision, and regulation of banks;
  8. currency reform;
  9. central banking operations and governance structure;
  10. CBS accounting and internal audit;
  11. macroeconomic statistics;
  12. debt sustainability analysis;
  13. preparing a medium-term fiscal framework for the NDP.

*Source: 1somea2019002 - 9.      We plan to launch Phase I of currency reform as soon as preparations are completed.*

### 18.      Our standing SMP Monitoring Committee will continue to monitor the

### 18.      Our standing SMP Monitoring Committee will continue to monitor the implementation of our program by preparing and assessing the indicative targets (Table 1) and SBs (Table 2)

### SMP reviews, monitoring cadence, and updates
- The program will have one more review to assess its performance based on the test date of March 31, 2019.
- SB2 will be monitored every six months and will be assessed at end-March 2019 (following first completion in September 2018).
- SB3 will be monitored monthly starting from its first completion date in September 2018.
- On SB3: although the Appropriations Act was not passed by September 2018, cash advances were processed in accordance with the prescribed process; the appropriate language was included in the Supplemental Appropriations Act, passed in October.
- The PFM Bill awaiting Parliamentary approval envisions the continued practice of recording/processing cash advances as described.
- SB16 benchmark language updated from "Prepare an update of National Development Plan (NDP) 2020-24" to "Prepare a draft National Development Plan (NDP) for 2020–24".
- Updates will be reflected in the TMU. ITs and SBs are defined in the TMU (Attachment II).

### Indicative targets (Table 1): selected program numbers and statuses (Millions of U.S. dollars)
- Columns correspond to test dates: 2018 June; 2018 Sept. 2/; 2018 Dec.; 2019 March 3/.
- Fiscal balance (cash basis; floor): 0.0; 2.3; Met; 0.0; 8.6; Met; 0.0; 0.0; 0.0.
- Domestic revenue floor: 75.7; 82.9; Met; 116.1; 127.2; Met; 165.0; 47.0; 49.1.
- Accumulation of new domestic expenditure arrears (ceiling) 4/: 0.0; 0.0; Met; 0.0; 0.0; Met; 0.0; 0.0; 0.0.
- Contracting of new domestic debt (ceiling) 4/: 0.0; 0.0; Met; 0.0; 0.0; Met; 0.0; 0.0; 0.0.
- Contracting or guaranteeing of new nominal external non-concessional borrowing (ceiling) 4/: 0.0; 0.0; Met; 0.0; 0.0; Met; 0.0; 0.0; 0.0.
- Central Bank of Somalia (CBS) – Net foreign assets of the CBS (floor) 4/ 5/: 24.0; 27.7; Met; 24.0; 29.0; Met; 24.0; 24.0.
- Memorandum item — Debt contracting or guaranteeing of nominal external concessional borrowing (ceiling): 0.0; 0.0; 0.0; 0.0; 0.0; 0.0.
- Notes: 1/ Based on preliminary data. Cumulative from the beginning of the year. 2/ Test date for the first review of the SMP. 3/ Test date for the second review of the SMP. 4/ Continuous indicative target. 5/ Calculated using program exchange rates.

### Structural benchmarks (Table 2): key benchmarks, target dates, rationale, and status (May 2018–Apr 2019)
- Benchmarks met (examples):
  - 1: Minister of Finance order to require that all salaries provided in cash be paid directly to individuals' bank accounts and record/register all Somali National Army payroll and non-payroll into the SFMIS payroll module. Target: Jun-18. Rationale: Improve PFM and fiscal reporting. Status: Met.
  - 2: Minister of Finance order to require all Federal Member States (FMS) and the Banadir region to report at end-Q1 and end-Q3 on utilization of any FGS budgetary transfer. Target: Sep-18. Rationale: Improve fiscal transparency, accountability, FGS leadership and oversight over the FMS. Status: Met.
  - 3: Record cash advances in SFMIS and process them in accordance with the Appropriations Act. Target: Sep-18. Rationale: Improve cash management and payment processes. Status: Met.
  - 4: Complete stocktaking and recording of all payroll and goods & services vouchers to December 31, 2017 which are in arrears into SFMIS. Target: Sep-18. Rationale: Create accurate and verified compilation of domestic arrears. Status: Met.
  - 8: Ensure LMTO is fully operational and share organizational structure and staffing status. Target: Jun-18. Rationale: Enhance the Inland Revenue Department. Status: Met.
  - 9: Minister of Finance to issue order making renewal of all licenses by MDAs conditional on presenting a tax clearance certificate. Target: Jun-18. Rationale: Expand revenue base. Status: Met.
  - 10: LMTO to increase registered large and medium taxpayers from 25 to at least 50, evaluate potential tax arrears for 2017 in Mogadishu, and collect corresponding tax obligations due. Target: Sep-18. Rationale: Expand revenue base. Status: Met.
  - 11: Submit the Revenue Bill to Parliament. Target: Dec-18. Rationale: Update tax law. Status: Met.
  - 13: Ministry of Finance to take over all non-tax revenue collections from at least 5 of the remaining MDAs currently collecting these revenues. Target: Dec-18. Rationale: Improve revenue collection. Status: Met.
  - 17: Submit to Parliament the draft Targeted Financial Sanctions Act. Target: Sep-18. Rationale: Strengthen AML/CFT framework. Status: Met.
- Benchmarks on-track (examples):
  - 5: Design and implement a cash-forecasting system to inform allotments issued prior to commitment, in accordance with the Appropriations Act. Target: Dec-18. Status: on-track.
  - 6: Conclude renegotiation of the Mogadishu port and airport fee-collection contracts. Target: Dec-18. Status: (no status explicitly marked in table excerpt).
  - 7: Minister of Finance to issue an order to identify MDAs accounts at commercial banks and the CBS, close unnecessary accounts, move active accounts to CBS, and map active MDA accounts to SFMIS. Target: Mar-19. Status: on-track.
  - 12: MPT and Minister of Finance to develop plan to enforce regulations associated with fees to be levied. Target: Dec-18. Status: on-track.
  - 14: Finalize petroleum and fisheries operational revenue-sharing mechanisms between the FGS and FMS. Target: Mar-19. Status: on-track.
  - 15: Submit amended National Customs Act to Parliament; implement common classification of goods based on HS codes and front-end customs declaration process. Target: Mar-19. Status: on-track.
  - 16: Prepare a draft of the National Development Plan 2020-24. Target: Mar-19. Status: on-track.
  - 18: CBS to issue regulation on credit classification and provision, and review reporting requirement for banks. Target: Mar-19. Status: on-track.

### TMU: definitions and computation highlights (Attachment II)
- Indicative targets evaluated at end of June 2018, end of September 2018, end of December 2018, and end of March 2019; evaluated in terms of cumulative flows from beginning of each calendar year.
- Indicative targets specified: 
  a) Floor on the fiscal balance (on a cash basis).
  b) Ceiling on accumulation of new domestic expenditure arrears of the 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 CBS.
  f) Floor on CBS’s net foreign assets.
- Government definition: the FGS (excludes public entities with autonomous legal personalities whose budgets are not included in the federal government budget). General government includes the FGS and the federal member states (Galmudug, Hirsabelle, Jubaland, Puntland, and South West State).
- Government revenue: all tax and nontax receipts transferred into the FGS general accounts at the CBS; excludes grants; measured on a cash basis; cumulative from the beginning of the fiscal year (calendar year).
- Fiscal balance (cash basis): difference between (1) sum of government revenue (as defined) and budget grants; and (2) total current expenditure plus 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), adopted on December 5, 2014; includes loans, suppliers’ credits, and leases as detailed.
- 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; temporary advances fully repaid within 90 days.
- External debt benchmarks: cumulative ceilings on contracting or guaranteeing of new nominal external non-concessional borrowing by the government from the beginning of the calendar year; external debt defined by residency of the creditor.
- CBS net foreign assets definition: CBS gross foreign assets minus gross foreign liabilities. Gross foreign assets comprise: (1) gold valued at $1,302.80 per ounce (market price of December 31, 2017); plus (2) foreign exchange (including recovered CBS assets, non-earmarked budget, and earmarked donor grants); minus (3) government budget grant deposits at the CBS in foreign currency; minus (4) other earmarked foreign currency deposits by residents of Somalia. Somalia’s net position to the IMF is excluded. Relevant exchange rates at December 31, 2017 used for currency conversion.

### Program monitoring arrangements, committee, and data reporting
- Program-monitoring committee composition: 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 has observer status.
- Committee responsibilities: monitor program performance, recommend policy responses, inform the Fund regularly on program performance, and transmit supporting materials for evaluation of benchmarks.
- 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.
- Data reporting obligations (selected items, frequency, and timing):
  - CBS monetary survey: Detailed balance sheet data of the CBS. Quarterly — 3 weeks after the end of each quarter.
  - Consolidated commercial banks’ balance sheet data by residency. Quarterly — 4 weeks after the end of each quarter.
  - Other financial indicators (prudential data, average interest and maturity information for private sector loans). Quarterly — 4 weeks after the end of each quarter.
  - Balance of payments items (trade in goods for the port of Mogadishu; petroleum imports to Mogadishu; travel data from Immigration; MTB survey on cross-border transfers). Quarterly — 4 weeks after the end of each quarter.
  - CBS temporary advances to the FGS: monthly amounts and terms. Monthly — 1 week after the end of each month.
  - Budget grants: amounts of on-budget grants, including transfers to government’s accounts from government’s external accounts at the CBS. Monthly — 3 weeks after the end of each month.
  - Ministry of Finance — FGS budget operations: detailed revenue and expenditure by budget line and comprehensive table summarizing Government operations including TSA balances. Monthly — 4 weeks after the end of each month.
  - Outstanding appropriation, allotment, commitment, vendor purchasing/payments, cash advances, and bank balances (including all MDA accounts) since the beginning of the calendar year. Monthly — 4 weeks after the end of the month.
  - Monitoring Agent reports for Recurrent Cost and Reform Financing non-salary reimbursement eligibility. Monthly — 4 weeks after the end of the month.
  - SFMIS audit report recording use of the allotment "allow to exceed" control override function. Monthly — 4 weeks after the end of the month.
  - Monthly cash plan. Monthly — 4 weeks after the end of each month.
  - Report of all payment requests by MDAs awaiting payment since the beginning of the calendar year where commitments exceed agreed payment terms (in SFMIS/Excel). Monthly — 4 weeks after the end of the month.
  - Payroll and non-payroll salary and allowance payments made by MDAs and individual embassies (in Excel). Monthly — 4 weeks after the end of the month.
  - Regional Member States’ budget operations: reports from all FMS and the Banadir region on utilization of any FGS budgetary transfers. Semi-annually — 4 weeks after the end of Q1 (March) and Q3 (September).
  - Domestic arrears: end-of-period stock of domestic arrears accumulated during the year by MDA and 4-digit Object Code. Annually — 4 weeks after the end of the year.
  - Domestic debt: amount of new domestic debt contracted by Government. Monthly — 4 weeks after the end of the month.
  - External debt: end of year external debt in U.S. dollars, by creditor, and origination currency; amount of new external debt contracted or guaranteed by Government. Monthly — 4 weeks after the end of the month.
  - Disbursements and repayments: (1) scheduled; and (2) actual interest and principal on debt of the Government and the CBS, by creditor. Monthly — 30 days after the end of each month.
  - Structural benchmarks: table with description of status of implementation of the structural benchmarks in Table 2 of the MEFP. Monthly — 4 weeks after the end of the month.
  - National Statistics Bureau — CPI and other economic indicators. Monthly — 6 weeks after the end of each month.
  - Production data. Annually — 6 months after the end of each year.

*Source: Somalia — Staff-Monitored Program (May 2018–April 2019), Technical Memorandum of Understanding and Tables (Table 1 and Table 2).*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2019/1somea2019002.pdf_