## 1somea2019003

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### Background and context
- Somalia is a fragile state very vulnerable to security and climate shocks; agriculture and livestock account for the largest share of GDP.
- Nearly seven out of ten citizens live in poverty.
- International grants and remittances are critical to maintaining consumption.
- Post-civil war (1991–2012) rebuilding has progressed under frameworks including the 2013 Somali Compact, the 2017 London Conference, and the New Partnership for Somalia (NPS).
- Reform agenda aligned to the National Development Plan (NDP8) and NDP9 (under preparation) includes political settlement, security, rule of law, women’s rights, youth empowerment, and economic development.

### Political and institutional progress
- Since 2012: Provisional Constitution agreed, parliament formed, Federal Republic of Somalia constituted (FGS and FMS).
- 2017: Second FGS elections with peaceful transfer of power.
- 2018: Federalization Negotiation Technical Committee (FNTC) established.
- Recent tensions: May 2019 negotiations failed to break through; Puntland and Galmudug temporarily suspended cooperation with the FGS.

### Economic developments and outlook
- GDP growth: estimated at 2.8 percent in 2018; 2019 projection around 2.9 percent (assuming normal rains); medium-term baseline projected around 3.5 percent.
- Inflation (CPI): 3.2 percent in 2018; expected 3.0 percent in 2019.
- Per capita income: 2018 GDP level revised downward by 37 percent to $4.7 billion; per capita income estimated at around $332 in 2018.
- External and external-flow indicators (percent of GDP):
  - Trade deficit: 73 percent in 2018.
  - Current account balance: -8.3 percent in 2018; projected -8.3 percent in 2019; -8.0 percent in 2020.
  - Remittances: 29.2 percent in 2018; projected 28.8 percent in 2019; 29.1 percent in 2020.
  - Grants: 36.9 percent in 2018; projected 36.3 percent in 2019; 34.7 percent in 2020.
- External public debt: about $4.7 billion or nearly 100 percent of GDP in 2018; 96 percent ($4.5 billion) in arrears (of which $1.8 billion or 39 percent reflects late interest and charges).
- Reserves: minimal (less than one month of imports).

### Key quantitative indicators (selected)
- Real GDP growth (percent): 2016: 2.9; 2017: 1.4; 2018: 2.8; 2019: 2.9; 2020: 3.2.
- Inflation (CPI, e.o.p., percent): 2016: 1.2; 2017: 6.1; 2018: 3.2; 2019: 3.0; 2020: 2.7.
- Revenue and grants (% of GDP): 2016: 4.1; 2017: 6.0; 2018: 5.7; 2019: 6.9; 2020: 7.2.
- Trade balance (% of GDP): 2016: -74.5; 2017: -80.5; 2018: -73.7; 2019: -72.6; 2020: -71.1.
- External debt (% of GDP): 2016: 105.3; 2017: 103.3; 2018: 99.5.
- Stock of domestic arrears (% of GDP): 2016: 76.5; 2017: 68.8; 2018: 68.8; 2019: 63.5; 2020: 57.2.

### Fiscal outcomes, revenue mobilization, and PFM progress
- 2018 fiscal outturn: FGS ended 2018 with a fiscal surplus due to improved domestic revenue mobilization and expenditure restraint, despite lower-than-expected grants.
- Domestic revenue: 2018 outturn at $183 million exceeded program projections; through March 2019 domestic revenue continued to exceed program targets.
- Grants: 2018 outturn $87 million (program level $97 million); Q1 2019 grants also below program level.
- Expenditure: contained within available funds; increases in health, education, hospital rehabilitation, takeover of three schools; security-related expenditure increased.
- PFM progress and actions:
  - Expenditure controls improved; cash management improved; use of cash advances declined; cash forecasting regularized to inform allotments.
  - Treasury Single Account (TSA) operationalization: 68 MDA accounts closed; balances on five remaining accounts transferred to the TSA.
  - Linkages between SFMIS and CBS established for real-time TSA balances.
  - Customs modernization: HS codes implemented at Port of Mogadishu since March 2019.

### SMP III performance and structural benchmarks
- SMP III: all quantitative indicative targets (ITs), including continuous ITs, met for June, September, December 2018 and March 2019 with over-performance on domestic revenue and fiscal balance.
- Structural benchmarks: all but one SB met (SB#6 on renegotiation of Mogadishu port and airport fee-collection contracts not met).
  - Airport concession agreement reached in May; Mogadishu port contract negotiations ongoing.
- Key quantitative outcomes under SMP III (examples, cumulative flows in Millions of U.S. dollars):
  - Fiscal balance (cash basis; floor) — June 2018: Prog 0.0; Act 2.3; Sept. 2018: Prog 0.0; Act 3.6; Dec. 2018: Prog 0.0; Act 7.9; March 2019: Prog 0.0; Act 16.5.
  - Domestic revenue floor — Dec. 2018: Prog 165.0; Act 183.4.

### SMP IV objectives and modalities (May 2019–July 2020)
- SMP IV aims to meet UCT conditionality standards and support progress toward HIPC Decision Point (DP).
- Composition: 18 structural benchmarks; three reviews (July 2019, October 2019, May 2020).
- Indicative targets anchored on: fiscal balance (seasonality-adjusted), zero accumulation of domestic arrears, increasing quarterly revenue floor, and a floor on CBS NFA.
- Contingency: fiscal balance floor may be adjusted to account for fiscal buffer use, provided guideline compliance and no overruns in other non-priority spending.

### Fiscal projections and fiscal buffer
- Domestic revenues projected to reach 5.2 percent of GDP by 2022.
- Staff revised 2019 domestic revenue projection to $196 million (from $190 million in the budget), representing a 7 percent increase over 2018 outturn.
- Medium-term projections for domestic revenues: $221 million in 2020; $238 million by 2022.
- Fiscal buffer guidance (tentative):
  - Usage: Triggered only by revenue shortfalls affecting priority spending (wages and security).
  - Size: Maximum ceiling two-months of total FGS compensation plus the food component of G&S for the SNA; Minimum floor one-month of total FGS compensation plus food component of G&S for the SNA.
  - Management: Oversight by Prime Minister and Minister of Finance; monitoring by Cash Management Committee; monthly reporting in SMP.

### Financial sector developments and stability
- Private sector credit growth: 2016–18 annual average around 53 percent (from a very low base).
- Commercial banks — credit to private sector (mn USD): 66.1 (2016); 105.2 (2017); 161.4 (2018); 1Q2019 Est.: 174.
- Consolidated commercial banks balance sheet (Millions of U.S. dollars):
  - Total assets: 2015: 194; 2016: 234; 2017: 345; 2018: 415; 1Q2019 Est.: 426.
  - Customer deposits: 2015: 143; 2016: 177; 2017: 267; 2018: 332; 1Q2019 Est.: 344.
- Capital ratios: total capital to assets: 22.1 percent (2016); 15.3 percent (2017); 13.3 percent (2018).
- Sector concentration: loans concentrated in trade (40 percent), real estate (23 percent), construction (10 percent) as of 2019Q1.
- CBS supervisory capacity improved; mobile money regulations prepared and expected to be issued shortly (SB#12; implementation SB#15).
- Prudential/minimums noted: commercial banks must hold $1.5 of the minimum $7 million capital requirement at the CBS; MTBs must hold $60,000 each at the CBS.

### AML/CFT and financial inflows
- AML/CFT baseline framework in place; Financial Reporting Center (FRC) operational since H2 2018 with large and suspicious transaction reporting underway.
- Key AML/CFT reforms and action plan (with IMF and World Bank):
  - Expand AML/CFT regulations to financial institutions beyond MTBs (SB#14).
  - Issue Targeted Financial Sanctions regulations once bill passed (SB#16).
  - Build FRC capacity (SB#17) and improve reporting compliance and inter-agency coordination.
  - Roll out national digital ID with World Bank assistance by early 2020 to improve KYC.

### Debt, arrears, and HIPC process
- Somalia in debt distress: public debt ~100 percent of GDP in 2018; 96 percent in arrears.
- Arrears details (end-2018): AfDB and World Bank arrears about $107 million and $340 million respectively (end-2018 for AfDB and World Bank arrears stated in text).
- DSA projections:
  - Baseline: total debt burden rises to over 128 percent of GDP by 2039 (late interest accrual on arrears).
  - Shock scenarios: debt burden could exceed 190 percent of GDP under severe shocks.
- HIPC prerequisites to reach Decision Point (DP):
  - (i) establish minimum six-month track record under a UCT-standard program;
  - (ii) adopt an interim PRSP (NDP9 expected Cabinet approval by end-September 2019);
  - (iii) receive necessary financing assurances, including for arrears clearance to IMF, World Bank, and AfDB.
- Financing assurances and IMF participation: Fund’s participation for Somalia under HIPC not included in original HIPC cost estimates; additional resources must be mobilized.

### Risks, shocks, and tailored stress scenarios
- Principal risks: security and climate shocks, political tensions (FGS-FMS), legislative bottlenecks, fiscal risks (poor revenue, lower grants), and financial stability risks (mobile money operator failure).
- RAM assessments (examples):
  - Climate Shock (drought): Relative Likelihood: Medium; Impact: High.
  - Domestic Conflict/Terrorism strengthening of Al Shabaab: Relative Likelihood: High; Impact: High.
  - Fiscal risk (volatile grants, poor revenue): Relative Likelihood: Medium; Impact: Medium.
- Tailored DSA shock outcomes (selected):
  - External financing shock → by 2039: debt ≈ 171 percent of GDP; 640 percent of exports; debt service ≈ 120 percent of revenues.
  - Security shock → by 2039: debt ≈ 190 percent of GDP; 711 percent of exports; debt service ≈ 127 percent of revenues.
  - Climate shock (drought) → by 2039: debt ≈ 132 percent of GDP; 494 percent of exports; debt service ≈ 88 percent of revenues.

### Policy recommendations and SMP IV reform priorities
- Fiscal policy and PFM:
  - Deepen PFM reforms to improve expenditure control, commitment controls, procurement procedures, cash forecasting, and TSA operationalization.
  - Broaden revenue base via tax and non-tax measures at federal level; enact Revenue Bill and Revenue Administration Bill (SB#8).
  - Operationalize LMTO and strengthen tax administration (80 taxpayers registered with LMTO as of April 2019).
  - Implement a fiscal buffer initially sized at one months’ worth of critical expenditures (wages and security), seeded from existing bilateral grants (unused 2018 bilateral grants about $12 million).
- Financial sector and AML/CFT:
  - Implement CBS re-organization plan and issue mobile money regulations; bring mobile money providers within CBS oversight.
  - Strengthen AML/CFT regime: enact TFS Bill, issue implementing regulations, and operationalize FRC capacity.
  - Continue moratorium on licensing new banks until supervisory capacity aligned with licensing.
- Governance and institutional reforms:
  - Swift legislative action: PFM, Procurement, Revenue, Amended Customs, Anti-corruption and Statistics Bills.
  - Strengthen anti-corruption legislation and establish anti-corruption commission once enabling law passed.
  - Review MDAs and independent commissions to limit proliferation and associated off-budget resources.
- Natural resources:
  - Enact Petroleum Bill, adopt Extractive Industry Tax provisions, and devise strategy for auctioning oil blocks prior to licensing.
  - Continue transparent fisheries licensing and implement agreed revenue-sharing mechanisms.
- Development strategy:
  - Finalize and cost NDP9 to serve as interim PRSP; incorporate DINA and RRF findings; use NDP9 as anchor for HIPC DP.
- Debt management:
  - Clarify debt contracting authority across government levels; build debt management capacity early to secure sustainable post-HIPC debt trajectories.
- Data and statistics:
  - Pass Statistics Law (SB#18); develop production-based GDP estimates; expand CPI coverage; roll out FDI survey by September 2019; reconcile external debt database.

### Monitoring, reporting, and program implementation
- SMP IV monitoring:
  - Three program reviews with test dates: July 31, 2019; October 31, 2019; May 31, 2020.
  - Standing SMP Monitoring Committee chaired by Deputy Prime Minister to oversee implementation.
- Indicative targets (examples, cumulative flows from beginning of calendar year):
  - Fiscal balance (cash basis; floor): 0.0 across test dates.
  - Domestic revenue floor (Millions of U.S. dollars): 110.9; 154.4; 196.3; 32.0; 92.9 (Table 3 sequence).
  - CBS NFA (floor): 24.8 across test dates (as per TMU definition and program exchange rates).
- Reporting obligations to IMF Resident Representative (selected and with timing preserved exactly):
  - CBS — Monetary survey: Quarterly. 3 weeks after the end of each quarter.
  - CBS — Consolidated commercial banks’ balance sheet data: Quarterly. 4 weeks after the end of each quarter.
  - Ministry of Finance — FGS budget operations and TSA balances: Monthly. 4 weeks after the end of each month.
  - National Statistics Bureau — CPI and other indicators: Monthly. 6 weeks after the end of each month.
  - Regional Member States’ fiscal operations: Quarterly, starting end-3Q2019.
  - Structural benchmarks status: Monthly. 4 weeks after the end of the month.

### Authorities’ views and commitments
- Authorities broadly aligned with staff on policy discussions; request continued TA and capacity development support from Fund and IFIs.
- Agreed with revenue and expenditure reforms, but highlighted fiscal federalism challenges amid FMS tensions.
- Requested phased implementation of mobile money regulations and emphasized protection of customers’ holdings (trust accounts).
- Authorities aim for SMP IV to meet UCT-conditionality and to build a six-month track record toward HIPC DP; intend to start token payments from January 2020 (size to be discussed).
- Authorities expect Cabinet approval of NDP9 by end-September 2019 and committed to provide information per the TMU.

### Governance assessment and reforms
- IMF governance engagement framework applied to identify macro-critical governance vulnerabilities.
- Available information indicates widespread governance weaknesses and perceptions of severe corruption; information gaps constrain full assessment.
- Progress areas:
  - Fiscal governance: gains in revenue mobilization, transparent fiscal reporting, and expenditure controls.
  - Financial sector governance: CBS restructuring plan, accounting and audit improvements, supervision enhancements.
  - AML/CFT: 2016 Law, establishment of FRC, large transaction reporting started in late 2018.
  - Anti-corruption: anti-corruption strategic plan; Anti-corruption and Audit Bills submitted to Parliament.
- Recommended governance actions: continue PFM deepening, enact anti-corruption law, strengthen procurement oversight, and improve judicial and market regulatory frameworks.

### Conclusion and policy implications
- Somalia’s economy is gradually recovering but remains fragile; downside risks dominate (security, climate, political).
- Debt is unsustainable without HIPC debt relief; staff supports authorities’ pursuit of HIPC DP once program track record and other benchmarks met.
- Key policy priorities: consolidate PFM reforms, broaden revenue base, strengthen CBS and financial sector supervision, complete AML/CFT reforms, finalize NDP9, build debt management capacity, and mobilize financing assurances for arrears clearance and debt relief.

_Italic: Source: IMF staff report excerpts, "Somalia — Selected Economic and Financial Indicators and Background" (extracted content)._

### 1. Smoothing Revenue and Spending Cycles–Benefits of a Fiscal Buffer _________________________ 26

### 1. Smoothing Revenue and Spending Cycles–Benefits of a Fiscal Buffer _________________________ 26

### Background and Context
- Somalia is described as a fragile state very vulnerable to security and climate shocks; agriculture and livestock account for the largest share of GDP.
- Nearly seven out of ten citizens live in poverty.
- International grants and remittances are critical to maintaining consumption.
- Post-civil war (1991–2012) rebuilding has progressed across political, security, and economic areas under frameworks including the 2013 Somali Compact, the 2017 London Conference, and the New Partnership for Somalia (NPS).
- Reform agenda includes political settlement, security, rule of law, women’s rights, youth empowerment, and economic development aligned to the National Development Plan (NDP8).

### Political and Institutional Progress
- Since 2012: Provisional Constitution agreed, parliament formed, Federal Republic of Somalia constituted (FGS and FMS).
- 2017: Second FRS elections with peaceful transfer of power.
- 2018: Federalization Negotiation Technical Committee (FNTC) established.
- Recent tensions: a week-long negotiation in May 2019 failed to achieve a breakthrough; two FMS (Puntland and Galmudug) announced a temporary suspension of cooperation with the FGS.

### Economic and Financial Reform Advances
- Fiscal: basic fiscal framework established; annual budget process and regular fiscal reporting; improved cash management; progressing public financial management (PFM) reforms.
- Specific reforms implemented: biometric registration of the security sector; taxation of the telecommunication industry.
- Financial sector: Central Bank of Somalia (CBS) conducts regular supervision of banks and MTBs; governance and organization improvements underway.
- AML/CFT: baseline legal and operational framework in place; Financial Reporting Center (FRC) operational since H2 2018 with suspicious and large transaction reporting underway; implementing regulations for the Targeted Financial Sanctions (TFS) Bill drafted with IMF assistance.
- Statistics: economic and financial statistics are improving; deeper structural reforms planned.

### IMF Relationship and External Support
- Since 2015: three Article IV consultations and three staff-monitored programs (SMPs) completed.
- Somalia’s obligations to the Fund are in protracted arrears: SDR 242 million, 547 percent of the 8th quota (about $333 million at end-May 2019).
- Authorities seek Executive Board agreement that macroeconomic and structural policies under the proposed SMP meet standards associated with UCT/PRGT programs to progress to Decision Point (DP) under the HIPC Initiative.
- World Bank: two pre-arrears clearance grants (2017 and 2018); ready for arrears clearance operation once DP is reached.
- EU: approved a three-year budget finance grant in 2018.
- Total official development grants, mostly off-budget, have averaged around $1.5 billion over the past few years.

### Economic Developments and Outlook
- GDP growth: estimated at 2.8 percent in 2018.
- Outlook for 2019: assuming normal rains, GDP growth could remain broadly unchanged at around 2.9 percent in 2019; considerable uncertainty due to drought conditions.
- Inflation (CPI): 3.2 percent in 2018; expected at 3.0 percent in 2019 under the same assumptions.
- Per capita income: GDP level revised downward by 37 percent to $4.7 billion in 2018; per capita income estimated at around $332.
- Trade and external flows:
  - Trade deficit remains high at 73 percent of GDP in 2018.
  - Current account balance: -8.3 percent in 2018; projected -8.3 percent in 2019 and -8.0 percent in 2020.
  - Remittances: 29.2 percent of GDP in 2018; projected 28.8 percent in 2019 and 29.1 percent in 2020.
  - Grants: 36.9 percent of GDP in 2018; projected 36.3 percent in 2019 and 34.7 percent in 2020.
- External public debt: about $4.7 billion or nearly 100 percent of GDP in 2018, with 96 percent ($4.5 billion in arrears, of which $1.8 billion or 39 percent reflects late interest and charges).
- External debt remaining not in arrears: $191 million, of which $31 million to African Development Fund and $160 million to the International Development Association.

### Fiscal Outcomes, Revenue Mobilization, and PFM
- 2018 fiscal outturn: FGS ended 2018 with a fiscal surplus due to improved domestic revenue mobilization and expenditure restraint, despite lower-than-expected grants.
- Domestic revenue: 2018 outturn at $183 million exceeded program projections; through March 2019, domestic revenue continued to exceed program targets by a small amount.
- Grants: 2018 outturn $87 million, lower than program level of $97 million; first quarter of 2019 grants also below program level.
- Expenditure: contained within available funds; slight expansion in spending on health and education, rehabilitation of hospitals, operation takeover of three schools; security-related expenditure increased.
- PFM progress: expenditure controls improved; cash management improved; use of cash advances declined; cash forecasting regularized to inform allotments; operationalization progress on a Treasury Single Account (TSA).
  - 68 Ministry, Departments and Administrations (MDA) accounts closed; balances on five remaining accounts transferred to the TSA.
  - Linkages established between SFMIS and the CBS banking system providing real-time information on TSA balances.
- Customs modernization: Harmonized Commodity Description and Coding System (HS) implemented at Port of Mogadishu since March 2019.

### Financial Sector Developments and Stability
- Private sector credit growth: in 2016–18, private sector credit grew by an annual average of around 53 percent (from a very low base).
- Capital ratios: small decline in capital ratios; total capital to assets: 22.1 percent (2016), 15.3 percent (2017), 13.3 percent (2018).
- Commercial banks: credit to private sector (mn of USD): 66.1 (2016), 105.2 (2017), 161.4 (2018).
- Supervisory capacity: CBS supervisory capacity improved steadily; banks’ and MTBs’ data reporting improved due to asset classification regulations.
- Mobile money: regulations prepared and expected to be issued shortly.
- Monetary and banking sector data referenced in Tables 4–6 (not reproduced here).

### Key Quantitative Indicators (Selected Economic Indicators, 2016–20)
- Real GDP growth: 2016: 2.9; 2017: 1.4; 2018: 2.8; 2019: 2.9; 2020: 3.2 (percent)
- Inflation (CPI, e.o.p.): 2016: 1.2; 2017: 6.1; 2018: 3.2; 2019: 3.0; 2020: 2.7 (percent)
- Revenue and grants (% of GDP): 2016: 4.1; 2017: 6.0; 2018: 5.7; 2019: 6.9; 2020: 7.2
  - of which: grants: 2016: 1.4; 2017: 2.8; 2018: 1.8; 2019: 3.0; 2020: 2.9
- Total expenditure (% of GDP): 2016: 4.1; 2017: 6.6; 2018: 5.7; 2019: 6.9; 2020: 7.0
  - of which: Compensation of employees (% of GDP): 2016: 1.3; 2017: 2.8; 2018: 3.0; 2019: 3.2; 2020: 3.3
- Overall fiscal balance (% of GDP): 2016: 0.0; 2017: -0.6; 2018: 0.0; 2019: 0.1; 2020: 0.2
- Drawdown of government deposits (% of GDP): 2016: 0.0; 2017: 0.7; 2018: 0.1; 2019: 0.0; 2020: 0.0
- Overall balance, net (% of GDP): 2016: 0.0; 2017: 0.1; 2018: 0.2; 2019: 0.1; 2020: 0.2
- Current account balance (% of GDP): 2016: -9.4; 2017: -9.0; 2018: -8.3; 2019: -8.3; 2020: -8.0
- Trade balance (% of GDP): 2016: -74.5; 2017: -80.5; 2018: -73.7; 2019: -72.6; 2020: -71.1
- Remittances (% of GDP): 2016: 32.5; 2017: 31.5; 2018: 29.2; 2019: 28.8; 2020: 29.1
- Grants (% of GDP): 2016: 33.3; 2017: 40.8; 2018: 36.9; 2019: 36.3; 2020: 34.7
- External debt (% of GDP): 2016: 105.3; 2017: 103.3; 2018: 99.5
- Stock of domestic arrears (% of GDP): 2016: 76.5; 2017: 68.8; 2018: 68.8; 2019: 63.5; 2020: 57.2

### Risks, Challenges, and Program Implementation
- Primary risks: security and climate shocks; drought conditions in early 2019 threaten agricultural season and food security (UN FAO special alert for severe food insecurity for July-September).
- Political risk: effective cooperation between FGS and FMS is essential; recent tensions and electoral cycles pose key risks to reform delivery.
- Legislative bottlenecks: key bills (PFM, Procurement, Revenue, amended Customs) are with Parliament, creating a heavy legislative schedule.
- SMP monitoring: FGS set up an SMP monitoring committee chaired by the Deputy Prime Minister to help unlock political impediments and ensure reform delivery.
- Program performance: SMP III implementation remained strong and SMP III has been completed.

*Source: IMF staff report excerpts, "Somalia — Selected Economic and Financial Indicators and Background" (extracted content).*

### 12.      All but one structural benchmark under SMP III, and all quantitative indicative targets

### 12.      All but one structural benchmark under SMP III, and all quantitative indicative targets (ITs), including all continuous ITs, have been met

### Compliance with SMP III quantitative targets and continuous indicative targets
- For June and September 2018, all structural benchmarks (SBs) and indicative targets (ITs) were met, including over-performance on domestic revenue and the fiscal balance.
- For December 2018 and March 2019, all December and March ITs were met, again with over-performance on domestic revenue and the fiscal balance. All but one SB were met, while continued monitoring of SBs#2, #3, and #5 indicate they were also met through March 2019.
- One SB was missed: SB#6 for December 2018—re-negotiation of the airport and port fee-collection contracts—was missed despite good faith efforts by the authorities.
  - Agreement on the airport concession was subsequently reached in May.
  - Negotiations continue on the terms of a new Mogadishu port contract and agreement has not yet been reached.
  - Given ongoing negotiation efforts, no remedial measures are envisioned for SMPIV; the program instead addresses reforms in the framework for procurement and concessions more broadly.

### Key quantitative outcomes (Text Table 2: Somalia: Indicative Targets Under the Staff‑Monitored Program III, May 2018–April 2019)
- Fiscal balance (cash basis; floor)
  - June 2018: Prog 0.0; Act 2.3; Status Met
  - Sept. 2018: Prog 0.0; Act 3.6; Status Met
  - Dec. 2018: Prog 0.0; Act 7.9; Status Met
  - March 2019: Prog 0.0; Act 16.5; Status Met
- Domestic revenue floor (Millions of U.S. dollars)
  - June 2018: Prog 75.7; Act 82.9; Status Met
  - Sept. 2018: Prog 116.1; Act 127.2; Status Met
  - Dec. 2018: Prog 165.0; Act 183.4; Status Met
  - March 2019: Prog 47.0; Act 54.0; Status Met
- Accumulation of new domestic expenditure arrears (ceiling, continuous IT)
  - Prog 0.0; Act 0.0; Status Met (for all test dates)
- Contracting of new domestic debt (ceiling, continuous IT)
  - Prog 0.0; Act 0.0; Status Met (for all test dates)
- Contracting or guaranteeing of new nominal external non-concessional borrowing (ceiling, continuous IT)
  - Prog 0.0; Act 0.0; Status Met (for all test dates)
- Central Bank of Somalia (CBS) net foreign assets (NFA) (floor) 5/
  - June 2018: Prog 24.0; Act 25.2; Status Met
  - Sept. 2018: Prog 24.0; Act 25.3; Status Met
  - Dec. 2018: Prog 24.0; Act 26.2; Status Met
  - March 2019: Prog 24.0; Act 25.1; Status Met
- Memorandum item: Debt contracting or guaranteeing of nominal external concessional borrowing (ceiling)
  - Prog 0.0; Act 0.0 (for all test dates)

### Structural benchmarks (selection of SBs, target dates, rationales, and status)
- SB#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 date: Jun-18. Rationale: Improve PFM and fiscal reporting. Status: Met.
- SB#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 the utilization of any FGS budgetary transfer.
  - Target date: Sep-18. Rationale: Improve fiscal transparency, accountability, FGS leadership and oversight over the FMS. Status: Met.
- SB#3: Record cash advances in SFMIS and process them in accordance with the Appropriations Act.
  - Target date: Sep-18. Rationale: Improve cash management and payment processes. Status: Met.
- SB#4: Complete the stocktaking and recording of all payroll and goods & services vouchers to December 31, 2017 which are in arrears into SFMIS.
  - Target date: Sep-18. Rationale: Create an accurate and verified compilation of domestic arrears. Status: Met.
- SB#5: Design and implement a cash-forecasting system to inform allotments which are issued prior to commitment, in accordance with the Appropriations Act.
  - Target date: Dec-18. Rationale: Provide effective use of the purchasing module in SFMIS, improve cash management, and limits/avoid new arrears. Status: Met.
- SB#6: Conclude the renegotiation of the Mogadishu port and airport fee-collection contracts.
  - Target date: Dec-18. Rationale: Strengthen PFM and broaden FGS revenue base. Status: Not met.
- SB#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 require mapping of active MDA accounts to the SFMIS.
  - Target date: Mar-19. Rationale: Make progress towards developing the Treasury Single Account. Status: Met.
- SB#8–#18: Additional SBs covering LMTO operationalization, tax administration measures, submission of Revenue Bill to Parliament, regulatory fee enforcement plans, takeover of non-tax revenue collections from MDAs, petroleum and fisheries revenue-sharing mechanisms, amended National Customs Act, draft National Development Plan 2020-24, Targeted Financial Sanctions Act, CBS regulations on credit classification and reporting requirements for banks, etc.
  - Majority Target dates: Jun-18, Sep-18, Dec-18, Mar-19. Status: Met (except SB#6).

### Outlook, projections, and key macro-fiscal numbers
- Growth outlook:
  - Under the baseline, growth is projected to remain at around 3.5 percent over the medium-term.
- Domestic revenue and fiscal projections:
  - Domestic revenues are projected to reach 5.2 percent of GDP by 2022.
  - Grants accounted for about 32 percent of total 2018 revenues, with almost half earmarked for specific projects.
  - Transfers to FMS reached $30 million (0.6 percent of GDP) in 2018.
  - Staff estimate revised 2019 domestic revenue projections will reach $196 million from $190 million in the budget, representing a 7 percent increase over the 2018 outturn.
  - Medium-term fiscal framework projections for domestic revenues:
    - $221 million in 2020
    - $238 million by 2022
- LMTO and tax administration:
  - Strengthening the large and medium-sized taxpayer office (LMTO) is expected to support revenue gains. Note: 80 taxpayers are now registered with the LMTO (as of April 2019).
- Budget composition and risks:
  - Operational expenditures are dominated by wages; expenditure on goods and services and capital equipment expected to increase gradually but development spending remains very limited.
  - Budget financing is highly dependent on grants and trade-related fees and taxes that account for as much as 55 percent (2018) of domestic revenues.
- Fiscal buffer:
  - Staff encouraged implementing a fiscal buffer initially sized at one months’ worth of critical expenditures of wages and security costs. The buffer will initially be financed from existing bilateral grants, with guidelines to govern replenishment.

### Risks to the outlook
- Downside risks dominate:
  - Security and political risks, including increased terrorist attacks (especially in Mogadishu), heightened political tensions between FGS and FMS, and upcoming Presidential elections (expected in early 2021) could slow reforms.
  - Climate shocks: dryer than average weather during late 2018 and early 2019 increased food insecurity.
  - Fiscal risks: poor revenue collection, lower-than-pledged grants, lack of fiscal discipline, and weak governance could undermine fiscal performance.
  - Financial stability risk: failure of a mobile money operator could affect the domestic payments system and erode household savings.
- Upside risks:
  - Stronger improvement in the security situation, stronger growth, higher-than-projected fiscal revenues from reforms, and higher FDI and grants due to improved confidence or a well-designed national development plan.

### Program and policy discussions and recommended reforms
- SMPIV focus areas:
  - Extend reforms across the FGS and FMS to support self-sufficiency and progress toward the HIPC DP.
  - Expand and deepen measures to build fiscal sustainability at the national level, improve financial stability, address residual AML/CFT gaps, and strengthen governance to reduce corruption.
  - Front-load key reforms and structure reviews to meet the track-record requirement of the HIPC Initiative as soon as feasible, assuming Executive Board endorsement that the program meets the UCT-conditionality standard.
- Public financial management (PFM) and fiscal policy recommendations:
  - Deepen PFM reforms to improve expenditure control, safeguard limited resources, and improve governance.
  - Enforce commitment controls and tighten procurement procedures to enhance oversight as purchases increase (linked to SB#4 and SB#5).
  - Institutionalize budget preparation and execution processes and cash management; strengthen the capacity of the Debt Management Unit and clarify debt contracting authority across government levels.
  - Implement fiscal reforms spanning FGS and FMS to broaden the revenue base and increase fiscal space, including:
    - Fiscal reporting by FGS and FMS (SB#2) to provide greater insight into general government operations—a key test for moving towards the HIPC DP.
    - Enacting the Revenue Bill (SB#8) to broaden revenue mobilization across the FRS.
    - Developing expenditure assignment guidelines to facilitate transparent use of revenues collected under FGS/FMS common arrangements (SB#3).
    - Customs reforms in Mogadishu and key ports (SBs#6, 7 and 9) to modernize customs practices and support revenue mobilization.
- Medium-term fiscal framework and capacity building:
  - Build capacity to develop a robust medium-term fiscal framework to underpin fiscal decisions and ensure debt sustainability beyond HIPC, especially as development spending needs are addressed.
  - Incorporate estimated costs of NDP9 into the medium-term fiscal framework to improve scope and coverage.

*Source: Somalia — Staff‑Monitored Program III and related program documents (May 2018–April 2019).*

### 22.      Over the longer term, implementing a durable fiscal federal framework will be critical

### 22.      Over the longer term, implementing a durable fiscal federal framework will be critical

### Fiscal federalism and natural resource governance
- Progress is being made on fiscal federalism through the constitutional review process and forums such as the Council of Ministers Inclusive Politics Economic Forum, but the model remains undetermined and the process is in early formative stages; coordination challenges and trust-building remain.
- Authorities and staff agree these reforms are essential to fulfilling Somalia’s development goals.
- Natural resource management and clear revenue-sharing arrangements are critical to realize potential from petroleum and fisheries while maintaining political stability.
  - Fisheries licensing commenced in 2018 and generated fees of $1 million in 2018.
  - Petroleum exploration licenses were planned to be auctioned in 2019.
  - Staff urged enactment of the Petroleum Bill, adoption of Extractive Industry Tax provisions, and devising a clear strategy for auctioning oil blocks prior to oil exploration licensing.

### Public expenditure, agencies, and program budgeting
- Government expenditure is dominated by salary spending, which crowds out program spending in health and education; salary numbers in the civil service have almost doubled since 2013.
- Staff recommendations:
  - Plan a systematic review of MDAs and independent commissions to constrain proliferation of agencies with independent budget resources.
  - Use biometric registration efforts to help contain salary costs and identify scope for rationalization and reduction in operating costs.
  - As fiscal space increases, progressively increase program spending on education, health, and infrastructure.
  - Gradually improve budget presentation by introducing program definitions for MDAs and integrating program codes into SFMIS during 2020–2021.

### Supporting financial stability and improving financial intermediation
- Banking sector developments and supervision:
  - In 2019, the CBS licensed five new banks (an additional two licenses are pending), doubling the number of banks and potentially stretching supervision capacity.
  - CBS re-organization and continued capacity building remain a priority.
  - CBS has strengthened accounting and internal audit capacities and processes, developed a multi-year audit plan, an accounting manual, and a plan for IFRS compliance expected by the end of 2019.
  - A transition plan towards the agreed new CBS organizational structure will be developed and implemented as soon as feasible (SB#13).
  - An IMF Safeguards Assessment is anticipated to precede the HIPC DP.
- Mobile money and supervision:
  - Declining financial inflows via MTBs while imports remain robust suggest financial channels may be formalizing in favor of banks and mobile money service providers.
  - Mobile money sector regulation was introduced in 2019 and to be implemented early 2020; mobile money regulations will be issued by end July (SB#12) and implemented gradually starting at the end of 2019 when CBS plans to issue the first set of licenses (SB#15).
  - CBS is preparing guidelines on operational risk, agent banking, and accounting standards for Islamic banking, and has begun implementing a supervision IT system.
  - Staff welcomed the resumption of the moratorium on licensing new banks to ease supervisory strain.
- AML/CFT and financial inflows:
  - Deeper AML/CFT reforms are needed to support financial inflows that underpin domestic consumption and investment.
  - Authorities have developed an AML/CFT action plan with IMF and World Bank assistance. Key items include:
    - (i) issuance of regulations covering financial entities other than MTBs (SB#14);
    - (ii) issuance of targeted financial sanction regulations once the bill is passed (SB#16);
    - (iii) capacity building at the Financial Reporting Center (FRC) (SB#17);
    - (iv) strengthening reporting compliance and enforcement;
    - (v) improving inter-agency coordination and communication.
- Financial infrastructure and inclusion:
  - Priority projects include introducing a Digital ID, a national payments system, and a movable collateral register (with World Bank support).
  - Legal reforms planned: review and update of the Financial Institutions Law and introduction of the Insurance Law; adoption of the Companies’ Law encouraged.
  - Currency reform to exchange counterfeit notes for new secure currency is prioritized but contingent on finalizing communication strategy, project timeline, project management and administration, and operationalizing the accountability framework.

### Foundations for sustained growth, business climate, and governance
- Poverty and demographics:
  - Latest household survey indicates Somalia is poorer than previously thought.
  - 50 percent of the population is estimated to be less than 15-years old.
  - About one in seven people are displaced, including due to climate-related events.
- Development planning:
  - Authorities are developing an updated National Development Plan (NDP9) to promote stability, poverty reduction, and higher and more inclusive growth; NDP9 is intended to serve as the interim Poverty Reduction Strategy for the HIPC DP.
  - NDP9 preliminary draft pillars: security, inclusive politics, economic growth and inclusion, social services and protection, and effective governance. The plan aims for better prioritization and inclusion of cost estimates and financing sources; staff advised prioritizing DINA and RRF findings.
- Natural resources and private sector constraints:
  - Somalia has significant potential in commercial fishing and oil, but development is impeded by security issues, degraded infrastructure, and developing legal and governance frameworks.
  - June 2018 Baidoa Agreement and March 2019 Addis Ababa Fishery Management and Revenue Sharing Agreement secured political agreement on ownership, administration, and sharing of natural resource revenues.
  - Commercial successes exist (e.g., telecommunications and mobile money growth), but constraints include limited access to affordable and reliable energy (one of the highest electricity tariffs in the world), poor transportation, poor water and sanitation, lack of skilled labor, and limited access to finance.
- Business environment reforms:
  - Enabling legislation submitted to Parliament includes the Company’s Act and the Foreign Investment Law.
  - An online business registration system has been launched and efforts to establish a “one-stop shop” to expedite business establishment are ongoing.
- Governance and anti-corruption:
  - Available information suggests widespread governance challenges and severe and systemic corruption.
  - Reforms under consecutive SMPs have emphasized revenue mobilization, PFM, central bank governance and organization, financial regulation and supervision, AML/CFT, improved reporting and transparency.
  - Ministry of Finance participation in the Open Budget Survey and increased transparency measures (public forums, social media presence, monthly revenue and expenditure reports) were noted.
  - Authorities submitted legislation related to anti-corruption, the auditor general, and AML/CFT; the National Economic Council was commissioned to study financial integrity issues.

### External position, arrears clearance, and debt relief
- Current debt and external position:
  - Somalia is in debt distress.
  - Public debt at 100 percent of GDP, 384 percent of exports, and 1,762 percent of revenues in 2018.
  - 96 percent in arrears (2018).
  - Reserves are minimal (less than one month of imports).
  - Somalia has no access to external financing; the trade deficit is largely covered by grants and remittances.
  - Staff considers the external position as very weak.
- Debt dynamics and scenarios:
  - Under the baseline scenario (modest stable growth, no debt relief, no new debt accumulation), total debt burden rises gradually to over 128 percent of GDP by 2039 as late interest accrues on arrears (based on originally contracted interest rates).
  - Under various shock scenarios, the debt burden could deteriorate faster and could exceed 190 percent of GDP.
  - Arrears to the World Bank and AfDB amounted to about $340 and $107 million, respectively, at end-2018.
- Need for HIPC debt relief:
  - Debt relief under the HIPC Initiative is needed to restore debt sustainability and support medium-term development prospects.
  - To reach the HIPC Decision Point (DP), three benchmarks must be met:
    - (i) establishing a (minimum six-month) track record of strong policy performance under a UCT-standard program;
    - (ii) adoption of an interim PRSP;
    - (iii) receiving necessary financing assurances, including to clear arrears to the IMF, World Bank and AfDB Group.
  - Assuming Board endorsement of SMP IV as UCT-compliant, items (i) and (ii) are under the authorities’ control.
  - The World Bank has resources set aside for an arrears clearance operation once the HIPC DP is reached.
  - AfDB Group resources in the Transition Support Facility can help clear arrears to the Nigerian Trust Fund and AfDB (non-concessional window); AfDB is working with authorities on modalities to secure resources needed to cover the portion of arrears due to the African Development Fund (about $80 million as of end-December 2018).
  - Under the AfDB burden-sharing policy, one third of the total arrears to the AfDB Group (about $107 million as of end-December 2018) should be provided by the authorities (with donor support).
- Financing assurances and IMF participation:
  - The Fund's participation for Somalia under the HIPC Initiative was not included in original HIPC cost estimates; additional resources will need to be mobilized before Somalia can reach the DP.
  - Mobilizing these resources is likely to be a complicated and protracted process based on precedents.

*Source: IMF country report chapter content.*

### 42.      The authorities were broadly aligned with staff on the policy discussions. They

### 1somea2019003 - 42.      The authorities were broadly aligned with staff on the policy discussions. They

### Authorities’ perspectives and priorities
- Broad alignment with staff on policy discussions; appreciation for policy framework provided by successive SMPs and coordination benefits with other IFIs.
- Requested continued assistance from the Fund and other IFIs for capacity development to support policy and reform implementation.
- On fiscal policy:
  - Agreed with proposed revenue and expenditure reforms, but highlighted fiscal federalism challenges for PFM, especially given current tensions with FMS.
- On financial sector:
  - Pace and sequence of implementing the CBS reorganization plan will depend on availability of donor support, which still needs clarification.
  - Implementation of mobile money regulations should be phased; agreed with staff to prioritize key elements, such as trust accounts to protect customers’ holdings.
- On governance and indicators:
  - Noted usefulness of third-party indicators (e.g., World Bank’s Doing Business Indicators, Transparency International) to guide reforms to the business climate.
  - Expressed concern about use of perceptions-based indices, arguing they may not accurately reflect efforts to address governance and corruption since 2012.
- On risks:
  - Agreed with overall thrust of risk assessment but suggested risk of terrorism or domestic conflict is now lower given recent campaigns that resulted in a loss of territory by Al Shabaab and reduced their organizational capabilities.
- On HIPC/IMF engagement:
  - Strongly argued SMP IV should lead to the HIPC DP once a successful six-month implementation record is established (expected by the second review).
  - Hoped international community will support timely mobilization of resources to finance the Fund’s share of debt relief to reach the DP in early 2020.
  - Warned of reform fatigue if debt relief becomes a distant goal.
  - Intend to start making token payments from January 2020, with size to be discussed during the first review of SMP IV; payments to be very small and informed by Somalia’s limited payment capacity and past precedents.

### Program modalities (SMP IV)
- SMP IV (May 2019–July 2020) objectives and composition:
  - Principally focuses on extending reforms across the FGS and FMS to lay a firmer foundation for self-sufficiency over the longer term.
  - Comprises 18 structural benchmarks.
  - Envisages three reviews—July 2019, October 2019, and May 2020.
  - Anchored by indicative targets on:
    - Fiscal balance (taking account of seasonality created by the timing of Ramadan).
    - Zero accumulation of domestic arrears.
    - An increasing quarterly revenue floor.
    - A floor on net foreign assets (NFA) of the CBS.
- Contingencies and clarifications:
  - In the event of shortfall in expected domestic revenues and grants, the fiscal balance floor will be adjusted to take account of any use of the fiscal buffer, provided it is in line with guidelines and there are no overruns in other non-priority spending items.
  - Definition of NFA clarified to exclude the CBS-owned US dollar holdings in Mogadishu, categorized as operational balances.
  - Continued efforts to strengthen financial sector stability and address residual gaps in the AML/CFT framework.

### Data issues and statistical priorities
- Progress achieved:
  - Substantial progress on reporting monthly CPI and fiscal data, and quarterly data on CBS and commercial banks’ balance sheets, and cross-border financial flows via MTBs.
  - An annual expenditure-based GDP estimate is well developed.
- Additional priorities under concurrent TA on balance of payments and government finance statistics:
  - Trade in goods, current transfers, FDI, travel data, and general government fiscal reporting (SB#2) and debt compilation.
- Staff recommendations:
  - Adoption of amendments to the Statistical Bill as an important step (SB#18).
  - In absence of production-based national accounts indicators, collect and analyze micro-level data to support surveillance and the planned project to estimate a production-based GDP.

### Staff appraisal — macroeconomic outlook and reform assessment
- Socioeconomic context:
  - Somalia’s economy continues to gradually recover but conditions remain extremely difficult; over 70 percent of the population lives in poverty.
  - Outlook vulnerable to fragile security, climate shocks, domestic political tensions, and still developing institutional capacity.
- Reform performance and program completion:
  - Authorities determined to meet commitments under successive SMPs; consistent implementation helped maintain macroeconomic stability and build capacity.
  - Management approved successful completion of SMP III given performance meeting all indicative targets and all but one structural benchmark.
- Policy priorities and recommendations:
  - Timely and steadfast implementation of broader reform agenda under SMP IV is critical to improve economic conditions and unlock additional resources.
  - Fiscal:
    - Continue and expand revenue efforts on taxes, non-taxes, and customs to a Federal level, including fiscal reporting.
    - Fully implement commitment controls across all agencies; institutionalize procurement improvements.
    - Over the longer term, implement a durable fiscal federal framework supported by effective natural resource management and revenue-sharing frameworks.
  - Financial sector and AML/CFT:
    - Bringing mobile money service providers within CBS oversight is essential.
    - Urged implementation of the CBS re-organization plan as soon as possible, including adoption of the revised Strategic Plan.
    - Continue strengthening AML/CFT regime; address remaining gaps by enacting the TFS bill and issuing associated regulations.
  - Governance:
    - Address governance weaknesses and risk of significant corruption.
    - Swift implementation of key legislation with Parliament—revenue, public financial management, audit, petroleum, and statistics—would promote better governance and consolidate reform.
    - Enact the draft anti-corruption law as soon as feasible.
  - Development and inclusion:
    - Increase efforts to support broad-based and inclusive economic growth.
    - Complete and cost the new National Development Plan (NDP9); narrow priorities and incorporate DINA and RRF findings; consider financing strategy.
    - Reforms to support business and investment environment: physical and financial infrastructure, strengthen property rights, and judicial process.
  - Capacity building:
    - Sustain efforts in PFM and revenue mobilization, financial stability, AML-CFT compliance, governance, and macroeconomic statistics.
    - Additional focus on debt and natural resource management, development of medium-term fiscal frameworks, and public investment management.
- Debt sustainability and HIPC:
  - Somalia’s debt is unsustainable despite reform efforts.
  - Staff supports authorities’ efforts to reach the HIPC decision point as soon as benchmarks are met to unlock grant-based development financing.
  - Staff finds SMP IV meets conditionality standard of an IMF upper credit tranche arrangement.
  - Somalia would need satisfactory program performance for at least six months to meet HIPC track record benchmark.
  - Staff encourages completion of NDP9 to meet requirements of an interim poverty reduction strategy and continued efforts to secure financing assurances from international partners for HIPC relief and IFI arrears clearance.
- Risks:
  - Downside risks dominate: political risks associated with elections and political developments; need for constructive cooperation between FGS and FMS.
  - Slow international mobilization of necessary financial resources, especially IMF membership contributions for HIPC debt relief, could delay reaching HIPC DP.
- Consultation scheduling:
  - Proposed next Article IV Consultation to follow standard 12-month cycle.

### Box 1 — Fiscal buffer: rationale and tentative guidelines
- Background: Fiscal buffers help smooth revenue and spending cycles, strengthen fiscal discipline, manage debt, and limit domestic arrears accumulation.
- Benefits for Somalia:
  - Large share of budget revenues from donor grants which have historically been volatile.
  - Paying public sector salaries and security costs on time is key to maintaining government operational capacity; shortfalls in revenues in 2013-2016 resulted in arrears accumulation and increased operational vulnerabilities.
- Tentative guidelines (tailored to Somalia; discussed with authorities but not formally adopted):
  - Usage: Triggered only by revenue short-falls that would affect priority spending (wages and allowance of civil service and security).
  - Size: Maximum (ceiling) would be two-months of total FGS compensation plus the food component of goods and services (G&S) for the SNA.
  - Replenishment trigger: Minimum (floor) would be one-month of total FGS compensation plus food component of G&S for SNA.
  - Management and reporting:
    - Primary oversight and management with the Prime Minister and Minister of Finance.
    - Monitoring by the Cash Management Committee, which would make recommendations on use to Minister of Finance and Prime Minister.
    - Monthly financial reporting in the SMP.

### Box 2 — Progress and next steps towards fiscal federalism
- Context: Fiscal federalism is high-priority; 2012 Provisional Constitution allows establishment of a Federal State but does not define intergovernmental fiscal relations or authority over fiscal resources.
- Progress since 2012:
  - Establishment of the National Security Council and the Inter-governmental Fiscal Forum.
  - Natural resource sharing agreement reached in June 2018 (“Baidoa agreement”) and a preliminary fisheries revenue-sharing agreement in March 2019.
  - Revenue Harmonization and Revenue Administration Bills, and a Statistical Bill are currently before Parliament.
- Remaining challenges:
  - Coordination issues and overlap of responsibility in socio-economic areas; security costs crowd-out public service delivery.
  - Insufficient revenues; reliance on donor financing and constrained FGS transfers to FMS due to limited domestic revenues and low and volatile budgetary grants.
  - No common fiscal reporting framework from FMS; lack of a consolidated fiscal account makes monitoring general government operations difficult.
- Recommended way forward:
  - Operationalize a common budget classification and accounting framework guided by the 2014-GFSM across FGS and FMS; ensure annual budgets consistent with common chart of accounts.
  - Clarify revenue generation assignments and spending responsibilities in an appropriately sequenced manner.
  - Strengthen FGS and FMS revenue collection and PFM capacity.
  - Reform the transfer system to support delivery of a minimum standard of public services.

### Box 3 — AML/CFT reforms: progress and next steps
- Progress since 2016:
  - Landmark AML/CFT Law passed in 2016; establishment of the Financial Reporting Center (FRC) and issuance of regulations.
  - Focused reforms on money transfer bureaus (MTBs) which conduct the majority of cross-border transactions.
  - Submission of the Targeted Financial Sanctions Law to Parliament in 2018.
  - FRC capacity improvements guided by a three-year strategic plan: hiring staff, renovating building, developing IT resources, establishing reporting channels and National Compliance Forum.
  - Reporting of large transactions started in the third quarter of 2018 and improved in early 2019.
  - Somalia joined the regional MENAFAFT in late 2018.
- AML/CFT Action Plan (with IMF and World Bank) and SMP IV short- to medium-term priorities:
  - Expand AML/CFT regulations to other financial institutions, including mobile money operators (SBs13 and 11).
  - Once the Targeted Financial Sanctions Regulations Law is passed, issue implementing regulations already developed with IMF TA (SB15).
  - Continue strengthening FRC capacity focusing on physical infrastructure, IT systems, secure data collection and storage, and data analysis capabilities (SB16).
- Other planned reforms:
  - Improve Know-Your-Customer framework by rolling out a national digital ID with World Bank assistance by early 2020.
  - Improve inter-agency coordination and communication by developing MOUs and an operational sub-committee of the Somalia National AML/CFT Committee (NAMLC).
  - Begin preparations for a country level risk assessment under MENAFATF within two years to comply with FATF’s recommendation.

*International Monetary Fund — contents of the specified chapter/section*

### Box 4. Governance Assessment and Reforms

### Box 4. Governance Assessment and Reforms

### IMF governance engagement framework
- The IMF Board adopted the policy framework outlined in “Review of 1997 Guidance Note on Governance–A proposed Framework for Enhanced Fund Engagement”.
- The framework articulates principles to promote more systematic, effective, candid, and evenhanded engagement with member countries regarding governance vulnerabilities, including corruption, judged to be macro-critical.
- The framework has four elements:
  - assess the nature and severity of governance vulnerabilities;
  - assess the macroeconomic implications of governance vulnerabilities;
  - provide policy advice and capacity development support where Fund engagement is warranted;
  - measures to prevent private actors from offering bribes or providing services that facilitate concealment of corruption proceeds.

### Extent and measurement of governance vulnerabilities in Somalia
- Available information suggests that Somalia has widespread governance weaknesses and perceptions of severe corruption.
- Significant information gaps make it difficult to conduct a full assessment.
- Third party indicators and reports cited include: World Bank’s World Governance Indicators, Transparency International, 2016 UN Monitoring Group on Somalia and Eritrea, and Maplecroft.
- In the World Bank’s World Governance Indicators, all of Somalia’s sub-indicators rate in the lower end of the -2.5 to 2.5 absolute scale.
- Continuous improvements in voice and accountability and political stability have been seen since 2012.

### Capacity constraints and drivers of governance weaknesses
- Somalia is a fragile state with significant capacity constraints, which contributes to its governance weaknesses.
- Institutional and human capital is weak, and poverty is widespread, which contributes to the risk of corruption.
- Example: the government’s recent efforts at biometric registration revealed an inflated public payroll, which they are in the process of rectifying.

### Progress, reforms, and areas of engagement
- The authorities have identified steady, incremental progress on governance as one of the key pillars of national development.
- Reform efforts undertaken by the authorities under the SMP benchmarks have led to improved governance practices and transparency.
- The Fund’s TA has supported these reforms.
- The authorities are also directly addressing corruption through work on an anti-corruption strategy.

Key reform areas and developments:
- Fiscal governance.
  - The FGS is making gains in revenue mobilization.
  - Significant effort has been made on transparent fiscal reporting, expenditure controls, and procurement.
- Financial sector governance.
  - The CBS has accepted a restructuring plan, has improved accounting, financial reporting and audit functions and is also anticipating an IMF Safeguards Assessment in the near future.
  - Financial reporting by, and regulation of, financial institutions has also made great strides.
  - AML/CFT compliance has improved and reforms here are accelerating (see Box 3 on AML/CFT reforms).
- Anti-corruption.
  - A national anti-corruption strategic plan is being developed by Ministry of Justice to coordinate efforts across the government.
  - Anti-corruption and audit bills have been submitted to Parliament, and once the relevant legislation is passed, an anti-corruption commission will be formed.
- Market regulation.
  - Market regulation is relatively nascent.
  - Legislation was passed and the National Communication Agency established to regulate the telecommunications industry.
  - Company and foreign investment bills have been submitted to Parliament.
- Rule of law.
  - The country’s dispute resolution system continues to be a hybrid of the legal framework the pre-existed the Federal Republic of Somalia (based on the Italian system), shariah law, and the customary (Xeer) system.
  - The authorities indicate that the customary arbitration system is commonly used and has been effective in addressing typical, small-sized property rights and contractual disputes.
  - The UNDP is supporting the government’s efforts to improve the national integrity system and policing.

*Source: Box 4. Governance Assessment and Reforms.*

### 2.5 w eak to 2.5 strong)

### 1somea2019003 - 2.5 w eak to 2.5 strong)

### Macroeconomic outlook and key aggregates
- Real GDP, annual percentage change:
  - 2015: 3.5
  - 2016: 2.9
  - 2017: 1.4
  - 2018: 2.8
  - 2019: 2.9
  - 2020: 3.2
  - 2021: 3.5
  - 2022: 3.5
- Nominal GDP in millions of U.S. dollars 1/:
  - 2015: 4,049
  - 2016: 4,198
  - 2017: 4,509
  - 2018: 4,721
  - 2019: 4,958
  - 2020: 5,218
  - 2021: 5,507
  - 2022: 5,816
- Per capita GDP in U.S. dollars:
  - 2015: 310
  - 2016: 313
  - 2017: 327
  - 2018: 332
  - 2019: 339
  - 2020: 347
  - 2021: 357
  - 2022: 368
- Consumer prices (e.o.p., percent change):
  - 2015: 0.3
  - 2016: 1.2
  - 2017: 6.1
  - 2018: 3.2
  - 2019: 3.0
  - 2020: 2.7
  - 2021: 2.3
  - 2022: 2.2

### Fiscal sector developments (Federal Government)
- Revenue and grants (Percent of GDP):
  - 2015: 3.5
  - 2016: 4.1
  - 2017: 6.0
  - 2018: 5.7
  - 2019: 6.9
  - 2020: 7.2
  - 2021: 7.4
  - 2022: 7.7
- Grants (Percent of GDP):
  - 2015: 0.7
  - 2016: 1.4
  - 2017: 2.8
  - 2018: 1.8
  - 2019: 3.0
  - 2020: 2.9
  - 2021: 2.9
  - 2022: 2.8
- Expenditure (Percent of GDP):
  - 2015: 3.3
  - 2016: 4.1
  - 2017: 6.6
  - 2018: 5.7
  - 2019: 6.9
  - 2020: 7.0
  - 2021: 7.2
  - 2022: 7.5
- Compensation of employees (Percent of GDP):
  - 2015: 1.3
  - 2016: 1.3
  - 2017: 2.8
  - 2018: 3.0
  - 2019: 3.2
  - 2020: 3.3
  - 2021: 3.4
  - 2022: 3.5
- Purchase of non-financial assets (Percent of GDP):
  - 2015: 0.1
  - 2016: 0.2
  - 2017: 0.1
  - 2018: 0.2
  - 2019: 0.5
  - 2020: 0.4
  - 2021: 0.4
  - 2022: 0.3
- Overall fiscal balance (Percent of GDP):
  - 2015: 0.0
  - 2016: 0.0
  - 2017: -0.6
  - 2018: 0.0
  - 2019: 0.1
  - 2020: 0.2
  - 2021: 0.2
  - 2022: 0.2
- Stock of domestic arrears (Percent of GDP):
  - 2015: 1.7
  - 2016: 1.8
  - 2017: 1.5
  - 2018: 1.5
  - 2019: 1.3
  - 2020: 1.1
  - 2021: 0.8
  - 2022: 0.6
- Fiscal note: "There has been a significant downward revision to GDP compared to the last staff report that affects all ratios to GDP." (as provided in source)

### Federal Government operations (millions of U.S. dollars, selected)
- Revenue and grants (selected years):
  - 2016: 171.1
  - 2017: 268.5
  - 2018: 274.6
  - 2019 (Dec. Est.): 297.1
  - 2019 (Prog.): 261.9 (appears in table rows)
  - 2020–2022: series shown in table with values (e.g., 2022 Prog. revenue and grants: values up to 449.5)
- Revenue (millions of U.S. dollars):
  - 2016: 112.7
  - 2017: 142.6
  - 2018: 156.0
  - 2019 Dec. Est.: 172.5
- Tax revenue (millions of U.S. dollars):
  - 2016: 88.6
  - 2017: 112.0
  - 2018: 127.2
  - 2019 Dec. Est.: 127.9
- Grants (millions of U.S. dollars):
  - 2016: 58.4
  - 2017: 125.9
  - 2018: 118.6
  - 2019 Dec. Est.: 124.6
- Total expenditure (millions of U.S. dollars):
  - 2016: 171.1
  - 2017: 295.4
  - 2018: 274.6
  - 2019 Dec. Est.: 297.1
- Compensation of employees (millions of U.S. dollars):
  - 2016: 55.1
  - 2017: 125.4
  - 2018: 131.2
  - 2019 Dec. Est.: 145.3
- Purchase of non-financial assets (millions of U.S. dollars):
  - 2016: 5.9
  - 2017: 6.3
  - 2018: 15.6
  - 2019 Dec. Est.: 15.5
- Overall fiscal balance (millions of U.S. dollars, selected):
  - 2016: 0.0
  - 2017: -26.9
  - 2018: 0.0
  - 2019 Dec. Est.: 0.0
  - 2022 Prog.: 13.0

### Financial sector developments
- Commercial banks: Loans and Deposits (index or level chart shown from Mar-16 to Mar-19; narrative points):
  - "Loans to the private sector have increased rapidly, driven by depsit growth..."
  - "MTBs are main conduit to external inflows, but their share appears to be declining."
  - "...but liquidity and capital ratios remain robust."
  - "Loans to the private sector are concentrated in trade, real estate, and construction sectors."
- Loan sectoral breakdown 2019Q1 (Percent):
  - Trade: 40%
  - Real estate: 23%
  - Construction: 10%
  - Car: 7%
  - Financial Service: 3%
  - Other: 17%
- Financial inflows via MTBs 2/ (million of USD) by year (chart values shown for 2015–2019 (proj.) with categories: Remittances, FDI, Grants, Other)
- Financial Soundness Indicators (Percent, Mar-16 to Mar-19):
  - Total loans/deposits, Total capital/total assets (charted; narrative: liquidity and capital ratios remain robust)
- Consolidated commercial banks balance sheet (Millions of U.S. dollars):
  - Total assets:
    - 2015: 194
    - 2016: 234
    - 2017: 345
    - 2018: 415
    - 1Q2019 Est.: 426
  - Cash on Hand:
    - 2015: 64
    - 2016: 63
    - 2017: 71
    - 2018: 115
    - 1Q2019 Est.: 107
  - Credit to private sector:
    - 2015: 45
    - 2016: 66
    - 2017: 105
    - 2018: 161
    - 1Q2019 Est.: 174
  - Customer Deposits:
    - 2015: 143
    - 2016: 177
    - 2017: 267
    - 2018: 332
    - 1Q2019 Est.: 344
  - Equity:
    - 2015: 47
    - 2016: 52
    - 2017: 53
    - 2018: 53
    - 1Q2019 Est.: 54
- Key ratios (Consolidated banks):
  - Credit to private sector share of total assets (percent):
    - 2015: 23
    - 2016: 28
    - 2017: 30
    - 2018: 39
    - 1Q2019 Est.: 41
  - Credit to private sector share of GDP (percent):
    - 2015: 1
    - 2016: 2
    - 2017: 2
    - 2018: 3
    - 1Q2019 Est.: 4
  - Total capital to assets (percent):
    - 2017: 22
    - 2018: 15
    - 2019 (Est.): 13
  - Loan to deposits (percent):
    - 2017: 37
    - 2018: 39
    - 2019 (Est.): 49
    - 1Q2019 Est.: 51
  - Liquid assets to total assets (percent):
    - 2018: 37
    - 1Q2019 Est.: 34

### Central Bank summary balances and monetary survey
- Summary accounts of the Central Bank (Thousands of U.S. dollars, selected):
  - Net Foreign Assets (NFA) (program definition shows negative values):
    - 2015: (324)
    - 2016: (321)
    - 2017: (317)
    - 2018: (306)
    - 1Q2019 Est.: (302) to (275) across quarters in table
  - Foreign assets:
    - 2015: 69
    - 2016: 61
    - 2017: 89
    - 2018: 110
    - 1Q2019 Est.: up to 125 in later quarters
  - SDR holdings:
    - 2015: 25
    - 2016: 25
    - 2017: 26
    - 2018: 26
    - 1Q2019 Est.: 25
  - Gross reserves of the central bank (Memorandum):
    - 2015: 43
    - 2016: 42
    - 2017: 48
    - 2018: 51
    - 1Q2019 Est.: 51
  - Somali shillings per US dollar (eop):
    - 2015: 22,285
    - 2016: 24,005
    - 2017: 23,605
    - 2018: 23,405 to 24,475 in 2018/2019 quarterly estimates
- Monetary survey (Thousands of U.S. dollars, selected):
  - Net foreign assets:
    - 2015: -299
    - 2016: -286
    - 2017: -272
    - 2018: -258
    - 1Q2019: -251
  - Net domestic claims:
    - 2015: 464
    - 2016: 533
    - 2017: 607
    - 2018: 697
    - 1Q2019: 701
  - Broad Money 2/:
    - 2015: 144
    - 2016: 178
    - 2017: 270
    - 2018: 334
    - 1Q2019: 346
  - CBS claim on government (IMF net position) (memo under claims on central government):
    - 2015: 357
    - 2016: 381
    - 2017: 375
    - 2018: 375
    - 1Q2019: 345

### Balance of payments and external sector
- Current account balance (Millions of U.S. dollars):
  - 2015: -243
  - 2016: -397
  - 2017: -405
  - 2018: -391
  - 2019: -409
  - 2020: -417
  - 2021: -442
  - 2022: -516
- Overall trade balance (Millions of U.S. dollars):
  - 2015: -2,949
  - 2016: -3,127
  - 2017: -3,630
  - 2018: -3,478
  - 2019: -3,599
  - 2020: -3,710
  - 2021: -3,931
  - 2022: -4,105
- Exports of goods, f.o.b. (Millions of U.S. dollars):
  - 2015: 683
  - 2016: 657
  - 2017: 463
  - 2018: 675
  - 2019: 764
  - 2020: 803
  - 2021: 847
  - 2022: 910
- Imports of goods, f.o.b. (Millions of U.S. dollars):
  - 2015: -2,667
  - 2016: -2,861
  - 2017: -3,202
  - 2018: -3,219
  - 2019: -3,362
  - 2020: -3,452
  - 2021: -3,632
  - 2022: -3,874
- Current transfers (net) (Millions of U.S. dollars):
  - 2015: 2,746
  - 2016: 2,761
  - 2017: 3,257
  - 2018: 3,121
  - 2019: 3,225
  - 2020: 3,331
  - 2021: 3,529
  - 2022: 3,632
- Private (net), including remittances (Millions of U.S. dollars):
  - 2015: 1,331
  - 2016: 1,364
  - 2017: 1,420
  - 2018: 1,379
  - 2019: 1,427
  - 2020: 1,521
  - 2021: 1,616
  - 2022: 1,674
- Capital account and financial account (Millions of U.S. dollars):
  - 2015: 262
  - 2016: 372
  - 2017: 435
  - 2018: 429
  - 2019: 409
  - 2020: 417
  - 2021: 442
  - 2022: 516
- Foreign direct investment (Millions of U.S. dollars):
  - 2015: 300
  - 2016: 330
  - 2017: 369
  - 2018: 408
  - 2019: 447
  - 2020: 464
  - 2021: 494
  - 2022: 526
- Balance of payments (Percent of GDP):
  - Current account balance (Percent of GDP):
    - 2015: -6
    - 2016: -9
    - 2017: -9
    - 2018: -8
    - 2019: -8
    - 2020: -8
    - 2021: -8
    - 2022: -9
  - Overall trade balance (Percent of GDP):
    - 2015: -73
    - 2016: -74
    - 2017: -81
    - 2018: -74
    - 2019: -73
    - 2020: -71
    - 2021: -71
    - 2022: -71
  - Exports of goods, f.o.b. (Percent of GDP):
    - 2015: 17
    - 2016: 16
    - 2017: 10
    - 2018: 14
    - 2019: 15
    - 2020: 15
    - 2021: 15
    - 2022: 16
  - Imports of goods, f.o.b. (Percent of GDP):
    - 2015: -66
    - 2016: -68
    - 2017: -71
    - 2018: -68
    - 2019: -68
    - 2020: -66
    - 2021: -66
    - 2022: -67
  - Current transfers (net) (Percent of GDP):
    - 2015: 68
    - 2016: 66
    - 2017: 72
    - 2018: 66
    - 2019: 65
    - 2020: 64
    - 2021: 64
    - 2022: 62
  - Foreign direct investment (Percent of GDP):
    - 2015: 7
    - 2016: 8
    - 2017: 8
    - 2018: 9
    - 2019: 9
    - 2020: 9
    - 2021: 9
    - 2022: 9

### External public debt and arrears
- Total external public debt stock outstanding (Millions of U.S. dollars):
  - 2014: 4,389
  - 2015: 4,380
  - 2016: 4,420
  - 2017: 4,657
  - 2018: 4,697
- External public debt stock outstanding (Percent of GDP):
  - 2014: 110.7
  - 2015: 108.2
  - 2016: 105.3
  - 2017: 103.3
  - 2018: 99.5
- External debt in arrears (Millions of U.S. dollars, as reported in table row "of which: in arrears"):
  - 2014: 6,307
  - 2015: 2,910
  - 2016: 4,656
  - 2017: 4,448
  - 2018: 4,506
- Composition by creditor (Millions of U.S. dollars, selected):
  - Multilateral creditors (2018): 1,514
  - Bilateral creditors (2018): 3,183
  - Paris Club creditors (2018): 2,492
  - World Bank (IDA) (2018): 500
  - IMF (2018): 335
  - United States (2018): 1,044
- External debt memorandum: "All non-US dollar claims are converted at period-end exchange rates. The external debt database is undergoing a reconcilliation process." (as provided)

### Off-budget aid
- Total estimated grants (Millions of U.S. dollars, off-budget):
  - 2014: 1,685
  - 2015: 1,741
  - 2016: 1,688
  - 2017: 2,171
  - 2018: 2,091
- Total Official Development Assistance (ODA) aid 1/ (Millions of U.S. dollars):
  - 2014: 1,218
  - 2015: 1,172
  - 2016: 1,186
  - 2017: 1,627
  - 2018: 1,513
- Humanitarian aid (Millions of U.S. dollars):
  - 2014: 672
  - 2015: 588
  - 2016: 563
  - 2017: 1,011
  - 2018: 909
- Developmental aid (Millions of U.S. dollars):
  - 2014: 546
  - 2015: 584
  - 2016: 623
  - 2017: 616
  - 2018: 604
- Support for peacekeeping (Millions of U.S. dollars):
  - 2014: 467
  - 2015: 569
  - 2016: 502
  - 2017: 544
  - 2018: 578
- FGS budgetary grants (Millions of U.S. dollars) (Memorandum):
  - 2014: 61.0
  - 2015: 26.9
  - 2016: 58.4
  - 2017: 125.9
  - 2018: 86.5
- FGS budgetary grants, as percent of ODA:
  - 2014: 5.0
  - 2015: 2.3
  - 2016: 4.9
  - 2017: 7.7
  - 2018: 5.7

### Key policy and structural notes (textual findings from source)
- "Loans to the private sector have increased rapidly, driven by depsit growth."
- "MTBs are main conduit to external inflows, but their share appears to be declining."
- "...but liquidity and capital ratios remain robust."
- "Loans to the private sector are concentrated in trade, real estate, and construction sectors."
- Fiscal data caveats:
  - "Budget data for the Federal Government of Somalia. Fiscal operations are recorded on a cash basis. GDP data cover the entire territory of Somalia."
  - "There has been a significant downward revision to GDP compared to the last staff report that affects all ratios to GDP."
  - "Increase in compensation of employees in 2017 reflects the bringing onto budget military spending related to the loss of an off-budget grant."
- Central Bank and monetary data caveats:
  - "Based on incomplete financial data."
  - "Prudential regulations require that commcercial banks hold $1.5 of the minimum $7 million capital requirement at the CBS; MTBs must hold $60,000 each at the CBS."
  - "Program definition per TMU ¶9."

*Source: IMF staff estimates, Somali authorities, and the provided PDF content.*

### Annex I. Somalia’s Political and Economic Reform Agenda and

### Annex I. Somalia’s Political and Economic Reform Agenda and Partnership with the International Community Stabilization

### Stabilization and Political Transition
- Stability and commitment to reform sustained since the UN-backed agreement on the Provisional Constitution in 2012.
- Creation of the Parliament and election of the President moved the country from the Transition Federal Government to the Federal Government of Somalia (FGS).
- UN, AMISOM, and US provided peacekeeping and security support prior to 2012 and in the fight against Al-Shabaab.
- By 2016, five Federal Member States were constituted; together with the FGS they form the Federal Republic of Somalia.
- Somalia has a decentralized fiscal regime reflecting the evolving federal structure and conflict legacy.
- A relatively peaceful transfer of power occurred in 2017 and reform commitment has continued despite the change in administration.

### Somali and Donor Framework for Reform and Nation Building
- International support frameworks:
  - Somali Compact and the New Deal for Somalia Conference (Brussels, 2013) agreed framework and pledging vehicle for reconstruction.
  - The Compact served as the country’s comprehensive development and political roadmap for 2014–2016.
  - The Compact established the High-Level Partnership Forum, the Mutual Accountability Framework (MAF), and the Somali Development and Reconstruction Facility.
- Subsequent national plans and partnerships:
  - NDP 8 (2017–2019) outlined FGS development priorities.
  - 2017 London Somalia Conference produced the Security Pact and the New Partnership for Somalia (NPS).
  - Authorities working on NDP 9 to set priorities for 2020–24 and serve as an interim PRSP.
- Participation:
  - During the 2nd Partnership Forum in Brussels in July 2018, 58 countries and six international organizations attended.

### New Partnership for Somalia (NPS) — Engagement Areas and Objectives
- The NPS and current MAF span multiple themes. Key engagement areas and listed objectives include:
  - Political Settlement:
    - Regular and substantive FGS-FMS dialogue
    - Local Government Laws
    - Electoral Law
    - National Independent Electoral Commission strategic plan
    - National Reconciliation Framework
    - National Stabilization strategy
  - Security:
    - National Security Architecture
    - Transition from AMISOM to Somalia led security
    - Payroll consolidation and verification
    - Transfer for high risk case load
  - Rule of Law:
    - Rule of law institutions
    - State level plans for police, justice and corrections
    - Anti-corruption commission
    - Transfer for high risk case load
  - Human Rights and Gender:
    - UN Human Rights Council's Universal Periodic Review
    - Bill of Rights
    - Political participation
    - Combatting gender-based violence
    - Child Rights Law
    - Independent Human Rights Commission
  - Youth Empowerment / Social Development:
    - Work plan for youth
    - Somali Youth Fund
    - National Education Act
    - Health Sector Strategic Plan
  - Financial and Economic Management:
    - IMF SMP
    - Communications Act
    - Finance Governance Committee
    - FGS annual audited financial statements
    - Harmonized customs tariff
  - Growth, Economic Recovery, and Resilience:
    - Public Private Dialogue and its website
    - Regulatory framework for investment board
    - Tuna licensing agreement
    - Company's Act
    - National Employment Strategy
    - National Resilience Strategy
    - Harmonized export and quarantine procedures
    - Financial Sector Roadmap
  - Inclusion and Regulation:
    - Continued and enhanced discussion with the public
    - Civic education
    - National policy and institutional framework for IDPs and vulnerable groups
    - Social protection policy
  - Infrastructure:
    - National Water Roadmap and Laboratory
    - Infrastructure development
    - Urban infrastructure planning
    - Highway Authority
    - Laws and regulations for Water and Energy sectors

### Economic Reforms and IMF Engagement
- IMF re-engagement:
  - IMF re-engaged with Somalia in April 2013 providing policy advice and capacity building.
  - Over 115 TA missions delivered since re-engagement.
  - In 2015 the IMF launched the “Trust Fund for Capacity Development in Macroeconomic Policies and Statistics for Somalia”—the Somalia Country Fund (SCF).
  - Somalia remained among the largest beneficiaries of IMF CD programs among fragile states.
  - The SCF helped broadly double the number of TA missions (relative to 2013) to about 20 missions per year.
  - SCF supported authorities’ full participation in IMF engagement often in a third country due to security constraints.
- IMF tailored approach for a fragile state:
  - Focus on “quick-wins” to deliver rapid gains.
  - Successive SMPs integrated policy advice and TA capacity building with gradual institution building.
  - Strong coordination across IMF departments and with donors (World Bank, EU, DFID).
  - “Needs assessment” missions to tailor TA to country circumstances and capacity absorption pace.
- CD program priorities and structure:
  - Nine key workstreams:
    1. public financial management (PFM)
    2. tax policy and administration
    3. banking legislation, regulation, and supervision
    4. central bank organization, governance, and accounting
    5. currency reform
    6. financial and fiscal law
    7. legal framework for combating the financing of terrorism (AML/CFT)
    8. central bank law
    9. macroeconomic and financial statistics
  - Each workstream has a clearly sequenced and prioritized TA program; authorities have broader reform action plans in areas like PFM, financial sector, and AML/CFT.

### Results and Progress
- Fiscal:
  - Offices of accountant general and auditor general established in 2015.
  - Somalia Financial Management Information System (SFMIS) implemented in 2017.
  - Cash forecasting operationalized and cash advances reduced significantly in 2018.
  - Authorities began enforcing existing taxes (sales, payroll, corporate income tax), improved taxpayer segmentation, implemented taxpayer IDs, strengthened the large taxpayer unit, and began modernizing customs administration.
  - Harmonized selected taxes, concluded revenue sharing agreements for fisheries and oil, and submitted the Revenue Harmonization Bill and the Revenue Administration Bill to Parliament.
- Monetary and Financial:
  - CBS re-built since 2014, governance structure established and Central Bank Law passed.
  - Accounting practices developed; monthly financial statements approaching IFRS consistency; internal and external auditors appointed.
  - Legal and operational framework for supervision established; 11 MTBs and 10 banks subject to quarterly off-site inspections and annual on-site inspections and relicensing.
  - AML/CFT foundational Law passed in 2016; Financial Reporting Center established in 2017 and operationalized in 2018; large transaction reporting began in late 2018; draft Financial Targeted Sanctions Bill submitted to Parliament in 2018.
- Data and Statistics:
  - FGS fiscal statistics well developed; other data more nascent.
  - Authorities report monthly or quarterly CPI, CBS and commercial bank balance sheets, exchange rate developments, and cross-border flows via MTBs.
  - Somali National Bureau of Statistics established in 2017 and statistical law submitted to Parliament.
  - Progress being made toward improving national accounts, consumer prices, balance of payments, and external public debt statistics with extensive TA.

### Implementation of Past IMF Policy Recommendations (Annex II summary)
- Budgets should reflect realistic revenue projections and confirmed grants:
  - Authorities receptive; realistic revenue forecasts observed in 2018 outturns and approved 2019 budget.
- Enhance cash management practices:
  - Cash management improved; use of cash advances reduced considerably.
  - Monthly cash forecasts developed and used since 3Q18 to inform expenditure allotment.
- Improve operability of the TSA:
  - Many MDA accounts closed; most residual accounts mapped to SFMIS, improving TSA visibility.
- Broaden the tax base and increase domestic revenues:
  - Authorities implemented income and sales tax instruments, submitted Revenue Bills to parliament, agreed fisheries licenses with FMS, harmonizing customs rates.
  - Operationalized LMTO and progressing modern customs processes.
- Prepare for phase I of the currency reform:
  - Final preparatory reforms pending and financing not fully identified; World Bank considering project-based support.
- Implement Financial Sector Reform Roadmap:
  - Supervision capacity and financial data quality improving.
  - Plan approved to improve CBS organization and governance; drafted Regulation to supervise the mobile money sector near completion.
- Improve compliance with AML-CFT regulations:
  - Compliance improving in relicensing of MTBs.
  - Targeted Financial Sanctions Law submitted to Parliament; Action Plan developed to address gaps, especially FRC capacity and regulatory framework.
- Improve the business environment, including addressing weaknesses in the NDP:
  - NDP 2020-2024 under development; review of NDP 2017-2019 underway.
  - National Communications Authority established; Company Act sent to parliament.
- Reduce corruption and improve governance:
  - Continued PFM reforms; CBS restructuring plan agreed to improve governance; financial sector supervision improved; some high profile enforcement actions against corruption.
- Fill key macroeconomic statistical gaps:
  - CPI published monthly; revaluation of expenditure-based GDP in train.
  - Support to improve business registry and start production-based GDP estimate.
  - Debt database complete and undergoing reconciliation.
  - Balance of payments improving (remittance data, trade in goods and FDI data being developed).

### HIPC Process (Annex III)
- HIPC benchmarks and requirements:
  - Key requirements:
    1. establishing a track record of implementing economic policies under an upper credit tranche (UCT) arrangement;
    2. develop a poverty reduction strategy (PRS);
    3. commitments from donors to finance arrears clearance and debt relief.
  - Additional technical steps include reconciling external debt and conducting a HIPC debt relief analysis.
- Establishing a track record:
  - Under the PRGF-HIPC Trust Instrument, countries must have a minimum six-month track record of policy performance under specified UCT instruments.
  - An SMP was added to eligible instruments in 2008 provided the Board agrees the SMP meets UCT standards.
- Poverty reduction strategy:
  - A satisfactory interim PRS is required to reach the Decision Point (DP) and must be implemented for at least a year before Completion Point.
  - NDP9 consultations well advanced; NDP9 targeted for Cabinet approval by end-September 2019.
- Financing assurances:
  - Creditors must pledge debt relief on HIPC terms amounting to at least 70 percent of HIPC eligible claims.
  - Fund’s costs for Somalia debt relief not included in original HIPC Trust; member countries must commit resources to finance the Fund's share.
  - Before reaching DP, Somalia must clear arrears to IMF, World Bank, and AfDB; IMF operation would include an intra-day bridge loan refinanced via an IMF arrangement.
  - Donors likely need to provide additional resources to finance implementation of Somalia’s economic development and poverty reduction program (iPRS).
- Other technical requirements:
  - Complete and reconcile Somalia external debt database with creditors (well underway); joint WB/IMF debt reconciliation mission planned for July 2019.
  - IMF, World Bank, and AfDB to develop an arrears clearance strategy and financing modalities.
- Illustrative timing:
  - If Board endorsement of SMPIV as meeting the UCT-standard is accomplished in July 2019, the DP could potentially be reached in early 2020, depending on program performance and other benchmarks, particularly financing assurances.
- Somalia’s arrears:
  - Somalia’s arrears to the IMF reached SDR 242 million or $333 million (547 percent of quota) at end-May 2019.

### Risk Assessment Matrix (Annex IV) — Key Risks, Likelihood, Impact, and Policy Responses
- Global Risks:
  - Weaker-than-expected global growth:
    - Relative Likelihood: High/Medium
    - Impact if Realized: Medium
    - Effects: (i) lower demand for exports (ii) possible reduction in donor support (iii) lower remittances
    - Policy Responses: (i) policies to support export growth and remittances (ii) greater domestic revenue mobilization (iii) accelerate recovery and resilience planning
  - Heightened security risks globally (Middle East and some African countries):
    - Relative Likelihood: High
    - Impact if Realized: Low
    - Effects: (i) lower grant funding (ii) disruption to trade
    - Policy Responses: (i) improve national security and maintain good relations with security partners (ii) diversify and maintain good relations with development partners (iii) greater revenue mobilization
- Country Specific Risks:
  - Climate Shock (drought, extreme flooding, famine):
    - Relative Likelihood: Medium
    - Impact if Realized: High
    - Effects: (i) death and displacement (ii) infrastructure damage (iii) higher humanitarian demand (iv) lower agricultural production
    - Policy Responses: (i) accelerate implementation of recovery and resilience plan (ii) maintain good relations with donor community (iii) policies to support remittances (iv) create fiscal space and build a buffer
  - Domestic Conflict or Sustained Terrorism (strengthening of Al Shabaab):
    - Relative Likelihood: High
    - Impact if Realized: High
    - Effects: (i) death and displacement (ii) infrastructure damage (iii) reduced confidence and growth
    - Policy Responses: (i) improve national security and maintain good relations with security partners (ii) strengthen capacity of essential economic institutions and operations (iii) create fiscal space to spend on social development needs
  - Political Risk & Weak Governance (FGS-FMS tensions or breakdown of relations with UN or neighbors):
    - Relative Likelihood: Medium
    - Impact if Realized: High
    - Effects: (i) delay in progress on reforms (ii) delayed or lower grants (iii) reduced support for HIPC (iv) less trade or security support
    - Policy Responses: (i) accelerate fiscal federalism reforms (ii) improve budget transparency, execution and expenditure efficiency (iii) accelerate PFM reforms, especially on budget execution and commitment controls (iv) strengthen AML/CFT compliance
  - Fiscal Risk (volatile grants, lower-than-expected domestic revenues, poor budget execution):
    - Relative Likelihood: Medium
    - Impact if Realized: Medium
    - Effects: (i) cut critical expenditures (ii) accumulate arrears
    - Policy Responses: (i) follow sequestration rule (ii) build fiscal buffer (iii) accelerate PFM reforms, especially on budget execution and commitment controls
  - Financial System Risk (lack of mobile money regulations, poor AML/CFT compliance):
    - Relative Likelihood: Low
    - Impact if Realized: Medium
    - Effects: (i) reduction in remittance inflows (ii) loss of household savings (iii) disrupted payments and transactions
    - Policy Responses: (i) strengthen AML/CFT compliance (ii) implement regulations for mobile money
- Note on RAM methodology:
  - The RAM is based on the February 2019 Risk Assessment Matrix and shows events that could materially alter the baseline outlook. The relative likelihood categories are staff’s subjective assessment (“low” <10 percent, “medium” 10–30 percent, “high” 30 percent or more). Non-mutually exclusive risks may interact and materialize jointly.

*International Monetary Fund — Annex I. Somalia’s Political and Economic Reform Agenda and Partnership with the International Community (extracted content).*

### Appendix I. Letter of Intent

### Appendix I. Letter of Intent

### Progress and reform agenda (summary)
- Somalia reports substantial and steady progress in rebuilding the economy since the end of the civil war, supported by development partners and IMF engagement through three successive Staff-Monitored Programs (SMPs) beginning May 2016 and substantial technical assistance.
- Fiscal framework improvements: strengthened budget preparation and execution, broadened revenue base, enhanced tax collection and public financial management (PFM).
- Financial sector and monetary developments: reforms to enhance financial sector stability, deepen intermediation, operationalize AML/CFT, and work toward the launch of a new national currency.
- Macroeconomic context and risks: external public debt is high and not serviceable; growth insufficient to reduce widespread poverty and address large social needs; vulnerability to climate shocks and ongoing fragility of the security situation.
- Commitment to further reforms: request to complete the second and final review of SMP III and a request for a fourth SMP (SMP IV) focused on revenue mobilization across FGS and FMS, deepening PFM reforms, and strengthening financial sector stability and AML/CFT compliance.
- Institutional and procedural commitments: FGS will provide IMF staff with necessary information per the Technical Memorandum of Understanding (TMU) and stands ready to adopt additional measures as needed to keep SMP IV on track.
- HIPC and arrears strategy: SMP IV designed to meet upper-credit tranche conditionality standards to support qualification for the Enhanced HIPC Initiative; Cabinet expected to approve the ninth National Development Plan (NDP9) by end-September 2019 to serve as the interim Poverty Reduction Strategy (iPRS); intend to make budget appropriations to enable token payments on overdue obligations to IMF and other IFIs to commence in 2020.
- Request to IMF on mission logistics: FGS urges IMF to revisit travel policy and consider conducting missions at the UN compound at Mogadishu International Airport to reduce opportunity costs of travel for officials.
- Publication: FGS authorizes IMF to publish the letter, the attached MEFP, TMU, and related staff report, subject to removal of market-sensitive information.

*Signed by Abdirahman Duale Beileh, Minister of Finance of Somalia, and Abdirahman M. Abdullahi, Governor of the Central Bank of Somalia (dated June 24, 2019).*

### Macroeconomic performance and outlook (MEFP background)
- Real GDP growth:
  - 2017: 1.3 percent (reported)
  - 2018: estimated increase to 2.8 percent
  - 2019: projected at 3.0 percent
- Inflation:
  - 2018: 3.2 percent
  - 2019: expected to subside to 3.0 percent
- Structural drivers: robust activity in construction, transport and telecommunications; agricultural output improved since the 2017 drought.
- Statistics and measurement: expanded High Frequency Household Survey (Wave I and Wave II) increased geographic reach; evidence suggests per capita consumption was likely overestimated in Wave I leading to a lower level of historical GDP series, though trajectory since 2014 unchanged; ongoing statistical reforms planned.

### Fiscal performance under SMP III (highlights)
- 2018 domestic FGS revenues:
  - Outperformed the supplementary budget by 6 percent at $183 million (equivalent to 3.9 percent of GDP).
- Expenditure and cash management:
  - Expenditure controls improved; use of cash advances declining; cash forecasting informs monthly allotments.
- Customs modernization:
  - Port of Mogadishu adopted HS codes and introduced on-line declaration—first steps toward full automatic front-end customs declaration.
- Fiscal federalism:
  - Roadmap developed to mainstream fiscal federalism across security, PFM, inclusive politics, and economic policies; Council of Ministers Inclusive Politics Forum scrutinizing candidate fiscal federalism models.
- Financial sector:
  - Strengthened on- and off-site inspection capacity for banks and MTBs; banks well capitalized; quarterly reporting improving; regulations for mobile money providers drafted; draft Targeted Financial Sanctions Act submitted to Parliament; implementing regulations drafted with IMF assistance.
- Governance and anti-corruption:
  - Anti-corruption and Audit Bills submitted to Parliament; anti-corruption strategy to be presented to Cabinet; HR audit of government personnel completed eliminating ghost workers and duplications; security sector contracts reviewed with improper contracts cancelled and to be retendered; Office of the Auditor General conducted an interim audit of the security sector.

### Program performance and targets (SMP III)
- General statement: Performance under SMP III has been good. All end-June and end-September indicative targets (ITs) and structural benchmarks (SBs) were met. All ITs set for end-December and end-March 2019 were met, with overperformance on domestic revenue and net foreign assets.
- Structural benchmark not completed: Of ten SBs established for the review, the only benchmark not completed related to the renegotiation of the airport-fee collection and Port of Mogadishu contracts (targeted for end-December 2018). Agreement in principle reached on the airport-management contract (under review by the interim National Procurement Commission prior to Cabinet approval); negotiations on Port of Mogadishu contract continue in good faith.

- Indicative Targets under the Staff-Monitored Program III (Millions of U.S. dollars; cumulative from the beginning of the year; program exchange rates; preliminary data)
  - Fiscal balance (cash basis; floor)
    - Prog. 0.0; Act. 2.3; Status Met (June 2018)
    - Prog. 0.0; Act. 3.6; Status Met (Sept. 2018)
    - Prog. 0.0; Act. 7.9; Status Met (Dec. 2018)
    - Prog. 0.0; Act. 16.5; Status Met (March 2019)
  - Domestic revenue floor
    - Prog. 75.7; Act. 82.9; Status Met (June 2018)
    - Prog. 116.1; Act. 127.2; Status Met (Sept. 2018)
    - Prog. 165.0; Act. 183.4; Status Met (Dec. 2018)
    - Prog. 47.0; Act. 54.0; Status Met (March 2019)
  - Accumulation of new domestic expenditure arrears (ceiling) (continuous IT)
    - Prog. 0.0; Act. 0.0; Status Met (all reporting dates)
  - Contracting of new domestic debt (ceiling) (continuous IT)
    - Prog. 0.0; Act. 0.0; Status Met (all reporting dates)
  - Contracting or guaranteeing of new nominal external non-concessional borrowing (ceiling) (continuous IT)
    - Prog. 0.0; Act. 0.0; Status Met (all reporting dates)
  - Net foreign assets of the Central Bank of Somalia (CBS) (floor) 5/
    - Prog. 24.0; Act. 25.2; Status Met (June 2018)
    - Prog. 24.0; Act. 25.3; Status Met (Sept. 2018)
    - Prog. 24.0; Act. 26.2; Status Met (Dec. 2018)
    - Prog. 24.0; Act. 25.1; Status Met (March 2019)
  - Memorandum item: Debt contracting or guaranteeing of nominal external concessional borrowing (ceiling): 0.0 recorded across reporting dates.
  - Footnote: 5/ Calculated using program exchange rates. See Technical Memorandum of Understanding, IMF Country Report No. 18/212. New information on the nature of CBS reserves gathered during the May 2019 discussions resulted in a revision of NFA for 2018.

### Structural benchmarks under SMP III (selected benchmarks and statuses)
- Key SBs met (examples):
  - 1A (Jun-18): 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. Status: Met. Rationale: Improve PFM and fiscal reporting.
  - 2A (Sep-18): 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. Status: Met. Rationale: Improve fiscal transparency, accountability, FGS leadership and oversight over the FMS.
  - 3 (Sep-18): Record cash advances in SFMIS and process them in accordance with the Appropriations Act. Status: Met. Rationale: Improve cash management and payment processes.
  - 4 (Sep-18): Complete stocktaking and recording of all payroll and goods & services vouchers to December 31, 2017 which are in arrears into SFMIS. Status: Met. Rationale: Create verified compilation of domestic arrears.
  - 5 (Dec-18): Design and implement a cash-forecasting system to inform allotments prior to commitment. Status: Met. Rationale: Improve cash management and avoid new arrears.
  - 8 (Jun-18): Ensure the large-and-medium-taxpayer office (LMTO) is fully operational and share its organizational structure and staffing status. Status: Met. Rationale: Enhance Inland Revenue Department and expand revenue base.
  - 9 (Jun-18): Minister of Finance to require renewal of licenses by MDAs be conditional on presenting a tax clearance certificate. Status: Met. Rationale: Expand revenue base and increase tax collection.
  - 11 (Dec-18): Submit the Revenue Bill to Parliament. Status: Met. Rationale: Update tax law and correct deficiencies.
  - 15 (Mar-19): Submit an amended National Customs Act to Parliament and implement a common classification of goods based on HS codes and a front-end customs declaration process. Status: Met.
  - 17 (Sep-18): Submit draft Targeted Financial Sanctions Act. Status: Met. Rationale: Strengthen AML/CFT framework to address terrorist financing risks and correspondent banking relationship pressures.
  - 18 (Mar-19): CBS to issue regulation on credit classification and provision, and review reporting requirement for banks. Status: Met.
- Single SB not met:
  - 6 (Dec-18): Conclude renegotiation of the Mogadishu port and airport fee-collection contracts. Rationale: Strengthen PFM and broaden FGS revenue base. Status: Not met. Notes: Agreement in principle reached on airport-management contract (under review prior to Cabinet approval); negotiations on Port contract ongoing.

### Policy priorities for SMP IV (overview from MEFP)
- SMP IV objectives: meet upper-credit tranche conditionality standard; support progress toward Enhanced HIPC Initiative Decision Point; expand revenue mobilization across FGS and FMS; deepen PFM reforms; strengthen financial sector stability and AML/CFT compliance.
- Institutional and legislative priorities:
  - Finalize a high-quality National Development Plan (NDP9) by end-September 2019 to serve as interim PRSP (iPRS).
  - Advance debt relief engagement with creditors and develop strategy to address arrears with international financial institutions.
  - Continue implementation of PFM, Procurement, Revenue, and Amended Customs Bills (noting heavy legislative schedule as these are with Parliament).
- Financial sector and AML/CFT:
  - Complete legal and operational framework for AML/CFT, ensure compliance, and strengthen Financial Reporting Center (FRC) capacity.
  - Strengthen CBS organizational structure and governance; continue to enhance supervisory capacity.
- Fiscal federalism:
  - Continue mainstreaming fiscal federalism; finalize model to determine relative roles of FGS and FMS, revenue-sharing mechanisms, natural resource management, and public borrowing powers.

*Source: Appendix I. Letter of Intent and Attachment I. Supplemental Memorandum of Economic and Financial Policies for 2019–21 (Mogadishu, June 24, 2019).*

### 11.      SMPIV will be aligned with our medium-term priorities and will anchor reforms over

### SMPIV will be aligned with our medium-term priorities and will anchor reforms over the next two years.

### Program objectives and conditionality
- SMP IV will focus on building fiscal sustainability at the combined level of the FGS and FMS, deepening PFM reforms to reduce corruption, and mitigating financial stability risks.
- Structural benchmarks (Table 3) will anchor key reform objectives, including: expand domestic revenue mobilization; strengthen commitment controls and procurement processes; implement CBS reorganization; broaden financial sector reforms; and cement implementation of the AML/CFT framework.
- Program floors and ceilings: a floor for domestic revenue; a zero floor on the cash-based fiscal balance; no accumulation of domestic arrears; and a floor on the net foreign assets of the CBS.
- SMP IV policies are designed to meet conditionality standards associated with arrangements in the upper credit tranches (UCT) and to pave the way for a financial arrangement with the IMF.

### Fiscal policy and reforms
- Commitment to maintaining fiscal discipline, oversight, and more transparent fiscal reporting; continued avoidance of accumulating new arrears.
- Finalized biometric registration of security personnel to improve wage-bill control.
- Revenue windfalls: prioritized to pay down arrears and, if needed, replenish the fiscal buffer; clear guidelines will be developed for these processes.
- Treasury single account (TSA) operationalization and enhanced transparency (reforms from SMPIII) will support fiscal objectives.
- NDP9 will provide a blueprint for medium-term objectives and self-sufficiency, informing fiscal federalism, transparency, governance, private investment, and resource management.

### Domestic revenue mobilization and fiscal federalism
- Measures to broaden domestic revenue mobilization to the FMS:
  - (i) Roll out the enacted Revenue Bills’ tax instruments across FGS and FMS (SB#8).
  - (ii) Report fiscal performance for general government operations covering FGS and FMS (SB#2).
- Customs reforms:
  - Implemented customs front-end declaration functionality at the Port of Mogadishu; follow-up work on manifest verification and goods inspection (SBs#6, 7 and 9).
  - Roll out customs reforms to other main ports and modernize customs administration with international support (SB#11).
  - Commit to preparation of an ad valorem schedule to facilitate transition to a modern system of customs tariffs by May 2020, with implementation as early as feasible in 2020, depending on capacity building and WTO article 20 compliance.
- LMTO and Inland Revenue Department oversight: develop an audit strategy at the LMTO (SB#10) and strengthen LMTO capacity, establish a tax academy, and enhance collection of sales taxes on goods and services, including expansion to the FMS.
- A medium-term strategy will be developed, with continued IMF TA, to increase domestic revenues and finance development spending.

### Resource allocation, petroleum and fisheries revenues
- Petroleum sector: ensure Petroleum Bill is enacted and Extractive Industry Tax provisions approved by the cabinet; devise clear strategy for auctioning oil blocks prior to issuance of licenses.
- Fisheries: continue transparent fisheries licensing; build on 2018 experience to attract more bidders; distribute related revenues in line with the revenue-sharing agreement signed in March 2019.
- Interim guidelines will be issued to facilitate spending revenues collected under FGS and FMS common arrangements (SB#3), taking account of existing agreements and FMS discussions.
- Commitment to increase FGS transfers to FMS while requiring greater accountability from recipients.

### Key 2019–2020 budget targets and measures
- Issue a supplementary budget to increase the target domestic revenue to $196 million for 2019.
- Programmed grants expected at $154 million; readiness to cut discretionary expenditures if grants fall, while utilizing the fiscal buffer to meet critical expenditures.
- Expectation to easily exceed the 2019 revenue floor and to meet the 2020 domestic revenue projection of $221 million.
- New and expanded non-tax revenue measures for 2019 include: (i) airport fees; (ii) overflight fees; (iii) visa charges; (iv) annual tuna fisheries licensing fees; and (v) telecommunications licensing and spectrum fees.
- Revenue measures implemented in the 2019 budget will continue into 2020.

### Public financial management (PFM) and fiscal buffer
- Establish a fiscal buffer (SB#1) with guidelines clarifying purpose, management, usage triggers and replenishment provisions; seed money will come from the unused 2018 bilateral grants of about $12 million.
- Progress fiscal reporting to capture combined government operations of FGS and FMS (SB#2).
- Implement commitment controls to cover all goods and services and ensure MDAs adhere to commitment control guidelines (SB#4).
- Issue and implement regulations on public procurement and disposals (SB#5) and include certification of delivery of goods and services in AGO payment vouchers.
- Enhance debt management capacity: clarify debt contracting powers among FGS, FMS and other government levels, including guarantees, and develop monitoring guidelines.
- Institutionalize reforms achieved under SMPIII: (i) cash forecasting; (ii) arrears management; (iii) reducing use of cash advances; and (iv) budget preparation and execution.

### Financial sector reforms and supervision
- Short-term priorities: strengthen CBS governance and organization; regulate and supervise the mobile money sector.
  - Implement CBS re-organization plan in line with IMF TA, starting with a transition plan and updating the CBS strategic plan (SB#13).
  - Issue mobile money regulation (SB#12) and establish supervisory capacity to be ready to issue mobile money service provider licenses within six months of the regulations being issued (SB#15).
- Strengthen supervisory capacity and oversight: deepen off- and on-site inspections, improve financial reporting and data quality, and develop a plan for dealing with problem institutions.
- Issue guidelines under development: Agent Banking, Operational Risk, Financial Reporting and Accounting Standards for Islamic Banks; more stringent enforcement of the Audited Financial Statement regulation.
- Maintain a moratorium on licensing new banks following the 2018/19 licensing round; future licensing pace to be commensurate with CBS capacity and financial stability.
- Audit and accounting priorities: develop a multi-year audit plan, finalize an accounting manual, and clarify progress to full IFRS compliance.
- Clarify treatment of the IMF position on the CBS balance sheet.
- Financial deepening: complete payments system reform with World Bank assistance; advance movable collateral registry and credit bureau; update Financial Institutions, Payment Systems, Insurance laws and Companies Law; roll out a digital ID for KYC and financial inclusion.

### AML/CFT, currency reform, and remittances
- Accelerate AML/CFT operational and legal reforms to support remittance flows:
  - Implement a detailed AML/CFT Reform Action Plan to prioritize and sequence reforms; urgent issuance of AML/CFT regulations covering financial entities other than MTBs (SB#14).
  - Issue implementing regulations to support the Targeted Financial Sanctions Law once the Bill is passed (SB#16); a preliminary draft has been prepared with IMF assistance.
  - Strengthen capacity building at the Financial Reporting Center (FRC) (SB#17) across training, infrastructure, IT systems, and data security.
  - Strengthen coordination between the FRC and CBS and prepare groundwork to conduct a national risk assessment within the next three years.
- Launch Phase I of currency reform as soon as preparations are completed: Phase I limited to exchanging counterfeit notes in circulation for new, secure, legitimate currency.
  - Outstanding preparatory tasks: project management framework, project timeline, updated budget, finalized communication strategy, and operationalized accountability framework.
  - Progress and development partner support will help drive the program funding process to completion.

### Policies for growth, governance, and social inclusion
- Advance a broad-based reform agenda to strengthen resilience and foundations for sustained inclusive growth.
- Develop NDP9 (2020–24) to outline national priorities, act as an Interim Poverty Reduction Strategy (iPRSP), and reflect consultations with national stakeholders and the international donor community.
  - NDP9 goals: reduce insecurity, strengthen inclusive politics, accelerate economic growth and institutions, improve access to social services, and strengthen institutional capacity for effective governance.
  - NDP9 will incorporate findings of the Disaster Needs Assessment (DINA) and the Recovery and Resilience Framework (RRF) completed in 2018; RRF implementation will occur during 2019.
  - NDP9 will be fully costed and include an investment strategy recognizing financing will come from government budget, overseas development aid, private sector investment, foreign direct investment, and remittances.
- NDP9 will be a key anchor for prospective debt relief and Somalia’s medium-term economic development strategy, and will act as a key benchmark for HIPC decision point.

### Governance, anti-corruption, and institutional reforms
- Strong commitment to improving governance and fighting corruption to secure efficient use of resources and donor financing for HIPC decision point and beyond.
- SMP commitments supporting governance and transparency include: increasing fiscal revenues, customs, procurement, PFM, CBS reorganization, financial sector surveillance and regulation, and AML/CFT reforms.
- Pursue reforms in market regulation, policing, and the judicial system.
- Urge passage and implementation of the Anti-corruption Bill; form an anti-corruption commission once legislation has passed.
- Strengthen the Reform Implementation Unit and internal controls to monitor reform priorities and procurement issues.
- Work with the UN on Integrity System reforms, including rule of law and anti-corruption policies and institutions.

### Data, statistics, and HIPC preparatory work
- Create the National Statistics Bureau and pass the National Statistics Bill to centralize and formalize statistical generation (SB#18).
- Continue developing key statistics and reporting capacity to the IMF:
  - Progress on harmonized fiscal reporting under Government Financial Statistics (GFS).
  - Develop a production side GDP estimate with World Bank assistance over the next couple of years.
  - Undertake a labor force survey later this year with ILO support.
  - Expand CPI coverage geographically as resources allow.
  - Improve data quality from financial institutions and develop a monetary survey with IMF assistance.
  - Urgently reconcile the external debt database with IMF and WB assistance as a technical precondition for a preliminary HIPC decision point document.
  - Roll out an FDI survey by September 2019.
  - Develop international trade data covering Mogadishu, Kismayo, and Bossaso based on harmonized HS codes.
  - Ensure availability of aggregated traveler data from the Immigration Department.
  - Continue improving and expanding the transfers database to cover banks and mobile money service providers.

### HIPC Decision Point prerequisites
- Recognition that reaching HIPC Decision Point requires fulfilling three criteria:
  - (i) at least six months satisfactory performance under a program that meets the standard of an UCT-arrangement;
  - (ii) delivery of the cabinet-approved NDP9 as Somalia’s interim poverty reduction strategy (iPRS);
  - (iii) clearing arrears to the international financial organizations and mobilizing adequate financing assurances, including to cover the IMF’s share of HIPC debt relief.

*Source: SMPIV program chapter (1somea2019003).*

### 28.      We are hopeful that the IMF Executive Board will agree that SMPIV meets the

### 1somea2019003 - 28.      We are hopeful that the IMF Executive Board will agree that SMPIV meets the

### Program status and arrears resolution
- Somali authorities expect Cabinet approval of the interim poverty reduction strategy (the NDP9) by end-September 2019, to be submitted for IMF and World Bank review shortly thereafter.
- Authorities committed to make provision for token payments on overdue obligations to the IMF, recognizing similar payments will likely be required to the African Development Bank and World Bank.
- Authorities will propose an amount for the token payments to the IMF “with due consideration for Somalia’s very limited repayment capacity and other related demands from the African Development Bank and World Bank.”
- Authorities will continue high-level outreach to creditors to maximize available debt relief and to donors to fund arrears clearance.

### Program monitoring: reviews, committee, and test dates
- The standing SMP Monitoring Committee will prepare and assess the indicative targets (Table 4) and structural benchmarks (Table 5).
- The program will have three reviews based on test dates of July 31, 2019; October 31, 2019; and May 31, 2020.
- The indicative targets are defined in the TMU (Attachment II).

### Indicative targets (Table 3) — key figures
- Fiscal balance (cash basis; floor): 0.0; 0.0; 0.0; 0.0; 0.0
- Domestic revenue floor: 110.9; 154.4; 196.3; 32.0; 92.9
- Accumulation of new domestic expenditure arrears (ceiling) 5/: 0.0; 0.0; 0.0; 0.0; 0.0
- Contracting of new domestic debt (ceiling) 5/: 0.0; 0.0; 0.0; 0.0; 0.0
- Contracting or guaranteeing of new nominal external non-concessional borrowing (ceiling) 5/: 0.0; 0.0; 0.0; 0.0; 0.0
- Central Bank of Somalia (CBS) — Net foreign assets of the CBS (floor) 5/ 6/: 24.8; 24.8; 24.8; 24.8; 24.8
- Memorandum item — Contracting or guaranteeing nominal external concessional or non-concessional borrowing debt (ceiling): 0.0; 0.0; 0.0; 0.0; 0.0

Sources note: “Based on preliminary data. Cumulative from the beginning of the year.” Test dates footnotes: 2/ Test date for the first review of the SMP. 3/ Test date for the second review of the SMP. 4/ Test date for the final review of the SMP. 5/ Continuous indicative target. 6/ As defined in the Technical Memoradum of Understanding, IMF Country Report No. 18/212.

### Proposed structural benchmarks for SMP IV (Table 4) — benchmarks, target dates, and rationale (numbered 1–18)
1. Establish a “fiscal buffer” under the TSA to support fiscal liquidity management and submit monthly reports on available balances. — End-July 2019; thereafter end-month basis. Rationale/Monitoring: “Sustain critical expenditures and avoid arrears in the face of volatile revenues. Issue and submit the guidelines governing its initial financing, future replenishment, use and reporting. Account balances to be reported on a continuous, monthly basis following first test date.”

2. Submit quarterly reports on the fiscal operations of the FMS and FGS. — End-September 2019; thereafter end-quarter basis. Rationale/Monitoring: “Support production of national revenue and expenditure information and support fiscal federalism. Report FGS and FMS operations (in the agreed format) on a quarter to date basis. The first report should capture 1Q and 2Q 2019 data, and will be subsequently monitored on a continuous quartlery basis.”

3. Prepare and issue expenditure assignment guidelines to facilitate spending of revenues collected under FGS and FMS arrangements. — End-October 2019. Rationale/Monitoring: “Develop national expenditure assignment system to complement revenue assignment specified in Revenue Allocation Bill and support fiscal federalism. Guidelines to be issued in anticipation of ongoing constitutional review process, and in line with existing agreements. FGS to prepare and submit to IMF staff copy of the issued interim principles and guidelines and minutes of discussions between the FGS and FMS.”

4. Enforce the use of commitment controls on payments for goods and services across all MDAs. — End-December 2019; thereafter end-year. Rationale/Monitoring: “To strengthen governance, budget oversight and improve budget execution by achieving as close to 100% vendor payments subject to commitment controls. Submit regulations instructing MDAs to follow the commitment control system. Include certification of delivery of goods and services in AGO payment voucher. Submit monthly SFMIS report detailing for MDAs the number and value of vendor payments utilizing the commitment systems (analysis to exclude donor projects). Cumulative year-to-date value of payments covered to increase to 75 percent and proportion of payments to increase to 80 percent of total by end-December 2019 (relative to 50 and 65 percent for 2018). Continuous monthly reporting to support the SB; subsequent test-date of May 2020 (for 2020 cumulative YTD).”

5. Enact amendment of the 2016 Public Procurement, Concessions, and Disposals Act, and issue associated procurement and disposal regulations. — End-February 2020. Rationale/Monitoring: “Provide oversight to ensure all MDAs follow appropriate practices in conducting public procurements and disposal of public assets. Submit amended act as passed and issued regulations to IMF staff.”

6. Automate the front-end customs declaration functionality related to the use of Somalia Standard Administrative Document for online customs declaration at the Port of Mogadishu. — End- July 2019, thereafter end-month basis. Rationale/Monitoring: “Support domestic revenue generation and modern customs operations, as a step towards national application. Allow for automated processing of front-end customs declaration system. Submit report detailing number of declaration forms processed by the system for period May-July 2019. Continuous monitoring on a monthly basis following the first test date.”

7. Implement manifest verification in the customs IT systems at the Port of Mogadishu. — End- September 2019, thereafter end-month basis. Rationale/Monitoring: “Support domestic revenue generation and modern customs operations, as a step towards national application. Allow for validation of online customs declarations submitted via Somalia Standard Administrative Document. Submit report detailing number of goods manifests processed by the system in September 2019. Continuous monitoring on a monthly basis following the first test date.”

8. Enact Revenue Bill (“Allocation of Revenue Raising Power” and “Revenue Administration” Bills). — End-October 2019. Rationale/Monitoring: “Support national revenue collection and expand the tax base by assigning revenue raising authority between FGS and FMS. Submit Revenue Acts to the IMF staff.”

9. Include goods inspection in the automated front-end declaration process and IT systems at the Port of Mogadishu. — End-December 2019; thereafter end-month basis. Rationale/Monitoring: “Support domestic revenue generation and modern customs operations, as a step towards national application. Allow for verification of goods processed through the automated customs front-end declaration system. Submit report on number of goods inspections undertaken. Continuous monitoring on a monthly basis following the first test date.”

10. Develop and implement an tax audit strategy at the LMTO to validate tax returns and revenues. — End-May 2020. Rationale/Monitoring: “Support domestic revenue generation and governance. Report number and value of returns audited, tax audit strategy, and tax audit summary report on key findings.”

11. Implement harmonized HS codes and prepare ad valorem tariff schedule at key ports of Bossaso, Kismayo, and Mogadishu. — End-May 2020; thereafter end-month basis. Rationale/Monitoring: “Support domestic revenue generation and modern customs operations, as a step towards national application. Submit schedule of HS codes and ad valorem rate schedule, and report revenue on a continuous, monthly basis (following first test date).”

12. CBS to issue Mobile Money Regulations. — End-July 2019. Rationale/Monitoring: “Support stability of the financial system. Submit issued mobile money regulations to the IMF staff.”

13. Adopt updated CBS Strategic Plan and transition toward updated organizational structure (as approved by the CBS Board November 2018). — End-October 2019. Rationale/Monitoring: “Strengthen capacity and governance at the Central Bank of Somalia. (i) Prepare updated CBS Strategic Plan; (ii) prepare and secure Board approval of a transition plan to guide the interim period before full implementation of updated CBS organizational structure, and (iii) secure Board approval of updated organizational structure and Strategic Plan. Before submitting to Board, send draft CBS organizational structure and Strategic Plan to IMF staff, and subsequently deliver Board-approved versions.”

14. MOF to issue AML/CFT regulations that apply to all financial institutions. — End-October 2019. Rationale/Monitoring: “Support normalization of correspondent banking relationships by broadening enforcement of AML-CFT provisions. Submit issued regulations to the IMF staff.”

15. Implement Mobile Money Regulations. — End-February 2020. Rationale/Monitoring: “Support stability of the financial system. Establish LSD capacity to supervise MNOs; develop and finalize prioritized transition plan to imposing full compliance with regulations, supervision manual, and data reporting template; and issue licenses for MNOs. Submit transition plan and regulation manual, and LSD resourcing plan to IMF staff.”

16. Issue regulations implementing the Targeted Financial Sanctions Law, following approval by Parliament. — End-May 2020. Rationale/Monitoring: “Support normalization of correspondent banking relationships by bringing Somalia AML-CFT framework into compliance with international standards. Submit issued regulations (by the Ministry of Finance) to IMF staff.”

17. Further operationalize and build capacity at the Financial Reporting Center to review and assess suspicious transactions. — End-May 2020. Rationale/Monitoring: “Support operational capacity of the AML-CFT framework. Address key gaps: (1) key physical infrastructure, (2) IT system (GOAML), and (3) secure data collection and storage. Confirm acquisition of key physical and data management infrastructure, and IT systems. Provide summary of activities over previous six months.”

18. Pass Amendment to the Statistics Law and build the capacity to collect key macroeconomic statistics on national basis. — End-February 2020. Rationale/Monitoring: “Improve macroeconomic data. Submit passed Amendment; submit a detailed and time-bound statistics action plan to close key data gaps in the areas of trade, FDI, GDP, employment, CPI, and monetary statistics.”

### Technical Memorandum of Understanding (Attachment II) — monitoring framework and definitions
- SMP covers May 2019–July 2020; the TMU specifies indicative targets and data transmission terms for monitoring program implementation.
- Indicative targets are set for end of July 2019, end of October 2019, end of December 2019, end of February 2020, and end of May 2020; evaluated in terms of cumulative flows from the beginning of each calendar year.
- Indicative targets (as specified in Table 1 of the Memorandum of Economic Financial and Policies): floor on FGS fiscal balance (cash basis); floor on FGS revenue; ceiling on accumulation of new domestic expenditure arrears by the FGS; ceiling on new domestic debt contracted by the FGS; ceiling on new external debt contracted or guaranteed by the FGS or the CBS; and floor on CBS’s net foreign assets.

Key definitional points (numbered paragraphs):
- Paragraph 2: Government for SMP purposes = FGS (excludes public entities with autonomous legal personalities). General government includes FGS and federal member states (Galmudug, Hirsabelle, Jubaland, Puntland, and South West State).
- Paragraph 3: Government revenue = all tax and nontax receipts received into the FGS general accounts; excludes grants; measured on a cash basis; cumulative from the beginning of the fiscal year (calendar year). Revenues defined in line with GFSM 2014 on a cash accounting basis, excluding grants. Revenues include taxes, non-tax revenues, other compulsory transfers, property income, sales of goods and services, penalties and forfeits, and voluntary transfers from nongovernment other than grants. Excludes grants, receipts from sale of nonfinancial assets, future signing bonuses from natural resource contracts, and transactions in financial assets and liabilities such as borrowing (except interest payments).
- Paragraph 4: Fiscal balance (cash basis) = (i) sum of government revenue and budget grants; minus (ii) total expenditures (excluding foreign-financed off-budget investment). Floor on fiscal balance will be adjusted down by amount drawn from the fiscal buffer to cover priority spending (public wages and food rations for security personnel) per SMP structural benchmark #1, provided no overruns in other non-priority spending.
- Paragraph 5: New domestic expenditure arrears = budgeted federal government payments to residents determined by contractual obligations that remain unpaid 90 days after the due date. Due date refers to contractual due date including grace periods. Government payment definitions include vouchers approved by Budget Department/Accountant General Office, expenditures automatically approved by legislation, debt payments to CBS and commercial banks, and transfers to regional governments.
- Paragraph 6: Debt definition follows Executive Board Decision No. 15688 (14/107), adopted December 5, 2014: debt = current liability under a contractual arrangement requiring future payments; includes loans, suppliers’ credits, and leases (debt is present value at inception of lease payments). Arrears, penalties, and judicially awarded damages arising from failure to make payment under contractual obligation that constitutes debt are debt.
- Paragraph 7: Domestic debt = debt whose counterparty is resident of Somalia, including the CBS. Excludes temporary advances for liquidity management from the CBS; temporary advances to be fully repaid within 90 days.
- Paragraph 8: Benchmarks for external debt = 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.
- Paragraph 9: CBS net foreign assets = CBS gross foreign assets minus gross foreign liabilities. Gross foreign assets defined as (i) gold valued over the program period at the market price of December 31, 2018 ($1,282.49 per ounce); plus (ii) total foreign exchange; net of (iii) CBS-owned US dollar holdings in Mogadishu categorized as operational balances, (iv) government grant deposits at the CBS in foreign currency, (v) other earmarked foreign currency deposits by residents of Somalia, and (vi) recovered Somalia foreign assets pending clarification of ownership between CBS and MOF. Somalia’s net position to the IMF is excluded. Relevant exchange rates at December 31, 2018 will be used to convert foreign assets and liabilities denominated in currencies other than U.S. dollars.

_Italic: Source: Attachment and tables in the SMP IV documentation provided in the content unit._

### 10.      The Somali authorities shall maintain a program-monitoring committee composed of

### 10.      The Somali authorities shall maintain a program-monitoring committee composed of 

### Program monitoring, mandates, and reporting timelines
- The 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 will have observer status.
- Committee responsibilities:
  - Monitor the performance of the program.
  - Recommend policy responses.
  - Inform the Fund regularly on program performance.
  - Transmit supporting materials necessary for the evaluation of benchmarks.
  - 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 to the IMF Resident Representative’s office
- Reporting agencies: Central Bank of Somalia (CBS), Ministry of Finance (MoF), National Statistics Bureau, and Regional Member States (Federal Member States).
- Key reporting items and timing (selected entries preserved exactly as in source):
  - Central Bank of Somalia — Monetary survey: Detailed balance sheet data of the CBS submitted in the reporting template. Quarterly. 3 weeks after the end of each quarter.
  - Central Bank of Somalia — Consolidated commercial banks’ balance sheet data by residency submitted in the reporting template. Quarterly. 4 weeks after the end of each quarter.
  - Central Bank of Somalia — Other financial indicators: Prudential data as per associated CBS regulations (total capital, core capital, total net assets, high quality liquid assets, and 30-day funding requirement), and average profit rates and tenor information for private sector financing assets from banks. Quarterly. 4 weeks after the end of each quarter.
  - Central Bank of Somalia — Balance of payments: Trade in goods data by HS code and value for the ports of Mogadishu, and Bossaso and Kismayo, starting end-June 2020; petroleum imports to Mogadishu; travel data from the Immigration Department; and cross-border current transfers (MTBs, and banks (and December 2019) MMSPs starting June 2020). Quarterly. 4 weeks after the end of each quarter.
  - CBS temporary advances to the FGS: Provide monthly amounts and terms of the temporary advances to the Ministry of Finance. Monthly. 1 week after the end of each month.
  - Budget grants: Provide data on the amounts of on-budget grants, including transfers to the government’s accounts from the government’s external accounts at the CBS. Monthly. 3 weeks after the end of each month.
  - Ministry of Finance — FGS budget operations: The detailed revenue and expenditure by budget line and a comprehensive table summarizing Government operations including TSA balances. Monthly. 4 weeks after the end of each month.
  - Ministry of Finance — Outstanding appropriation, allotment, commitment, vendor purchasing/payments, cash advances, and bank balances since the beginning of the calendar year. Also, FGS bank balances reflected in the up to date TSA. Monthly. 4 weeks after the end of the month.
  - Ministry of Finance — SFMIS audit report recording use of the allotment "allow to exceed" control override function. Monthly. 4 weeks after the end of the month.
  - Ministry of Finance — The monthly cash plan. Monthly. 4 weeks after the end of each month.
  - Ministry of Finance — A report of all payment requests by MDAs awaiting payment since the beginning of the calendar year where the commitments exceed the agreed payment terms (in SFMIS/Excel). Monthly. 4 weeks after the end of the month.
  - Ministry of Finance — 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’ fiscal operations: Reports of fiscal operations (expenditures and revenues) from all Federal Member States (FMS) starting end-3Q2019. Quarterly. Quarterly after the end of each quarter.
  - Domestic arrears: A table providing the 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: The 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. The amount of new external debt contracted or guaranteed by Government. Annually. 4 weeks after the end of the month.
  - Disbursements and repayments: (i) scheduled; and (ii) actual interest and principal on debt of the Government and the CBS, by creditor. Annually. 30 days after the end of each month.
  - Structural benchmarks: A table with a description of the 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: Indicators to assess overall economic trends, such as the consumer price index. Monthly. 6 weeks after the end of each month.
  - National Statistics Bureau — GDP by expenditure data (from June 2020). Annually. 6 months after the end of each year.

### Key debt and macroeconomic findings
- Debt sustainability assessment summary:
  - Somalia is in debt distress based on both external and public debt indicators.
  - Total public debt is very high—at $4.8 billion, or 101 percent of GDP at end-2018—nearly all of which is external (100 percent of GDP).
  - Of the $4.5 billion in arrears: $1.7 billion is composed of principal, $1.0 billion is unpaid interest, and $1.8 billion is late interest or fees.
  - Composition of external creditors (end-2018): Paris Club creditors $2.49 bn, 53%; multilaterals (World Bank $0.5 bn, 11%; AfDB Group $0.14 bn, 3%; IMF $0.34 bn, 7%; AFESD $0.18 bn, 4%; Arab Monetary Fund $0.29 bn, 6%; Others IFIs $0.07 bn, 1%); non-Paris Club creditors $0.69 bn, 15%.
  - All domestic debt (1.5 percent of GDP) represents central government arrears.
  - Under broadly steady state assumptions, total public debt is expected to increase to around 128 percent of GDP by 2039.
  - By 2039, external debt would reach around 480 percent of exports, and debt service would be over 80 percent of fiscal revenues.

### Data and analytical limitations
- Public debt data coverage is limited to the central government; no government guaranteed debt, no known liabilities of state-owned enterprises or subnational governments, and no public-private partnerships.
- National accounts data: relatively short time series (six years) built from expenditure-based estimates derived from household survey data.
- Balance-of-payments data gaps, including on current account flows; trade data rely on third party data and Port of Mogadishu data; secondary transfers derived from third parties; direct investment data from the real sector file but an FDI survey is under construction.
- The short historical series and structural breaks limit the applicability of standard LIC-DSF sensitivity tests; standard deviations used to scale tests are undermined by data volatility and short series.

### Baseline assumptions (medium- and long-term)
- Baseline scenario assumptions preserved exactly:
  - Stable real growth of around 3.5 percent a year.
  - Somalia’s population growth rate since 2000: 2.9 percent.
  - Economy remains fully dollarized, implying low inflation and no adverse nominal exchange rate movements.
  - Trade balance remains highly negative, financed by official grants and remittances.
  - Residual current account balance financed by foreign direct investment.
  - Export growth in line with overall economic growth.
  - Fiscal stance expected to remain in balance, given no access to new external or domestic debt financing, and no accumulation of new domestic arrears, as required under the new SMP.
- Even under these assumptions, debt stock expected to continue increasing in the absence of HIPC debt relief due to accumulation of late interest and other penalties.

### Tailored stress scenarios and quantitative outcomes
- Rationale: tailored tests reflect risks in the risk assessment matrix (RAM) and account for Somalia’s binding financing constraint; shocks are modeled as changes in economic activity, export receipts, and fiscal revenues rather than financing gaps.
- External financing shock:
  - Development aid and FDI fall gradually to about half their current levels by 2024, thereafter stabilizing. Humanitarian aid and remittances remain stable.
  - Growth declines to about 2.0 percent by 2024.
  - By 2039: debt equivalent to 171 percent of GDP and 640 percent of exports; debt service around 120 percent of revenues.
- Security shock:
  - GDP slows to nil by 2024, followed by a modest recovery; long-term growth weaker than baseline at 1.8 percent.
  - Continued donor support helps short-run fiscal revenues, but long-run revenue potential reduced.
  - By 2039: debt reaches 190 percent of GDP and 711 percent of exports; debt service of 127 percent of revenues.
- Climate shock:
  - Reoccurrence of drought akin to the 2017 episode; GDP growth slows immediately to 1 percent and recovers to baseline (3.5 percent) after two years.
  - Shock largely mitigated by increased humanitarian aid.
  - By 2039: debt at 132 percent of GDP and 494 percent of exports; debt service equivalent to 88 percent of fiscal revenues.

### Conclusions and policy implications
- Somalia’s external public debt and overall public debt are in distress; arrears are approaching the totality of the debt stock.
- External debt and total public debt are already in breach of their indicative thresholds and the trajectory worsens in the medium and long term even under steady state assumptions.
- Key risks that worsen the outlook: external financing, security, confidence shocks, and the risk of higher interest rates.
- Policy recommendation: Exiting the unsustainable debt situation will require debt relief; the authorities should continue to pursue the HIPC debt relief process as a priority. Successful completion of that process holds the prospect of possibly renewed access to regular debt financing.

*Prepared by the staff of the International Monetary Fund (IMF) and the International Development Association (IDA).*

### 13.      The authorities broadly agreed with the results of the DSA. They concurred with the

### 1somea2019003 - 13.      The authorities broadly agreed with the results of the DSA. They concurred with the

### Authorities' assessment and priorities
- The authorities broadly agreed with the results of the DSA, including:
  - underlying macroeconomic assumptions;
  - use of tailored shocks in response to data limitations;
  - projected debt paths within the analysis; and
  - the headline debt sustainability rating.
- The authorities stressed that restoring debt to a sustainable path and realizing poverty-reducing real GDP growth hinge upon completing the HIPC debt relief process.
- Prioritized actions to reach HIPC decision point and beyond:
  - fulfil necessary prerequisites for HIPC debt relief;
  - intensify early preparations to build debt management capacity to ensure debt remains sustainable post-HIPC;
  - strengthen monitoring capacity;
  - clarify the power to contract debt at the central and general government levels;
  - develop frameworks for the issuance of government guarantees.

### Debt outlook and headline DSA results (baseline, selected years and indicators)
- External debt (nominal) as percent of GDP: 2018: 99.5; 2019: 99.5; 2020: 99.5; 2021: 99.4; 2022: 99.3; 2023: 99.3; 2024: 99.5; 2029: 103.2; 2039: 128.2; memorandum PV of external debt: 98.6, 98.7, 98.9, 98.9, 98.9, 99.1, 99.4, 103.2, 128.3.
- PV of PPG external debt-to-GDP ratio: 98.6; 98.7; 98.9; 98.9; 98.9; 99.1; 99.4; 103.2; 128.3 (years covering 2018–2039 table).
- PV of PPG external debt-to-exports ratio (selected entries): 380.1; 368.3; 373.1; 377.5; 366.7; 367.4; 368.9; 384.9; 481.7.
- PPG debt service-to-exports ratio (selected entries): 2.0; 17.7; 18.9; 19.4; 19.1; 19.7; 20.4; 24.4; 39.5.
- PPG debt service-to-revenue ratio (selected entries): 13.3; 66.4; 67.5; 65.8; 64.2; 63.8; 63.3; 64.7; 81.0.
- Gross external financing need (Million of U.S. dollars, selected): 3.5; -17.6; -27.0; -32.2; 9.3; 18.5; 17.6; 12.2; 4.6.

### Key macroeconomic assumptions used in projections
- Real GDP growth (in percent): 2.8; 2.9; 3.2; 3.5; 3.5; 3.5; 3.5; 3.5; 3.5; -3.5; 3.4 (table lists sequence across years).
- GDP deflator in US dollar terms (change in percent): 1.8; 2.1; 2.0; 2.0; 2.0; 2.0; 2.0; 2.0; 2.0; 1.3; 2.0 (series across projection horizon).
- Effective interest rate (percent) 4/: 0.1; 4.6; 4.9; 5.0; 5.1; 5.3; 5.5; 6.6; 8.9; 0.1; 5.6.
- Growth of exports of G&S (US dollar terms, in percent): 23.1; 8.6; 4.1; 4.3; 8.7; 5.6; 5.5; 5.5; 5.5; 5.8; 5.9.
- Growth of imports of G&S (US dollar terms, in percent): 1.7; 4.8; 3.4; 5.5; 5.6; 3.7; 3.7; 3.9; 3.1; 5.8; 4.2.
- Government revenues (excluding grants, in percent of GDP): 3.9; 4.2; 4.5; 4.9; 5.2; 5.6; 6.0; 7.7; 11.1; 2.4; 5.9 (table lists across years).
- Aid flows (in Million of US dollars) 5/: 86.7; 147.9; 152.8; 157.7; 162.9; 168.3; 173.9; 204.6; 283.3.

### Public sector debt and fiscal dynamics (baseline, selected entries)
- Public sector debt (percent of GDP): 2018: 101.0; 2019: 100.9; 2020: 100.9; 2021: 100.6; 2022: 100.5; 2023: 100.4; 2024: 100.6; 2029: 104.0; 2039: 128.7.
- Change in public sector debt: -3.9; -0.1; 0.0; -0.2; -0.2; 0.0; 0.1; 1.1; 3.9.
- Identified debt-creating flows (percent of GDP): -4.7; -0.7; -0.9; -1.3; -1.6; -1.5; -1.6; -2.3; -4.0; -4.7; -1.6 (series).
- Primary deficit (percent of GDP): 0.0; -0.3; -0.3; -0.3; -0.4; -0.2; -0.3; -0.4; -0.1; 0.1; -0.3.
- Revenue and grants (percent of GDP): 5.7; 7.2; 7.4; 7.7; 8.0; 8.3; 8.7; 10.1; 13.0; 3.7; 8.6.
- Primary (noninterest) expenditure (percent of GDP): 5.7; 6.9; 7.1; 7.4; 7.7; 8.1; 8.4; 9.7; 12.9; 3.8; 8.3.
- Automatic debt dynamics contribution (percent of GDP): -4.6; -0.4; -0.6; -1.0; -1.2; -1.3; -1.4; -1.9; -3.9.
- PV of public debt-to-GDP ratio 2/: 100.0; 100.1; 100.3; 100.2; 100.1; 100.2; 100.4; 104.0; 128.8.
- PV of public debt-to-revenue and grants ratio (selected): 1,747.5; 1,399.5; 1,349.9; 1,297.9; 1,245.4; 1,202.1; 1,160.0; 1,031.2; 990.2.
- Debt service-to-revenue and grants ratio 3/: 9.1; 66.4; 67.5; 65.8; 64.2; 63.8; 63.3; 64.7; 81.0.

### Stress tests, sensitivity, and thresholds
- Stress tests presented include scenarios: Baseline; External Financing Shock; Security Shock; Climate Shock; and tailored tests (e.g., Combined contingent liabilities).
- Baseline PV of debt-to-GDP series (Table 3): entries include a steady baseline of 99–104 across 2019–2029 with specific alternative scenario breaches noted (e.g., A1, B tests) in the sensitivity tables.
- Thresholds and benchmark values used in sensitivity analysis:
  - PV of debt-to-GDP threshold: 30 (in table header "Threshold 30").
  - PV of debt-to-exports threshold: 140.
  - Debt service-to-exports threshold: 10.
  - Debt service-to-revenue threshold: 14.
  - Total public debt benchmark: 35 (Table 4).
- Selected sensitivity outcomes (examples from Table 3 and Table 4):
  - Under A1 (key variables at historical averages) PV of debt-to-GDP rises across projection horizon to values including 134 in 2029 (Table 3).
  - Under B5 (Depreciation) PV debt-to-GDP entries include 125, 115, 115, 116, 116, 117, 118, 119, 120, 122 across years (Table 3).
  - PV of debt-to-revenue baseline values: 1,400; 1,350; 1,298; 1,245; 1,202; 1,160; 1,135; 1,112; 1,082; 1,053; 1,031 (Table 4).

### Data, capacity, and statistical issues affecting the DSA
- Data provision has serious shortcomings caused by institutional weaknesses, weak capacity, and poor source data.
- Ongoing statistical developments referenced in the content:
  - Creation of a Somali National Bureau of Statistics (SNBS) pending passage of the National Statistics bill.
  - Re-estimated GDP series for 2013–16; efforts to re-estimate using World Bank’s 2017 high frequency survey.
  - CPI series expanded to a basket of 419 items (previously 312).
  - No producer price index (PPI) currently.
  - FGS adopted FMIS in 2015; mapping to GFS items completed; progress toward Treasury Single Account (TSA) is complete.
  - Financial sector reporting improving; commercial banks report quarterly since 2017; CBS aims for IFRS-compliant balance sheet by end of 2019.
  - External sector statistics advancing: annual Balance of Payments for 2013–16 compiled based largely on third-party data and assumptions; FDI survey expected by September 2019.
  - Aid Information Management Systems (AIMS) expected to be rolled out in June 2019.
- Limitations influenced the DSA choice of tailored shocks and the need for strengthening monitoring and debt management capacity.

### Policy implications and recommendations identified by authorities/staff
- Critical to complete HIPC debt relief prerequisites to restore debt sustainability and support poverty-reducing growth.
- Build and intensify debt management capacity early to ensure sustainable post-HIPC debt trajectories.
- Strengthen monitoring capacity, clarify legal powers to contract debt across central and general government levels, and develop frameworks for government guarantees.
- Continue statistical capacity building to reduce data gaps that complicate surveillance and DSA reliability.

*Source: https://www.imf.org/-/media/files/publications/cr/2019/1somea2019003.pdf*

### Introduction

### Introduction

### Engagement with the Fund and reform commitment
- Authorities welcome deepening engagement with the Fund and constructive dialogue with staff.
- Authorities broadly share staff’s appraisal and agree with key policy recommendations.
- Since formation of a permanent government in 2012, Somalia has made notable improvements in macroeconomic conditions, policy and institutional infrastructure, and security outcomes.
- Security challenges have receded in recent times, reflecting increased effectiveness of the Somalia National Army (SNA) and strong support from the African Union Mission in Somalia (AMISOM).
- Authorities remain committed to reform implementation, supported by three successive IMF Staff Monitored Programs (SMP).
- Authorities aim to establish a strong performance record meeting upper credit tranche (UCT) conditionality through the implementation of the fourth SMP.
- To meet the HIPC decision point requirements, authorities are finalizing the ninth National Development Plan (NDP9) to reduce poverty incidence and support inclusive growth.
- Authorities seek the Executive Board’s endorsement of the fourth SMP.

### Program performance under the third SMP
- Performance described as solid: authorities met and exceeded all 2018 indicative targets for June, September, and December and those for March 2019.
- Structural benchmarks (SB): all but one SB met.
  - Missed benchmark: renegotiation of two contracts with two foreign companies managing Mogadishu airport and the seaport; airport management contract renegotiated and a new contract signed; seaport negotiations ongoing and expected to be concluded soon.

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### Recent Economic Development and Outlook

### Growth and sector drivers
- Recovery from the severe 2017 drought continues.
- Economy grew by 2.8 percent in 2018, up from 1.4 percent in 2017.
- Growth drivers: agriculture sector, telecommunications, trade, construction, and the financial sector.

### External position and reserves
- Recovery in livestock exports narrowed the current account deficit slightly to 8.3 percent of GDP in 2018, down from 9 percent of GDP in 2017.
- With no access to external debt, and reserves at less than a month of import cover, the trade deficit was financed primarily through grants and remittances.

### Inflation and projections
- Inflation declined from 6.1 percent in 2017 to 3.2 percent in 2018.
- Inflation is expected to decline further to 3.0 percent in 2019.

### Growth outlook
- GDP growth is expected to reach 2.9 percent in 2019, subject to favorable weather conditions.
- Over the medium-term, growth projected to stabilize at around 3.5 percent, subject to continued security improvements and political stability.
- Noted vulnerabilities: disruptive climate shocks and food insecurity.

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### Policy Priorities and Reforms

### Governance of SMP implementation
- To mitigate reform fatigue and overcome political impediments, a Ministerial level SMP monitoring committee chaired by the Deputy Prime Minister has been established.

### Fiscal Policy, PFM Reforms and Debt Relief

- Revenue mobilization and tax administration
  - Authorities committed to a medium-term fiscal framework underpinned by robust revenue mobilization and improved tax administration.
  - The 2019 Revenue Bill, currently in Parliament, aims to intensify efforts to improve sales tax collection by expanding the tax to federal states.
  - Plans to strengthen the large and medium-sized taxpayers’ office (LMTO) to enhance tax compliance.
  - Intent to modernize customs processes to support implementation of an ad valorem tax schedule and a new harmonized system of customs tariffs.
  - These reforms are expected to boost Government revenue collection over the medium-term.

- Expenditure management
  - Expenditure restraint will continue to underpin the fiscal outlook.
  - Authorities aim to maintain wages, and goods and services expenditure within current parameters, while creating space for increased development and social spending to support NDP9.
  - Plan to build a fiscal buffer sufficient to cover one month of wages and critical security-related expenditures; buffer to cover budget shortfalls resulting from fluctuations in domestic revenue and grants.

- Public financial management (PFM)
  - Sustained efforts to strengthen PFM will continue under the new SMP.
  - Progress made under the 2013-16 PFM Action Plan (developed with World Bank TA) will be sustained.
  - Authorities will strengthen commitment and expenditure controls, enhance debt management capacity, and continue to promote efficient use of resources.
  - Commitments: enact a new PFM Bill (currently in the senate after approval by the lower house); amend the 2016 Public Procurement, Concessions, and Disposal Act and issue associated regulations by early 2020.
  - Priorities: improve institutional capacity for budget preparation and execution, cash forecasting and management, debt management, and reducing cash advances.

- Debt relief / HIPC
  - Somalia remains in debt distress, with public debt at 100 percent of GDP.
  - Achieving the HIPC decision point remains an urgent priority.
  - Preparatory activities for HIPC Decision Point: debt reconciliation and finalization of an IPRSP compliant National Development Plan consistent with HIPC requirements.
  - Authorities determined to establish a solid track record under the new UCT quality SMP.

### Financial Sector Policies

- Bank supervision and central bank organization
  - Authorities committed to strengthening financial stability and improving bank supervision.
  - Central Bank of Somalia (CBS) to develop a transitional plan for the new organizational structure, accounting for financial sector growth.
  - To improve supervision, CBS preparing guidelines on operational risk, agent banking, and accounting standards for Islamic banking.
  - CBS will develop an accounting manual and a plan for IFRS compliance, expected by the end of 2019.

- Currency reform
  - Phased currency reform agenda is a key priority to facilitate small transactions.
  - CBS will develop a detailed project management framework, finalize a communication strategy, and operationalize an accountability framework.

- Mobile money regulation and telecommunications
  - A well-regulated mobile money sector is critical for financial stability; CBS plans to issue mobile money regulations by the end of July 2019.
  - Telecommunications Authority became operational in 2018 and began issuing annual licenses to those meeting regulatory requirements.

### Structural Reforms

- Fiscal federalism and governance
  - Strengthening fiscal federalism remains a key government priority.
  - National Security Council (bringing together Federal Government of Somalia (FGS) and Federal Member States (FMS) leaders) and the Intergovernmental Fiscal Forum (Finance Ministers from FMS) continue to provide political leadership on constitutional and governance issues.
  - A Council of Ministers Inclusive Politics Forum established to lead technical work on constitutional review, including determining an appropriate fiscal federalism model for Somalia.
  - Revenue Harmonization, Revenue Administration, and Statistics Bills have been tabled before Parliament.

- Natural resources and extractives
  - Authorities emphasize equitable sharing of revenue streams from natural resources.
  - A natural resources management and resource sharing agreement concluded in June 2018.
  - A fisheries license revenue sharing agreement concluded in March 2019, building on the 2018 agreement creating a transparent fisheries licensing regime.
  - A Petroleum Bill approved by the lower house and currently being considered by the Senate.
  - Authorities committed to adopting Extractive Industry Tax provisions and developing a strategy for auctioning oil blocks before issuance of exploration licenses.

- AML/CFT and anti-corruption
  - Progress on AML/CFT since passage of the AML/CFT Law in 2016: establishment of Financial Reporting Center; development of regulations to cover other financial institutions including MMOs; preparation of a Targeted Financial Sanction Law.
  - With support from the Fund and the World Bank, a comprehensive and well sequenced AML/CFT action plan has been developed to guide next-stage reforms.
  - Anti-corruption and governance: Anti-Corruption Law approved by both houses of Parliament; Audit Bill with the Senate after approval by the lower house.
  - An anti-corruption commission will be established once enabling legislation is enacted.
  - Authorities committed to sustaining efforts to improve the justice system, including policing, with support from the UNDP.

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### Conclusion

- Somali authorities reaffirm commitment to implementing far reaching reforms under the new SMP.
- Authorities view strong economic and political institutions as instrumental to delivering long term growth and reducing poverty.
- Authorities value continued engagement and support from the Fund and the international community.

*Source: Introduction (1somea2019003).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1somea2019003.pdf_