## 1somea2020005 - EXECUTIVE SUMMARY ## Source details **Canonical URL:** [1somea2020005 - EXECUTIVE SUMMARY](https://www.imf.org/-/media/files/publications/cr/2020/english/1somea2020005.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2020/english/1somea2020005.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2020/english/1somea2020005.pdf.json) --- ### Context and recent shocks - Somalia reached the HIPC Decision Point and began a new IMF-supported program to support the authorities’ National Development Plan, but was hit by a triple shock of flooding, desert locusts, and the coronavirus pandemic. - Authorities implemented a Country Preparedness and Response Plan (CPRP) and containment measures; schools reopened on August 15; flights resumed on July 5 (domestic) and August 3 (international). - Fiscal/financial support measures: - Temporary tax relief on some basic food commodities (partly offset by a permanent tax increase on some other products). - Donor-funded expansion of the social safety net and lending-support to small and medium-sized enterprises. - Additional donor-funded transfers to federal member states (FMS). - Political timeline: - New Prime Minister approved on September 18 following former PM’s resignation after a no confidence vote on July 25. - Parliamentary elections scheduled for December; new President expected to be elected in February 2021 by the new parliament. ### Growth outlook and balance of payments (selected figures) - Growth and per-capita impacts: - Staff project a contraction of 1.5 percent in 2020, relative to the ECF-request projection of 3.2 percent growth in 2020. - This implies a contraction of about 4.4 percent in real per-capita-incomes. - Authorities’ April projection was -5 percent for 2020. - Recovery anticipated in 2021 with growth reaching about 3 percent; long-term average growth projected to reach 4.75 percent, implying positive real per-capita GDP growth of close to 2 percent over the long run. - Balance of payments (Text Table 1, 2020 projections, Millions of U.S. dollars): - Exports of goods and services: 702 - Imports of goods and services: 5,184 - Remittances: 1,543 - Grants: 2,344 - High-frequency resilience indicators: - Remittance inflows to Money Transfer Businesses increased 2.3 percent in Q2 compared to Q1; preliminary Q3 data suggest this trend sustained. - Bank deposits rebounded after March–April outflows and are only slightly down from Dec-2019 levels. - Formal credit to the private sector has slowed, mainly due to a slowdown in trade financing and construction loans. ### Fiscal developments and 2020 supplementary budget - COVID-19 materially reduced fiscal revenues, especially trade and sales taxes in Q2; major effects on khat receipts and non-tax revenues from international travel and delayed telecom licensing reforms. - 2020 supplementary budget (approved August 3): - Estimated FGS domestic revenues reduced by $67 million relative to the original budget. - Grants increased by $179 million, including additional World Bank support of $55 million and anticipated AfDB support of $13 million. - Expenditures increased to $685 million from $476 million. - Donor-financed social spending increased to $93 million. - Provision for increased transfers to sub-national governments of $104 million. - Unfunded contingent expenditures of $74 million; authorities will prioritize expenditures per the sequestration rule to match available resources. ### Program performance, targets, and authorities’ requests - Overall assessment: program performance is broadly satisfactory. - Compliance: - All structural benchmarks (SBs), indicative targets (ITs), and all but one quantitative performance criterion (QPCs) for end-June 2020 were met. - SBs for end-September and end-October were met; all but one IT for end-September were met. - Missed targets: - Floor on FGS domestic revenues (QPC#1) missed by $10 million for end-June; related IT for end-September missed by $14 million. - Authorities’ requests to the IMF: - Waiver for nonobservance of the missed QPC on domestic revenues, based on submission for cabinet approval of a 2021 budget supporting revenue recovery. - Modification of the end-December 2020 QPC on domestic revenues to an IT. - Modification to the NFA QPC to include an adjustor allowing reserves to be drawn as a last resort if fiscal revenues underperform, subject to limits; request to increase the December QPC on NFA to reflect overperformance through June. - Request to reset the target date for enacting the Targeted Financial Sanctions Law to June 2021. ### Risks, mitigation, and financing - Risk environment: - Vulnerable to security, political, and climate risks; COVID-19 increases near-term uncertainty; elections could delay legislation and reform focus. - Mitigants: - Authorities’ strong track record of reform, current grant commitments, FGS fiscal savings, continued fiscal discipline, and sequestration rule. - Adverse scenario concerns: - Reversal in COVID-19 trajectory and/or another climate shock could materially worsen the outlook. - If remittances and grants do not increase further, growth and domestic revenues would be lower, increasing financing needs; significant adverse scenarios would require additional international support. - Financing status: - Program remains fully financed with additional grant funding from the World Bank, AfDB and EU; firm financing assurances through October 2021; financing gap falls considerably in 2021. ### Staff recommendation and mission - Staff supports completion of the first review under the ECF arrangement, which will make available SDR 7 million. - Discussions were held virtually from September 12–22, 2020; Mission head: A. Holland; team included P. de Imus, A. Chaudry, L. Agoumi, G. Kalyandu, T. Orav, I. Samake, W. Irungu, and P. Muir. - Document date: November 4, 2020. ### Fiscal outlook, revenue mobilization, and 2021 budget - Staff projects a small deficit of about $11 million in 2020 (Table 2a). - Domestic revenue target for 2020 revised down to $189 million (December IT). - Authorities committed to a 2021 budget consistent with ECF objectives and MTFF; draft 2021 budget targets domestic revenues of $260 million. - Text Table 2. Revenue Projections, 2021 (US$ millions): - Projected increase in domestic revenues in 2021: 66.1 - New measures: 34.2 - Introduction of turnover taxes: 2.0 - Increase in tax rate on Khat /1: 32.2 - Ongoing measures: - Recovery from COVID-19 reflecting post-June 2020 performance trends: 31.9 - Income taxes: 1.1 - Taxes on goods and services: 8.0 - Taxes on international trade: 8.5 - Other taxes: 1.3 - Non-tax revenues /2: 13.0 - Notes: - 1/ Tax rate on Khat increased from $2.50 to $4.00 per kg - 2/ Increased telecomunication spectrum license fees contribute $9.7 million ### Key structural and institutional reforms - Revenue administration and customs: - Tax audit strategy implemented (SB #1): initial audits covered 35 companies and 100 tax returns. - Customs modernization: HS codes introduced at Bossaso and Kismayo (in addition to Mogadishu) at end-August; ad valorem schedule modeling completed (SB#4). - Extractives: - Petroleum Law enacted in February; petroleum exploration licensing round launched; drafting progressed on Extractive Industry Tax law (EIT; HIPC CPT) and revised model Petroleum Sharing Agreement. - Fiscal federalism: - FGS and FMS Ministers of Finance meet monthly; MOU signed to facilitate data sharing and reporting; agreements on sharing World Bank supplementary DPO proceeds and proposed ad valorem tariff schedule. - SB #8 (due June 2021) to improve fiscal transparency and accountability at general government level. - Central Bank of Somalia (CBS) restructuring and financial sector: - New Board, three new senior managers, HR Advisor, Legal Advisor appointed; transition team established. - CBS preparing first operational budget in nearly three decades for 2021. - Mobile money operator (MMO) licensing beginning; licenses to two main MMOs expected by end-2020. - Financial Sector Reform Road Map: re-introduce moratorium on licensing additional banks until capacity deficiencies addressed; adopt revised capital adequacy regulation and introduce a reserve requirement; aim to fully apply mobile money regulations by 2022. - Currency exchange project: - World Bank supporting updated survey to estimate Shillings in circulation eligible for exchange; measures needed to strengthen CBS balance sheet and secure assets to back new currency. ### AML/CFT, governance, and transparency measures - Financial Reporting Center (FRC) capacity improving (SB #2): progress on IT systems (go-AML), guidance, and training. - National Anti-Corruption Strategy (NACS) endorsed by Cabinet (SB #3); nomination of commissioners to establish Anti-Corruption Commission underway. - Targeted Financial Sanctions Bill (SB#7) revised; enactment extended to June 2021 due to COVID-19 and elections. - SB #9 (due March 2021) to improve transparency and governance around telecommunications regulatory regime and mobile money licensing; by March 2021 NCA to publish list of licensed MNOs and MVNOs and CBS to publish MMOs. ### Social safety nets and MSME support - Baxnaano social safety net program: - Supported by World Bank multi-year financing of $65 million (SRSNHC). - Target transfer: $20 per month (~30 percent of the food basket of rural households). - Goal: reach 200,000 households nationwide (~10 percent of the population). - Disbursement quarterly via mobile money; women as direct recipients; using WFP delivery system while FGS systems developed. - Locust-response scale-up: - Six-month scale-up: additional $40 per month to regular beneficiaries in locust-impacted areas (total $60 per month); additional 70,000 households temporarily added; underpinned by $40 million from World Bank (IDA regional window). - Gargaara facility: - New financial facility funded by the World Bank (US$15 million) to on-lend to eligible bank and non-bank financial institutions targeting MSME projects in agriculture, energy, fishery, and livestock. ### Debt sustainability, HIPC process, and debt relief implications - Somalia remains in debt distress and needs to secure debt relief at the HIPC Completion Point (CP) to restore debt sustainability. - DSA key findings: - Total public debt: US$5.3 billion, or 109 percent of GDP at end-2019—nearly all external. - Present value of external debt around 60 percent of GDP in revised baseline, above 30 percent threshold for countries with weak capacity. - Baseline indicates sustained breaches of PV of external debt-to-exports and debt service thresholds beyond 2023. - Conditional scenario (full delivery of HIPC, MDRI, and beyond-HIPC assistance at Completion Point) would reduce debt burden indicators significantly and could yield a moderate risk rating. - Baseline external debt (nominal), percent of GDP (selected years): - 2019: 107.5; 2020: 55.3; 2021: 50.8; 2022: 48.3; 2023: 45.0; 2024: 43.3; 2025: 40.1; 2030: 26.6; 2040: 14.3 - PV of PPG external debt-to-GDP (selected years): - 2019: 105.4; 2020: 60.8; 2021: 56.5; 2023: 51.3; 2025: 43.9; 2030: 27.1; 2040: 14.2 - Staff policy implications: - Full delivery of eligible debt relief at the HIPC Completion Point is critical to bring external debt to manageable levels. - Anchor fiscal policy on ensuring debt sustainability and limit future borrowing to concessional sources as much as possible. - Strengthen debt management institutions and capacity; secure further advisory services to advance debt restructuring negotiations. ### Monitoring, program conditionality, and data reporting - QPCs and ITs set through September 2021; proposed fiscal targets established with reference to MTFF and draft 2021 budget. - Test dates: - QPCs for end-December 2020 and end-June 2021; ITs for end-September 2020 and end-March 2021 (and other dates through September 2021). - Key quantitative anchors: - Floor on FGS domestic revenue; ceiling on spending on FGS public compensation, goods & services, & contingency; floor on CBS NFA; ceilings on new domestic debt and new external arrears; no accumulation of domestic arrears. - NFA definition and adjustor: - NFA = CBS’s gross foreign assets − gross foreign liabilities. - Gross foreign assets include gold valued at $1,517.275 per ounce (Dec 31, 2019 price), total foreign exchange held abroad, SDR holdings (valued at $1.382830 per SDR at Dec 30, 2019). - Program floor on NFA can be adjusted down for exceptional financing needed due to revenue shortfalls from COVID-19; maximum size of such an adjustment: one twelfth the level of annual FGS domestic revenues in the program baseline. - Reporting obligations: detailed monthly, quarterly, and annual reporting schedules from CBS, Ministry of Finance, Customs, FMS, FRC, and SNBS with specific frequencies and timing (e.g., CBS monetary survey monthly, 3 weeks after month end). ### Data, capacity development, and Somalia Trust Fund - Data limitations: short national accounts time series, gaps in balance-of-payments data, reliance on third-party data for trade estimates and transfers. - Statistics advances: - Amendments to Statistics Law passed; SNBS operational and Director General appointed. - Published Somalia Facts and Figures 2018; 2019 edition planned for mid-2021. - Capacity development: - IMF TA to be closely integrated with ECF program priorities. - Somalia Trust Fund Phase I ends in October; Phase II intended to support IMF TA through FY2024. - Fundraising for Phase II has been relatively slow, posing risk to future IMF TA delivery. - Staff actions: adapt and prioritize TA activities given logistical challenges from COVID-related travel restrictions. ### Key macro aggregates and selected tables (high-level figures) - National income and prices (Millions of U.S. dollars and percent of GDP, selected series): - Nominal GDP: 4,721 4,942 4,918 5,365 5,651 5,964 6,306 6,687 - Real GDP: 4,420 4,548 4,480 4,610 4,758 4,919 5,097 5,295 - Real GDP, annual percent change: 2.8 2.9 -1.5 2.9 3.2 3.4 3.6 3.9 - Real GDP per capita: 311 311 298 299 301 304 307 311 - Consumer prices (e.o.p., percent change): 3.2 3.1 3.0 2.5 2.2 2.2 2.2 2.2 - Central government finances (percent of GDP, selected): - Revenue and grants: 5.7 6.8 12.6 10.0 11.5 12.5 10.2 10.9 - Grants: 1.8 2.2 8.6 5.2 6.2 6.7 3.7 3.6 - Expenditure (FGS): 5.7 6.4 12.8 9.6 10.8 11.9 12.0 12.2 - Overall balance: 0.1 0.5 -0.2 0.4 0.6 0.6 -1.8 -1.4 - Monetary sector (millions of U.S. dollars, selected): - Net Foreign Assets: -258 -212 -170 -175 -164 189 172 176 - Credit to the private sector: 184 206 219 263 313 383 482 623 - Broad Money: 440 523 547 620 687 763 857 993 - Balance of payments (Millions of U.S. dollars and percent of GDP, selected): - Current account balance: -356 -518 -641 -630 -686 -693 -729 -786 - Trade balance: -4,005 -4,104 -4,639 -4,482 -4,918 -4,659 -4,984 -5,067 - Current transfers (net): 3,682 3,622 4,035 3,887 4,272 4,005 4,296 4,317 - Private remittances (percent of GDP): 31.4 31.9 31.4 31.0 31.4 30.8 30.2 29.5 ### Staff appraisal and final recommendations - Staff view: - Authorities’ prompt actions mitigated impacts of external and domestic shocks; committed to economic reforms despite limited policy space. - Satisfactory progress in implementing key reforms under the program. - Specific staff encouragements and recommendations: - Support authorities’ request for waiver of the missed QPC and modifications to performance criteria as requested. - Implement a 2021 budget that underpins greater domestic revenue mobilization and tight control on operating expenditures to create fiscal space for NDP9 priorities. - Further improvements in general government fiscal reporting to improve transparency and accountability. - Secure Phase II financing for the Somalia Trust Fund to sustain IMF TA through FY2024; donors encouraged to accelerate pledges. - Anchor fiscal policy on debt sustainability and limit future borrowing to concessional sources. *Executive Summary, 1somea2020005 - Somalia: First Review Under the ECF Arrangement (IMF, November 4, 2020).* ### EXECUTIVE SUMMARY ### 1somea2020005 - EXECUTIVE SUMMARY ### Context - Somalia reached the HIPC Decision Point and began a new IMF-supported program to support the authorities’ National Development Plan and lift growth, but was hit by a triple shock of flooding, desert locusts, and the coronavirus pandemic. - Prompt action by authorities and international support mitigated impacts on lives and livelihoods, but shocks significantly affected economic activity, exports, and domestic fiscal revenues. - The authorities are implementing a Country Preparedness and Response Plan (CPRP) with partner support and adopted containment measures; schools reopened on August 15; flights resumed on July 5 (domestic) and August 3 (international). - Fiscal and financial support measures implemented include: temporary tax relief on some basic food commodities (partly offset by a permanent tax increase on some other products); donor-funded expansion of the social safety net; donor-funded lending-support to small and medium-sized enterprises; and additional donor-funded transfers to federal member states (FMS). - Political timeline: a new Prime Minister was approved on September 18 following the former PM’s resignation after a no confidence vote on July 25. Parliamentary elections are scheduled for December, with the new President expected to be elected in February 2021 by the new parliament. ### Recent developments and outlook - Revised growth projections and impacts: - Staff project a contraction of 1.5 percent in 2020, relative to the ECF-request projection of 3.2 percent growth in 2020. - This implies a contraction of about 4.4 percent in real per-capita-incomes. - Authorities’ April projection was -5 percent for 2020. - Recovery and medium-term outlook: - A recovery is anticipated in 2021 with growth reaching about 3 percent, assuming the pandemic impact continues to abate. - Growth is projected to gradually accelerate to a long-term average of 4.75 percent. - This implies positive real per-capita GDP growth of close to 2 percent over the long run. - Balance of payments and external flows (selected figures from Text Table 1, 2020 projections): - Exports of goods and services: 702 (Millions of U.S. dollars) - Imports of goods and services: 5,184 (Millions of U.S. dollars) - Remittances: 1,543 (Millions of U.S. dollars) - Grants: 2,344 (Millions of U.S. dollars) - Recent indicators of resilience: - Imports data and stronger-than-anticipated remittance flows suggest some resilience in domestic demand. - Remittance inflows to Money Transfer Businesses increased 2.3 percent in Q2 compared to Q1; preliminary Q3 data suggest this trend sustained. - Bank deposits rebounded after March–April outflows and are only slightly down from Dec-2019 levels. - Formal credit to the private sector has slowed, mainly due to a slowdown in trade financing and construction loans. - Sectoral shocks: - Exports were hit hard, partly due to cancellation of the Hajj (a large export market for Somali livestock) and impacts on airline and hospitality sectors. ### Fiscal developments and budget actions - COVID-19 materially reduced fiscal revenues, especially trade and sales taxes in Q2, with major effects on khat receipts and non-tax revenues from international travel and delayed telecom licensing reforms. - A 2020 supplementary budget was approved on August 3: - Estimated FGS domestic revenues reduced by $67 million relative to the original budget. - Grants increased by $179 million, including additional World Bank support of $55 million and anticipated AfDB support of $13 million. - Expenditures increased to $685 million from $476 million. - Donor-financed social spending increased to $93 million. - Provision for increased transfers to sub-national governments of $104 million. - The supplementary budget indicates unfunded contingent expenditures of $74 million; authorities will prioritize expenditures per the sequestration rule to match available resources. ### Program performance and specific targets - Overall assessment: program performance is broadly satisfactory. - Compliance: - All structural benchmarks (SBs), indicative targets (ITs), and all but one quantitative performance criterion (QPCs) for end-June 2020 were met. - SBs for end-September and end-October were met; all but one IT for end-September were met. - Missed targets and specifics: - Floor on FGS domestic revenues (QPC#1) was missed by $10 million for end-June. - The related IT for end-September was missed by $14 million. - Strong grant receipts ameliorated cashflow pressures; authorities did not incur any new external debt (QPC #4 and #5; IT #3). - FGS spending on compensation, goods and services, and contingency was $136.5 million within the June program ceiling of $154 million (QPC #2). - The Central Bank of Somalia met the floor on net foreign assets (NFA) with $71 million (QPC #3), reflecting commissions earned on increased donor support. - No new domestic arrears were accumulated (ITs #2). - Authorities’ requests to the IMF: - A waiver for nonobservance of the missed QPC on domestic revenues, based on submission for cabinet approval of a 2021 budget supporting revenue recovery. - A modification of the end-December 2020 QPC on domestic revenues to an IT, given continued uncertainty about 2020 revenues. - A modification to the QPC on net foreign assets to include an adjustor that would allow reserves to be drawn as a last resort should fiscal revenues underperform the program baseline due to COVID-19, subject to limits; also requesting the December QPC on NFA be increased to take account of overperformance through June. - A request to reset the target date for enacting the Targeted Financial Sanctions Law to June 2021 due to COVID-19 related delays and the upcoming election schedule. ### Risks, mitigation, and financing - Risk environment: - Somalia remains vulnerable to security, political, and climate risks; the COVID-19 pandemic increases near-term uncertainty. - The duration and impact of the COVID-19 crisis remains uncertain; elections could delay legislation and reform focus. - Mitigants: - Authorities’ strong track record of reform and donor support. - Current grant commitments, FGS fiscal savings, and continued fiscal discipline mitigate near-term financing risks. - Sequestration rule and other buffers provide fiscal contingency. - Adverse scenario concerns: - A reversal in COVID-19 infection trajectory and/or another climate shock could materially worsen the outlook. - If remittances and grants do not increase further—due to competing donor demands or waning stimulus measures in remittance source countries—economic growth and domestic revenues would be lower, increasing financing needs. - In a significant adverse scenario, additional international support would be required. ### Program review and staff view - Staff recommendation: support completion of the first review under the ECF arrangement, which will make available SDR 7 million. - Meetings and mission details: - Discussions were held virtually from September 12–22, 2020. - Mission head: A. Holland; team included P. de Imus, A. Chaudry, L. Agoumi, G. Kalyandu, T. Orav, I. Samake, W. Irungu, and P. Muir. - Meetings with the Finance Minister Dr. Abdirahman Beileh and other senior officials; donors and IMF Executive Director attendees participated. - Document date: November 4, 2020. *Executive Summary, 1somea2020005 - Somalia: First Review Under the ECF Arrangement (IMF, November 4, 2020).* ### 15. QPCs and ITs have been set through September 2021. The proposed fiscal targets (MEFP ### 15. QPCs and ITs have been set through September 2021 ### Program monitoring, SBs, and timeline - QPCs and ITs have been set through September 2021. - The proposed fiscal targets (MEFP Table 1) were established taking account of discussions on the outlook for the remainder of 2020, the draft 2021 budget and updated medium-term fiscal framework (MTFF). - The NFA QPC for June 2021 was established with the central bank. - Understandings reached with the authorities on two new SBs (MEFP Table 2): - SB #8, due June 2021, aimed at improving fiscal transparency and accountability at the general government level. - SB #9, due March 2021, aimed at improving transparency and governance around the nascent regulatory regime for telecommunications. - The draft Targeted Financial Sanctions Law has been revised; an extension in the timeframe for enacting the law to June 2021 (SB#7) was agreed given COVID-19 related delays in parliamentary outreach and the elections timetable. - The program is expected to revert to the standard of setting SBs for a 12-month ahead period at the next review. ### A. Recovering revenues and sustaining fiscal reform momentum — fiscal outlook and budget - Staff projects a small deficit of about $11 million in 2020 (Table 2a). - Domestic revenue target for 2020 revised down to $189 million (December IT) due to crisis-induced uncertainty. - Staff recommended close monitoring of revenue developments and readiness to defer lower priority Q4-spending if further revenue shortfalls materialize. - Authorities view that, depending on prioritization and evolution of actual expenditures, a small deficit could be absorbed by the authorities’ cash balances if necessary. - Authorities committed to implementing a 2021 budget consistent with the ECF-supported program objectives and MTFF; plan to strengthen domestic revenue mobilization and tightly control operational expenditures. - Draft 2021 budget targets domestic revenues of $260 million. - Draft 2021 budget: - Approved by Cabinet on October 29 and submitted to Parliament for approval and adoption. - Is in line with program projections (Table 2a) and anchored on the 2021-24 MTFF. - Reflects increase in the tax rate on Khat, proposed introduction of turnover taxes in 2021, and resumption of positive trends in underlying revenue collection. - MTFF reflects potential impact of introducing the single customs tariff from 2021, intended to be revenue neutral for the first year. - Identifies and costs spending on select NDP9 priorities (SB#5), including about $38 million discretionary activities of the FGS; about $26 million of allocated spending in the draft 2021 budget was identified via the MTFF. - Spending reprioritization would not affect social spending as this is donor-financed. ### A (continued). Revenue administration and customs - A tax audit strategy has been prepared and is being implemented (SB #1). - Initial audits covered 35 companies and 100 tax returns spanning personal and corporate income, and sales tax. - Experience highlighted need for more audit personnel and greater clarity in regulations. - Customs modernization project progressing: - Modeling work on the ad valorem schedule completed. - HS codes introduced at Bossaso and Kismayo (in addition to Mogadishu) at the end of August (SB#4). - Capacity building across customs administration and private sector needed to support transition to ad valorem tariff and mitigate governance risks. ### Text Table 2. Revenue Projections, 2021 (as presented) - Revenues US$ millions - Projected increase in domestic revenues in 2021 66.1 - New measures 34.2 - Introduction of turnover taxes 2.0 - Increase in tax rate on Khat /1 32.2 - Ongoing measures - Recovery from COVID-19 reflecting post-June 2020 performance trends 31.9 - Income taxes 1.1 - Taxes on goods and services 8.0 - Taxes on international trade 8.5 - Other taxes 1.3 - Non-tax revenues /2 13.0 - Notes: - 1/ Tax rate on Khat increased from $2.50 to $4.00 per kg - 2/ Increased telecomunication spectrum license fees contribute $9.7 million ### A (continued). Extractives and intergovernmental fiscal relations - After enactment of the Petroleum Law in February, authorities launched the petroleum exploration licensing round. - Drafting of the Extractive Industry Tax law (EIT; HIPC CPT) and revised model Petroleum Sharing Agreement (PSA) has progressed; authorities committed to having a coherent framework (Petroleum Act, model PSA and EIT law) in place before issuing licenses. - Cooperation on fiscal federalism appears to be improving: - FGS and FMS Ministers of Finance are meeting monthly. - FGS and FMS signed an MOU to facilitate data sharing and reporting. - In August, substantive agreements reached on: sharing proceeds of World Bank supplementary DPO; appointing a committee to propose systematic basis for sharing common resources; proposed ad valorem tariff schedule; and presentation of an aggregation of FGS and FMS budgets for 2021. - Staff proposed SB #8 to support stronger monitoring of additional spending, particularly transfers to subnational governments, focusing on enhanced reporting of FMS budgets and outturns. ### B. Improving debt management capacity - Despite the worse economic outlook, assessment of debt sustainability is broadly unchanged (see DSA). - Somalia is in debt distress and needs to secure the debt relief that will be provided at the CP to restore debt sustainability. - At that point, and assuming post-CP borrowing is contracted on highly concessional terms, all debt burden indicators would be significantly below their respective thresholds in 2023, and Somalia would be expected to achieve a moderate risk rating. - Authorities expect to acquire the Commonwealth Secretariat Meridian debt recording and management system in October, with financial assistance from the African Development Bank. - World Bank and IMF TA on preparation of a debt bulletin (regular publication is a HIPC CP trigger (CPT)) is underway. - Given critical capacity constraints, staff encouraged authorities to secure further advisory services, with partner support, to advance debt restructuring negotiations. ### C. Financial and monetary policies and reforms - Central Bank of Somalia (CBS) restructuring: - New Board of Directors, three new senior managers, a Human Resource Advisor, and a Legal Advisor were appointed; a transition team established. - A skills gap analysis will feed into the recently approved human resources policy. - CBS preparing its first operational budget in nearly three decades for 2021. - Currency exchange project: - World Bank supporting updated survey to estimate Shillings in circulation eligible for exchange. - Authorities developed oversight plan and coordination with all levels of government; working to close project financing gap. - Measures needed to strengthen CBS balance sheet and ensure sufficient assets to backstop new currency before exchange can be implemented. - Financial sector reforms under the Financial Sector Reform Road Map: - Licensing of mobile money operators (MMOs) beginning; authorities expect to have issued licenses to the two main MMOs by end-2020. - Authorities plan to sign an MOU with the National Communications Authority (NCA) and the Financial Reporting Center (FRC) to support coordination across CBS, FRC, and NCA for sector oversight and data sharing. - Progress on guidance for financial reporting and accounting standards, and on governance framework for Islamic banks (SB #6). - Authorities intend to re-introduce a moratorium on licensing additional banks until capacity deficiencies are addressed. - Over the medium term, CBS committed to enhance prudential regulations, adopt revised capital adequacy regulation, and introduce a reserve requirement for commercial banks. - Authorities plan to complete transition arrangements and fully apply mobile money regulations by 2022. - With World Bank assistance, progress toward Automated Transfer System (ATS) and establishment of a National Switch; draft bills for National Payment System Law, revised Financial Institutions Law (FIL), and Insurance Law are under review. ### D. AML/CFT, governance, and other program issues - AML/CFT reforms gaining momentum to support remittances and correspondent banking relationships; progress linked to national digital ID. - Financial Reporting Center (FRC) capacity improving (SB #2): - Progress on physical and IT infrastructure, on-the-job mentoring, and tailored training on new IT-system (go-AML) and related analytics. - FRC drafting guidelines for AML/CFT regulation for financial institutions, issuing AML/CFT compliance and risk assessment manuals, and initiating drafting of guidance notes for commercial banks and MTBs on AML/CFT regulations. - National Anti-Money Laundering Committee (NAMLC) Task Force operationalization remains committed; COVID-19 competing priorities delayed anticipated NAMLC meeting. - Targeted Financial Sanctions Bill (SB#7) enactment and associated regulations delayed; bill revised for re-submission to Cabinet and then parliament; staff agreed extension of target date for SB to June 2021. - Authorities plan to complete a first draft of the National Risk Assessment (NRA) by end-2020 with view to finalization in 2021 (CPT). - Governance and anti-corruption: - National Anti-Corruption Strategy (NACS) endorsed by the cabinet and published (SB #3); nomination of commissioners to establish the Anti-Corruption Commission is in train. - Cabinet endorsed the UN, African Union, and Arab League conventions on combating corruption and will submit them to parliament for ratification. - A program with UNDP to improve the integrity system has been signed and a draft action plan started. - NACS near-term commitments: aggregate existing laws and codes to enhance understanding/definition of corrupt practices; medium-term reforms include New Policing Model addressing financial/economic crimes and judicial reforms including codes of conduct. - Telecommunications and mobile money licensing transparency (SB #9): - By March 2021, NCA will publish list of licensed mobile network operators and mobile virtual network operators, and CBS will publish those of mobile money operators. - Expected to improve governance in licensing process and signal need for transparency in awarding licenses in other critical industries. ### Other program developments - New financial facility, Gargaara, launched to improve access to financing for MSMEs: - Funded by the World Bank (US$15 million). - Gargaara will on-lend to eligible bank and non-bank financial institutions which will determine MSME financing. - Targeting projects in agriculture, energy, fishery, and livestock sectors. - Complements CBS’ small, grant-funded facility operational since 2017 with full US$3 million endowment; CBS does not plan to expand this program. - Statistics: - Following passage of amendments to the Statistics Law, the National Bureau of Statistics (SNBS) is operational and its Director General appointed. - SNBS will focus on institution building with international partners, implement strategic plan, and update Economic Statistics Action Plan to produce and disseminate specific economic and financial data in coordination with other government entities and the CBS. - HIPC process and CPTs: - Progress on fulfilling HIPC CPTs; reaching the CP by March 2023 remains feasible. - Authorities implementing NDP9 and completing preliminary costing exercise; 2021 budget will include FGS’ contribution to NDP9. - An annual performance report will be submitted to the Fund and World Bank at a future date. - First review approval by the IMF Board will confirm satisfactory implementation of the ECF program. - Progress on other CPTs includes development of a national social registry. - First social safety net scheme, Baxnaano, launched to provide cash transfers to poor and vulnerable households and promote gender inclusion by making the head woman of the household the direct beneficiary; currently uses WFP systems with aim to build FGS systems. *Source: IMF staff report content provided in the supplied document excerpt.* ### 36. Somalia will continue to need extensive capacity development support to meet the ### Somalia will continue to need extensive capacity development support to meet the program’s goals and to reach the HIPC CP ### Capacity development, Somalia Trust Fund, and IMF TA - Somalia will continue to need extensive capacity development support to meet the program’s goals and to reach the HIPC CP. - IMF TA will continue to be closely integrated with, and reflect the priorities of, Somalia’s ECF-supported program, and be designed to complement the activities of Somalia’s other TA providers. - Somalia Trust Fund: - Phase I ends in October. - Phase II is intended to support IMF TA delivery through FY2024. - Fundraising for Phase II has been relatively slow, representing a risk to future IMF TA and the success of the ECF-supported program. - Staff actions: - Staff has been working to adapt and prioritize activities to maximize the impact of the available resources and to take account the logistical challenges implied by continued COVID-related travel restrictions. - Institutional note: - The President signed the amendments in February 2020. ### Program issues, financing needs, and assurances - QPCs and waivers: - Staff supports the authorities’ request for a waiver of nonobservance for QPC on revenue that reflected the impact of the triple shock of COVID-19, locusts and flooding. - Staff supports requested modifications to the end-December QPCs given the potential for a protracted impact of these shocks on revenue. - Program targets and balance-sheet adjustment: - Understandings reached with the authorities on newly proposed SBs and revised December 2020 and June 2021 program targets; presented in the MEFP. - To support the program objective of building reserves, the QPC on NFA for end-December is proposed to be increased by $0.5 million to take account of the over-performance achieved through end-June. - Access and borrowing: - Despite the temporary increase in annual access limits under the PRGT, Somalia is not seeking an augmentation of the ECF. - Authorities are reluctant to incur any new debt and are prioritizing grant financing. - Financing status: - The program remains fully financed. - The FGS has received additional grant funding from the World Bank, AfDB and EU, and work is underway on a new World Bank DPO. - The financing gap falls considerably in 2021, so there are firm financing assurances through October 2021. - Staff expects the continued engagement of international donors indicates good prospects for full financing thereafter. - Creditor engagement: - The umbrella restructuring agreement with the Paris Club covers the majority of Somalia’s creditors and remains adequately representative. - As of October 2020, the authorities are actively engaged with several key non-Paris Club creditors on resolving their arrears and restructuring their debt. - Consequently, arrears to non-Paris Club creditors can be deemed away under the Fund’s policy on Non-Toleration of Arrears to Official Creditors. ### Debt, PRGT exposure, and capacity to repay - Somalia’s capacity to repay the Fund is considered adequate, albeit subject to higher-than-usual risks due to its fragility. - With this ECF-disbursement: - Outstanding credit from the Poverty Reduction and Growth Trust (PRGT) would reach 166 percent of quota. - Total PRGT-disbursements over a twelve month-period would reach 0.3 percent of quota. - Staff mitigation advice: - Emphasize anchoring fiscal policy on ensuring debt sustainability. - Encourage limiting any future borrowing (subsequent to this program) to concessional sources as much as possible. ### Central Bank of Somalia (CBS) safeguards, audits, and AML/CFT - Safeguards Assessment implementation progress: - CBS has improved procedures to compile its NFA and undertake periodic reconciliations between its accounting records and the monetary data tables. - The audited CBS financial statements for 2017 and 2018 have been published, and the IMF positions have been reflected on the balance sheet. - The authorities are aiming to complete the 2019 audit by end-December 2020. - CBS has activated some additional external accounts (including its Federal Reserve Bank of New York account), endorsed its Foreign Exchange Account Policy, and introduced quarterly reporting by the internal audit department to the Audit Committee. - Key remaining recommendations: - Adoption of an external audit selection and rotation policy. - Month-end closing procedures for accounting. - Reviewing currency operations ahead of the currency exchange. - AML/CFT progress: - Ongoing work on the National Risk Assessment. - Efforts to build capacity at the Financial Reporting Center. - Importance of expediting the licensing of the mobile money operators (MMOs) to advance implementation of the mobile money regulatory regime. - A new structural benchmark will ensure greater transparency in the MMO licensing process and in the issuance of the underlying telecommunications licenses. ### Fiscal outcomes, reforms, and social measures - Crisis response measures: - Temporary tax relief on some basic food commodities. - Introduction of a cash transfer system for the most vulnerable, Baxnaano. - Launch of a credit facility, Gargaara, for micro-, small-and-medium-sized enterprises. - Fiscal performance and targets: - All structural benchmarks, indicative targets and all but one QPCs for end-June and all but one indicative target for end-September were met, together with the structural benchmarks for September and October. - Cumulative domestic revenues (per program definition): - Through June for the Federal Government of Somalia (FGS) reached US$99 million against program target of US$109 million. - Reached $146 million through September against an indicative target of $160 million. - The authorities have requested a waiver for the missed QPC based on measures planned to ensure domestic revenues recover in 2021. - Policy recommendations: - Implement a 2021 budget that underpins greater domestic revenue mobilization and continued control on operating expenditures to create fiscal space for spending on priorities identified in the Ninth National Development Plan (NDP9). - Further improvements in general government fiscal reporting to improve transparency and accountability. ### Governance, anti-corruption, and debt relief toward HIPC Completion Point - Governance and anti-corruption: - Approval by the Council of Ministers of the National Anti-Corruption Strategy and its endorsement of the UN, African Union, and Arab League conventions against corruption. - Swift Parliamentary ratification of these conventions will be important to signal Somalia’s commitment to improving governance and fighting corruption. - Debt relief and HIPC framework: - Authorities have made significant efforts to reach agreement with external creditors on debt relief consistent with the HIPC framework. - Sustained efforts, together with support from creditors, will be needed to fully secure the required level of debt relief and ensure Somalia’s debt sustainability on reaching the HIPC Completion Point. ### Staff appraisal and recommendations - Staff view: - Authorities’ prompt actions have mitigated the impact of unexpected external and domestic shocks on the Somali people and the economy. - Despite limited policy space, authorities adopted measures underpinned by international support and sustained their commitment to economic reforms. - The authorities have made satisfactory progress in implementing key reforms under the program. - Specific staff encouragements: - Staff supports the authorities’ efforts to raise funds to support the second phase of Somalia Trust Fund and the related capacity development program. - Staff encourages Somalia’s partners to accelerate their pledges to ensure a continued smooth delivery of IMF TA to support the goals of the ECF. - Staff will continue emphasizing the need to anchor fiscal policy on ensuring debt sustainability and to limit future borrowing to concessional sources where possible. *Source: 1somea2020005 - 36.* ### 50. Staff supports the authorities’ request for a waiver and modification of performance ### Staff supports the authorities’ request for a waiver and modification of performance criteria, and the completion of the first review and disbursement of SDR 7 million under the ECF ### Program endorsement and risk assessment - Staff supports the authorities’ request for a waiver and modification of performance criteria, and the completion of the first review and disbursement of SDR 7 million under the ECF. - The attached Letter of Intent (LOI) and Memorandum of Economic and Financial Policies (MEFP) set out appropriate policies that meet the program’s objectives. - Despite uncertainties, risks to program implementation remain mitigated by the authorities’ strong track record of reform and continued donor support. ### High-frequency indicators, 2019–2020 (selected findings) - Covid-19: After falling since June, new Covid-19 cases appear to be picking up again (Daily New Cases Banadir and Other Regions, May 2 - October 29, 2020). - Regional comparison (cumulative as of October 29, 2020): Confirmed Cases per 100,000 population — Djibouti, Kenya, Ethiopia, Rwanda, Somalia, Uganda, Eritrea, Tanzania (charted). - Trade and remittances: - Exports and Imports (Millions of U.S. dollars): Exports have taken a hit, especially with a reduced Hajj attendance; imports held up. - Remittances (Millions of U.S. dollars): Remittances took a temporary hit in April, but have recovered. Charts compare 2019 and 2020 series and YTD values. - Fiscal flows and expenditures: - Quarterly Domestic Revenues (Millions of U.S. dollars): Quarterly series show Taxes on income and profits; Taxes on international trade; Taxes on goods and services; Other taxes; Non-tax revenues (covering 19Q1–20Q4 proj). - Current expenditures per quarter (Millions of U.S. dollars): Compensation of employees; Goods and services; Transfers to FMS; Social Benefits; Other current expenditures — expenditures have increased in 2020, especially social benefits. ### Macroeconomic projections and key statistics (Table 1 and related) - National income and prices (Millions of U.S. dollars and percent of GDP): - Nominal GDP in millions of U.S. dollars: 4,721 4,942 4,918 5,365 5,651 5,964 6,306 6,687 - Real GDP in millions of U.S. dollars: 4,420 4,548 4,480 4,610 4,758 4,919 5,097 5,295 - Real GDP, annual percentage change: 2.8 2.9 -1.5 2.9 3.2 3.4 3.6 3.9 - Real GDP per capita in U.S. dollars: 311 311 298 299 301 304 307 311 - Consumer prices (e.o.p., percent change): 3.2 3.1 3.0 2.5 2.2 2.2 2.2 2.2 - Central government finances (percent of GDP): - Revenue and grants: 5.7 6.8 12.6 10.0 11.5 12.5 10.2 10.9 - Grants: 1.8 2.2 8.6 5.2 6.2 6.7 3.7 3.6 - Expenditure (FGS): 5.7 6.4 12.8 9.6 10.8 11.9 12.0 12.2 - Compensation of employees: 3.0 3.3 4.7 4.8 5.2 5.5 5.4 5.6 - Purchase of non-financial assets: 0.2 0.3 0.9 0.6 1.0 1.0 1.0 0.9 - Overall balance: 0.1 0.5 -0.2 0.4 0.6 0.6 -1.8 -1.4 - Stock of domestic arrears: 1.5 1.4 1.4 1.2 1.1 1.0 0.9 0.8 - Public debt (percent of GDP): 112.8 108.8 40.7 37.9 36.6 30.3 12.4 13.3 - Monetary sector (millions of U.S. dollars): - Net Foreign Assets: -258 -212 -170 -175 -164 189 172 176 - Central Bank claims on non-res 4/: 122 148 208 219 247 263 243 244 - Net Domestic Assets: 697 735 717 794 851 574 685 817 - Credit to the private sector: 184 206 219 263 313 383 482 623 - Broad Money 5/: 440 523 547 620 687 763 857 993 - Balance of payments (percent of GDP and U.S. dollars): - Current account balance (Millions of U.S. dollars): -356 -518 -641 -630 -686 -693 -729 -786 - Current account balance (percent of GDP): -7.5 -10.5 -12.3 -12.8 -12.5 -12.9 -12.9 -13.2 - Trade balance (Millions of U.S. dollars): -4,005 -4,104 -4,639 -4,482 -4,918 -4,659 -4,984 -5,067 - Exports of goods and services (percent of GDP): 23.7 22.7 14.3 21.8 22.0 22.1 22.2 22.1 - Imports of goods and services (percent of GDP): 108.5 105.7 105.4 108.7 110.2 107.1 102.1 98.5 - Current transfers (net) (percent of GDP): 78.0 73.3 77.3 79.0 77.6 74.7 76.0 72.4 - Private remittances (percent of GDP): 31.4 31.9 31.4 31.0 31.4 30.8 30.2 29.5 - Foreign Direct Investment (percent of GDP): 8.6 9.1 9.4 9.2 9.3 9.6 10.0 10.2 ### Federal government operations (Tables 2a–2d) — selected figures (Millions of U.S. dollars and percent of GDP) - Revenue and grants (2020 Est./Prog. series shown across columns): - Revenue and grants (2020 series): 270.2 390.2 344.2 338.3 346.0 466.2 578.1 493.2 617.7 595.3 537.4 647.2 746.0 (table shows cumulative year-to-date positions across periods) - Revenue components (2020 series, Millions of U.S. dollars): - Revenue: 183.4 221.4 196.3 229.7 152.6 234.4 167.5 234.4 194.0 266.9 260.0 295.5 346.0 - Tax revenue: 138.9 146.1 137.7 154.8 100.6 155.5 107.0 155.5 129.8 177.0 184.3 209.5 238.3 - Non-tax revenue: 44.5 75.2 58.6 74.9 52.0 78.9 60.5 78.9 64.3 89.9 75.6 86.0 107.7 - Grants (total): 86.7 168.8 147.9 108.6 193.4 231.8 410.6 258.8 423.7 328.4 277.4 351.7 400.0 - Total expenditure (2020 series, Millions of U.S. dollars): 267.8 387.5 338.0 314.5 303.2 473.7 682.7 474.6 628.3 520.6 515.4 610.7 710.5 - Current expenditure (2020 series): 257.9 349.1 312.8 300.3 291.6 433.1 638.4 433.9 584.1 469.5 482.2 554.2 652.7 - Compensation of employees (2020 series): 143.1 165.3 157.4 162.3 157.8 220.3 229.9 220.3 229.9 238.3 256.7 291.0 330.6 - Use of goods and services (2020 series): 80.6 137.2 117.1 92.7 51.6 132.2 153.0 132.2 122.7 143.0 137.2 155.5 176.6 - Transfers to sub-national governments & Banadir Region (2020 series): 30.1 43.2 35.3 43.5 42.8 42.7 155.0 42.6 132.6 46.3 50.3 62.9 86.6 - Purchase of non-financial assets (2020 series): 9.9 38.4 25.2 14.1 11.6 40.6 44.3 40.7 44.2 51.1 33.2 56.5 57.9 - Overall fiscal balance (2020 series): 2.4 2.6 6.2 23.9 42.8 -7.5 -104.7 18.5 -10.6 74.7 22.0 36.5 35.4 - Memorandum items: - Stock of domestic arrears (Millions of U.S. dollars): 68.8 64.6 63.5 68.2 ... 65.7 65.7 66.7 68.2 65.0 66.5 63.7 60.7 - Stock of cash and other balances (Millions of U.S. dollars): 25.5 25.5 29.2 48.8 ... 38.8 -70.1 50.2 26.5 48.8 32.2 50.6 76.3 ### Central Bank and banking sector (Tables 3–4, Monetary Survey Table 5) — selected figures - Central Bank summary (2017–2020): - Net Foreign Assets (NFA): (317) ... (220) (program-era series: 32 26 25 25 25 25 71 71 71 shown in memorandum items) - Foreign assets components (SDR holdings, Gold, Foreign exchange) and Foreign liabilities (IMF obligations, SDR allocations) are tabulated across periods. - Somali shillings per US dollar (eop): 23,605 24,475 24,475 25,015 25,605 26,015 26,005 26,005 25,830 - Consolidated Commercial Banks (2017–2020, Millions of U.S. dollars): - Total assets: 345 415 426 459 504 556 563 573 604 - Credit to private sector: 105 184 197 199 194 206 215 193 202 - Customer Deposits: 267 332 344 363 382 430 413 425 440 - Total liabilities: 292 362 372 388 408 463 453 457 483 - Key ratios (memorandum): Credit to private sector share of total assets (percent): 30 44 46 43 39 37 38 34 33; Loan to deposits (percent): 39 55 57 55 51 48 52 45 46 ### Balance of payments and external financing (Tables 6a–8) - Balance of payments (2018–23, Millions of U.S. dollars): - Current account balance: -356 -518 -641 -630 -686 -693 -729 -786 - Overall trade balance: -4,005 -4,104 -4,639 -4,482 -4,918 -4,659 -4,984 -5,067 - Services, net (Millions of U.S. dollars): -1,001 -1,043 -1,171 -987 -1,261 -1,173 -1,271 -1,331 - Current transfers (net): 3,682 3,622 4,035 3,887 4,272 4,005 4,296 4,317 - Foreign direct investment: 408 447 464 464 495 495 526 570 - Nominal GDP (Millions of U.S. dollars): 4,721 4,942 5,218 4,918 5,507 5,365 5,651 5,964 - External financing requirement and sources (Table 8, Proj., Millions of U.S. dollars): - Gross financing requirement: 6,310 4,692 5,020 8,084 - Trade balance: -4,482 -4,659 -4,984 -5,067 - Amortization: 11.8 11.8 14.4 15.3 - Interest on external obligations: 2.3 2.4 2.3 9.7 - Official arrears/repayments: 1,795 0 0 2,983 - Change in reserves (increase = +): 19.2 18.8 18.9 9.2 - Available financing: 4,159 4,672 5,000 5,092 - Current transfers (net): 3,887 4,005 4,296 4,317 - Foreign direct investment: 46 44 95 52 6 570 (table lists 464 495 526 570 across columns) - Other flows: -192 172 178 205 - Financing gap: 2,151 20 20 2,992 - Exceptional Financing / HIPC debt relief: 1,796 1.3 1.3 2,983 - Remaining gap: -355 -19 -19 -9 - Identified financing: 355 191 99 - Of which IMF (identified financing): 355 191 99 - Schedule of Reviews and Disbursements (Table 7, Millions of SDRs): - Approval of arrangement, March 25, 2020: 210.86 PRGT (ECF) + 639.57 GRA (EFF) = 850.43 Total = 153.26 Percent of Quota - First review and end-June, 2020 performance criteria, November 18, 2020: 7.00 PRGT (ECF) = 7.00 Total = 4.28 Percent of Quota - Second review, April 15, 2021: 7.00 PRGT (ECF) = 7.00 Total = 4.28 Percent of Quota - Third review, October 15, 2021: 7.00 PRGT (ECF) = 7.00 Total = 4.28 Percent of Quota - Fourth review, April 15, 2022: 7.00 PRGT (ECF) = 7.00 Total = 4.28 Percent of Quota - Fifth review, October 15, 2022: 7.00 PRGT (ECF) = 7.00 Total = 4.28 Percent of Quota - Sixth review, February 28, 2023: 7.00 PRGT (ECF) = 7.00 Total = 4.28 Percent of Quota - Total disbursements: 252.86 PRGT (ECF) + 639.57 GRA (EFF) = 292.43 Total = 178.97 Percent of Quota - Note: New quota of SDR 163.4 million ### Implementation considerations and financing assessment - Donor support and debt relief are central to closing financing gaps: - Financing gap without exceptional financing: 2,151 20 20 2,992 (2020–23) - Exceptional Financing / HIPC debt relief proposed: 1,796 1.3 1.3 2,983 - Remaining gap after assumed exceptional financing: -355 -19 -19 -9 (identified financing listed as 355 191 99) - IMF identified financing included in these figures: 355 191 99 (Table 8 notes disbursements in 2020–23 conditional on Board approval of ECF reviews) - Arrears and prospective relief: - Official arrears/repayments line shows 1,795 in 2020 and prospective HIPC debt relief and rescheduling entries are included in financing tables. - Table 6a shows "Arrears, net change (+ = accumulation) 575 -1,801 -1,795 0 0 0 -2,983" and "Prospective debt relief and rescheduling 2/ 0 0 1,802 1,796 1 1 2,983" with footnote: Assumes full delivery of HIPC, MDRI, and beyond-HIPC assistance. *International Monetary Fund staff assessment and data as presented in the source document.* ### 1. Principal ### 1. Principal ### Financial Obligations and Balances - Repurchases (series): 0.0, 0.0, 0.0, 0.0, 3.3, 27.7, 50.9, 53.7, 56.5, 57.2, 32.8, 6.3, 3.5, 0.7 — 292.4 (total) - Charges and interest (Charges series): 0.1, 0.4, 0.4, 0.4, 0.4, 0.4, 0.3, 0.2, 0.2, 0.1, 0.0, 0.0, 0.0, 0.0 — 3.8 (SDR related charges listed separately as all 0.0 except last value 0.5) - Total obligations (series): 0.1, 0.5, 0.5, 0.5, 3.7, 28.1, 51.2, 53.9, 56.6, 57.3, 32.8, 6.3, 3.5, 0.7 — 296.8 (total) - Outstanding Fund credit, end of period (series): 257.4, 271.4, 285.4, 292.4, 289.1, 261.5, 210.6, 156.9, 100.5, 43.3, 10.5, 4.2, 0.7, 0.0 - Memorandum items — Outstanding Fund credit, in percent of: - Exports of goods and services (series): 50.6, 32.2, 32.0, 31.1, 29.2, 25.1, 19.1, 13.5, 8.1, 3.3, 0.8, 0.3, 0.0, 0.0 - External public debt (series): 18.4, 19.2, 19.9, 23.6, 56.7, 44.8, 33.2, 23.1, 13.7, 5.4, 1.2, 0.4, 0.1, 0.0 - Gross official reserves (series): 506.5, 423.6, 369.4, 350.9, 349.7, 318.4, 256.4, 191.1, 122.3, 52.7, 12.8, 5.1, 0.9, 0.0 - GDP (series): 7.2, 7.0, 7.1, 6.9, 6.5, 5.6, 4.2, 2.9, 1.8, 0.7, 0.2, 0.1, 0.0, 0.0 - Quota (series): 157.5, 166.1, 174.7, 179.0, 176.9, 160.0, 128.9, 96.0, 61.5, 26.5, 6.4, 0.0, 0.0, 0.0 - Total Obligations, in percent of: - Exports of goods and services (series): 0.0, 0.1, 0.1, 0.0, 0.4, 2.7, 4.7, 4.6, 4.6, 4.2, 3.0, 0.0, 0.0, 0.0 - External public debt (series): 0.0, 0.0, 0.0, 0.0, 0.7, 4.8, 8.0, 7.9, 7.7, 7.1, 3.7, 0.0, 0.0, 0.0 - Gross official reserves (series): 0.2, 0.7, 0.6, 0.5, 4.5, 34.1, 62.2, 65.5, 68.8, 69.5, 39.8, 0.0, 0.0, 0.0 - GDP (series): 0.0, 0.0, 0.0, 0.0, 0.1, 0.6, 1.0, 1.0, 1.0, 0.9, 0.5, 0.0, 0.0, 0.0 - Quota (series): 0.1, 0.3, 0.3, 0.3, 2.3, 17.2, 31.3, 33.0, 34.7, 35.0, 20.1, 3.9, 2.2, 0.4 - Quota (constant series): 163.4 repeated across periods - Note: Projections are based on current IMF charges. (In millions of SDR, unless otherwise noted) _Source: Fund staff estimates and projections._ ### Annex I — Increasing FGS Social Spending: Findings and Programs - Background: - Civil war destroyed capacity to provide education, health, social assistance, and other social services; gap filled partly by international humanitarian support; pervasive poverty results. - Trends since 2016: - FGS expenditures on education, health, social assistance, and other social services have steadily increased. - As of 2019, total social spending had more than trebled relative to 2016 levels, with education spending growing particularly fast. - In 2020, donor support facilitated a critically important increase in health expenditures to respond to the coronavirus pandemic. - Baxnaano social safety net program: - Supported by the World Bank; cash transfer program for rural areas underpinned by $65 million multi-year financing by the World Bank Shock-Responsive Safety Net for Human Capital Project (SRSNHC). - Target transfer: $20 per month (~30 percent of the food basket of rural households). - Goal: reach 200,000 households nationwide (~10 percent of the population). - Targeting: distress benchmark index considering chronic poverty and food insecurity. - Disbursement: quarterly via mobile money; women as direct recipients; using WFP delivery system while FGS delivery system is developed (supported by SNHCP). - Locust-response scale-up: - Six-month scale-up for locust-related food insecurity. - Regular beneficiaries in locust-impacted areas (~30,000 households) receive additional $40 per month (total $60 per month). - Additional 70,000 households temporarily added, receiving $60 per month. - Underpinned by $40 million from the World Bank (IDA regional window) for the Shock-Responsive Safety Net for Locust Response Project. - Complementary programs: - WFP Urban Safety Net: cash transfers of $35 per month to 125,000 urban poor in Mogadishu; initially food, switched to predictable cash transfers in July 2018; targets very poor urban families and vulnerable groups. - EU cash transfer program with initial budget of $15 million targeting vulnerable urban population. - Recommendations and implications: - Launch of unified social registry and national digital ID, with data protection, will improve coordination and targeting. - Donors should consider greater use of FGS systems to channel social safety net support to enhance sustainability and expand coverage. - Continued domestic revenue mobilization and sustained donor support are critical to generate fiscal space to sustain and expand social spending. - Multi-year World Bank financing will support health and education sectors through 2024. - Greater security is critical for generating fiscal space for human capital investment. - Social spending should be guided by priorities in NDP9 and evaluated as part of monitoring and evaluation of NDP9 implementation. ### Annex II — Step-by-Step Towards Fiscal Federalism: Progress and Milestones - Context: - Draft Constitution (2012) set basis for federal system; realization of fiscal federalism is gradual and requires multiple activities and agreements. - Progress since 2016 across technical, administrative, policy, and political lines, facilitated by the Finance Ministers Fiscal Forum (established 2017) and international support. - Key policy and political decisions (selected, with dates): - Harmonization of tariffs on khat and some imported items (2016). - Initial agreement to share fisheries resources (February 2018). - Agreement to harmonize tax laws enabling the Revenue Act (April 2018). - Baidoa agreement on petroleum resource management and revenue sharing (June 2018). - Agreement to share revenues from EU budget support (ongoing, September 2019) and World Bank budget support (August 2020). - Agreement on fiscal reporting to FGS on acquittal of transfers (September 2019); MOU on fiscal reporting and data sharing on fiscal outturns (April 2020). - Agreement on definition of common revenues in the Revenue Act and proposals to manage these (“expenditure assignments”) (November 2019). - Agreement on paper to guide fiscal transfers from FGS to FMS (November 2019). - Appointment of technical committee to develop systematic basis for sharing common resources (August 2020). - Agreement on adopting an ad valorem customs tariff (August 2020). - Agreement to present an aggregated FGS and FMS budget starting with 2021 budget (August 2020). - Technical cooperation: - Increased technical cooperation via the Technical Inter-governmental Fiscal Federalism Committee. - Efforts to strengthen PFM systems across FGS and FMS, harmonize charts of accounts, modernize customs administration, and revenue administration. - Key partners providing joint capacity building activities. - Assessment: - Recent advances have strengthened technical and political dialogue and trust, providing foundation for further progress as Somalia enters the next political cycle. ### Annex III — Progress Towards the HIPC Completion Point: Triggers and Status - Objective: - To achieve full and irrevocable debt relief under HIPC, Somalia must meet Completion Point (CP) requirements, sustain program performance, and implement Decision Point reforms (Floating Completion Point Triggers, CPTs), including at least one year of NDP9 implementation. - Overall timeline: - IMF and IDA staff maintain baseline that achieving CP by March 2023 appears feasible, contingent on sustained reform commitment and continued development partner support. - Status of selected HIPC CP triggers: - Public financial and expenditure management: - Publish at least two years of audited financial accounts: 2018 audited accounts published October 2019; 2019 audit ongoing, reports expected to be sent to parliament in December 2020 and thereafter published. - Issue PFM Act regulations on debt, public investment, natural resource revenue management: regulations on debt and natural resources drafted and under review; regulations on public investment management not yet drafted. - Domestic revenue mobilization: - Adopt and apply single import duty tariff schedule at all ports: agreement reached between FGS and FMS on single tariff; technical progress with World Bank and UK’s DIFD support; interim step expects key ports to adopt common tariff schedule in 2021 based on FMS-specific valuation tables. - Governance, anti-corruption, natural resource management: - Enact Extractive Industry Income Tax Law: draft prepared and to be presented to Cabinet soon. - Ratify UNCAC: Approved and endorsed in Cabinet meeting held on June 4, 2020; ratification requires parliamentary approval. - Debt management: - Publish at least four consecutive quarterly reports on government debt and debt-service projections: new debt recording system in process of being acquired; technical assistance from IMF and World Bank in pipeline. - Social sectors: - Establish national unified social registry: World Bank with WFP and UNICEF supporting; lead firm recruited and implementation started mid-September; technical committee established by Minister of Labor and Social Affairs; registration of cash transfer beneficiaries ongoing; data migration planned once platform and operational guidelines developed; planned date to reach basic functionality July 2021, subject to data protection policy development. - FGS and FMS Ministers of Education adopt agreement on curriculum and examinations: FGS and FMS (except Puntland) adopted agreement; common curriculum framework and syllabus for primary and secondary education adopted; completion depends on resolution with Puntland. - FGS and FMS Ministers of Health adopt joint national health sector strategy: Investment Case (IC) draft expected by November 2020; finalization by February 2021; development of essential package of health services underway. - Growth/structural: - Enact Electricity Act and supporting regulations: IFC reviewed draft; awaiting stakeholder consultations. - Issue Company Act implementing regulations on minority shareholder protection: IFC engaged advisors; regulations approved by Cabinet; ministerial decree expected in 2021Q1. - Statistical capacity: - Publish at least two editions of “Somalia Annual Fact Book”: first edition “Facts and Figures 2018” published July 2020; 2019 edition planned for mid-2021. ### Appendix I — Letter of Intent (excerpt) - Date and addressee: - Mogadishu, Somalia, November 4, 2020; addressed to Ms. Kristalina Georgieva, Managing Director, International Monetary Fund. - Key points: - Somalia has made great progress rebuilding since civil war and international recognition of FGS in 2012; ongoing reforms with IMF since 2016 under SMPs and ECF. - Continued grant-based support will be critical as Somalia progresses through HIPC. - Growth is insufficient to reduce widespread poverty and address large social needs, including youth employment. - Somalia remains vulnerable to climate shocks; concurrent shocks include flooding, COVID-19 pandemic, and desert locust invasion leading to significant economic hit. - A supplementary budget was prepared to increase key expenditures to respond to the multi-pronged crisis; gratitude expressed to partners and donors. - Security and political environment remain challenging; commitment to economic and political reform process affirmed. *Source: Fund staff estimates and projections.* ### 3. Considering Somalia’s satisfactory performance under the ECF, we request IMF Executive ### 1somea2020005 - 3. Considering Somalia’s satisfactory performance under the ECF, we request IMF Executive ### Program review request and performance - Request IMF Executive Board approval of the completion of the first review of the program and disbursement of SDR 7 million (4.28 percent of quota). - Met all but one of the quantitative performance criteria (QPC) and all indicative targets (IT) for end-June, and all but one indicative target for end-September; shortfall driven by the global coronavirus pandemic causing a large loss of domestic revenue. - Request a waiver for the missed QPC, based on submission to the Council of Ministers of a draft 2021 budget that supports recovery in domestic revenues in 2021 to a path close to that envisioned under the ECF-supported program. - Given uncertainty regarding revenue collection for the remainder of 2020: - Request modification of the end-December QPC into an IT. - Request modification of the ECF-supported program to include an adjustor on the floor on the net foreign assets (NFA) of the CBS to allow limited reserves drawdown if prolonged COVID-19 effects result in fiscal revenues underperforming the program baseline (subject to limits as defined in the TMU). - Request that the end-December QPC on NFA be increased to reflect part of the overperformance through end-June 2020. - Plan to use the disbursement under the first review to help strengthen external reserves to support greater integration in the global trade and financial system. ### MEFP scope and program anchors - The attached MEFP describes reform priorities for the remainder of the three-year arrangement and identifies specific reforms and conditionality for the subsequent twelve months, building on SMPs and NDP9 and reflecting COVID-19 challenges. - Policy anchors: strengthening PFM (including debt management); domestic revenue mobilization; continued deepening of CBS capacity; enhancing governance (including AML/CFT). - Program quantitative anchors include: a floor for domestic revenue, a ceiling on recurrent operating expenditures, a floor on the cash-based fiscal balance, no accumulation of domestic arrears, no new debt accumulation, and a floor on NFA of the CBS. - Structural benchmarks anchor reform objectives in revenue administration, public financial management, financial stability, and governance and AML-CFT. - FGS will provide IMF staff with necessary information within deadlines specified in the TMU (Attachment II). ### Economic developments, shocks, and outlook - Multiple shocks in first half of 2020: flooding, desert locusts, COVID-19. - Import flows remained stable through July, partly supported by stronger-than-expected remittance flows; exports disrupted, especially livestock due to Hajj cancellation. - Inflation through August 2020 was broadly stable at 4.1 percent year-on-year. - Data through June: COVID-19 had negative fiscal impact. - Cumulative domestic revenue for the FGS was US$99 million against a program target of US$109 million (program definition). - FGS spending on compensation, goods and services, and contingency was $136.5 million, within the June program ceiling of $154 million. - The period fiscal balance was US$66 million, reflecting strong budget support grant inflows and no accumulation of new domestic arrears. - Growth outlook: - Economic activity expected to contract by 1.5 percent during 2020, compared to growth of 3.2 percent as indicated in the ECF-supported program request. - Expect gradual resumption from 2021, and it remains realistic to expect growth to reach around 4¾ percent in the longer run. - A resurgence in COVID-19 could set back recovery and worsen outlook. ### Fiscal policy response and medium-term framework - Approved a supplementary 2020 budget to reflect crisis-related fiscal needs; uses budget support grants to offset domestic revenue declines across FGS, FMS, Banaadir Regional Administration (BRA), and Somaliland. - Supplementary budget secures appropriations for debt servicing on restructured post-HIPC DP external debt in 2020. - At FGS level, increased the tax rate on Khat to mitigate revenue risks. - Updated the MTFF to cover 2021-2024; MTFF informed 2021 budget preparation and identifies modest fiscal space for NDP9 spending. - 2021 budget will target a substantial increase in domestic revenues, tight control on operational expenditures, maintain reasonable social spending supported by donor grants, and include identified/costed spending on select NDP9 priorities (SB#4). - Future budgets to commence with an updated MTFF on a rolling three-year basis. ### Revenue mobilization and administration (next twelve months and program period) - Over the next twelve months: - Introduce some recommendations from November 2019 IMF tax policy TA, starting with the introduction of turnover tax. - Implement Revenue Act awareness and capacity-building across FMS; complete preliminary assessment of potential revenue impact for individual instruments. - Reinvigorate tax administration and undertake further tax audits. - Continue Customs Reform Road Map: implement agreed ad valorem tariff schedule at three largest ports and prepare for single tariff schedule introduction (CP trigger). - Complete drafting and enact the Extractive Industry Income Tax Law (CP trigger) and finalize revised model Petroleum Sharing Agreement (PSA). - Over the course of the program: - Roll out the Revenue Act to FMS, prioritizing customs and sales taxes. - Implement single customs tariff schedule across FGS and FMS (CP trigger). - Build administrative and enforcement capacity of the LMTO and strengthen customs capacity and compliance across FMS. - Reserve fiscal management matters to the Ministry of Finance while sector regulators operate independently. ### Public Financial Management (PFM) reforms - Overarching PFM actions: - Next twelve months: issue PFM regulations on budget preparation & execution, payment process, cash advances, cash management & banking; enhance fiscal transparency on FGS transfers to BRA and FMS. - Program period: comprehensive review of business practices; develop more efficient expenditure approval process; develop PFM regulations on debt, investment and asset management (CP trigger); implement Procurement Act amendments and draft concessions law; develop procurement portal; review Ministry of Finance organizational structure. - Budget preparation and execution: - Next twelve months: institutionalize budget development improvements; operationalize SFMIS budget module; align budget execution controls with Parliament-approved budget starting 2021; add SFMIS functionality for allotments and warrants linked to monthly cash forecasts; review SFMIS functionality and governance. - Program period: review use and presentation of earmarked revenues. - Cash management: - Next twelve months: CMU will develop fiscal year forecasts disaggregated monthly and update monthly; improve commitment control compliance; develop cash planning process involving MDAs with IT solution; restrict cash advances to exceptional circumstances; re-open some bank accounts based on Accountant General assessment. - Fiscal reporting and accountability: - Next twelve months: enact Audit Bill; Accountant General to circulate reporting framework for MDAs including off-budget grants, contingent liabilities, financial assets/liabilities; develop FGS public sector institutions table and inventory of FGS public sector non-financial assets. - Program period: publish two subsequent sets of audited financial accounts for the FGS (CP trigger); develop consolidated FGS public sector financial reporting system and implement enhanced General Data Dissemination System (e-GDD). ### Debt management, natural resources, and intergovernmental fiscal relations - Debt management: - DMU to continue negotiations with external creditors on restructuring external public debt. - March 31, 2020 agreement with the Paris Club provides framework; discussions advanced with several Paris Club members; outreach to multilateral creditors and non-Paris Club members including at September 2020 League of Arab States meeting. - Procurement of the Commonwealth Secretariat Meridian debt management system underway, financed with help of African Development Bank. - IMF and World Bank to provide TA to DMU on a template for a future debt bulletin; publishing four consecutive quarterly public debt reports is a CP trigger. - Natural resource management: - Will not issue any oil exploration licenses until Petroleum Act operationalized, Extractive Industry Income Tax Law enacted (CP trigger), model PSA finalized, and associated PFM regulations issued. - Finalize model PSA in line with Petroleum Act and Extractive Industry Income Tax Law and IMF recommendations. - Intergovernmental fiscal relations: - Over next twelve months: enhance transparency and accountability across FGS and FMS; dedicated intergovernmental fiscal federalism secretariat established; develop systematic basis for fiscal transfers of common revenues to FMS; beginning 2021 present aggregated budget for FGS and FMS in an annex to the FGS Budget Policy Framework Paper and publish aggregated monthly fiscal report of revenues and expenditures covering FGS and FMS (SB#8); progress on unifying chart of accounts and accounting guidance across FGS and FMS in line with GFSM2014. - Program period: continue working with FMS on expenditure assignments and sustain Intergovernmental Fiscal Forum meetings, capacity development, and technical information sharing. ### Monetary and financial sector reforms - CBS institutional capacity strengthening with new senior management. - Mobile money regulatory framework: regulations issued; Mobile Money Supervision Unit established; regulation manual drafted; implementation delayed by telecommunications licensing framework approval. - Progress on National Risk Assessment, stakeholder outreach, and ongoing AML/CFT training. - Program commitment to continued deepening of CBS capacity and financial sector oversight. *Source: 1somea2020005 - 3. Considering Somalia’s satisfactory performance under the ECF, we request IMF Executive (attached MEFP and TMU as described).* ### 15. Efforts to strengthen the CBS’ organizational framework, build capacity, and ### 15. Efforts to strengthen the CBS’ organizational framework, build capacity, and ### Central Bank of Somalia (CBS) restructuring, capacity building, and transition plan - Implementation of the CBS transition plan continues, including strengthening prudential supervision, improving monetary and financial statistics, and building capacity in banking operations and payment systems. - A new Board of Directors was appointed early in 2020; three new senior managers, a Human Resource Advisor and a Legal Advisor have been hired. - A transition team to oversee implementation of the transition plan has been established. - A new Human Resources policy to attract and retain staff has been approved. - The ECF-program will continue to be anchored on gradually building our reserves while maintaining a minimum floor. - Commitments: - Over the next twelve months: - Complete recruitment of a Restructuring Project Manager and a Communications Advisor. - Initial skills gaps analysis is ongoing. - Finalize and approve the CBS operational budget for 2021. - Over the course of the program: - Complete the transition to the new organizational structure. - With IMF and World Bank guidance, assess evolving monetary policy needs. - Prepare a medium-term business plan and review the CBS’ underlying income model to modernize and align it with business needs. ### Financial sector stability, supervision, and payment systems - Reform priorities are outlined in the Financial Sector Reform Road Map. - Recent development: launch of a new facility to support access to financing for micro, small and medium-sized enterprises (Gargaara), with World Bank support. - Commitments: - Over the next twelve months: - Work with industry to secure licensing of mobile money operators and begin implementing the mobile money regulatory regime. - Agree an MOU with the National Communications Authority (NCA) and the FRC to support inter-agency coordination across the CBS, FRC, and NCA for sector oversight, clarify roles and responsibilities, facilitate data sharing and timely licensing. - With IMF TA, enhance regulatory framework for Islamic banking by issuing guidance on financial reporting and accounting standards and developing a governance framework (SB #6). - Strengthen the Supervision Action Plan to improve and broaden on- and off-site inspections. - Recruit additional staff for the Licensing and Supervision Department (LSD). - Continue improvements in data collection and reporting. - With World Bank assistance, complete first stage implementation of an Automated Transfer System (ATS) shortly. - Establishment of a National Switch to support the national payment system is well underway. - Draft bills for the National Payment System, revised Financial Institutions Law (FIL), and Insurance are under review and expected to be submitted to Council of Ministers, with the National Payment System the initial priority. - Over the course of the program: - Enhance prudential regulations for the banking sector, including adopting a revised regulation on capital adequacy and introducing a reserve requirement. - Fully apply the mobile money regulations by 2022. - Continue developing other regulations called for in the FIL, including micro finance, Forex bureau and crisis management. - With World Bank assistance, progress work on introducing a credit bureau and movable collateral registry. - Continue to evaluate capacity needs to meet current and future prudential supervision commitments, such as insurance. ### Currency exchange project (currency reform phase I) - Plan to implement the currency exchange project in the context of a World Bank project once preconditions and financing are in place. - Currently undertaking a survey to estimate the amount of old Shilling in circulation. - The first high-level steering committee meeting on the currency exchange project will shortly be convened, to be chaired by the new Prime Minister. - The existing MOU with the FMS will be revisited to further support project goals. - Preparatory actions required: - Formulate medium-term policy priorities and develop basic monetary policy capacity before implementation. - Secure assets required to backstop the new currency, including by catalyzing donor assistance. ### Safeguards, audits, and CBS financial operations - Implementation of safeguards assessment recommendations is progressing well. - The FY2018 audit report has been approved and published; accounts now reflect IMF positions on the CBS balance sheet. - Expectation to complete the FY2019 audit by end of December 2020. - Clarified that full ownership of proceeds of asset recovery to date has been allocated to the CBS. - The CBS account with the Federal Reserve Bank of New York has now been reactivated. - The Foreign Exchange Account Policy has been endorsed by the CBS Board of Directors. - Quarterly reporting by the internal audit department to the Audit Committee has been introduced. ### AML/CFT reforms to support correspondent banking and remittances - With IMF and World Bank, an Action Plan has been developed to guide priorities in AML/CFT. - Despite COVID-19 challenges, the FRC continues building capacity and stakeholder relationships. - A draft of the FRC 2019 Annual Report has been prepared; training on goAML software is ongoing; stakeholder awareness activities are ongoing. - Guidelines for AML/CFT regulation for financial institutions have been drafted with Financial Services Volunteer Corps support. - Guidance notes for commercial banks and MTBs on AML/CFT regulations are underway; AML/CFT compliance and risk assessment manuals have been issued. - Commitments: - Over the next twelve months: - Secure endorsement of the National Anti-Money Laundering Committee (NAMLC) of the proposal to resolve overlaps and inconsistencies between new AML/CFT regulations for financial institutions and AML/CFT governance and compliance regulations. - Present revised draft of the Targeted Financial Sanctions Law to Cabinet shortly, with a view to presenting it to Parliament and having it enacted by end-March 2021 and issue associated regulations (SB#7, reset for end-June 2021). - Agree an MOU with the FRC to clarify responsibilities and coordinate training. - Complete and issue AML/CFT regulations and guidance for Designated Non-Financial Businesses and Professions (DNFBPs), and mobile money operators (MMOs), based on drafts already prepared. - Operationalize the NAMLC Task Force to support technical progress. - First draft of the National Risk Assessment (NRA) report expected by end-October 2020; finalize the NRA in a timely manner (CP trigger). - Over the course of the program: - Strengthen AML/CFT requirements in annual financial institution relicensing processes. - Incorporate NRA findings into a new National Strategy for AML/CFT; prepare for the MENA-FATF Mutual Evaluation Assessment in 2024. - Develop a public relations strategy and expand communications with source and transit country regulators to support resumption of correspondent banking relationships (MOUs, informational websites, Egmont Group participation, etc.). - Continue training and capacity building in financial institutions, leveraging innovations such as the National Compliance Forum. ### Governance, anti-corruption, and public sector modernization - Anti-Corruption Law enacted establishing the Anti-Corruption Commission (in process of appointment). - Cabinet approved a National Anti-Corruption Strategy (NACS), published by the Ministry of Justice (SB#3). - Outreach across the federation to increase NACS awareness and encourage anti-corruption mindset. - Requests for donor support for a multi-year UNDP program to improve national integrity system. - Commitments: - Over the next twelve months: - Develop a draft action plan to implement the NACS to be rolled out after upcoming elections. - Compile in a new regulation all provisions in existing laws, including the penal code, that define corrupt practices and associated penalties, and identify gaps or needed amendments. - Over the course of the program: - Begin implementing the action plan to operationalize the NACS with international partners. - Ratify the UN, African Union, and Arab Conventions Against Corruption (CP trigger). These have been approved by Cabinet and will be presented to Parliament for ratification. - Develop legal framework for an asset declaration regime for senior public officials. - Work to protect judicial independence and improve judiciary capacity. - Additional public institution modernization commitments over the course of the program: - Complete the pay and grading system for the FGS civil service. - Enact amendments to the Civil Service Law and Public Pensions Bill. - Modernize the FGS civil service commission. ### Transparency in licensing for telecommunications and mobile money sectors - NCA process for issuing licenses to Mobile Network Operators (MNOs) is underway; some licenses already issued; issuance to Mobile Virtual Network Operators (MVNOs) will follow. - Publication commitments: - The NCA and the CBS will publish outcomes of license applications for MNOs, MVNOs and MMOs, including which firms were granted a license, the general terms of those licenses (including licensing fees), and the criteria for qualification by end-June 2021 (SB#9). ### Economic diversification, standards, and private sector facilitation - Passed the Somali Standards and Quality Control Bill and established the Somali Bureau of Standards earlier this year to support agricultural standards and certification. - Established a “one-stop-shop” to e-register business for integrated tax and business licensing services. - A bill to establish an Investment Promotion Agency and the related Investment Protection Bill are being deliberated by Parliament. - Commitments: - Over the next twelve months: - Implement findings of the Somalia Drought Impact and Needs Assessment and the Recovery and Resilience Framework, with development partner support. - Develop the National Water Resource Strategic Plan and the Somalia Water Development Fund. - Improve road system and interconnections to neighboring countries. - Work towards operationalizing the new aid architecture to enhance visibility and oversight of aid flows and align with NDP9 priorities. - Continue work to enact legal framework for formal accounting standards and establish a Somali Institute of Certified Public Accountants. - Over the course of the program: - Enact the Electricity Act and issue supporting regulations to permit private investment and reduce electricity costs for households and entrepreneurs (CP trigger). - Issue key regulations under the Companies Act to support private sector investment and strengthen corporate governance (CP trigger). - Continue work towards accession to the World Trade Organization and improving regional and bilateral trade ties. ### Digital ID and social protection systems - Plan to introduce a national digital ID to support enhanced KYC, financial intermediation, and targeted delivery of government services. - Commitments: - In the first twelve months: - Continue developing legal underpinnings for the digital ID and procure necessary IT system. - Over the course of the program: - Complete work including enacting the Digital ID and Data Protection Bills and establish the national ID agency. - Transition the use of the ID to support the targeted social protection scheme. - National social registry: - Will be established to support registration and determination of eligibility for social programs (CP trigger). - Initiated Baxnaano social safety net scheme with World Bank support using World Food Program systems to provide cash transfers to targeted poor and vulnerable households; used to channel funds from World Bank’s locust response project. - Over time, delivery of the scheme will transition to greater use and reliance on FGS systems. ### Human capital: education and health - Drafted an education Memorandum of Understanding (MOU) between FGS and FMS defining respective roles in curriculum and national examination (CP trigger); draft signed by most FMS. - Over the course of the program: - Adopt the Joint National Health strategic plan to support functions and accountability across government levels (CP trigger). ### Statistics, national accounts, and data improvements - Amendments to the National Statistics Law passed; established the National Bureau of Statistics (SNBS). - Published Somalia Facts and Figures 2018, the first edition fact book including national accounts. - Shared first version of the Economic Statistics Action Plan (ESAP) with international partners. - Commitments: - Over the next twelve months: - Develop strategic and institutional framework of the SNBS and update the ESAP to reflect short-term operational objectives and progress on collecting and disseminating macroeconomic and financial data. - Work towards the second edition of Facts and Figures (CP trigger). - Continue developing key statistics and capacity to report them regularly to the IMF. - Strengthen collection of import and export of goods data from ports beyond Mogadishu, introduce travel survey and airline companies’ data to scale up Immigration Department travel data, and send the IMF preliminary FDI inflow estimates from the survey. - Progress a National Labor Survey. - Over the course of the program: - Outline granular reforms to improve macroeconomic and financial data. - Work with partners to develop production-based national accounts data and collect labor data. _International Monetary Fund — chapter content unit 1somea2020005 - 15._ ### 28. Program implementation is being monitored through quantitative performance ### 28. Program implementation is being monitored through quantitative performance ### Monitoring framework and review schedule - Program implementation is monitored through quantitative performance criteria, continuous performance criteria, indicative targets (MEFP Table 1), and structural benchmarks (MEFP Table 2). - Assessments occur through semi-annual reviews. - The second review will be based on the PCs set through end-December 2020 data. - The third review will be based on the ITs set through end-March 2021 and the PCs set through end-June 2021 data as described in MEFP Table 1 and the structural conditionality described in MEFP Table 2. - All reviews are conditioned on quantitative performance criteria outlined in MEFP Table 1 and defined in the TMU (Attachment II). ### Quantitative performance criteria and indicative targets (summary of scope and timing) - Test dates for quantitative performance criteria (QPC) have been set for the end of December 2020 and end of June 2021. - Test dates for the related indicative targets (IT) are end of September 2020 and end of March 2021. Other ITs are set for September and December 2020, and March, June, and September 2021. - Unless otherwise specified, all quantitative targets will be evaluated in terms of cumulative flows from the beginning of each calendar year. - Quantitative performance criteria proposed for December 31, 2020 and June 2021 include: - Floor on Federal Government of Somalia (FGS) domestic revenue (for June 2021 only). - Ceiling on spending on FGS public compensation, goods & services, & contingency. - Floor on the Central Bank of Somalia’s (CBS) net foreign assets (NFA). - Ceiling on new domestic debt contracted by the FGS. - Ceiling on accumulation of new external arrears by the FGS. - Ceiling on contracting or guaranteeing any new external, non-concessional debt. - Indicative targets include: - Floor on FGS domestic revenue (for December 2020). - Floor on the FGS fiscal balance (on a cash basis). - Ceiling on accumulation of new domestic expenditure arrears by the FGS. - Ceiling on contracting or guaranteeing any new external, concessional debt, excluding disbursements under an IMF arrangement. ### Selected numerical and timing definitions from the TMU - The fiscal year coincides with the calendar year. - Revenues and grants should be recognized on a cash basis and recorded when received. - New domestic expenditure arrears are payments that remain unpaid 90 days after the due date. - Temporary advances for liquidity management from the CBS will be fully repaid within 90 days. - For program purposes, a debt is concessional if it includes a grant element of at least 35 percent. - The grant element is calculated using a discount rate of 5 percent. ### Definitions and computation notes (key points) - Government for program monitoring is defined as the FGS (excluding autonomous public entities and federal member states (FMS)). - For monitoring external debt, the general government is defined as the FGS and federal member states (Galmudug, Hirshabelle, Jubaland, Puntland, and South West State) and the Banaadir region. - Government domestic revenue includes all tax and nontax receipts received into the FGS general accounts and excludes grants; measured on a cash basis and cumulative from the beginning of the fiscal year. - Program monitoring excludes: - Grants (except as otherwise specified). - Receipts from sale of nonfinancial assets and signing bonuses from natural resource contracts. - Transactions in financial assets and liabilities such as borrowing (except interest payments). - Domestic revenues exclude revenues received and recorded in the current fiscal year that relate to previous years’ activities (with specified exceptions such as underpaid taxes recovered through annual tax audit process and prepayments). - Total FGS public compensation, spending on goods and services, and contingencies are specified by expenditures in associated budget items using GFS classification. - Budget execution control points defined: - Allotment: distribution of budget funds by the Ministry of Finance to MDAs. - Warrant: request from an MDA for release of part of the allotment; once approved, reduces available allotment. - Commitment: stage where a legally binding agreement is entered into for future delivery of goods or services. ### Debt and arrears definitions (program rules) - Debt is defined in accordance with Executive Board Decision No. 15688 (14/107) (definition on a residency basis) and covers loans, suppliers’ credits, and leases (with the debt for leases equal to the present value at inception). - Arrears, penalties, and judicially awarded damages arising from failure to make payment on contractual debt are considered debt. - Domestic debt: debt for which the counterparty is resident of Somalia, including the CBS; excludes temporary advances from the CBS. - QPCs and related ITs on domestic debt are cumulative ceilings on contracting new domestic debt from the beginning of the fiscal year. - QPCs (and related ITs) for external debt are cumulative ceilings on contracting or guaranteeing of new non-concessional borrowing by the general government from the beginning of the fiscal year; ITs on external debt are cumulative ceilings on contracting of new concessional borrowing. - For program purposes, external debt is defined by the residency of the creditor and is deemed contracted when an underlying loan agreement is signed. Excluded from the PC are disbursements from the IMF. - Government will report any planned external borrowing and its terms to Fund staff before external debt is contracted or guaranteed. ### Structural benchmarks (overview) - Structural benchmarks for the arrangement cover March 2020–June 2021 and address reforms in domestic revenue, governance, anti–money laundering/combating the financing of terrorism (AML-CFT), public financial management, financial stability, telecommunications and mobile money sector regulatory transparency, and fiscal transparency between FGS and FMS. - Examples of benchmark objectives include: - Develop and implement a tax audit strategy at the LMTO to validate tax returns and revenues (target: End-June 2020). - Operationalize and build capacity at the Financial Reporting Center to review and assess suspicious transactions, including acquisition of IT systems (GOAML) and secure data management (target: End-June 2020). - Publish a cabinet-approved National Anti-Corruption Strategy (target: End-June 2020). - Implement harmonized HS codes and prepare ad valorem tariff schedule at key ports of Bossaso, Kismayo, and Mogadishu, and report revenue monthly thereafter (initial target: End-September 2020). - Complete preliminary NDP9 costing and reflect in 2021 budget (target: End-October 2020). - Issue guidance for financial reporting and accounting standards and Shariah governance framework for Somali banks (target: End-December 2020). - Enact the Targeted Financial Sanctions Law and issue related regulations (target: End-June 2021). - Enhance clarity and accountability of aggregated FGS and FMS fiscal status, including publishing aggregated 2021 FGS and FMS budget and monthly fiscal outturns with a 2 month lag (target: End-June 2021). - Enhance transparency in the regulatory process for Telecommunications and Mobile Money sectors by publishing licensing outcomes, terms, and criteria (target: End-March 2021). *Source: IMF staff and Somali authorities (MEFP Table 1, MEFP Table 2, and Attachment II: Technical Memorandum of Understanding).* ### 14. The CBS’s net foreign assets are defined as the difference between the CBS’s gross ### 14. The CBS’s net foreign assets are defined as the difference between the CBS’s gross ### Definition of CBS net foreign assets (NFA) - NFA = CBS’s gross foreign assets − gross foreign liabilities. - Gross foreign assets are defined as: - (i) gold (valued over the calendar year at the market price of December 31, 2019 ($1,517.275 per ounce)); - (ii) total foreign exchange held abroad; - (iii) Somalia’s SDR holdings in the SDR Department (valued over the calendar year at the December 30, 2019 exchange rate of $1.382830 per SDR). - Net of: - (iv) government grant deposits at the CBS in foreign currency held abroad; - (v) other earmarked foreign currency deposits by residents of Somalia held abroad. - IMF representative exchange rates against the U.S. dollar at December 30, 2019 will be used to convert foreign assets and liabilities denominated in currencies other than U.S. dollars. - These exchange rates and gold price will be reset annually on the final business day of the year for the subsequent year. - The current baseline for NFA includes an amount of US$1.19 million of recovered assets (included in the CBS’ “total foreign exchange held abroad”). - The allocation of these assets between the CBS and the FGS has been clarified, with no related impact on the NFA targets. ### Adjustment to NFA program floor for COVID-19 revenue shortfalls - The program floor on net foreign assets of the CBS will be adjusted down to reflect any exceptional financing needed in the event of a shortfall in revenues relative to the program baseline due to a longer-than-anticipated impact of the global COVID-19 pandemic. - The maximum size of such an adjustment: one twelfth the level of annual FGS domestic revenues in the program baseline. ### Program monitoring: institutional arrangements - A program-monitoring committee shall be maintained, composed of senior officials from: - Ministry of Finance (MoF), - Central Bank of Somalia (CBS), - Ministry of Planning, Investment and Economic Development (MoPIED). - The IMF Resident Representative will have observer status on this committee. - Committee responsibilities: - Monitor program performance; - Recommend policy responses; - Inform the Fund regularly on program performance; - Transmit supporting materials necessary for evaluation of benchmarks. - Reporting requirement: quarterly progress reports to the Fund within four weeks of the end of each quarter, using the latest available data. ### Data reporting to the Fund: agencies, data types, frequencies, and timing - Reporting agencies: Central Bank of Somalia, FGS external accounts, Ministry of Finance, Customs modernization, FMS and BRA budgets, FMS fiscal operations, Financial Reporting Center, Directorate of National Statistics of MoPIED. - Selected reporting obligations and exact timing (as specified): - Central Bank of Somalia - Monetary survey: Detailed balance sheet data of the CBS submitted in the reporting template. - Frequency: Monthly - Timing: 3 weeks after the end of each month - Consolidated commercial banks’ balance sheet data (including deposits by mobile money operators (MMOs)). - Frequency: Quarterly - Timing: 4 weeks after the end of each quarter - Financial data not included in broad money: Volume and value of mobile money transaction. - Frequency: Quarterly; starting with the end-March 2021 data point. - Timing: 4 weeks after the end of each quarter - 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. - Frequency: Quarterly - Timing: 4 weeks after the end of each quarter - Balance of payments: Trade in goods data by HS code and value for the ports of Mogadishu, and Bossaso and Kismayo, starting end-September 2020; petroleum imports to Mogadishu; and travel data from the Immigration Department. - Frequency: Quarterly - Timing: 4 weeks after the end of each quarter - Cross-border current transfers (both inflows and outflows) by MTBs, and banks, and for MMOs starting from end-March 2021. - Frequency: Quarterly - Timing: 4 weeks after the end of each quarter - FGS external accounts - Provide end-month balances included in the Treasury Single Account held abroad by the CBS on behalf of the FGS, including on-budget grants and the fiscal buffer. - Frequency: Monthly - Timing: 3 weeks after the end of each month - Ministry of Finance - FGS budget operations (for annual and supplemental budgets): revenue by GFS 6-digit revenue classification; proposed appropriation by MDA, program/project and 4-digit object code; proposed appropriation by MDA and 2-digit object code; staffing table by MDA; donor assistance tables; by COFOG showing on and off-budget spending; spending by NDP sector; and spending by FGS, Banaadir, and FMS. - Frequency: As required - Timing: Within a week of submission to Cabinet and to the Parliament; and when signed by the President. - Current year SFMIS reports showing budget, virements, and monthly data for: revenue at GFS 6-digit revenue classification code; expenditure by budget line and GFS classification with MDA lines, disaggregated by program/project and showing data by GFS 4-digit object code; and for applicable MDAs, details of budget transfers to each FMS and other units. (Reports 1A and 1B (as amended)) - Frequency: Monthly - Timing: 4 weeks after the end of the month - Comprehensive table summarizing Government operations including revenue, expenditure (by MDA and Object code), and TSA balances for the month and YTD; includes fiscal buffer balances. (Report 5A, 5B, 5C and 5D). - Frequency: Monthly - Timing: 4 weeks after the end of the month - Outstanding appropriation, allotment, warrant, commitment, and expenditure recorded by MDA in Report 2A. - Frequency: Monthly - Timing: 4 weeks after the end of the month - Payments report showing all payments in number and value made, disaggregated by those paid directly to vendor’s bank accounts consistent with commitment controls; cash advances; and other payments. - Frequency: Monthly - Timing: 4 weeks after the end of the month - SFMIS audit report recording use of the allotment "allow to exceed" control override function. - Frequency: Monthly - Timing: 4 weeks after the end of the month - Monthly cash plan and at least one-month ahead forward projections; supported by SFMIS reports on domestic revenue and donor budget support (report 3A); operating budget expenditures by MDA (report 3B); and operating budget expenditures by object code at 4-digit level (report 3C). - Frequency: Monthly - Timing: 4 weeks after the end of each month - Report of all payment requests by MDAs awaiting payment since the beginning of the calendar year where the commitments exceed the agreed payment terms (in SFMIS/Excel). - Frequency: Monthly - Timing: 4 weeks after the end of the month - Payroll and non-payroll salary and allowance payments made by MDAs and individual embassies (in Excel). - Frequency: Monthly - Timing: 4 weeks after the end of the month - Customs modernization - Report showing number of declarations, manifests processed, and goods inspections report (as per SMP IV). - Frequency: Monthly - Timing: 4 weeks after the end of the month - FMS and BRA budgets - For annual and supplemental budgets: Budget for each FMS and BRA, and aggregated budget (both revenue and expenditure). - Frequency: As required - Timing: Within a week of approval. - FMS’ fiscal operations - Reports of fiscal operations (expenditures and revenues) from all Federal Member States (FMS) (using the consolidation tool). - Frequency: Monthly - Timing: 6 weeks after the end of each month (from mid-June 2021). - Domestic arrears - Table providing the end-of-period stock of domestic arrears accumulated during the year by MDA and 4-digit Object Code. - Frequency: Annually - Timing: 4 weeks after the end of the year - Domestic debt - The amount of new domestic debt contracted by Government. - Frequency: Monthly - Timing: 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. - Frequency: Annually - Timing: 6 weeks after the end of the year - Disbursements and repayments: (i) scheduled; and (ii) actual interest and principal on debt of the Government and the CBS, by creditor. - Frequency: Annually - Timing: 30 days after the end of each year - Accumulation of any new arrears (principal or interest payments) on external debt. - Frequency: Monthly - Timing: 3 weeks after the end of the month - Structural benchmarks - A table with a description of the status of implementation of the structural benchmarks in MEFP Table 2 of the MEFP. - Frequency: Quarterly - Timing: 4 weeks after the end of each quarter - Financial Reporting Center (AML/CFT compliance data) - On a monthly basis, total number of each STR, LCTR, and Nil reports received from banks, MTBs, and MMOs. Total number of each banks, and MTBs that have submitted reports during the period. MMO reporting to be added as oversight and supervision develops, but latest for end-December 2020 data point. - Frequency: Quarterly - Timing: 4 weeks after the end of each quarter - Directorate of National Statistics of MoPIED - CPI and other economic indicators (Indicators to assess overall economic trends, such as the consumer price index). - Frequency: Monthly - Timing: 6 weeks after the end of each month; CPI every 15th of the month consistent with inflation report (or next available business day) - GDP by expenditure data (from June 2020). - Frequency: Annually - Timing: 6 months after the end of each year ### Debt Sustainability Analysis (DSA) — key findings and indicators - This DSA provides an update of the March 2020 DSA. - Total public debt: US$5.3 billion, or 109 percent of GDP at end-2019—nearly all external. - The revised baseline scenario: - Uses authorities’ end-2019 debt stock data; - Includes interim assistance received at the HIPC Decision Point in March 2020; - Incorporates the impact of three natural shocks: flooding, locusts, and the coronavirus pandemic. - The present value of external debt is now some 15 percentage points of GDP lower at around 60 percent of GDP, largely due to interim relief, but remains above the 30 percent threshold for countries with weak capacity to manage debt. - The baseline forecast indicates substantial and sustained breaches of the PV of external debt-to-exports indicative threshold. - The PV of external debt service-to-exports threshold, and the debt service-to-revenue threshold, also see sustained breaches beyond 2023. - Risks highlighted: any delay in reaching the HIPC Completion Point increases debt vulnerability. - Conditional scenario (full delivery of HIPC Initiative, MDRI, and beyond-HIPC assistance at Completion Point): - Somalia’s debt indicators would be consistent with a manageable debt situation following Completion Point. - In a forward-looking sense, Somalia’s debt is assessed as sustainable, conditional on the full delivery of the stated relief and assistance. ### Public debt coverage and background - Public debt coverage in the DSA: - Limited to the central government. - Coverage is near complete: no government guaranteed debt, no known liabilities of state-owned enterprises or subnational governments, and no public-private partnerships (PPPs). - External debt for the DSA is defined on a residency basis. - Debt-carrying capacity: - Classified as Weak. - Composite indicator score: 0.867 (based on October 2019 WEO and 2019 CPIA). - Debt levels and composition (background facts): - March 2020 HIPC Decision Point reported nominal total stock of debt outstanding was US$5.3 billion at end-2018, of which US$5.0 billion is in arrears. - Composition of end-2018 debt: $2.0 billion principal, $1.3 billion unpaid interest, $1.7 billion late interest or fees. - Creditor distribution: Paris Club creditors 58 percent; multilaterals 29 percent; non-Paris Club bilateral creditors 11 percent. - All domestic debt (1.5 percent of GDP) represents central government arrears. - 2019 updates: - Debt stock estimates for 2019 provided by Somali authorities; changes are minor and overall level at end-2019 is US$5.3 billion, or 109 percent of 2019 GDP. - Planned IMF and World Bank TA will help establish regular recording and dissemination of debt stock and debt service estimates; publication of four consecutive quarterly debt reports is a trigger for the floating HIPC Completion Point. - HIPC Decision Point outcomes (March 31, 2020 Paris Club agreement under Cologne terms): - Immediate cancellation of US$ 1.4 billion in non-Official Development Assistance (non-ODA) debt owed to Paris Club creditors. - Somalia not required to make debt service payments until at least end March 2024, conditional on satisfactory implementation of an IMF-supported program. - Cancellation of US$0.5 billion of debt in arrears through concessional clearance of arrears by IDA and African Development Bank. - IMF agreed to provide HIPC interim assistance on IMF-related obligations falling due prior to Completion Point, subject to satisfactory program progress; at Completion Point, provide beyond-HIPC assistance through cancellation of portion of pre-Decision Point financing not already covered by HIPC relief. *Source: IMF staff text from the provided content unit.* ### 6. Somalia is conducting negotiations with individual creditors to finalize restructuring its ### 1somea2020005 - 6. Somalia is conducting negotiations with individual creditors to finalize restructuring its ### Creditor negotiations and restructuring status - Agreements signed with Paris Club creditors: Spain and the United States. - Agreements nearing signature with Norway and the United Kingdom. - Representatives of the Kuwait Fund for Development, Saudi Fund for Development, and the Abu Dhabi Fund for Development attended the March 2020 Paris Club meeting as observers, expressed support for the terms, and indicated willingness to provide comparable terms. - Outreach undertaken to other creditors, including the Islamic Development Bank, the Arab Monetary Fund and the Arab Fund for Economic and Social Development (AFESD) at a League of Arab States meeting in early September 2020. - Negotiations with the Kuwait Fund for Development and AFESD are advancing. - Talks ongoing with the International Fund for Agricultural Development (IFAD) around modalities of a debt reprofiling (with World Bank and IMF support). ### Data limitations affecting analysis - Data weaknesses constrain macroeconomic analysis and limit the significance of standardized stress test results in the LIC-DSF. - Specific limitations: relatively short time series for national accounts data; substantial gaps in balance-of-payments data; heavy reliance on third-party data for trade estimates and secondary transfers. - Direct investment data are currently estimated; an FDI survey is underway. ### Revised baseline: shocks and assumptions - The revised baseline reflects three simultaneous natural shocks: flooding, desert locusts, and the coronavirus pandemic. - Somalia classified as a fragile, conflict-affected country by the World Bank. - Baseline updates incorporate impacts of the global coronavirus pandemic using high-frequency trade and remittance data through end-June 2020. - Baseline assumptions include: economy remains fully dollarized (implying low inflation and no adverse nominal exchange rate movements); government seeks to maximize grants; any long-run external debt financing would be on highly concessional terms. - Illustrative fiscal financing starting in 2024: central government assumed to undertake moderate deficit financing, with the overall deficit (including grants) projected to average about 2.0 percent of GDP per year through 2029, financed through external concessional borrowing. ### Near-term economic impacts (2020) - 2020 real GDP growth projection revised from 3.2 percent to -1.5 percent. - International trade and exports: - Somali commodity exports concentrated in agricultural products, especially livestock. - Receipts reduced by half through end June due to supply and transport disruptions. - Imports of goods recovered to register an increase of 3.2 percent in value terms through end-June 2020 (relative to H1 2019). - Food imports have declined. - Import growth expected to be 4.6 percent in 2020 (compared to 7.4 percent previously). - This would constrain the deterioration of the current account deficit in 2020 to around 12.8 percent of GDP (previously 12.3 percent). - International transfers: - Private transfers from émigré communities typically remitting around 32 percent of GDP per annum from 2013-19. - Remittances: increase in dollar terms in Q2 2020 by 2 percent relative to Q1 2020; Q2 2020 flows were 7.7 percent higher than Q2 2019. - Private transfers expected to modestly decline 2 percent for the year (compared to a previous forecast of 7 percent growth). - Public transfers (budget grants) projected to increase from US$ 207 million to US$ 339 million, or some 2.9 percentage points of GDP. - Caveat: higher on-budget support may not provide net macroeconomic stimulus if reflecting switching between aid types rather than additional inflows; preliminary indications that development partners are offsetting higher on-budget support against lower off-budget aid. ### Medium-term implications and outlook - Economic scarring likely: - Domestic revenue mobilization will be some 0.7 percentage points of GDP lower on average over 2020-24. - Pulling forward of donor aid to counter the pandemic likely leads to small reductions in future official flows (averaging 33.5 percent of GDP through 2029, or lower by about 0.7 percentage points compared to previous assumptions). - Growth dividend and potential growth: - Post-HIPC growth dividend peak revised to around 5.1 percent (instead of 5.4 percent previously). - Potential growth in the long run remains around 4.7-4.8 percent. - Trade and current account: - Exports and imports expected to recover in 2021 but to levels about 5 percent lower than previously, remaining so into the future. - Current account deficit remains large, financed by official grants and remittances. - Realism tools: - Some realism tools suggest baseline macroeconomic assumptions are reasonable; others are inapplicable due to data gaps (e.g., public investment-growth nexus). - Fiscal multipliers for Somalia likely weak given conservative projections for revenue reforms and limited transmission channels. ### Debt relief assumptions and scenarios - Baseline assumes interim HIPC debt relief, consistent with Bank-Fund LIC-DSF guidance. - Scenario assumptions: no new borrowing over the interim period; application of Cologne terms by all bilateral creditors following HIPC Decision Point. - Alternative scenario presented incorporates full impact of multilateral arrears clearance, interim debt relief, HIPC, MDRI and beyond HIPC debt relief. - Assumption that Somalia will reach HIPC Completion Point in early 2023. - Reaching Completion Point estimated to provide an additional stock reduction of external debt of about 50 percent of GDP relative to the baseline. - Note: the baseline does not include relief under HIPC Initiative at the Completion Point or MDRI. ### External debt sustainability findings - Somalia remains in debt distress in the revised baseline (which assumes interim HIPC relief). - Inclusion of interim HIPC relief improves indicators: PV of external debt-to-GDP is now some 10 percentage points of GDP lower in the medium term relative to the previous baseline. - PV of external debt-to-exports also declines substantially. - External debt service as a share of exports (2 percent) and revenues (8 percent) are under their thresholds (respectively 10 and 14 percent) through 2023, helped by exceptional moratorium on debt service provided by Paris Club creditors under the March 2020 agreement. - Despite improvements, sustainability thresholds for external debt stock relative to GDP and exports still see significant breaches through the forecast horizon. - External debt service thresholds are breached beyond 2023, highlighting risk that Somalia could reach the HIPC Completion Point later than currently anticipated. - Forward-looking assessment: debt considered sustainable given expectation that all outstanding arrears will be treated under debt restructuring agreements given Somalia has reached the HIPC Decision Point. - HIPC provisions could allow Somalia to seek additional debt relief beyond Decision Point commitments if specific conditions are met due to exogenous changes in economic circumstances. ### Stress tests and vulnerabilities - Standardized stress tests show considerable vulnerabilities and highlight importance of debt relief. - Application of standard DSA stress tests complicated by short historical data series and severe structural breaks. - Most debt indicators deteriorate substantially under temporary shock scenarios. - One-time depreciation appears as the most serious shock in standardized tests, but this is unlikely in Somalia’s fully dollarized context. - Non-debt flow shock emerges as a greater vulnerability and is consistently high-ranking across indicators, underlining Somalia’s high dependence on external aid. - External debt service-to-revenue ratio experiences large breaches under all shock scenarios, accentuating liquidity risks if Completion Point is delayed. ### Public debt sustainability - Public debt indicators largely mirror external debt indicators. - PV of total public debt-to-GDP would be well above the benchmark, with serious breaches under various stress scenarios. - Relevance of external debt conclusions extends to public debt sustainability given lack of a market for domestic debt and limited existing stock of domestic debt (small stock of government arrears). - Under the alternative scenario (full HIPC/MDRI/beyond-HIPC relief), debt burden indicators improve significantly and fall below respective thresholds. *Source: IMF staff report content from the Somalia DSA chapter provided in the supplied PDF content.* ### 18. Somalia’s external public debt and overall public debt remain in distress under the baseline ### 18. Somalia’s external public debt and overall public debt remain in distress under the baseline ### Key findings - Somalia’s external public debt and overall public debt remain in distress under the baseline scenario, but in a forward-looking sense overall debt is assessed as sustainable contingent on the full delivery of eligible debt relief at the HIPC Completion Point. - The baseline scenario has improved thanks to the inclusion of HIPC interim relief, but external debt burden indicators relative to GDP and exports remain well above their indicative thresholds. - Debt service indicators would see immediate breaches should there be a delay in achieving the HIPC Completion Point. - The baseline incorporates the impact of three simultaneous natural shocks—flooding, desert locusts, and the coronavirus pandemic—which imply a deterioration of Somalia’s debt carrying capacity and stress the need for debt relief. - Even after full debt relief, Somalia is expected to remain highly vulnerable to shocks, underscoring the importance of strengthening debt management institutions and capacity over the medium term. ### Baseline projections and key indicators (selected) - External debt (nominal), in percent of GDP: - 2019: 107.5 - 2020: 55.3 - 2021: 50.8 - 2022: 48.3 - 2023: 45.0 - 2024: 43.3 - 2025: 40.1 - 2030: 26.6 - 2040: 14.3 - PV of PPG external debt-to-GDP ratio: - 2019: 105.4 - 2020: 60.8 - 2021: 56.5 - 2022: 54.5 - 2023: 51.3 - 2024: 48.1 - 2025: 43.9 - 2030: 27.1 - 2040: 14.2 - PV of PPG external debt-to-exports ratio: - 2019: 465.1 - 2020: 425.9 - 2021: 259.2 - 2022: 247.7 - 2023: 231.9 - 2024: 216.7 - 2025: 198.4 - 2030: 127.4 - 2040: 68.9 - PPG debt service-to-exports ratio (selected years): - 2022: 1.7 - 2023: 1.8 - 2024: 7.4 - 2025: 12.2 - 2026: 13.3 - 2030: 7.9 - 2040: 2.9 - PPG debt service-to-revenue ratio (excl. grants) (selected years): - 2022: 7.8 - 2023: 7.5 - 2024: 28.2 - 2025: 41.5 - 2026: 40.5 - 2030: 18.5 - 2040: 5.4 - Gross external financing need (Million of U.S. dollars): - 2019: 70.2 - 2020: 181.2 - 2021: 215.7 - 2022: 221.7 - 2023: 309.6 - 2024: 472.7 - 2025: 460.7 - 2030: 398.1 - 2040: -74.5 - Key macro assumptions: - Real GDP growth (in percent): - 2019: 2.9 - 2020: -1.5 - 2021: 2.9 - 2022: 3.2 - 2023: 3.4 - 2024: 3.6 - 2025: 3.9 - 2030: 4.9 - 2040: 4.8 - Nominal GDP (Million of US dollars): - 2019: 4,942 - 2021: 5,365 - 2022: 5,651 - 2023: 5,964 - 2024: 6,306 - 2025: 6,687 - 2030: 9,365 - 2040: 18,285 - Government revenues (excluding grants, in percent of GDP): - 2019: 4.6 - 2020: 3.9 - 2021: 4.8 - 2022: 5.2 - 2023: 5.8 - 2024: 6.5 - 2025: 7.3 - 2030: 9.0 - 2040: 11.0 - Public sector debt (percent of GDP), baseline: - 2019: 108.8 - 2020: 56.7 - 2021: 52.1 - 2022: 49.6 - 2023: 46.2 - 2024: 44.1 - 2025: 40.5 - 2030: 25.7 - 2040: 16.3 - PV of public debt-to-GDP ratio: - 2019: 106.8 - 2020: 62.2 - 2021: 57.8 - 2022: 55.7 - 2023: 52.4 - 2024: 48.8 - 2025: 44.2 - 2030: 26.2 - 2040: 16.2 - PV of public debt-to-revenue (excl. grants) ratio: - 2019: 1,560.6 - 2020: 1,577.3 - 2021: 1,193.3 - 2022: 1,065.3 - 2023: 904.0 - 2024: 751.3 - 2025: 607.5 - 2030: 289.6 - 2040: 148.0 ### Stress tests, scenarios, and sensitivity analysis (high-level) - The baseline includes HIPC interim relief; an alternative scenario explicitly "With HIPC, MDRI and beyond-HIPC assistance" shows substantially lower debt indicators (e.g., PV of PPG external debt-to-GDP under A2 falls to 40.4 in 2020 and to 7.3 by 2021–2025 in Table 3). - Stress tests show large sensitivity of indicators to shocks: - PV of PPG external debt-to-GDP (Baseline vs. A2 with HIPC/MDRI/beyond-HIPC): - Baseline 2020: 60.8; A2 2020: 40.4 - Baseline 2025: 43.9; A2 2025: 8.8 - PV of PPG external debt-to-exports (Baseline 2020: 425.9; A2 2020: 185.3) - Debt service-to-exports and debt service-to-revenue ratios display large spikes in mid-2020s under certain scenarios (e.g., PPG debt service-to-exports ratio reaching 13.3 in 2026 and PPG debt service-to-revenue ratio reaching 41.5 in 2025). - Tailored tests include combined contingent liabilities and a combination of shocks (Combination of B1–B5) producing the most extreme outcomes in some indicators. - Some tailored tests are not available (n.a.) for natural disaster, commodity price, and market financing in selected tables. ### Policy implications and recommendations - Full delivery of eligible debt relief at the HIPC Completion Point is critical to bring external debt to a manageable level and to ensure debt is sustainable in a forward-looking sense. - Delay in achieving HIPC Completion Point would result in immediate breaches of debt service indicators, reinforcing the urgency of timely debt relief. - The deterioration of debt carrying capacity due to floods, desert locusts, and the coronavirus pandemic highlights the need for: - Continued external support (HIPC, MDRI, and beyond-HIPC assistance). - Strengthening debt management institutions and capacity over the medium term. - In practice, given Somalia’s lack of access to formal debt financing, any additional financing needs would be expected to be accommodated through lower fiscal expenditures, lower imports, or higher grants. - Data weaknesses (e.g., exports and GDP measurement issues) could bias simulation results; improving data quality would enhance the accuracy of DSAs and policy design. *Sources: Country authorities; and staff estimates and projections.* ### 7. The authorities’ strong commitment to reforms continues to lay the foundation for ### 7. The authorities’ strong commitment to reforms continues to lay the foundation for ### Program implementation and revenue performance - The authorities met all structural benchmarks through October 2020, and all but one QPC and one IT. - The two missed targets relate to domestic revenue collection which underperformed relative to the cumulative program floor, mainly due to the impact of the pandemic. - The Cabinet-approved draft 2021 budget includes new growth and revenue measures aimed at bringing revenue back up to levels initially envisaged by the program. - To mitigate risks to revenue performance, the authorities intend to implement measures in the 2021 budget guided by the 2021-24 MTFF. ### HIPC Debt Relief and the Completion Point - Somalia reached the HIPC Decision Point in March 2020 and has engaged actively with all creditors. - Notable agreements have been reached with Spain and the United States, Somalia’s largest bilateral creditor. - Authorities are implementing the floating HIPC Completion Point triggers with a view to completing them by March 2023. - Progress is underway on Completion Point triggers including governance and anti-corruption reforms, revenue mobilization, and public finance management. - Implementation of the poverty reduction strategy under the Ninth National Development Plan (NDP9) is advancing; the draft 2021 budget guided by the 2021-24 MTFF includes allowance for spending to support NDP9. - Authorities prioritize development of strong debt management capacity during the program and are receiving intensive capacity development and Fund TA plus debt management IT infrastructure support from development partners. ### Fiscal policy — pandemic response and future reforms - Grants from the World Bank, African Development Bank, and the European Union provided critical on-budget resources to support higher expenditure, including elevated social spending under a new cash transfer-based social safety net program (Baxnaano) and a program supporting lending to micro, small and medium-sized enterprises (Gargaara). - Guided by the Country Preparedness and Response Plan, UN agencies and other partners have acted to mitigate immediate humanitarian and socio-economic consequences of the pandemic. - Early pandemic measures included targeted revenue-neutral temporary tax relief for imported basic food commodities and a modest onetime health care allocation. - The authorities remain committed to domestic resource mobilization reforms under the Fund-supported program. - The 2021 budget and 2021-24 MTFF will advance significant reforms, including new tax and non-tax measures and actions to strengthen revenue administration. - A single ad valorem customs tariff will be introduced across three major ports over the course of the program, guided by the customs reform road map and key agreements with the regions, to enhance future revenue collection. - Plans include improving revenue administration and compliance, implementing a tax audit strategy and hiring more tax auditors. - Cooperative fiscal federalism is emphasized: frequent meetings between regional and federal finance ministers have led to a memorandum of understanding to facilitate sharing and reporting of fiscal data. - Authorities prefer grants to avoid contracting additional debt but may reconsider if conditions deteriorate (resurgence of the virus, failure of committed grants to materialize, or another climate-related shock). - Fiscal discipline will be supported by a sequestration rule that prioritizes critical expenditures alongside modest fiscal buffers to mitigate financing risks. ### Monetary policy and financial sector reforms - The economy remains largely dollarized; in the medium term, introduction of a new Somali currency is a priority to boost financial inclusion for the poor. - Progress is being made with World Bank support to advance the first phase of currency reforms under the currency exchange project. - Authorities are strengthening the central bank balance sheet and building CBS monetary policy instruments and capacity before implementing the currency exchange. - CBS restructuring is a key priority: a merit-based appointment of a new Board of Directors and hiring of three senior directors completed the bank’s leadership over the summer; implementation of a complex transformative transition plan will now begin. - The CBS has made steady progress on safeguards assessment recommendations and is committed to implementing the remaining recommendations. - Under the Financial Sector Reform Road Map (developed with Fund support), the CBS will refrain from issuing additional licenses to banks while building supervisory capacity. - Regulatory strengthening includes enacting a National Payment System Law, Insurance Law, and an amendment to the 2011 Financial Institutions Law. - Steps are being taken to regulate mobile money operators in coordination with the National Communications Authority and Financial Reporting Centre. ### AML/CFT and correspondent banking - Building a robust AML/CFT regime is critical to maintaining remittances, FDI, and correspondent banking relationships. - On November 4, the House of the People passed the National ID Authority Law, removing a key deficiency in the AML/CFT framework. - The Financial Reporting Centre (FRC) is building human and IT capacity while completing the building blocks of a robust AML/CFT regulatory framework. - Authorities plan to reinvigorate the National Anti-Money Laundering Committee (NAMLC) task force chaired by the Minister of Finance to promote cooperation among implementing agencies. ### Structural reforms, governance, and data - Governance reforms and the fight against corruption remain priorities, with ongoing improvements in fiscal and financial governance, the AML/CFT framework and recent legislative changes. - Recent high-profile court cases and convictions of senior public officials on charges of corruption and misuse of public funds signal that corrupt practices will no longer be tolerated. - Authorities are committed to implementing the recently enacted Anti-Corruption Law; the new Prime Minister has publicly committed to focus on the fight against corruption. - Cabinet approved the new National Anti-Corruption Strategy and endorsed nominations of nine anti-corruption commissioners to be submitted to parliament. - Cabinet endorsed United Nations, African Union, and Arab League conventions on combating corruption for parliamentary ratification. - A UNDP program to improve the integrity system has been signed and a draft action plan has been started. - Substantial progress was made by the Department of National Statistics with donor support; the autonomous Somali National Bureau of Statistics (SNBS) has been established and operationalized to accelerate high-quality data collection and dissemination. - A needs assessment identified human resources for the SNBS; a five-year strategic plan and necessary regulations are being developed. ### Capacity development, technical assistance, and financing risks - Fund TA has been instrumental in advancing reforms in public finance management, revenue mobilization, and modernizing and building central bank capacity. - Somali authorities consider continued and enhanced IMF capacity development and TA critical to reaching the HIPC completion point. - Authorities are concerned that slower than expected replenishment of the Somalia Trust Fund may lead to gaps in capacity support, impacting delivery on critical CD and TA projects. - Authorities and staff encourage Somalia’s development partners to contribute generously to Phase II of the Somalia Trust Fund. ### Conclusion and outlook - Somali authorities remain committed to the reform agenda under the ECF arrangement to build institutional capacity and implement prudent macroeconomic policies to spur durable and inclusive growth. - Authorities seek Executive Directors’ support towards completion of the first review under the ECF arrangement and look forward to enhanced staff capacity development and TA support as they work towards reaching the HIPC completion point. *Source: 1somea2020005 - 7. The authorities’ strong commitment to reforms continues to lay the foundation for* --- _Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1somea2020005.pdf_