## 1somea2024001 ## Source details **Canonical URL:** [1somea2024001](https://www.imf.org/-/media/files/publications/cr/2024/english/1somea2024001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2024/english/1somea2024001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2024/english/1somea2024001.pdf.json) --- ### Program performance and financing - All quantitative performance criteria (QPCs) and indicative targets (ITs) due for the first review were met. - Program is fully financed for the next 12 months; firm financing commitments include: - World Bank: US$100 million - EU: EUR10 million - UAE: US$38 million - ECF access and disbursement schedule: - Approval of arrangement: December 19, 2023 — Amount: SDR 30.000000 — Percent of quota: 18.359853 - First review (Apr 15, 2024) disbursement: SDR 7.500000 — Percent of quota: 4.589963 - Total ECF access under the schedule: SDR 75.000000 — Percent of quota: 45.899633 - Somalia's quota is SDR 163.4 million - Staff supports completion of the first review and disbursement of SDR 7.5 million. ### Fiscal stance, revenue, and expenditure priorities - Fiscal stance for 2024: - Overall fiscal deficit of 0.5 percent of GDP expected for 2024 (including World Bank financing on grant terms). - 2024 budget approved with an overall fiscal deficit of US$ 38 million (0.3 percent of GDP). - Revenue mobilization targets and measures: - Domestic revenue target for 2024 raised from US$345 million to US$357 million to better cover compensation of employees. - Key reforms: customs modernization (SOMCAS), new Income Tax Bill (expected submission by end-June 2024), Integrated Tax Administration System (ITAS) development, and increased revenue collection from large businesses (including telecom). - Text Table highlights (Somalia: Estimated Increase in Domestic Revenues (Percent of GDP)): - 2023 Proj. Increase in domestic revenue: 0.4 - 2024 Prog. Proj. Increase in domestic revenue: 0.3 0.4 - New measures/better enforcement: 0.2 0.2 0.3 - Tax on international trade: 0.2 0.1 0.2 - Nontax revenue: 0.0 0.1 0.1 - Ongoing policies: 0.2 0.1 0.1 - Expenditure controls and payroll: - Priorities: continue payroll integration, implement Pay and Grade policy, enhance expenditure controls, and develop debt management capacity. - Proposed structural benchmark (SB#9, end-December 2024): develop roadmap to implement Pay and Grade policies including aligning temporary worker salaries and a costing exercise. ### Monetary policy, currency reform, and Central Bank of Somalia (CBS) - Current monetary context: - CBS has not issued currency since 1991; Somali Shillings (SOS) in circulation are old and mostly counterfeit. - There are currently no deposits in shillings; about USD 1.2 billion in bank deposits and similar amounts estimated in mobile money wallets. - Currency exchange project: - World Bank estimates old shillings in circulation range between SOS 1.022-1.546 trillion (USD 40.9 - 61.8 million). - World Bank expected to provide about US$40 million in grant financing against a total estimated cost of US$72 million; implementation expected to take 18-24 months once approved. - Somalia currently has gross usable international reserves in the form of SDRs (about US$200 million) and gold (about US$33 million) sufficient to cover the estimated stock of old shillings to be replaced. - Policy recommendation: staff advised that a currency board arrangement (CBA) would provide a credible framework given capacity constraints; key features and requirements include: - CBS to maintain foreign reserves to fully cover its monetary liabilities (domestic currency issuance only against foreign exchange). - Maintain fiscal discipline and ensure CBS operational independence. - Strengthen CBS capacity (reserve management, regulation, supervision), develop financial markets, and improve macroeconomic data quality and timeliness. - Operational rules such as fixed exchange rate, convertibility with a 50–100 bps spread, and no monetary financing of the budget. - CBS reforms and safeguards: - 2024 Safeguards Assessment recommended enhancements to internal control environment, risk management, and controls in currency and banking operations. - Amendments to the CBS Law are being drafted; proposed SB#11 (submission of amendments to Parliament by end-March 2025). - CBS engaging with banks on capital adequacy and liquidity coverage ratios effective January 1, 2024. - SB#7 (due end-July 2024): CBS to develop and communicate an action plan to improve data quality submitted by commercial banks. ### Financial sector deepening and inclusion - Recent financial trends: - Private sector credit growth accelerated in November 2023, nearly 40 percent (y-o-y), though still below 5 percent of GDP. - Deposit growth reached 25 percent (y-o-y). - NPLs under 3 percent in 2023Q3; bank capital and liquidity at comfortable levels. - Payment systems and digital finance: - National Payment System (NPS) launched in 2021; IBAN standardization launched March 27, 2023. - Development of a National QR code and National SWITCH to support the national payment system. - As of February 2024, 23 thousand individuals enrolled in the National Identification and Registration Agency following Digital ID rollout started September 2023. - Approximately 73 percent of the Somali population over 16 years of age uses mobile money services. ### Debt relief, DSA, and debt management - HIPC Completion Point reached in December 2023: - Total debt relief at the Completion Point: US$4.5 billion. - External debt reduced to 6 percent of GDP by end-2023, compared to 64 percent of GDP at end-2018. - HIPC debt relief in 2023: 3,126.1 (millions of U.S. dollars) shown under Exceptional Financing / HIPC debt relief. - Debt sustainability assessment: - Somalia assessed at Moderate risk of external debt distress and Moderate overall risk of public debt distress. - Staff assesses Somalia’s external and overall public debt to be sustainable in the medium-term under baseline assuming continued highly concessional financing and full delivery of debt relief under HIPC, MDRI, and beyond-HIPC assistance. - PV of PPG external debt-to-GDP: 4.7 percent in 2024 (selected DSA entries). - Public debt and financing projections (selected exact figures): - Total public debt (percent of GDP, memorandum): 2024: 37.4; 2025: 6.1; 2026: 4.6 (table entries continue) - Gross financing requirement (millions of U.S. dollars): 2024: 7,467.5; 2025: 7,966.1; 2026: 8,524.3; 2027: 9,180.2; 2028: 9,867.1; 2029: 10,591.7 - External financing gap (Percent of GDP): 2024: 1.4; 2025: 1.2 - Financing commitments so far (Percent of GDP): 1.4 (2024), 1.2 (2025) - Debt management priorities: - Issue Prime Ministerial Decree articulating debt policy and procedures for new borrowing and guarantees (SB#5, due end-June 2024). - Amend PFM regulations to define “other financial liabilities” considered guarantees (SB#5). - DMU committed to regular and timely publication of the quarterly debt bulletin within 4 weeks after quarter-end. ### Macroeconomic performance and outlook - Recent outturns: - Real GDP growth: 2022: 2.4 percent; 2023: 2.8 percent. - December 2023 inflation: 6.6 percent; December 2022: 6.1 percent. - Domestic revenue in 2023: US$329 million, exceeding end-December 2023 program target. - 2023 fiscal surplus: US$6 million. - Near-term projections: - 2024 growth expected to rise to 3.7 percent. - Inflation expected to decline to 4.8 percent in 2024 (end-of-period). - Medium-term growth projected to gradually accelerate to 4.5 percent by 2029. - Balance of payments and external sector (selected exact figures, percent of GDP): - Current account balance: 2024 Est.: -8.0; 2025 Prog.: -9.5; 2026 Est.: -9.6 - Trade balance: 2024: -61.2; 2025: -61.0; 2026: -58.8 - Exports of goods and services: 2024: 17.3; 2025: 18.1; 2026: 17.9 - Imports of goods and services: 2024: 78.5; 2025: 79.0; 2026: 76.7 - Remittances (percent of GDP): 2024: 20.6; 2025: 20.6; 2026: 18.8 - Selected nominal GDP projections (millions of U.S. dollars): - 2024 Est.: 10,420 - 2025 Prog.: 11,515 - 2026 Est.: 11,680 - 2027 Proj.: 12,489 - 2028 Proj.: 12,804 - 2029 Proj.: 13,891 ### Structural benchmarks, conditionality, and monitoring - Structural benchmarks met: - SB#4: Roadmap to expand invoice tracking functionality to all goods and services approved on February 28, 2024 (met). - SB#8: Amendments to the AML/CFT Law submitted to Parliament on March 30, 2024 (met). - Key upcoming SBs and timelines: - SB#1: Publish Tax Policy and Revenue Administration Roadmap — End-June 2024. - SB#2: Submit Income Tax Bill to Parliament — End-June 2024. - SB#3: Full payroll integration into SFMIS — End-June 2024 (reduce non-payroll ratio to less than 1 percent). - SB#5: Prime Ministerial Decree on debt policy and amend PFM regulations — End-June 2024. - SB#6: Submit PPP Bill to Parliament — End-June 2024. - SB#7: CBS action plan to improve quality of data from commercial banks — End-July 2024. - Proposed SB#9: Roadmap to implement Pay and Grade policies — End-December 2024. - Proposed SB#10: Update PFM regulations on digital signatures and implement in SFMIS — End-June 2025. - Proposed SB#11: Submit CBS Law amendments to Parliament — End-March 2025. - Technical Memorandum of Understanding (TMU) modifications requested by authorities: - Raise domestic revenue floors to match revised projections and cost of compensation of employees. - Raise ceilings on government expenditure on compensation of employees, goods and services and contingency. - Reduce the floor on net international reserves (NIR) to reflect transfer to MoF of SDR 7 million windfall from HIPC debt relief and remove associated NIR adjustor. - Modify TMU definition of continuous ceiling on accumulation of external payments arrears to exclude obligations with creditor payment deferrals or payments into designated accounts. - Modify definition of goods and services expenditure to exclude the commission paid to the CBS (1.5 percent of revenues). ### Governance, AML/CFT, and sector reforms - Governance and anti-corruption: - Audit Law enacted in 2023; capacity enhancement of Auditor General’s Office ongoing. - Authorities plan to update the Anti-Corruption Strategy and staff the Independent Anti-Corruption Commission (IACC). - AML/CFT: - NRA published in 2022; NRA Action Plan published February 2023. - Targeted Financial Sanctions Law enacted March 2023; regulations approved July 2023. - Amendments to AML/CFT Law submitted to Parliament March 30, 2024 (SB#8, met). - Extractive industries: - Extractive Industries Fiscal Regime Law enacted June 2023; Model PSA and Petroleum Act regulations being finalized with IMF CD support. - PSAs signed in March 2023 valid only after legal process and IMCC review. ### Risks, mitigation, and contingency planning - Key downside risks (tilted to the downside): - Food insecurity if rainy seasons fail or if new natural disasters strike. - Deterioration of global/regional security, including risks associated with ATMIS transition and spillovers in the Red Sea. - Political risks linked to federalism and potential delays in FGS–FMS agreements. - Lower global growth affecting remittances and financing. - Mitigants: - Continued program ownership, capacity development, sustained donor support, cash buffers, expenditure rationalization, and current financing commitments. - Contingency: - Careful assessment of fiscal costs of proposed new pension regimes will be carried out before implementation. ### Data reporting, statistics, and capacity development - Data reporting and monitoring: - Program monitoring via QPCs, continuous performance criteria (including Article VIII commitments), ITs, and SBs; semi-annual reviews. - Detailed data reporting schedules and reporting requirements assigned to MoF, CBS, SNBS, FRC, and MoPIED with specific monthly and quarterly timelines (examples: monetary survey monthly within 3 weeks; consolidated bank data quarterly within 4 weeks; SFMIS reports monthly within 4 weeks). - Fiscal balance adjustor and financing memorandum items (US$ million, cumulative from start of year): example entries include Budget support grants in the Budget estimate: Jun-24: 89.0; Sep-24: 170.0; Dec-24: 188.0. - Statistical developments: - Business Survey finalization expected in July 2024. - New census expected in 2025 (first after 40 years). - Work ongoing to develop production-based national accounts data in 2025 using Business Survey data. - Capacity development financing: - Somalia Country Fund (SCF) Phase II fully funded through April 2025; additional financing needed beyond April 2025. *Source: IMF staff report — First Review under the Extended Credit Facility Arrangement and requests for modification of performance criteria (Discussions held February 26–March 7, 2024; Report approved April 17, 2024).* ### 2023. Somalia’s performance under the Fund-supported Extended Credit Facility Arrangement ### 2023. Somalia’s performance under the Fund-supported Extended Credit Facility Arrangement ### Executive summary and reform priorities - Program performance: All quantitative performance criteria (QPCs) and indicative targets (ITs) due for this review were met. - Financing: The program is fully financed for the next 12 months. - Fiscal stance: An overall fiscal deficit of 0.5 percent of GDP for 2024 accommodates priority expenditure that supports growth, security, and development. - Revenue mobilization: Continued efforts on domestic revenue mobilization are prioritized to make room for priority spending; key reforms include customs modernization and the new income tax law. - Public financial management: Priorities include continued progress on payroll integration, implementation of the Pay and Grade policy, enhancing expenditure controls, and developing debt management capacity. - Central bank and monetary policy: Ongoing reforms to strengthen central bank institutional capacity; careful formulation of the monetary and exchange rate policy frameworks is important in the context of the planned currency reform and will be supported by IMF technical assistance. - Financial sector and governance: Efforts to promote financial deepening and financial inclusion and to advance reforms to improve the AML/CFT framework and governance. - Inclusive growth and resilience: Focus areas include building capacity in the petroleum sector and implementing its legal framework, addressing food insecurity, building climate resilience, and enhancing trade integration. *Key specific program requests and adjustments* - Authorities request modifications to June and December 2024 QPCs to: - raise the floor on domestic revenues in line with revised projections and to a level that matches the cost of compensation of employees; - raise the ceiling on government expenditure on compensation of employees, goods and services and contingency to accommodate higher spending that supports security and growth; - reduce the floor on net international reserves (NIR) to reflect the transfer to the Ministry of Finance of the SDR 7 million windfall from the HIPC debt relief and remove the associated NIR adjustor. - Definition changes requested: - modify the TMU definition of the continuous ceiling on accumulation of external payments arrears to exclude external payment obligations for which the creditor has extended a payment deferral or for which payments are made into a designated account due to the risks of blocking of the payment by correspondent banks; - modify the definition of goods and services expenditure to exclude the commission paid to the central bank. ### Context and recent milestones - HIPC Completion Point: Somalia reached the Completion Point under the Heavily Indebted Poor Countries (HIPC) Initiative in December 2023. - Total debt relief at the Completion Point: US$4.5 billion. - External debt reduced to 6 percent of GDP by end-2023, compared to 64 percent of GDP at end-2018. - Access to financing: Debt relief expected to facilitate access to new external financing from multilateral and bilateral partners to support inclusive growth and poverty reduction. - Security environment: The security situation remains challenging with government military actions against Al-Shabab and the planned withdrawal of the African Union Transition Mission in Somalia (ATMIS) by end-December 2024. - Regional integration and geopolitics: - Somalia became the eighth Partner State of the East African Community (EAC) as of March 4, 2024. - In February 2024, Somalia and Türkiye signed a 10-year maritime defense pact. - Dispute noted regarding an MoU between Ethiopia and Somaliland (January 2024) related to Berbera port access. - Federalism: Agreements in 2023 on revenue responsibilities and revenue sharing were reached among FGS, four out of five FMS, and the Mayor of Mogadishu; discussions continue with Puntland. ### Recent economic performance and fiscal outcomes - Growth and inflation: - Growth in 2023 improved to 2.8 percent compared to 2.4 percent in 2022. - December 2023 inflation: 6.6 percent compared to 6.1 percent at end-December 2022. - Agriculture and remittances: - Agriculture (livestock and crops) started to recover after two years of drought and recent severe flooding. - Remittances growth slowed in 2023 relative to 2022. - Revenues and expenditures: - Domestic revenue in 2023: US$329 million, exceeding the end-December 2023 program target. - Expenditure in 2023 was within the 2023 Supplementary Budget. - A small budget surplus of US$6 million was achieved for the year. - IMF disbursement at ECF approval in December 2023 and budget grant disbursements (including US$75 million from the World Bank and US$7.5 million from Türkiye) contributed to larger cash balances for liquidity needs in 2024. - World Bank financing terms: - As of the HIPC Completion Point in December 2023, Somalia is assessed as being at moderate risk of debt distress. - The World Bank Executive Board approved the extension of Somalia’s grant status under IDA20 until end-June 2025; Somalia’s financing terms for new commitments will be maintained as grants until end-June 2025. ### Program performance, structural benchmarks, and conditionality - Quantitative targets: All QPCs and ITs due for the review were met. - Structural benchmarks met: - Expanding invoice tracking functionality to all goods and services. - Submission of amendments to the AML/CFT Law to Parliament. - Program additions: New indicative targets and structural benchmarks included through March 2025 to support key policy areas. - Mission and approvals: - Discussions were held in Nairobi, Kenya during February 26–March 7, 2024. - Report approved April 17, 2024. ### Outlook, risks, and mitigation - Downside risks: - Food insecurity can worsen if rainy seasons fail or new natural disasters hit Somalia. - Additional risks include deterioration of the global/regional security situation, risks related to the ATMIS transition, political risks linked to federalism, and lower global growth. - Mitigating factors: - Continued program ownership by the authorities, capacity development, and sustained support from development partners. - Contingency and assessment: - A careful assessment of the fiscal costs of proposed new pension regimes will be carried out before moving forward with implementation. ### Program and policy discussions (high-level) - Fiscal policy: - Increase domestic revenues to fully cover the cost of compensation of employees. - Continue payroll integration and implement the Pay and Grade policy. - Strengthen expenditure controls and develop debt management capacity. - Monetary and financial policy: - Strengthen central bank institutional framework and capacity, including financial regulation and supervision. - In consultation with the IMF, formulate monetary and exchange rate policy frameworks for the currency reform, with IMF technical assistance for implementation. - Promote financial deepening, financial inclusion, and AML/CFT reforms. - Governance, inclusive growth, and resilience: - Build capacity in the petroleum sector and implement its legal framework. - Address food insecurity, build climate resilience, and enhance trade integration. - Implement the Somalia Security Sector Development Plan, contingent on financing from partners and potential consideration of a post-ATMIS AU-sanctioned mission by the UN. *Source: IMF staff report — First Review under the Extended Credit Facility Arrangement and requests for modification of performance criteria (Discussions held February 26–March 7, 2024; Report approved April 17, 2024).* ### 10. Financial deepening continues, although from a very low base. Private sector credit ### 10. Financial deepening continues, although from a very low base. Private sector credit ### Financial deepening and soundness - Private sector credit growth accelerated in November 2023, nearing 40 percent (y-o-y), though it is still below 5 percent of GDP. - Deposit growth reached 25 percent (y-o-y) over the same period. - Financial soundness indicators reported by the CBS show: - Bank capital and liquidity at comfortable levels. - NPLs under 3 percent in 2023Q3. ### Program performance - Program performance has been satisfactory. - All quantitative performance criteria (QPCs) and indicative targets (ITs) for end-December 2023 were met. - Structural benchmarks (SBs) due for the 1st review were met: - Roadmap to expand the coverage of invoice tracking functionality to all goods and services approved on February 28, 2024 (SB#4, met, due end-February 2024). - Amendments to the AML/CFT Law submitted to Parliament on March 30, 2024 (SB#8, met, due end-March 2024). ### Outlook and risks - Near-term 2024 outlook: - Growth is expected to rise to 3.7 percent as crops and livestock recover more fully during the year. - Recovery supported by agriculture, remittances, and investment. - Foreign direct investment expected to trend upwards in 2024 following Somalia’s achievement of the HIPC Completion Point in December 2023. - Remittances projected to increase, bolstered by the moderation of global inflation and upgraded growth outlooks in several host countries. - Inflation expected to decline to 4.8 percent as fuel and food prices fall, although at a slower pace than anticipated earlier. - Medium-term projections: - Growth projected to gradually accelerate to 4.5 percent by 2029 as public and private investment scale up. - Current account deficit expected to widen gradually as Somalia gradually loses access to grants, financed by foreign direct investment and a modest increase in concessional borrowing. - Baseline projections do not incorporate the impact of joining the EAC due to lack of clarity on roadmap and timeline. - Key risks (tilted to the downside): - Food insecurity if rainy seasons fail or new natural disasters occur. - Deterioration of global/regional security (including Red Sea), risks related to the ATMIS transition, political risks linked to federalism, and lower global growth. - Potential lower economic growth and domestic revenue (including port revenues) if adverse shocks materialize. - Mitigants include existing cash buffers, expenditure rationalization, and current financing commitments; additional international support would be needed in a significant adverse scenario. ### Fiscal policy: priorities, revenue, and spending - Fiscal stance for 2024: - Overall fiscal deficit of 0.5 percent of GDP expected for 2024 (including World Bank financing on grant terms). - Project spending to continue to be supported by development partners. - UAE grant financing: - Ongoing grant financing from the UAE (US$38 million) is being channeled through the budget to cover higher budget spending on non-civilian compensation of employees (US$34.1 million) and food for soldiers. - To support sustainability, domestic revenue target raised from US$345 million to US$357 million for 2024. - Revenue mobilization and reforms: - Development of the new tax policy and revenue administration roadmap for 2024-2027 (SB#1, due June 2024) is ongoing. - Authorities expected to submit the Income Tax Bill to Parliament by end-June 2024 (SB#2). - SOMCAS implementation: smooth in Mogadishu; customs processing through SOMCAS for some goods in Kismayo as part of gradual harmonization. - Integrated Tax Administration System (ITAS) development supported by the World Bank; still in early stages. - Importance of FGS reaching agreement with all FMS on revenue responsibilities across levels of government. - Text Table 1 highlights (Somalia: Estimated Increase in Domestic Revenues (Percent of GDP)): - 2023 Proj. Increase in domestic revenue: 0.4 - 2024 Prog. Proj. Increase in domestic revenue: 0.3 0.4 - New measures/better enforcement: 0.2 0.2 0.3 - Tax on international trade (including customs duty increase in May 2023, SOMCAS implementation, Khat import tax): 0.2 0.1 0.2 - Other tax revenue (including income tax, turnover tax): 0.0 - Nontax revenue (including spectrum fees, fishing license, automation of road tax and rental income): 0.0 0.1 0.1 - Ongoing policies: 0.2 0.1 0.1 - Source: Somali authorities and IMF staff calculations. ### Public financial management and pensions - PFM reforms and controls: - Roadmap to expand invoice tracking to all payments for goods and services approved in February 2024 (SB#4, met). - Integration of remaining non-payroll compensation of FGS employees into a single payroll (SB#3, due June 2024) is ongoing. - By end-December 2024, authorities will develop a roadmap to implement Pay and Grade policies (proposed SB#9). - Proposed SB#10: Update PFM regulations relating to digital signatures and implement digital signatures in the SFMIS by end-June 2025, including training of MDAs. - Authorities will request IMF capacity development support on public investment management (project appraisal and selection). - Pensions: - Pension Law for civil servants passed by Parliament in January 2024 but not yet signed by the President. - New pension scheme for the security sector being developed. - Authorities plan careful assessment of fiscal costs and sustainability before approval and implementation; IMF CD support encouraged. ### Debt management - With IMF CD support, progress on: - Issuing a Prime Ministerial Decree articulating key debt policy parameters and procedures for new borrowing and sovereign guarantees. - Amending PFM regulations to include a clear definition of “other financial liabilities” considered guarantees as per Article 37 (6) of the PFM Act (SB#5, due end-June 2024). - Debt Management Unit committed to regular and timely publication of the quarterly debt bulletin within 4 weeks after quarter-end. ### Monetary and financial policy, CBS reforms, and currency reform - Central Bank of Somalia (CBS) capacity and safeguards: - CBS strengthening institutional framework and capacity for financial sector regulation and supervision. - 2024 Safeguards Assessment recommended enhancements to internal control environment, risk management, and controls in currency and banking operations. - Amendments to the CBS Law are being drafted; plan to submit amendments to Parliament by end-March 2025 (proposed SB#11). - CBS engaging with banks to ensure compliance with new regulations on capital adequacy and liquidity coverage ratios effective January 1, 2024. - CBS to develop and communicate an action plan to improve data quality submitted by commercial banks (SB#7, due end-July 2024), with IMF CD support. - CBS advancing development of a National QR code and National SWITCH to support the national payment system. - AML/CFT: - Amendments to the AML/CFT Act submitted on March 30, 2024 (SB#8, met); IMF CD support provided. - Fund staff provided technical assistance and training on targeted financial sanctions for the 2024 MENAFATF Mutual Evaluation. - Currency exchange project and monetary/exchange rate frameworks: - Currency exchange project (World Bank-supported) will reintroduce Somalia Shillings (SOS) as legal tender by replacing old and counterfeit notes in circulation. - Precise timing unclear; depends on raising external financing and agreement between FGS and FMS. - Staff advised that a currency board arrangement would provide a credible framework given capacity constraints; would require CBS to maintain foreign reserves to fully cover its monetary liabilities. - Complementary policies required for a currency board include: - Maintain fiscal discipline and ensure fiscal sustainability. - Ensure CBS operational independence and prevent fiscal dominance. - Strengthen CBS capacity, including financial regulation and supervision, and promote transparency. - Develop financial markets and support capacity building of financial institutions. - Improve quality, frequency, and timeliness of macroeconomic and financial data. - Currency project financing and context: - World Bank estimates old shillings in circulation range between SOS 1.022- 1.546 trillion (USD 40.9 - 61.8 million). - World Bank currency exchange project expected to provide about US$40 million in grant financing against a total estimated cost of US$72 million; authorities approaching bilateral partners to fill the funding gap. - Once approved by the World Bank Board, implementation expected to take 18-24 months. - Somalia currently has gross usable international reserves in the form of SDRs (about US$200 million) and gold (about US$33 million) sufficient to cover the estimated stock of old shillings in circulation that would be replaced for new SOS during the currency exchange. - CBS would need to assess whether its income would be sufficient to cover any costs associated with the use of SDR holdings. - An augmentation of the ECF arrangement could be considered in a subsequent program review to back the new currency and enhance credibility once timing is clearer. ### Governance, inclusive growth, and resilience - Petroleum and extractives: - Progress on regulations for the Extractive Industries Fiscal Regime Law and the Petroleum Act with IMF CD support. - PSAs signed in March 2023 will be valid only after legal process and IMCC review to ensure alignment with the 2021 model PSA and legal framework. - Licensing round and any new PSAs should follow established legal framework and require IMCC approval. - Procurement, concessions, and public assets: - Ministry of Finance disseminating IMCC standard operating procedures among MDAs. - Draft PPP bill being advanced to manage fiscal risks and establish a gateway process managed by the Ministry of Finance (SB#6, due by end-June 2024). - Further progress needed on implementing new policy on management of public assets. - Anti-corruption and audits: - Audit Law enacted in 2023; capacity enhancement of the Auditor General’s Office ongoing with World Bank support. - UNODC technical assistance secured for UNCAC self-assessment; legal framework review to identify gaps is needed. - Authorities plan to update the Anti-Corruption Strategy and staff the Independent Anti-Corruption Commission (IACC). - Inclusive growth, resilience, and data: - Somalia National Digital ID rollout started in September 2023; as of February 2024, 23 thousand individuals enrolled in the National Identification and Registration Agency. - Digital ID will support targeted social protection and enhance AML/CFT customer due diligence. - Food Security Crisis Plan launched in December 2023 to strengthen food systems and climate resilience, to be implemented with the World Bank. - Somalia’s accession to the EAC: full integration (including customs union and common market) can span several years as capacity and institutional alignment progress. - Business Survey finalization expected in July 2024 to broaden economic activity and social data. - Work ongoing to develop production-based national accounts data in 2025 using Business Survey data. *Source: IMF staff report (content unit: 1somea2024001 - 10. Financial deepening continues, although from a very low base. Private sector credit).* ### 27. Understandings have been reached with the authorities on program conditionality. ### 27. Understandings have been reached with the authorities on program conditionality. ### Performance criteria and targets - Authorities requested modifications to the June and December 2024 QPCs to: - (1) incorporate a higher domestic revenue target; - (2) accommodate higher spending that supports security and growth within the ceiling on compensation of employees, goods and services and contingency; - (3) reduce the floor on net international reserves to reflect the transfer to the Ministry of Finance of the SDR 7 million windfall from the HIPC debt relief and remove the associated NIR adjustor. - New indicative targets are proposed for March 2025. - The authorities have requested modifications to June and December 2024 QPCs (see Table 10). ### Technical Memorandum of Understanding (TMU) modifications - For the expenditure ceiling definition: - Spending on goods and services will be modified to exclude the commission paid to the CBS (1.5 percent of revenues) so that overperformance of domestic revenues or budget grants does not impact the authorities’ ability to meet the expenditure ceiling. - For net international reserves (NIR): - The definition of NIR will be revised to remove all SDR holdings belonging to the MoF from the total SDR holdings of Somalia, in order to reflect the reserves that belong solely to the CBS. - For the continuous ceiling on accumulation of external payments arrears: - The TMU definition will be modified to exclude external payment obligations for which the creditor has extended a payment deferral or payments are made into a designated account due to the risks of blocking of the payment by correspondent banks. ### New structural benchmarks (proposed) - Proposed SB#9 (end-December 2024): - Develop a roadmap to implement the Pay and Grade policies, including: - (i) a plan and timeline for the development of a strategy to align the salaries of temporary workers with the pay scale of permanent workers; and - (ii) a plan and timeline for conducting a costing exercise to understand the fiscal implications of the proposed shift of permanent and temporary workers to a new pay scale. - Proposed SB#10 (end-June 2025): - Update the PFM regulations relating to digital signatures for the purchase order to payment process and implement the digital signatures in the SFMIS. - Proposed SB#11 (end-March 2025): - Submission of amendments to the CBS Law to Parliament, in line with the IMF safeguards recommendations. ### Debt sustainability assessment and debt relief - The debt sustainability assessment remains broadly unchanged from the December 2023 DSA. - Staff assesses Somalia’s external and overall public debt to be sustainable in the medium-term. - Full delivery of debt relief under: - the HIPC Initiative, - Multilateral Debt Relief Initiative, and - beyond-HIPC assistance at the HIPC CP brought all debt burden indicators significantly below their respective thresholds in the baseline. - The extension of World Bank grant financing until end-June 2025 has no material impact on the DSA. - Some indicators of external debt burden continue to breach the indicative thresholds under the stress scenarios, consistent with a moderate risk rating. - Authorities are continuing good faith negotiations to finalize debt relief agreements with remaining creditors that have any HIPC eligible debt (see Table 14). - As the Paris Club agreement with Somalia is representative, principal arrears to non-Paris club creditors can be deemed away under the Fund’s Lending into Official Arrears (LIOA) policy. ### Program financing and projected financing gaps - The program is fully financed. The authorities secured firm financing commitments for the next 12 months of the program, including: - World Bank: US$100 million - EU: EUR10 million - UAE: US$38 million - Continued strong engagement of international donors indicates good prospects that financing will be adequate for the remaining program period. - Key financing table entries (Percent of GDP): - External financing requirement: 58.3 (2024), 57.3 (2025) - Fiscal deficit, excl. budget support grants: 1.7 (2024), 1.4 (2025) - of which: Revenue and grants, excl. budget support grants: 5.8 (2024), 5.8 (2025) - Trade balance: 58.2 (2024), 57.2 (2025) - Expenditure: 7.5 (2024), 7.2 (2025) - Official arrears/repayments: 0.0 (2024), 0.0 (2025) - Available financing: 56.9 (2024), 56.1 (2025) - Total financing, excl. projects: 0.3 (2024), 0.2 (2025) - of which: Net acquisition of financial assets: 0.4 (2024), 0.3 (2025) - Current transfers (net): 48.6 (2024), 48.5 (2025) - Net incurrence of liabilities: -0.1 (2024), -0.1 (2025) - HIPC debt relief: 0.0 (2024), 0.0 (2025) - External financing gap: 1.4 (2024), 1.2 (2025) - Fiscal financing gap: 1.4 (2024), 1.2 (2025) - Financing commitments so far: 1.4 (2024), 1.2 (2025) - Financing commitments so far (breakdown): - IMF ECF: 0.2 (2024), 0.1 (2025) - World Bank budget support grants: 0.9 (2024), 0.1 (2025) - World Bank concessional loans: 0.0 (2024), 0.6 (2025) - Other: 0.4 (2024), 0.3 (2025) ### Capacity to repay and IMF exposure - Somalia’s capacity to repay the Fund remains adequate, albeit subject to risks. - With HIPC debt relief and the current ECF program, IMF credit outstanding based on existing and prospective drawings is projected to peak at 70.75 percent of quota in 2026 (SDR 115.6 million), below the applicable normal cumulative access limit. - To mitigate debt servicing risks, the program includes reforms to increase revenues and ceilings on overall deficits and non-concessional borrowing. ### Capacity development (CD) financing - Somalia will continue to need extensive CD support, financed by the Somalia Country Fund (SCF). - Phase II of SCF is fully funded through April 2025. - Additional financing will be needed for CD support beyond April 2025. ### Fiscal policy, revenue mobilization, and PFM reforms - The 2024 budget: - overall fiscal deficit of 0.5 percent of GDP for 2024. - The higher domestic revenue target for 2024 fully covers the cost of compensation of employees and advances the authorities’ goal of covering operational expenses with domestic revenues by 2027. - External budget support remains crucial. - Revenue mobilization priorities: - Customs modernization (including alignment with EAC requirements); - A new income tax law; - Increasing revenue collection from large businesses (including the telecom sector); - Enhancement of revenue administration. - Public financial management and debt management priorities: - Fully integrate all compensation of FGS employees into the payroll; - Expand invoice tracking to all goods and services; - Implement digital signatures; - Outline steps to implement the Pay and Grade policies; - Build public investment management capacity; - Carefully assess fiscal costs and sustainability of proposed new pension regimes before implementation; - Strengthen public debt management framework, including clearly articulating procedures for initiating loan negotiations and entering loan agreements. ### Financial sector, safeguards, and monetary framework - Encourage reforms to promote financial deepening and financial inclusion. - Strengthen CBS financial regulation and supervision capacity, including improving the quality of data submitted by commercial banks. - In line with the 2024 Safeguards Assessment recommendations, the CBS should further enhance its internal control environment, advance risk management, and controls in currency and banking operations. - Authorities should move forward with planned amendments to the CBS Law to enhance CBS autonomy and operations. - Recent submission to Parliament of the AML/CFT Bill is welcome; continued efforts needed to address ML/TF risks and to base reforms on the MENAFATF Mutual Evaluation findings in 2024. - Staff view a currency board arrangement as a good fit for Somalia given capacity constraints and de facto dollarization, as it would provide a credible framework while helping to set conditions to enhance capacity and financial institutions over time. - Authorities should formulate, in consultation with the IMF, the monetary and exchange rate policy frameworks to be adopted in the context of the currency reform and seek IMF CD support for implementation. ### Governance, anti-corruption, and sectoral reforms - Sustained efforts needed to improve governance and fight corruption. - Petroleum sector: continue building capacity and ensure implementation of the established legal framework. - Strengthen framework for procurement and concessions, including enactment of a new PPP law that adequately manages fiscal risks. - Strengthen the capacity of the Auditor General’s Office, further progress on implementation of the UNCAC, and staffing of the IACC. ### Risks and mitigation - Risks remain high and tilted to the downside, including: - extreme weather shocks; - deterioration of the global/regional security situation (including the security situation in the Red Sea); - risks related to the ATMIS transition; - political risks linked to federalism; - lower global growth. - These risks are mitigated by continued program ownership, capacity development, and sustained support from development partners. *Source: IMF staff report excerpt (section 27 and surrounding text).* ### 39. Staff supports completion of the first review and disbursement of SDR 7.5 million ### 1somea2024001 - 39. Staff supports completion of the first review and disbursement of SDR 7.5 million ### Program review and disbursement decision - Staff supports completion of the first review and disbursement of SDR 7.5 million under the ECF arrangement. - The authorities plan to use the disbursement for direct budget support, as indicated at the time of the approval of the ECF arrangement. - Staff supports the request for modifications to the June and December 2024 QPCs on: - (1) domestic revenues; - (2) compensation of employees, goods and services, and contingency; - (3) net international reserves. - The attached Letter of Intent and the Memorandum of Economic and Financial Policies set out the appropriate policies that meet the program objectives. ### Key program financing and schedule - Approval of arrangement: December 19, 2023 — Amount: SDR 30.000000 — Percent of quota: 18.359853 - First review and end-December 2023 performance criteria: April 15, 2024 — Amount of disbursement: SDR 7.500000 — Percent of quota: 4.589963 - Second review and end-June 2024 performance criteria: October 15, 2024 — Amount: SDR 7.500000 — Percent of quota: 4.589963 - Third review and end-December 2024 performance criteria: April 15, 2025 — Amount: SDR 7.500000 — Percent of quota: 4.589963 - Fourth review and end-June 2025 performance criteria: October 15, 2025 — Amount: SDR 7.500000 — Percent of quota: 4.589963 - Fifth review and end-December 2025 performance criteria: April 15, 2026 — Amount: SDR 7.500000 — Percent of quota: 4.589963 - Sixth review and end-June 2026 performance criteria: October 15, 2026 — Amount: SDR 7.500000 — Percent of quota: 4.589963 - Total ECF access under the schedule: SDR 75.000000 — Percent of quota: 45.899633 - Somalia's quota is SDR 163.4 million. ### Fiscal and macro indicators (selected exact figures from tables) - Population: 15.6 million, 2022 estimate. - Nominal GDP (millions of U.S. dollars): - 2024 Est.: 10,420 - 2025 Prog.: 11,515 - 2026 Est.: 11,680 - 2027 Proj.: 12,489 - 2028 Proj.: 12,804 - 2029 Proj.: 13,891 - Real GDP, annual percentage change: - 2024: 2.4 - 2025: 2.8 - 2026: 2.8 - 2027: 3.7 - 2028: 3.7 - 2029: 3.9 - CPI (period average, percent change): - 2024: 6.8 - 2025: 5.7 - 2026: 6.1 - 2027: 4.1 - 2028: 4.8 - 2029: 3.9 - Central government finances (percent of GDP, selected): - Revenue and grants: 2024: 6.9; 2025: 6.4; 2026: 6.3; 2027: 8.1; 2028: 6.9; 2029: 7.1 - Tax (percent of GDP): 2024: 1.7; 2025: 1.9; 2026: 1.9; 2027: 1.9; 2028: 2.0; 2029: 2.1 - Grants (percent of GDP): 2024: 4.4; 2025: 3.7; 2026: 3.5; 2027: 4.1; 2028: 4.3; 2029: 2.8 - Expenditure (FGS) (percent of GDP): 2024: 6.9; 2025: 6.5; 2026: 6.3; 2027: 8.1; 2028: 7.5; 2029: 7.2 - Compensation of employees (percent of GDP): consistently reported as 2.5 in 2024 and 2025, and varying 2.6–2.8 in subsequent years. - Purchase of non-financial assets (percent of GDP): 2024: 0.1; 2025: 0.3; 2026: 0.2; 2027: 0.3; 2028: 0.3; 2029: 0.3 - Overall balance (percent of GDP): 2024: 0.0; 2025: -0.1; 2026: 0.0; 2027: -1.2; 2028: -0.5; 2029: -1.3 - Public debt (percent of GDP, Table 2b memorandum): - 2024: 37.4 - 2025: 6.1 - 2026: 4.6 - 2027: ... (table shows series continuing to 2029; entries include 6.8, 6.1, 6.6, 8.0, 9.4, 10.7, 12.0 in later years) - Gross International Reserves (program definition, in millions of US$): - 2024: 265.5 (table lists series across years including 221.4 for 2023 and subsequent values) ### Balance of payments and external sector (selected exact figures) - Current account balance (percent of GDP): - 2024 Est.: -8.0 - 2025 Prog.: -9.5 - 2026 Est.: -9.6 - 2027 Prog.: -9.0 - 2028 Proj.: -8.7 - 2029 Proj.: -8.8 - Trade balance (percent of GDP): - 2024: -61.2 - 2025: -61.0 - 2026: -58.8 - 2027: -60.8 - 2028: -58.2 - 2029: -57.2 - Exports of goods and services (percent of GDP): - 2024: 17.3 - 2025: 18.1 - 2026: 17.9 - 2027: 19.2 - 2028: 18.9 - 2029: 20.1 - Imports of goods and services (percent of GDP): - 2024: 78.5 - 2025: 79.0 - 2026: 76.7 - 2027: 79.9 - 2028: 77.1 - 2029: 77.2 - Remittances (percent of GDP): - 2024: 20.6 - 2025: 20.6 - 2026: 18.8 - 2027: 20.9 - 2028: 18.8 - 2029: 18.9 ### External financing needs and identified financing (selected exact figures) - Gross financing requirement (millions of U.S. dollars, Table 8): - 2021: 5,093.0 - 2022: 6,461.0 - 2023: 10,056.6 - 2024: 7,467.5 - 2025: 7,966.1 - 2026: 8,524.3 - 2027: 9,180.2 - 2028: 9,867.1 - 2029: 10,591.7 - Trade deficit (millions of U.S. dollars): - 2024: 6,378.0 - 2025: 6,867.7 - 2026: 7,446.0 - 2027: 7,940.5 - 2028: 8,498.3 - 2029: 9,153.1 - Available financing (millions of U.S. dollars): - 2021: 4,742.4 - 2022: 6,217.2 - 2023: 6,728.9 - 2024: 7,289.6 - 2025: 7,797.8 - 2026: 8,219.1 - 2027: 8,831.6 - 2028: 9,502.3 - 2029: 10,163.3 - Financing gap (millions of U.S. dollars): - 2021: 350.7 - 2022: 243.9 - 2023: 3,327.7 - 2024: 177.9 - 2025: 168.3 - 2026: 305.2 - 2027: 348.6 - 2028: 364.8 - 2029: 428.4 - Exceptional financing and HIPC-related entries: - HIPC debt relief in 2023: 3,126.1 (millions of U.S. dollars) shown under Exceptional Financing / HIPC debt relief. - Identified financing (millions of U.S. dollars, selected): - Official budget grants 2022: 38.4; 2023: 171.4; 2024: 141.3; 2025: 158.0; later years include zeros in some entries per table. - IMF disbursements (ECF and related): entries show IMF totals and ECF disbursement lines; Table notes: "Disbursements in 2024-26 are conditional on Board approval of ECF reviews." ### Monetary and banking sector (selected exact figures) - Central Bank summary (Table 3, selected points): - Net Foreign Assets series include negative and positive values across quarters (e.g., -250, -183, -301, -356, -327, -281, 73 in one series). - SDR holdings and SDR allocation details: 2021 SDR Allocation distribution referenced as SDR 156.6 million between CBS (about US$ 90 million) and FGS (about US$ 133 million). - Consolidated commercial banks (Table 4, selected): - Total assets (sample entries): 2020: 764; 2021: 1,182; 2022: 1,259; 2023: 1,364/1,292/1,505/1,617 depending on quarter. - Credit to private sector (millions of US$): series includes 219, 319, 400, 429, 410, 526, 535 in quarterly entries. - Memorandum: Credit to private sector share of total assets (percent) shows values like 29, 27, 32, 31, 32, 35, 33 across years/quarters. ### Policy context and notable institutional points (as presented) - The Letter of Intent and the Memorandum of Economic and Financial Policies accompany the request and specify policies that meet program objectives. - The authorities decided to distribute the 2021 SDR Allocation by the IMF on August 23, 2021 for SDR 156.6 million between the CBS (about US$ 90 million) and the FGS (about US$ 132 million). - A World Bank policy change replacing the previous 50:50 mix of grants and loans with 100 percent loans (with 50-year maturity) will impact Somalia starting in July 2025; the table notes this change will reduce grants and could result in deficits of 1.5 to 2.0 percent of GDP relative to previous projections. *Source: IMF staff report excerpts and tables.* ### 1. Principal ### 1. Principal ### Principal balances, charges, and outstanding Fund credit - Repurchases and Repayments: 250.40.00.01.42.86.315.218.219.820.617.18.35.32.30.00.0 - SDR related charges: 0.01.61.41.41.41.41.41.41.41.41.41.41.41.41.41.4 - Total obligations: 250.41.61.42.84.27.716.619.621.222.018.59.76.73.71.41.4 - Outstanding Fund credit, end of period: 72.087.0102.0115.6112.8106.591.473.253.532.915.87.52.30.00.00.0 - Net Use of Fund Credit: -206.415.015.013.6-2.8-6.3-15.2-18.2-19.8-20.6-17.1-8.3-5.3-2.30.00.0 - Disbursements and Purchases: 44.015.015.015.00.00.00.00.00.00.00.00.00.00.00.00.0 - Repayments and Repurchases (repeat): 250.40.00.01.42.86.315.218.219.820.617.18.35.32.30.00.0 Memorandum items (Outstanding Fund credit, in percent of): - Exports of goods and services: 4.64.84.94.94.33.62.92.21.50.90.40.20.00.00.00.0 - External public debt: 13.716.215.913.410.17.85.53.82.41.30.50.20.10.00.00.0 - Gross official reserves: 36.143.651.158.457.856.452.644.532.520.09.64.61.40.00.00.0 - GDP: 0.80.91.01.00.90.80.60.50.30.20.10.00.00.00.00.0 - Quota: 44.153.262.470.769.065.255.944.832.720.19.64.61.40.00.00.0 Total Obligations, in percent of: - Exports of goods and services: 15.90.10.10.10.20.30.50.60.60.60.50.20.10.10.00.0 - External public debt: 47.50.30.20.30.40.61.01.00.90.90.60.30.20.10.00.0 - Gross official reserves: 125.50.80.71.42.24.19.511.912.813.411.25.94.02.20.90.9 - GDP: 2.90.00.00.00.00.10.10.10.10.10.10.00.00.00.00.0 Quota (details): - Quota: 153.31.00.91.72.64.710.112.012.913.511.35.94.12.20.90.9 - Quota (alternative line): 163.4163.4163.4163.4163.4163.4163.4163.4163.4163.4163.4163.4163.4163.4163.4 - Source: IMF staff estimates and projections. - Note: Projections are based on current IMF charges. ### Table 10 — Quantitative Performance Indicators and Indicative Targets Under the ECF Arrangement (December 2023 – March 2025) - Units: Millions of U.S. dollars - Test dates and program columns shown for Mar. 2024 and Mar. 2025. Quantitative Performance Criteria (selected items with program/proposed status): - 1 FGS domestic revenue, floor: 312329 Met; 145150; 345357 - 2A Spending on FGS compensation of employees, goods & services, & contingency, ceiling: 384384 Met; 236437 - 2B Spending on FGS compensation of employees, goods & services (excl. CBS commission), & contingency, ceiling: 252468 - 3A Net international reserves, floor 7/: 0.7 adjusted 13 Met; 1010 - 3B Net international reserves (excl. all SDR holdings of MoF), floor 7/ 8/: 1.51.5 - 4 Contracting or guaranteeing any new external, non-concessional debt, ceiling 3/: 00 Met; 0000 - 5 Accumulation of new external arrears, ceiling 3/: 00 Met; 0000 Indicative Targets: - 1 FGS domestic revenue, floor: 6923123985 - 2A Spending on FGS compensation of employees, goods & services, & contingency, ceiling: 118349 - 2B Spending on FGS compensation of employees, goods & services (excl. CBS commission), & contingency, ceiling: 374131 - 3A Net international reserves, floor 7/: 1010 - 3B Net international reserves (excl. all SDR holdings of MoF), floor 7/ 8/: 1.5 1.5 - 4 Contracting or guaranteeing any new external, non-concessional debt, ceiling 3/: 0000 - 5 Accumulation of new external arrears, ceiling 3/: 0000 - 6 Fiscal balance, floor (cash basis) 2/ 5/: -44 adjusted 6 Met -48 -21-2166-38-38-47 - 7 Contracting of new domestic debt, ceiling 3/: 00 Met 00000000 - 8 Accumulation of new domestic expenditure arrears, ceiling 3/: 00 Met 00000000 Memorandum item: - Contracting or guaranteeing of new external concessional debt 5/ 6/: 000750750133 Sources and notes (selected): - Sources: Somali authorities; and IMF staff estimates and projections. - 2/ Cumulative from the beginning of the fiscal year. - 3/ This target is applied on a continuous basis. - 4/ Test date for the first, second and third reviews, respectively. - 5/ The fiscal balance floor is in line with the authorities' 2024 budget (US$38 million), which is consistent with the IMF staff forecast (US$60 million). The authorities' budget assumes higher budget grants (by US$27 million) than what is incorporated in the IMF baseline. Interest payments: US$10 million based on signed agreements; IMF forecast assumes agreements reached with all creditors (US$10 million). For 2024, fiscal balance floor adjustments per TMU for delays/shortfalls in budget support grants or higher interest payments. - 7/ The floor on NIR would be adjusted downward if the CBS transfers distributable earnings to the government, and if the CBS provides temporary liquidity advances to the government, as per the TMU. - 1/ The quantitative targets, indicative targets, and program exchange rates are defined in the Technical Memorandum of Understanding (TMU). - 8/ Revised definition introduced in the 1st review. ### Table 11 — Structural Benchmarks Under the ECF Arrangement (December 2023–April 2025) Benchmarks, target dates, sector/agency, rationale, monitoring, and status (selected benchmarks): - 1 Publish a Tax Policy and Revenue Administration Roadmap approved by the Minister of Finance, in line with IMF staff recommendations - Target date: End-June 2024 - Sector/FGS Agency: Domestic revenue / MOF - Rationale: Support domestic revenue generation and revenue administration - Monitoring: Publish roadmap approved by the Minister of Finance on the MOF website. - 2 Submit the Income Tax Bill to Parliament - Target date: End-June 2024 - Sector: Domestic revenue / MOF - Monitoring: Send to the IMF staff the version of the Bill submitted to Parliament - 3 Ensure full payroll integration of FGS employees in the SFMIS payroll module by reducing the ratio of non-payroll compensation of employee payments to total compensation of employees to less than 1 percent - Target date: End-June 2024 - Sector: PFM / MOF NCSC MOLSA - Rationale: Strengthen payroll integrity, expenditure controls, and governance - Monitoring: Submit to IMF staff monthly SFMIS reports. A ratio to be decreased to less than 1 percent on average between April and June 2024 (relative to 10.9 percent in May-July 2023) - 4 Publish a plan approved by the Minister of Finance to expand invoice tracking functionality to all goods and services - Target date: End-February 2024 - Sector: PFM / MOF - Rationale: Strengthen PFM, expenditure controls, transparency, and accountability - Monitoring: Publish the plan on the MOF website. - Status: Met - 5 (1) Issue a Prime Ministerial Decree articulating key parameters for debt policy and procedures for new borrowing and sovereign guarantees; (2) amend the PFM regulations to define “other financial liabilities” considered guarantees as per Article 37 (6) of the PFM Act - Target date: End-June 2024 - Sector: Public debt/ MOF - Rationale: Define debt policy and strengthen debt management framework and capacity - Monitoring: Publish approved Prime Ministerial Decree and amended PFM regulations on the MoF website. - 6 Submit the PPP Bill to Parliament with a fiscal-risk-managing framework and gateway process managed by the Ministry of Finance - Target date: End-June 2024 - Sector: Governance / MOF - Monitoring: Send to IMF staff the version of the Bill submitted to Parliament - 7 Develop an action plan to improve the quality of data submitted by commercial banks, and communicate it to commercial banks - Target date: End-July 2024 - Sector: Financial Supervision / CBS - Monitoring: Provide IMF staff with action plan approved by the CBS Board and copies of letters from the CBS Governor to commercial banks - 8 Submit to Parliament amendments to the AML/CFT Law, in line with IMF staff recommendations - Target date: End-March 2024 - Sector: AML-CFT Governance / FRC MOF CBS - Monitoring: Send to IMF staff the version of the AML/CFT Act amendments submitted to Parliament - Status: Met Proposed structural benchmarks (selected): - 9 Develop a roadmap to implement the Pay and Grade policy (elements include aligning salaries of temporary workers and a costing exercise) - Target date: End-December 2024 - Sector: PFM / MOF NCSC MOLSA - Monitoring: Publish roadmap approved by the Cabinet on the MOF website. - 10 (i) Publish updated PFM regulations relating to digital signatures for the purchase order to payment process; and (ii) implement digital signatures in the SFMIS - Target date: End-June 2025 - Sector: PFM / MOF - Monitoring: Publish amended PFM regulations; confirm implementation in SFMIS; provide list of users and number/amount of vouchers processed using digital signatures - 11 Submit amendments to the CBS Law to Parliament, in line with IMF safeguards recommendations - Target date: End-March 2025 - Sector: Financial Supervision / CBS - Monitoring: Send to IMF staff the version of the Bill submitted to Parliament - Note: Abbreviations — Ministry of Finance (MOF), Central Bank of Somalia (CBS), Federal Member States (FMS), Financial Reporting Center (FRC), Ministry of Justice (MOJ), public financial management (PFM), Somalia Financial Management Information System (SFMIS), Anti-Money Laundering/Combating the Financing of Terrorism (AML-CFT). ### Table 12 — Summary Table on Projected External Borrowing Program (January 1, 2024 – December 31, 2024) - PPG external debt contracted or guaranteed: Volume of new debt, USD million: 19.9100 - Percent: Sources of debt financing: 19.9100 (Concessional debt, 1/) - o/w IMF prospective: 19.9 - o/w Other 2/: 0.00 - Non-concessional debt: 0.00 - o/w Semi-concessional 3/: 0.00 - o/w Commercial terms 4/: 0.00 - Uses of debt financing: 19.9100 - Project Financing: 0.00 - Budget Financing: 19.9100 - Type of interest rate: 19.9100 - Fixed Interest Rate: 19.9100 - Variable Interest Rate: 0.00 - Currency denomination: 19.9100 - USD denominated loans: 19.9100 - Loans denominated in other currency: 0.00 Memorandum items: - Indicative projection FY2025: 153.3 - Indicative projection FY2026: 305.2 Notes: - 1/ Debt with a grant element of at least 35 percent. - 2/ Can include multilateral lenders such as the World Bank and the AfDB. - 3/ Debt with a positive grant element that is lower than the minimum grant element of 35 percent. - 4/ Debt without a positive grant element. - 5/ HIPC Completion Point reached in December 2023. ### Table 13 — Decomposition of Public Debt and Debt Service by Creditor, 2022–24 (selected figures) Debt stock (end of period) and debt service for 2022, 2023, 2024: - Total 1/: 3894.8100.033.316.417.712.90.20.20.2 - External: 3827.098.332.816.417.712.90.20.20.2 - Multilateral creditors: 1074.927.69.216.417.710.00.20.20.1 - IMF 2/: 370.59.53.20.02.32.30.00.00.0 - World Bank 3/: 104.62.70.913.412.50.00.20.20.0 - AfDB: 20.10.50.22.52.30.00.00.00.0 - Other Multilaterals: 579.614.95.00.50.57.60.00.00.1 - Arab Monetary Fund: 298.67.72.60.00.01.80.00.00.0 - Arab Fund for Economic and Social Development: 191.54.91.60.00.04.30.00.00.1 - International Fund for Agricultural Development: 26.20.70.20.50.50.50.00.00.0 - Islamic Development Bank: 27.20.70.20.00.00.40.00.00.0 - OPEC Fund for International Development: 36.10.90.30.00.00.60.00.00.0 - Bilateral Creditors: 2752.170.723.60.00.02.90.00.00.0 - Paris Club 4/: 2004.551.517.20.00.00.20.00.00.0 - Denmark: 2.80.10.00.00.00.00.00.00.0 - France: 109.72.80.90.00.00.00.00.00.0 - Japan 6/: 109.02.80.90.00.00.00.00.00.0 - Russia 7/: 711.118.36.10.00.00.20.00.00.0 - United States: 998.425.68.50.00.00.00.00.00.0 - Other international creditors 8/: 745.019.16.40.00.02.70.00.00.0 - Kuwait Fund and Central Bank: 125.33.21.10.00.02.70.00.00.0 - Saudi Arabia: 118.93.11.00.00.00.00.00.00.0 - United Arab Emirates: 253.56.52.20.00.00.00.00.00.0 - Domestic: 67.81.70.60.00.00.00.00.00.0 - Of which: in arrears: 67.81.70.60.00.00.00.00.00.0 - Nominal GDP: 11680 Notes: - 5/ Debt cancellation of 100 percent of ODA debt became effective on March 2021. - 6/ No debt reduction at the HIPC Decision Point; Japan will cancel 100% of their debt stock under the HIPC Completion Point. - 7/ Debt stock as of end-2022, consistent with the HIPC Debt Reconciliation Exercise in 2023. The bilateral agreement between Russia and Somalia was signed in 2023. - 8/ Amount reported for non-PC creditors assumes PC comparable treatment and reflects estimates of interim debt relief under Cologne Terms computed as part of the HIPC DRA exercise. Sources: Somalia Debt Management Unit; IMF; World Bank; and AfDB. ### Table 14 — Progress on Negotiations with Creditors for Restructuring Outstanding HIPC-Eligible Debt - (Table content present in source; detailed creditor negotiation progress listed as of March 3, 2024.) ### Annex I — Risk Assessment Matrix (selected risks and impacts) Conjunctural risks: - Intensification of regional conflict(s). - Overall Level of Concern: High - Relative Likelihood: High - Expected Impact if Threat Materializes: Intensifying spillovers from Russia’s war in Ukraine and commodity price shocks would exacerbate inflation in Somalia. Humanitarian support may be affected by the supply shock (of food). Lower economic growth could reduce remittances, affecting local consumption and investment. Escalation of conflicts in the region can negatively affect security, trade and fiscal revenues in Somalia. - Commodity price volatility. - Overall Level of Concern: High - Social discontent. - Overall Level of Concern: Medium - Relative Likelihood: High - Expected Impact: May intensify the precarious security situation in Somalia. - Monetary policy miscalibration. - Overall Level of Concern: Medium - Relative Likelihood: High - Expected Impact: As a dollarized economy, Somalia does not conduct active monetary policy but imports monetary policy from advanced economies. High global commodity price inflation will significantly impact poor households which account for 70 percent of the population. - Abrupt global slowdown or recession. - Overall Level of Concern: Medium - Relative Likelihood: High - Expected Impact: Would significantly affect Somalia’s state-building, development and poverty reduction efforts through trade and financing, including remittance and international aid inflows. - Systemic financial instability. - Overall Level of Concern: Medium - Relative Likelihood: Low - Expected Impact: Will negatively affect the incipient financial system and reduce the availability of credit. Structural risks: - Extreme climate events. - Overall Level of Concern: Medium - Relative Likelihood: High - Expected Impact: Pastoral agriculture is key; livestock is the most important export. Recurring droughts can be macro-critical and cause widespread suffering. ### Annex II — Monetary and Exchange Rate Policy Framework in the Context of the Currency Reform (excerpt) - Summary: Considering Somalia’s capacity constraints, a currency board arrangement (CBA) would provide a credible policy framework for Somalia, while maintaining a dual currency regime. The CBA would help provide conditions for Somalia to gradually build policy capacity and strengthen financial institutions. - IMF role: The IMF remains committed to providing ongoing policy advice and capacity development support to Somalia in the design and implementation of new monetary and exchange rate policy frameworks in the context of the currency reform. *Source: IMF staff estimates, projections, and accompanying tables from the Somalia ECF program documents.* ### 1. Somalia is a de facto dollarized economy. The Central Bank of Somalia (CBS) has not ### 1. Somalia is a de facto dollarized economy. The Central Bank of Somalia (CBS) has not ### A. Current monetary context and currency reform objective - The Central Bank of Somalia (CBS) has not issued currency since 1991 and does not conduct monetary or exchange rate policy. - Somali Shillings (SOS) notes currently in circulation are old and mostly counterfeit. - The Somali shilling is generally used for small-value transactions and is the main medium of exchange for those earning in Somali shillings such as the rural and urban poor (including IDPs), nomad/pastoralist communities, and small informal businesses. - The currency reform is considered a national priority. - The currency exchange project will reintroduce the national currency as a legal tender by replacing old and counterfeit notes in circulation. - Even after new SOS banknotes are introduced, the Somali economy is expected to remain highly dollarized for some time. ### B. Objectives and expected benefits of the currency reform - Restore credibility in the national currency. - Support financial inclusion of the most vulnerable populations that have limited access to formal financial services. - Fulfill an important liquidity function by facilitating payments for small value transactions. - Over the long-term, create the preconditions for the central bank to develop monetary policy as a tool to help address aggregate demand shocks. - The Federal Government of Somalia (FGS) views the currency reform as an opportunity to contribute to peace-building as the national currency will be a symbol of national sovereignty and unity. ### C. Key statistics and financing context - The World Bank estimates that old shillings in circulation range between SOS 1.022-1.546 trillion (USD 40.9 - 61.8 million). - There are currently no deposits in shillings. - This contrasts with about USD 1.2 billion in bank deposits and some estimates suggests that a similar amount is held in mobile money wallets. - The World Bank project currently is expected to provide US$20-40 million in grant financing, against a total estimated cost of US$72 million for the currency exchange project. - Approximately 73 percent of the Somali population over 16 years of age uses mobile money services for airtime purchase, P2P money transfers, savings, retail transactions, salary payments, remittances, and mobile banking. - Somalia currently has sufficient gross usable international reserves (in the form of SDRs (about US$200 million) and gold (about US$33 million)) to cover the estimated stock of old shillings in circulation that would be replaced for new SOS during the currency exchange. - There is excessive liquidity in the banking system (51 percent of assets, 60 percent of liabilities). ### D. Roles of international partners - The World Bank is supporting the authorities for the currency exchange. - The IMF will provide support on the monetary and exchange rate frameworks. - The World Bank is considering taking the currency exchange project to their Board in 2024H2, though timing for approval of the project will depend on ability to secure co-financing and a firm agreement between FGS and Federal Member States (FMS). - The Fund (MCM, LEG and MCD) has provided TA previously in support of the currency reform in 2016-17; in close cooperation with the IMF, the CBS prepared a currency reform roadmap in 2016 with key steps. ### E. Key institutional challenges affecting policy design - De facto dollarization (currency, asset, and financial dollarization), which has served as Somalia’s nominal anchor to keep inflation low. - Mobile money in US dollars is used extensively. - Very low net international reserves at the CBS and currently no mechanisms to accumulate net reserves. - Weak capacity of the central bank: reestablished in 2009, no recent experience with monetary policy, no channels for monetary policy transmission, limited experience with reserve management and cash management, and weak regulatory and supervisory capacity. - Weak capacity of the financial system and undeveloped markets: money and foreign exchange markets are not developed; banks and mobile money operators do not have capacity in managing exchange rate risks. - Limited availability of macroeconomic and market data that is timely and accurate. ### F. Proposal: Currency Board Arrangement (CBA) — rationale and key features - Given Somalia’s capacity constraints, the exchange and monetary policy frameworks should: - Provide a stable and predictable policy environment to establish confidence in the national currency across Somalia; - Build credibility of the CBS in managing the new currency; and - Facilitate development of the domestic financial market. - Considering capacity constraints, a currency board arrangement would provide Somalia with a credible framework while maintaining a dual currency regime. - The CBA is a monetary regime based on an explicit legislative commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate. - Under a CBA: - Domestic currency is issued only against foreign exchange (no domestic credit creation by the central bank); domestic currency remains fully backed by foreign assets. - The central bank cannot issue credit, eliminating control over money supply, provision of credit to the banking system, and the lender of last resort (LOLR); it cannot make loans to fiscal authorities and state-owned enterprises. - Money supply depends on foreign exchange outflows and inflows, producing an automatic adjustment mechanism via interest rate movements. - The main benefit is a credible commitment to low inflation and macroeconomic stability by importing credibility from the central bank of the anchor currency. - The central bank accumulates reserves over time in line with demand for local currency and can generate profits from interest differentials on foreign reserve assets. ### G. Why a CBA is a good fit for Somalia — benefits - The CBA provides an efficient nominal anchor. - The framework is simple, transparent, and easily understandable by businesses and households. - Operationalizing the framework can be done even with limited central bank resources and operational capacity. - The CBA would require only enough gross foreign reserves to back up the initial level of domestic currency, and thereafter reserves would build up in parallel to the demand for new SOS. - The central bank can build foreign reserves and earn interest income on foreign asset holdings. - The CBA would preclude monetary financing of the budget, protecting CBS independence and ensuring that fiscal policy is consistent with the monetary regime. - The CBA provides a reasonable degree of certainty for banks’ balance sheets as they gain experience managing the dual currency and exchange rate risks. - From a political economy perspective, the rules-based/no-discretion approach would support trust and communication between the FGS and FMS. - Some inherent constraints of a CBA (no LOLR and no financing of the Treasury) would not impose additional restrictions relative to the current de facto dollarization. ### H. Required reforms and capacity building to implement a CBA successfully - Maintain reserves to cover CBS liabilities in domestic currency and build reserve management capacity. Under CBA, the central bank is required to have sufficient foreign exchange reserves to fully cover its liabilities in domestic currency. - Maintain fiscal discipline to prevent fiscal dominance and maintain credibility; strengthen cash management and develop alternative liquidity tools as temporary advances from the CBS would not be feasible under the CBA. - Protect CBS independence and accountability; the CBS will need considerable capacity building and policies to promote transparency. - Establish the legal framework specifying the fixed exchange rate and reserve coverage requirements. - Set the initial exchange rate at the CBA introduction; it should not be more appreciated than the going rate in the market at the time of initiation. - Ensure convertibility and a unified exchange rate system: the CBS would buy and sell foreign exchange for all current account transactions at a fixed rate, with a spread of 50 to 100 bps between buying and selling to cover operational costs. - Protect against risk of counterfeit dollars and counterfeit SOS. - Develop cash management capacity of the CBS, ensure supply of adequate quantity of SOS banknotes, set up a window to provide foreign exchange to commercial banks and decide access for money transfer businesses (MTB) and mobile money operators (MMO). - Strengthen financial sector regulation and supervision: adopt and enforce prudential regulations, including on domestic and foreign currency liquidity, reserve requirements in both currencies, and limits on open foreign exchange positions; develop financial skills and risk management arrangements at the CBS and financial institutions. - Develop financial markets and capacity of financial institutions; a well-functioning payment system and interbank market is crucial in absence of a lender of last resort. - Improve quality, frequency, and timeliness of macroeconomic and financial data, including data on the exchange rate, interest rates, monetary aggregates, and domestic prices in local currency. *Source: IMF staff report excerpt.* ### 14. Cross-country experience suggests that key risks for the credibility and sustainability ### 14. Cross-country experience suggests that key risks for the credibility and sustainability of the CBA include ### Key identified risks to a Currency Board Arrangement (CBA) / reintroduction of the Somali shilling (SOS) - Monetary authorities lend to the government, breaching the CBA basic principles. If the central bank creates SOS liabilities to provide financing for the government or other agencies, this would erode the backing of SOS by foreign currency, which would make the regime unsustainable. - Inadequate exchange rate level. Under a CBA, it is very important to set the right initial exchange rate, as an overvalued shilling could cause excess demand for dollars which the CBS would not be able to meet. - Risk of a bank run if the public loses trust in the banking system or currency. - Building adequate capacity and transparency at the CBS. Credibility of the new currency will also depend on the ability of the CBS to carry out smoothly and transparently the necessary operations. - Counterfeit SOS and USD. - Mobile money. Widespread use of mobile money in USD, which also allows for small transactions, could imply that there will be little demand for the new SOS. ### Summary of exchange-arrangement trade-offs (selected advantages, disadvantages, and common issues) - Dollarization (official use of foreign currency in all transactions) - Advantages: Provides a nominal anchor, inflation low if anchor currency inflation is low; No currency risk; No possibility for monetary financing of fiscal deficit; Potentially improves integration of trade with “dollar zone” countries; Potentially facilitates investment. - Disadvantages: No LOLR; Loss of seigniorage; No independent MP; Large REER volatility; Banknote recycling; Limited scope to accumulate reserves. - Common issues: Fiscal discipline required; CBS operational independence and prevention of fiscal dominance; CBS transparency and Capacity building; Development of financial markets; Quality, frequency and timeliness of macroeconomic and financial data. - Currency Board (explicit legislative commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate) - Advantages: Credibility if strictly rules-based; No FX volatility; Provides a nominal anchor for public expectations for the exchange rate and inflation; No possibility for monetary financing of fiscal deficit. - Disadvantages: No independent MP; Unable to respond to shocks (e.g. balance of payments crisis); Need sufficient reserves; Limited LOLR role (limited to excess reserves); Potential conflict of policies if fixed exchange rate is incompatible with other economic targets; Challenging to determine appropriate exchange rate level in context of structural changes. - Hard Peg - Advantages: No FX volatility; Stable inflation. - (Table continues with managed float and free float advantages/disadvantages: flexibility and autonomy versus volatility and market depth requirements.) ### Key criteria and context-specific findings for Somalia’s exchange rate arrangement choice (selected entries from Table 2) - Macroeconomic initial conditions - Level of inflation: Inflation has remained low and stable, in the context of de facto dollarization that serves as the nominal anchor. Inflation measured in local currency is not clear. - Size of external imbalances: Large current account deficits are financed by FDI and other financial account flows. Current account deficits are expected to persist in the medium term due to structural rigidities. Competitiveness is unlikely to be corrected by changes in the real exchange rate. - Foreign exchange reserves: Due to the de facto dollarization, the authorities do not accumulate reserves. Foreign assets of the central bank that are readily available in times of crisis is minimal – including about $6 million in cash deposit, 16 ounces of gold (about $30 million) and about SDR 120 million. - Note from table: "√ in a carefully managed currency board arrangement were reserves back 100% of domestic currency" - Fiscal position: The FGS currently has a broadly balanced budget, though with heavy reliance on budget grants. Post-HIPC, the authorities’ fiscal anchor is based on keeping deficits below 3.5 percent of GDP financed with concessional loans, of which at a minimum 1.5 percent of GDP will come from multilateral creditors that provide highly concessional financing terms (at least 50 percent grant element). - Capacity constraints - Low institutional capacity to implement a flexible exchange rate arrangement and the associated independent monetary policy, as well as effective financial regulation and supervision — favors fixed regime. - Banks and mobile money operators do not have capacity in managing exchange rate risks. Money and foreign exchange markets are not developed. Correspondent banking relationships are weak — favors fixed regime. - Characteristics of the economy - Size of the economy: Small open economy will find it difficult to conduct independent monetary policy — favors fixed regime. - Openness: Import and export accounts for 108 percent of GDP — a fixed exchange rate would reduce trading and transaction cost. - Diversification of exports and output: Exports concentrated in primary agricultural products; structural rigidities make competitiveness unlikely to be corrected by changes in the real exchange rate. - Dollarization and financial development - De facto dollarized. The economy is expected to remain highly dollarized for an extended period even after the currency reform takes place. Monetary policy transmission will be hampered. Credibility of macroeconomic policies needs to be established for a gradual dedollarization. - Underdeveloped financial market. Hedging instruments not available. - Types of shocks and capital flows - Real shocks: Recent shocks have been climate-related or domestic political and security shocks; external shocks include global pandemics and higher prices of food and fuel. - Volatile capital flows: After the HIPC CP, Somalia will still rely on multilateral financial institutions for financing. In the near term, it is unlikely that large amounts of cross-border loans from private creditors and portfolio investment will flow into Somalia after the HIPC CP. ### Policy implications and operational priorities (drawn from listed risks and criteria) - Ensure strict adherence to CBA basic principles: prevent central bank financing of the government and avoid creating SOS liabilities without full foreign-currency backing. - Set and defend an appropriate initial exchange rate to avoid an overvalued SOS that could trigger excess dollar demand. - Strengthen public confidence in the banking system and currency to reduce bank-run risk. - Build CBS capacity and transparency to execute currency operations smoothly and credibly. - Mitigate risks from counterfeit SOS and USD through currency design, control, and enforcement measures. - Address mobile-money dynamics: consider how widespread USD mobile-money usage for small transactions may limit demand for SOS and plan measures to support uptake of SOS. - Maintain fiscal discipline consistent with the chosen exchange arrangement (noting the post-HIPC anchor of keeping deficits below 3.5 percent of GDP and the minimum that 1.5 percent of GDP of financing come from multilateral creditors with at least 50 percent grant element). - Develop financial markets, correspondent banking relationships, and hedging instruments over time to expand policy options and support any move toward greater exchange rate flexibility. *Source: IMF staff report chapter titled “14. Cross-country experience suggests that key risks for the credibility and sustainability of the CBA include” from the Somalia report.* ### 4. The government has stepped up its fight against terrorism to improve security across ### 4. The government has stepped up its fight against terrorism to improve security across ### Security and counterterrorism - In December 2023, the UN Security Council lifted the arms embargo on the FGS, which had been in place since 1992. - Since mid-2022, the government has scaled up the military, ideological, and financial campaign against Al-Shabab. - The Somali military—with support of the community defense, the general population, and international partners—has gained ground against Al-Shabab in the central Somali regions, facilitating delivery of humanitarian assistance, with the Somalia Disaster Management Agency (SODMA) providing the emergency response. - Stabilization efforts in liberated central regions include delivery of health and education services and the beginnings of the establishment of local governance. - The Somali National Armed Forces are gradually taking over security responsibilities from the African Union Transition Mission in Somalia (ATMIS), which is expected to gradually withdraw its forces by December 2024. - The ATMIS transition, the scale-up of the military campaign, and stabilization policies for liberated areas are generating pressures on government finances. - The FGS has developed the Somalia Security Sector Development Plan and discussions are ongoing with development partners on security financing. ### Economic activity and prices - In 2023, real GDP growth is forecast at 2.8 percent, compared to 2.4 percent in 2022. - Crops and livestock are gradually recovering, though affected by lingering effects of two years of drought and recent severe flooding. - Remittances growth was weaker in 2023 relative to 2022, partly attributed to the impact of global inflation on the purchasing power of the diaspora community. - Although food and fuel prices have been moderating, inflation remains persistent, with December 2023 inflation at 6.6 percent compared to 6.1 percent at end-December 2022. ### East African Community accession - On November 24, 2023, Somalia was admitted as a full member of the EAC. - The Federal Parliament of Somalia ratified the Treaty in February 2024, and the instrument of ratification of the Treaty of Accession was deposited by the authorities with the EAC Secretary General on March 4, 2024, making Somalia the eighth Partner State of the EAC. - The EAC Secretariat are developing a roadmap for Somalia’s full integration into the EAC based on negotiated agreements between the Federal Republic of Somalia, the seven other Partner States, and the EAC Secretariat. - Full integration, including adoption of a customs union and common market, can span several years as Somalia builds capacity and aligns its institutional and policy framework with the EAC. ### Fiscal performance and liquidity - A small overall fiscal surplus was achieved in 2023, with strong domestic revenue outturns. - Strong domestic revenue performance was supported by the implementation of higher customs duties and tax administration improvements. - Total expenditure followed the 2023 Supplementary Budget and a small overall surplus achieved for the year. - Revenue overperformance and budget support grants allowed maintaining a cash balance to partially address liquidity needs in early 2024. ### Revenue administration reforms (findings and measures) - Customs modernization: - Implementation of the Somalia Customs Automated System (SOMCAS) and ad valorem tariffs are key reforms. - Enactment of the ad valorem tariff schedule in June 2022. - Issuance of customs regulations on valuation and declarations in September 2022. - SOMCAS rolled out to different ports and airports; harmonized tariffs, Harmonized System (HS) codes, and harmonized item descriptions incorporated. - SOMCAS fully operationalized in Mogadishu port and airport as of early October 2023. - In Kismayo port and airport in Jubaland State, SOMCAS partially implemented; shipping lines and airlines entering manifests and declarations being made for khat imports; discussions ongoing in Jubaland on common valuation table. - Training and additional IT equipment provided to support implementation. - New spectrum fees: - In September 2022, a spectrum fee schedule for telecom operators approved by the National Communications Authority (NCA) in agreement with the Ministry of Finance (MoF). - Revenue collection from the spectrum fee schedule is expected to be US$ 6 million per year for the next 10 years. - New turnover tax: - Introduced turnover taxes with 2,597 newly registered taxpayers who commenced paying taxes in July 2023. - Expands tax net to micro and small retailers and businesses in Mogadishu. - Reporting on tax exemptions: - Published the annual report on tax exemptions as part of the 2023 budget package. - First quarterly report for 2022Q4 published in January 2023; regular quarterly reports have followed. - Digitalization of rental income tax and road tax: - New IT system for generating electronic invoices and receipts and tracking payments of rental income tax for all rental properties in Mogadishu. - Mobile app—Somalia Road Tax—allows users to manage and pay road tax bills and view payment receipts. - Extension of sales tax to services: - As part of the 2024 Appropriations Law, sales tax extended to a range of services (including telecom, electricity, and TV cable providers) not taxed under the 1984 Sales Tax Law; related regulations issued. - Revenue administration measures: - Rolled out Point of Sales (POS) machines at restaurants and hotels in Mogadishu transmitting sales data to tax offices in real time. - New rounds of tax audits undertaken every year since 2020, improving quality of tax returns, particularly from small and medium-sized enterprises. - Public awareness events held to improve taxpayer understanding of the 2019 Revenue Administration Law. - Capacity of the revenue administration strengthened. ### Public financial management (PFM) - Reporting: - Regular publication of annual financial statements of the Federal Government of Somalia (FGS) since 2019. - Aggregated budget combining budgets of the FGS, five Federal Member States (FMS) and Banaadir Regional Administration (BRA) published first as part of the 2021 Budget Policy Framework and annually since. - Monthly consolidation reports of fiscal outturns of the FGS and five FMS published on the MoF website since January 2021. - Expanded disclosures in monthly and annual financial statements, including a memorandum annex on SDR holdings of the MoF. - PFM Act regulations: - Regulations on debt, public investment, and natural resource revenue management issued in May 2022. - Expenditure controls: - Somalia Financial Management Information System (SFMIS) fully operationalized to control commitments within allocations and warrants guided by monthly cash forecasts. - Since May 2023, invoice tracking functionality of SFMIS launched for electricity and internet service. - Payroll integration: - Pay and Grade policy and roadmap for payroll integration approved by the Cabinet on December 1, 2022. - Share of non-payroll payments to total compensation reduced to 10.9 percent on average in May-July 2023, from 32 percent in 2021. - In October 2023, SFMIS configured to allow only the MoF to change payroll entries with financial implications. - Provision specifying the MoF’s authority over financial clearance of compensation included in the 2023 Appropriations Law and in the 2024 Appropriations Bill approved by Cabinet in October 2023. - Streamlining of business processes: - Roadmap to expand invoice tracking to all goods and services approved on February 28, 2024 (SB#4, met). - Public procurement: - Continued implementation of the Public Procurement Law and regulations to develop an open and transparent process. - July 2023 Prime Minister guidelines on emergency procurement define emergency situations, permissible procurement methods, and require standardized specifications and framework contracts. - Reinforcing oversight role of the Inter-Ministerial Concessions Committee (IMCC) with Cabinet approval of standard operating procedures in line with the Procurement Act. - Prime Ministerial decree in October 2023 reinforced due process for procurement and concessions; agreements without due process void and criminal procedures to follow. - Public lands and real estate: - In September 2023, amended the PFM Regulations to implement PFM Act provisions on public property and issued Asset Management Guidelines to standardize government assets management. ### Debt management - Debt Management Unit (DMU) upgraded its debt recording management system with the Commonwealth Meridian System. - DMU has been publishing consecutive quarterly public debt reports from 2020Q4 to 2023Q3. - A debt reconciliation exercise was carried out in 2023 in preparation for the HIPC Completion Point. ### Federalism and intergovernmental fiscal relations - In March 2023, the National Consultative Council convened leaders of the FGS, four out of five FMS, and the Mayor of Mogadishu. - High-level agreements reached on creating a National Revenue Authority, assignment of revenue responsibilities across levels of government, and the pool of revenues to be shared between the FGS and FMS. - In July 2023, the group agreed on the distribution of external budget support. ### Central Bank of Somalia (CBS), financial stability, and financial deepening - Launch of the National Payment System (NPS) in 2021 enabled safer and more efficient payment infrastructure; transactions through the NPS have been increasing. - IBAN account standardization launched March 27, 2023 to improve cross-border payments and reduce operational risks within the NPS. - The Gargaara program, with World Bank support, continues to support access to financing for micro, small, and medium-sized enterprises. - Guidance for Islamic bank financial reporting and Shariah bank governance framework issued in 2020; engagement with the Islamic Financial Services Board (IFSB) ongoing to improve regulatory capacity for Islamic banks. - CBS issued banking regulations on capital and liquidity requirements in July 2023, covering risk management aspects: - Capital adequacy regulation incorporates risk weighting of exposures to credit and operational risks according to the Basel III framework, in a proportionate manner and considering Islamic financing. - Liquidity regulation clarifies and simplifies the liquidity coverage ratio (LCR) requirement and includes qualitative requirements on risk management, in line with Basel III. - Engagement with banks to ensure they meet new requirements. - As of September 2023, four mobile money operators have been granted licenses. - Mobile money regulations issued; payment system and mobile money oversight division established; a regulation manual drafted. - Capacity in financial supervision improving through increased resources, moving towards risk-based prudential supervision. ### CBS institutional strengthening and safeguards - Performance criteria on net international reserves (NIR) consistently met. - Adopted a function-based organizational structure and established a performance management system. - Most recommendations from the March 2020 safeguards assessment have been implemented. - Financial reporting transparency improved with implementation of International Financial Reporting Standards. - Governance bodies—the Board and the Audit Committee—have been restored and exercise oversight responsibilities. - The 2022 audited financial statements were published in July 2023 with a clean auditor opinion. - Period-end closing procedures established in January 2023. ### AML/CFT progress - National AML/CFT Taskforce operational since February 2021 to support the National Anti-Money Laundering Committee (NAMLC). - National Risk Assessment (NRA) on ML/FT finalized and published in 2022. - NRA Action Plan published in February 2023. - Targeted Financial Sanctions Law (TFSL) enacted in March 2023; related regulations approved in July 2023. - Key infrastructure and IT systems acquired to support the Financial Reporting Center’s capacity to review and assess suspicious transactions. - Outreach and training to improve integrity of the financial sector. - CBS issued guidance on Know-Your-Customer and customer due diligence risk-based approach and large cash transactions and suspicious transactions reporting for commercial banks in July 2023. - NAMLC issued a guideline on mobile money transaction limits in July 2023. - Amendments to the 2016 AML/CFT Law submitted to Parliament on March 30, 2024, in line with IMF staff recommendations (SB#8, met) as part of preparations for the MENA-FATF Mutual Evaluation Assessment. ### Governance, anti-corruption, and audit - CBS and National Communication Authority (NCA) published outcomes of licensing applications for Mobile Network Operators and Mobile Money Operators on their websites to enhance transparency. - Acceded to the UN Convention Against Corruption (UNCAC) in August 2021. - Parliament ratified the African Union Convention on Preventing and Combating Corruption and Arab Anti-Corruption Convention. - National Anti-Corruption Strategy (NACS) published in 2019; outreach to public sector employees for ethics training and to increase awareness of the NACS. - Audit Law enacted in September 2023: - Lays legal groundwork for a robust federal audit system. - Strengthens independent oversight of use of public resources at federal and state level, including intergovernmental transfers. - Outlines checks and balances for appointing and dismissing the Auditor General. - Separates responsibilities of federal and state Auditors General related to special audits of grant transfers. ### Petroleum, extractives, and sector frameworks - Model Oil and Gas Production Sharing Agreement (PSA) approved by the IMCC in November 2021. - PFM regulations on natural resource revenue management issued in May 2022. - Revised tender protocol approved by the IMCC in November 2022. - Extractive Industries Fiscal Regime Law enacted in June 2023. ### Legislation and reforms for inclusive growth and resilience - Somali Standards and Quality Control Bill passed and Somali Bureau of Standards established in 2020 to provide framework for agricultural standards and certification. - Established a “one-stop-shop” to e-register business for integrated tax and business licensing services. - In May 2022, issued regulations to the Company Act covering minority shareholder protection. - Electricity Act enacted in March 2023; Electricity Service Provider (ESP) Licensing Regulations and ESP Tariff Regulations approved. - Additional legislation passed by Parliament in March 2023: Data Protection Law, Digital ID System Law, Investment and Investor Protection Act, and Federal Law on Fisheries. ### National digital ID - Launched the national digital ID in September 2023. - As of February 2024, 23 thousand individuals enrolled in the National Identification and Registration Agency (NIRA). - The digital ID will support implementation of targeted social protection programs and improve know-your-customer requirements to enhance AML/CFT efforts. *Source: 1somea2024001 - 4. The government has stepped up its fight against terrorism to improve security across* ### 20. The FGS and FMS are working jointly to enhance human capital development. The FGS ### The FGS and FMS are working jointly to enhance human capital development. ### Human capital and social sectors - The FGS and FMS Ministers of Education adopted an agreement defining their respective roles and responsibilities on curriculum and examinations. - The FGS and FMS Ministers of Health adopted a joint national health sector strategy to support effective functions and accountability across different levels of governments. - A national Unified Social Registry (USR) has been established as a functional platform to support registration and determination of potential eligibility for social programs. - The USR is undertaking a nationwide survey targeting approximately 1.9 million households. - A social safety net scheme—Baxnaano—is being implemented with support of the World Bank and using the systems of the World Food Program. ### Statistics, data transparency, and capacity - The Somalia National Bureau of Statistics (SNBS) has published the Somalia Facts and Figures annually since 2018. - National accounts are published annually and the consumer price index is published monthly. - The 2022 Somalia Integrated Household Budget Survey (SIHBS), the first since 1985, was published in February 2023 and has been used to rebase GDP. - Somalia continues to implement the enhanced General Data Dissemination System (e-GDDS) framework. ### Outlook and risks - Real GDP growth for 2024 is forecast at 3.7 percent. - Inflation is expected to decline to 4.8 percent (eop) in 2024. - Growth is expected to increase to 4.3 percent by 2028. - Near-term risks identified: climate shocks (drought, floods, and related impact on food insecurity), security risks, lower than anticipated global growth, additional pressures on international food and energy prices, and shortfalls or delays in disbursement of budget support financing. - Policy responses to risks: continued fiscal discipline, drawing on available cash buffers, applying a sequestration rule that prioritizes critical expenditure, and seeking additional financing from development partners. ### ECF-supported program priorities and conditionality - Reform priorities include: - (i) increasing domestic revenues; - (ii) strengthening PFM (including the legal and regulatory framework, internal and external audit, expenditure controls, cash management, accounting and reporting, debt management, and public investment management); - (iii) promoting financial deepening and financial inclusion, including the currency reform; - (iv) improving the business environment and governance (including AML/CFT); and - (v) enhancing statistics. - Quantitative performance criteria and indicative targets consist of: - a floor for domestic revenue; - a ceiling on recurrent operating expenditures; - a floor on the cash-based fiscal balance; - no new external arrears; - no new accumulation of domestic arrears; - no new accumulation of non-concessional external debt; - a ceiling on new domestic debt; and - a floor on the net international reserves of the CBS. - No intent to impose new or intensify existing restrictions on payments and transfers for current international transactions, introduce new or intensify trade restrictions for balance of payments purposes, or enter into bilateral payments agreements inconsistent with Article VIII of the IMF’s Articles of Agreement. ### Fiscal policy framework and medium-term objectives - The FGS will anchor policy in a medium-term fiscal framework (MTFF) and rely solely on grants and concessional loans for external financing to preserve debt sustainability. - Target to maintain overall fiscal deficits of up to 3.5 percent of GDP financed with concessional loans, of which at a minimum 1.5 percent of GDP will come from multilateral creditors that provide highly concessional financing terms and capacity development support. - Borrowing capacity will be reviewed periodically and is expected to increase as revenue capacity, debt management capacity, and public investment management capacity strengthen. - Specific fiscal conditionality will be set on a 12-month rolling basis during program reviews. ### 2024 budget and revenue strategy - The 2024 budget was approved with an overall fiscal deficit of US$ 38 million (0.3 percent of GDP). - Domestic revenues in 2024 are expected to rise to a level that at least matches the cost of compensation of employees. - Objective: raise domestic revenue to fully cover operational expenditure by 2027. - A Tax Policy and Revenue Administration Roadmap will be finalized by June 2024 (SB#1) and will include: - Customs modernization: complete ad valorem customs reform and operationalize SOMCAS at ports and airports of Mogadishu and Kismayo, with later expansion to remaining ports when political conditions allow; align with EAC membership requirements. - Modern income tax law: finalize draft Income Tax bill and submit to Parliament by end-June 2024 (SB#2). - Revenue mobilization from large businesses, in particular the telecom sector, to bring effective tax rates to levels comparable with peers. - Other measures: issue implementing regulations of the Revenue Administration Law; develop the Integrated Tax Administration System (ITAS); implement a new audit manual to strengthen tax audits. ### Public financial management (PFM) reforms - Key PFM actions: - Payroll integration: integrate all compensation of employees into the single payroll included in the SFMIS; reduce the ratio of non-payroll payments to total compensation of employees to less than 1 percent by end-June 2024 (SB#3). - Develop a roadmap to implement Pay and Grade policies by end-December 2024 (proposed SB#9), including plans for aligning temporary worker salaries with permanent pay scales and a costing exercise. - Streamline budget execution and Treasury management; accelerate automation of cash planning and revenue management through the SFMIS; update PFM regulations relating to digital signatures and implement digital signatures in the SFMIS by end-June 2025 (proposed SB#10). - Debt management: by June 2024, (1) Issue a Prime Ministerial Decree articulating key parameters for debt policy and procedures for entering into new borrowing and issuing sovereign guarantees; (2) amend PFM regulations to define “other financial liabilities” considered guarantees per Article 37 (6) of the PFM Act (SB#5). - Fiscal transparency: amend PFM Regulations to require costing of the NDP in annual and supplementary budgets; develop FMS financial statements template compliant with Cash-Basis IPSAS; coordinate with Banaadir to include their participation in aggregated reporting. - PPPs: submit the PPP Bill to Parliament by June 2024 with a framework that manages fiscal risks and establishes a gateway process managed by the Ministry of Finance (SB#6). - Public procurement: continue implementing the Public Procurement Law and regulations and strengthen MDAs’ capacity through training and sensitization. - Public lands and real estate: implement PFM Regulations on public property and the Asset Management Guidelines. ### Debt relief, extractive industries, and legal frameworks - Since reaching HIPC Completion Point in December 2023, progress has been made negotiating with pending multilateral and bilateral creditors. - On March 13, 2024, the Paris Club negotiated and agreed upon a HIPC Initiative exit debt treatment for Somalia and agreed to provide beyond-HIPC debt relief. - Following enactment of the Extractive Industries Fiscal Regime Law (EIFRL), related regulations will be developed and regulations for the Petroleum Act finalized. - Commitment: not to issue any new product sharing agreements until the legal framework is completed, including EIFRL regulations and Petroleum Act regulations; direct negotiations will be limited and informed by price discovery through previous licensing rounds. ### Monetary and financial sector reforms - Bills for the National Payment System and Islamic Insurance have been submitted to Parliament; the Revised Financial Institutions Bill is being finalized for Cabinet submission. - Development of a National QR code and National SWITCH to support the national payment system. - Strengthen staffing and capacity of the CBS Licensing and Supervision Department; by end-July 2024, the CBS will develop an action plan to improve the quality of data submitted by commercial banks and communicate the action plan to commercial banks (SB#7). - Advance on recommendations of the 2024 IMF safeguards assessment, including internal control, cyber security and business continuity, and the CBS Law. - By end-March 2025, submit amendments to the CBS Law to Parliament, in line with IMF safeguards recommendations (proposed SB#11), to further strengthen governance and autonomy provisions. - Plan to advance currency reform once preconditions and financing are in place with World Bank and IMF support; secure a firm agreement between the FGS and all FMS and address the funding gap; formulate monetary and exchange rate policy frameworks and develop CBS and financial institution capacity; secure gross international reserves required to backstop the new currency, including by catalyzing donor assistance. - Continue reforms of the AML/CFT operational and legal framework, implement the recently approved NRA action plan, and prepare for the MENA-FATF Mutual Evaluation Assessment in 2024 to support remittance flows. ### Governance, inclusion, climate resilience, and trade integration - Commitment to improve governance and fight corruption: review existing laws for UNCAC compliance, strengthen resources of the Independent Anti-Corruption Commission, and update the National Anti-Corruption Strategy. - Climate and resilience actions: - Ministry of Environment and Climate Change launched a Food Security Crisis Plan in December 2023. - Developing a new National Transformation Plan (NTP) to succeed the NDP9, aiming to accelerate development in poverty reduction, inclusive growth, and climate resilience. - International integration: work towards integration with the East African Community and accession to the World Trade Organization. - Aid management: work with development partners to encourage greater channeling of aid flows through country systems to align with NDP9 and NTP priorities, enhance visibility, and facilitate monitoring and evaluation. *Source: 1somea2024001 - 20. The FGS and FMS are working jointly to enhance human capital development.* ### 37. We are committed to improving key macroeconomic and financial data, ### We are committed to improving key macroeconomic and financial data ### Data improvements and statistical work - Availability of economic activity and social data will be broadened with the expected finalization of the Business Survey in July 2024. - A new census is expected in 2025, the first after 40 years. - Work is ongoing to develop production-based national accounts data in 2025 by using data from the Business Survey. ### Program monitoring and access - Program implementation will be monitored through: - Quantitative performance criteria (QPCs) - Continuous performance criteria (including a continuous performance criteria related to Article VIII commitments) - Indicative targets (MEFP Table 1) - Structural benchmarks (MEFP Table 2) - Assessments will be through semi-annual reviews. - The second and third reviews of the new ECF arrangement will be based on the QPCs and ITs set for end-June 2024 and end-December 2024, respectively. - All reviews will be conditioned on quantitative performance criteria outlined in MEFP Table 1. ### Quantitative performance criteria and indicative targets (overview) - QPCs for June 2024 and December 2024 (and related ITs) include: - Floor on Federal Government of Somalia (FGS) domestic revenue - Ceiling on spending on FGS compensation of employees, goods & services, & contingency - Floor on the Central Bank of Somalia’s (CBS) net international reserves (NIR) - Ceiling on accumulation of new external arrears by the FGS - Ceiling on contracting or guaranteeing any new external, non-concessional debt - ITs for March, June, September, and December 2024, and March 2025 include: - Floor on the FGS fiscal balance (on a cash basis) - Ceiling on new domestic debt contracted by the FGS - Ceiling on accumulation of new domestic arrears by the FGS - Memorandum item: contracting or guaranteeing of any new external, concessional debt, excluding disbursements under an IMF arrangement. ### Key TMU definitions and computation rules - Government is defined as the FGS; excludes public entities with autonomous legal personalities whose budgets are not included in the federal government budget and federal members states (FMS). - For monitoring external debt, general government is defined as the FGS and FMS (Galmudug, Hirshabelle, Jubaland, Puntland, and South West State) and the Banaadir region. - Government revenue and expenditure follow GFSM 2014 on a cash basis; measured cumulatively from the beginning of the calendar year. - Financing transactions—including amortization of World Bank and other debt, receipts and repayments of CBS advances, and withdrawal and reconstitution of Special Drawing Rights (SDR) distributed to the MoF—are excluded from revenue and expenditure. - Government domestic revenue includes all tax and nontax receipts received into the FGS general accounts and excludes grants; definition excludes (i) grants and other noncompulsory contributions and (ii) transfers of CBS distributable earnings that are not included in the Appropriation Law. - Spending on FGS compensation of employees, goods and services, and contingencies excludes expenditure made under project appropriations specified in the Appropriation Law and excludes the commission paid to the CBS from spending on goods and services. - Tax exemptions reporting requirements under the PFM Law include specific deadlines and micro-level disclosure obligations (Articles 5 and 18 referenced). - Budget execution control points defined: - Allotment: ceiling on warrants requested by MDAs during a specific time period. - Warrant: ceiling on commitments by MDAs during a specific time period; reduces available allotment when approved. - Commitment: contract or legally binding agreement to make payments; liability recognized upon delivery for goods/services. - Fiscal balance (cash basis) = total government revenue (including domestic revenue, transfers of CBS distributable earnings that are not included in the Appropriation Law, and grants) minus total government expenditures (excluding foreign-financed off-budget expenditure). - Adjustor to the fiscal balance floor: the floor will be adjusted down by any delays or shortfalls in budget support grants as compared to the budget estimate (up to maximums in TMU Table 1) to cover priority spending per the sequestration rule and provided no overruns in non-priority spending; the floor will also be adjusted down by any higher interest payments compared to the budget estimate. - New domestic arrears: FGS obligations to residents unpaid 90 days after the due date; includes CBS advances, borrowing from commercial banks, and accrued but unpaid expenditure commitments; includes those accumulated from the beginning of the fiscal year. ### Fiscal balance adjustor and financing memorandum items (US$ million, cumulative flows from the beginning of each calendar year) - Maximum amount of the fiscal balance adjustor related to delays or shortfalls in budget support grants: - Mar-24: 0.0 - Jun-24: 89.0 - Sep-24: 139.6 - Dec-24: 90.2 - Mar-25: 0.0 - Budget support grants in the Budget estimate: - Mar-24: 0.0 - Jun-24: 89.0 - Sep-24: 170.0 - Dec-24: 188.0 - Mar-25: 0.0 - Interest payments in the Budget estimate: - Mar-24: 9.8 - Jun-24: 9.8 - Sep-24: 9.8 - Dec-24: 9.8 - Mar-25: 10.7 - Possible sources of financing for fiscal deficit: - Mar-24: 159.6 - Jun-24: 139.6 - Sep-24: 139.6 - Dec-24: 90.2 - Mar-25: 115.4 - Withdrawal of cash buffers: - Mar-24: 49.1 - Jun-24: 29.1 - Sep-24: 29.1 - Dec-24: 29.1 - Mar-25: 0.7 - MOF SDR holdings: - Mar-24: 61.1 - Jun-24: 61.1 - Sep-24: 61.1 - Dec-24: 61.1 - Mar-25: 61.1 - Proceeds from CBS temporary advances: - Mar-24: 49.4 - Jun-24: 49.4 - Sep-24: 49.4 - Dec-24: 0.0 - Mar-25: 53.6 *Source: IMF staff report and Technical Memorandum of Understanding (TMU) as provided in the content unit.* ### 12. External arrears of the government are defined as debt obligations to non-residents ### 12. External arrears of the government are defined as debt obligations to non-residents ### External arrears: definition and program treatment - External arrears are debt obligations to non-residents that are not paid on the contractual due date (plus any applicable grace period). - For program purposes, external arrears exclude: - arrears arising from debt that is being renegotiated with creditors in the context of the HIPC process, including Paris Club creditors; - external arrears in respect of which a creditor has agreed that no payment needs to be made pending negotiations. - For the performance criterion of the ceiling on new external arrears, nonpayment of external debt service to Russia will not give rise to arrears when the Central Government and the CBS cannot pay or settle based on the contractual terms solely due to factors outside Somalia’s control (e.g. the transfer of funds being rejected owing to intermediary financial institutions’ compliance policies, sanctions, or inability to identify the counterparty), provided: - the debt service payments have been paid in full into a designated account held by a third-party – in this case the CBS – by the contractual due date, taking into account any contractual grace period. - Conditions for the designated account: - (i) no third party (including the Ministry of Finance) has access to the funds deposited in the account; - (ii) funds deposited in the account can only be used to service the debt to the creditor, according to the repayment schedule agreed upon between the creditor and Somalia; - (iii) funds accumulated in the account can only be transferred back to the Ministry of Finance if there is legal evidence of an agreement to service the debt through other instruments or if funds need to be transferred to another account with the same purpose. - Use of funds in the designated account: - Funds in such designated account will be used only to satisfy the related external debt obligations, and their use or withdrawal for other purposes would constitute a breach of the PC. ### Debt: definition, instruments, and concessionality - Debt is defined in accordance with Executive Board Decision No. 15688 (14/107), Point 8(a) and 8(b), adopted on December 5, 2014, as amended, and is defined on a residency basis. - The term “debt”: - means a current (that is, not contingent) liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. - Primary forms of debt: - Loans: advances of money to the obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans, and buyers’ credits) and temporary exchanges of assets that are equivalent to fully collateralized loans (such as repurchase agreements and official swap arrangements). - Suppliers’ credits: contracts where the supplier permits the obligor to defer payments until sometime after the date on which the goods are delivered or services are provided. - Leases: arrangements under which property is provided which the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property; for the guideline, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement, excluding payments that cover operation, repair, or maintenance. - Concessionality and classification: - 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. - A memorandum item is included on the contracting of new concessional borrowing by the general government from the beginning of the fiscal year. - For program purposes, external debt is defined by the residency of the creditor and is deemed to have been contracted when an underlying loan agreement is signed. - Excluded from this performance criterion are disbursements from the IMF. - The government will report any planned external borrowing and its terms to Fund staff before external debt is contracted or guaranteed. - Borrowing is concessional if it includes a grant element of at least 35 percent, calculated as follows: - the grant element of a debt is the difference between the net present value (NPV) of debt and its nominal value, expressed as a percentage of the nominal value of the debt. - The NPV of debt at the time of its signing is calculated by discounting the future stream of payments of debt service due on this debt. - The discount rate used for this purpose is 5 percent. - External borrowing that does not have a grant element of at least 35 percent is deemed non-concessional borrowing. - For the purposes of the program, highly concessional financing is defined as borrowing with at least 50 percent grant element. - Footnote: The calculation of concessionality will take into account all aspects of the loan agreement, including maturity, grace period, payment schedule, upfront commissions, and management fees. ### Arrears, penalties, and non-debt obligations - Under the definition of debt, arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt are debt. - Failure to make payment on an obligation that is not considered debt under this definition (for example, payment on delivery) will not give rise to debt. ### Domestic debt and temporary advances - Domestic debt is debt for which the counterparty is resident of Somalia, including the CBS. - The definition of domestic debt excludes temporary advances for liquidity management from the CBS. - Temporary advances will be fully repaid within 90 days. - QPCs and related ITs on domestic debt are cumulative ceilings on contracting new domestic debt from the beginning of the fiscal year. ### CBS net international reserves (NIR): definition, valuation, and exclusions - NIR are defined as the difference between gross foreign assets and gross foreign liabilities. - Valuation and conversion: - All SDRs are valued over the calendar year at the August 31, 2023 exchange rate of US$1.329940 per SDR. - IMF representative exchange rates against the U.S. dollar at August 31, 2023 will be used to convert foreign assets and liabilities denominated in currencies other than U.S. dollars. - Exclusions: - The assets and liabilities related to the designated account held by the CBS into which FGS debt service payments due are deposited as per paragraph 12 are excluded from the definition of NIR for program purposes. - Gross foreign assets are defined as: - the sum of (i) gold (valued over the calendar year at the market price of August 31, 2023 (US$ 1,942.9 per ounce)); (ii) total foreign exchange held abroad; and (iii) Somalia’s SDR holdings in the IMF SDR Department; - net of (iv) all SDR holdings that belong to the MoF. - Gross foreign liabilities are defined as: - the sum of (i) government deposits at the CBS in foreign currency held abroad; (ii) other earmarked foreign currency deposits at the CBS by residents of Somalia held abroad; (iii) outstanding IMF credits and loans; and (iv) total amount of SDR general allocation; - net of (v) the MoF share of the 2021 General SDR Allocation as per the September 2021 Memorandum of Understanding between the MoF and the CBS; and (vi) SDRs disbursed under the ECF arrangement for budget support. - Note on SDR holdings belonging to the MoF (footnote detail): - This includes (i) the unused SDR holdings belonging to the MoF related to the 2021 SDR allocation not converted into USD, (ii) the SDR 7 million windfall from the HIPC debt relief not converted into USD, (iii) the IMF ECF disbursements for budget support not converted into USD, and (iv) any other SDR holdings attributed to the MoF. ### Adjustors to the NIR floor and limits on CBS advances - The NIR floor would be adjusted downward by the maximum amounts stipulated in TMU Table 2 if any of the following events materialize: - a. If the CBS transfers distributable earnings to the government as per the Central Bank of Somalia Act. - b. If the CBS provides the MoF with temporary liquidity advances to finance delays or shortfalls in budget support grants relative to the budget estimate. - Limits and operational rules for CBS advances: - In line with the CBS Law, the total amount outstanding at any time of CBS advances shall not exceed 15 percent of the most recent audited domestic revenue of FGS. - In line with the Appropriation Law, all liquidity advances should be repaid by end-December of the fiscal year. - In line with the Short-Term Government Financing Agreement between the CBS and MoF signed on June 21, 2021, the maturity of temporary advances should not exceed 90 days. - Illustrative maximum amounts: - For 2023, the most recent audited domestic revenue corresponds to 2022 and the maximum amount of liquidity advances from the CBS is USD39.4 million. - For 2024, the most recent audited domestic revenue will correspond to 2023 and the maximum amount of liquidity advances from the CBS is currently estimated at USD42.45 million--this amount will need to be updated in forthcoming program reviews once the audited accounts for 2023 become available. ### Program monitoring and governance - Program Monitoring Committee (Technical Working Group, TWG): - Composition: senior officials from the Ministry of Finance (MoF), the CBS, Financial Reporting Centre (FRC), Somalia National Bureau of Statistics (SNBS), and the Ministry of Planning, Investment and Economic Development (MoPIED). - The IMF Resident Representative will have observer status on this working group. - Responsibilities: - monitoring the performance of the program, - recommending policy responses, - informing the Fund regularly on program performance, - transmitting the supporting materials necessary for the evaluation of benchmarks. - Reporting: - The committee shall provide the Fund with quarterly progress reports on the program within four weeks of the end of each quarter, using the latest available data. *Source: 1somea2024001 - 12. External arrears of the government are defined as debt obligations to non-residents* ### 20. Data Reporting to the Fund. To allow monitoring of developments under the program, ### 20. Data Reporting to the Fund ### Data reporting framework and adjustors - To allow monitoring of developments under the program, the MoF, CBS, MoPIED, SNBS, and FRC will provide data to the Resident Representative’s office of the IMF on the schedule specified in the source table. - Adjustor values (as reported): - Adjustor 1, if the CBS transfers distributable earnings to the government: -0.2; -0.2; -0.2-0.2; -0.2-0.2 - Adjustor 2: if the CBS provides temporary liquidity advances to the government 1/: 0.0; -49.4; -49.4-49.4; 0.0-53.6 - Maximum adjustment amounts: (as indicated in the source table) ### Reporting requirements by agency (selected highlights) - Central Bank of Somalia (CBS) - Monetary Survey: Detailed balance sheet data of the CBS; Monthly; timing: 3 weeks after the end of each month. - Monetary Survey (bank consolidation): Consolidated commercial banks’ balance sheet data including deposits by mobile money operators (MMOs); Quarterly; timing: 4 weeks after the end of each quarter. - Financial data not in broad money: Volume and value of mobile money transaction; Quarterly; timing: 4 weeks after the end of each quarter. - Other financial indicators: Prudential data (total capital, core capital, total net assets, high quality liquid assets, and 30-day funding requirement), and average profit rates and tenor information for private sector financing assets from banks; Quarterly; timing: 4 weeks after the end of each quarter. - Balance of payments (trade and travel): Trade in goods by HS code and value for ports of Mogadishu, Bossaso, Kismayo (starting Sept 2020); petroleum imports to Mogadishu; travel data from the Immigration Department; Quarterly; timing: 4 weeks after the end of each quarter. - Balance of payments (cross-border transfers): Cross-border current transfers (inflows and outflows) by MTBs and banks (starting from end-March 2021); Quarterly; timing: 4 weeks after the end of each quarter. - FGS external accounts: 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; Monthly; timing: 3 weeks after the end of each month. - Designated account at CBS into which debt service payments due to Russia are paid: End-month balances and within-month flows of the designated account, including contractual grace periods; Monthly; timing: 3 weeks after the end of each month. - Financial Reporting Center (FRC) - 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 banks and MTBs that have submitted reports during the period; MMO reporting to be added as oversight develops; Quarterly; timing: 4 weeks after the end of each quarter. - Ministry of Finance (MoF) — FGS budget operations and related reporting (selected items) - Annual and supplemental budget submissions: - Revenue by GFS 6-digit revenue classification; Statement of tax exemption for the previous 12-month period (annual budget only); 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; Proposed spending by NDP sector; 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 (Reports 1A, 1B and special report for FMS transfers): Revenue at GFS 6-digit code; Expenditure by budget line and GFS classification with MDA lines disaggregated by program/project and GFS 6-digit object code; details of budget transfers to each FMS and other units; Monthly; timing: 4 weeks after the end of each month. - Report of FGS financing transactions (Report 1C): Monthly; timing: 4 weeks after the end of each month. - Original budget, virement, allotment, warrant, commitment, and YTD expenditure by 4-digit object codes for each MDA (Report 2A): Monthly; timing: 4 weeks after the end of each month. - Monthly cash plan and at least one-month ahead forward projections (reports 3A, 3B, 3C): Monthly; timing: 4 weeks after the end of each month. - Comprehensive table summarizing Government operations (reports 5A, 5B, 5C, 5D) including fiscal buffer balances: Monthly; timing: 4 weeks after the end of each month. - Payments report showing all payments (number and value) disaggregated by payment type: Monthly; timing: 4 weeks after the end of each month. - Payroll: Payroll and non-payroll salary and allowance payments by MDAs and individual embassies (Excel): Monthly; timing: 4 weeks after the end of each month. - SDR balances: Table showing SDR balances of the MoF and changes from the beginning of a fiscal year with breakdown of withdrawal and reconstitution of SDR holdings and credits and deductions for interest: Monthly; timing: 4 weeks after the end of each month. - Customs modernization: Number of declarations, manifests processed, and goods inspections from SOMCAS and SOMSAD systems: Quarterly; timing: 4 weeks after the end of the quarter. - FMS and Banaadir budgets: Budget for each FMS and aggregated budget (revenue and expenditure). BRA budget to be provided in due course: As required; timing: Within a week of approval. - FMS final accounts: Final accounts of each FMS and BRA: Annually; timing: 6 months after the end of the year. - FMS fiscal operations (consolidation tool): Monthly; timing: 6 weeks after the end of each month. - BRA fiscal operations (from September 2023): Monthly; timing: 6 weeks after the end of each month. - Domestic arrears: Letter confirming no accumulation of arrears or a table providing the end-of-period stock of domestic arrears by MDA and 4-digit Object Code: Quarterly; timing: 4 weeks after the end of each quarter. - Outstanding invoices: Report showing amount of outstanding invoices, including past due and not due yet: Monthly; timing: 4 weeks after the end of the month (from May 2023). - Quarterly debt bulletin (Debt Management Unit): Quarter overview of external debt position with decompositions, alignment with debt policy and debt management strategy when available, and risk assessment: Quarterly; timing: 4 weeks after the end of each quarter. - Domestic debt: Amount of new domestic debt contracted by Government: Monthly; timing: 4 weeks after the end of the month. - External debt (end of year): End of year external debt in U.S. dollars, by creditor, and origination currency; amount of new external debt contracted or guaranteed by Government: Annually; timing: 6 weeks after the end of the year. - External debt (disbursements and repayments): (i) scheduled; and (ii) actual interest and principal on debt of the Government and the CBS, by creditor: Annually; timing: 30 days after the end of each year. - External debt (accumulation of new arrears): Accumulation of any new arrears (principal or interest payments) on external debt: Monthly; timing: 3 weeks after the end of the month. - Structural benchmarks: Table describing status of implementation of the structural benchmarks in the MEFP Table 2: Quarterly; timing: 4 weeks after the end of each quarter. - Somalia National Bureau of Statistics (SNBS) - CPI and other economic indicators: Indicators such as the consumer price index; 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): Annually; timing: 6 months after the end of each year. ### Key debt and DSA findings - LIC-DSA update context: - Incorporates three new elements: (i) updated borrowing assumptions incorporating IDA20’s moratorium on hardening of financing terms extending grant status for Somalia until end-June 2025 (previously end-June 2024); (ii) shift in the first year of projections to 2024 (previously 2023); and (iii) updated macroeconomic forecasts. - Baseline assumes full delivery of debt relief under the HIPC Initiative, MDRI, and beyond-HIPC assistance at the Completion Point reached on December 13, 2023. - Public debt projections and risks: - Total public debt is projected to increase in nominal terms to US$778 million at end-2024 from US$766 million at end-2023, but decline relative to GDP from 6.6 percent of GDP at end-2023 to 6.1 percent of GDP at end-2024. - Majority of total public debt is external. - Somalia is assessed to be at Moderate risk of debt distress for both external and overall public debt. - The present value (PV) of public and publicly guaranteed (PPG) external debt is estimated to be 4.7 percent of GDP in 2024 — below the 30 percent threshold for countries like Somalia with weak debt carrying capacity. - Forecast indicates sustained breaches of the external debt service to revenue indicative threshold under the stress scenario in the long term as grace periods on initial loans expire. - Under the Moderate rating for overall risk of debt distress, Somalia is mechanically assessed to have Substantial space to absorb shocks. - Vulnerabilities: security, international commodity price, and climate shocks; high dependence on external concessional financing. - Policy imperatives stressed: strengthen domestic revenue mobilization, debt management institutions, and institutional capacity. ### Public debt coverage and stock (selected figures) - Public debt perimeter: central government; near complete coverage of public debt achieved through reconciliation missions in 2020 and 2023 under the HIPC process. - End-2022 and end-2023 stock estimates and context: - Overall level of public debt stock estimated at end-2022 at US$3.9 billion, or 37.4 percent of GDP. - Estimated total stock of outstanding debt as of end-2023: US$766.3 million, of which US$698.4 million is external and US$67.8 million represents central government wage arrears. - Of total PPG external debt at end-2023: 67 percent owed to multilateral creditors and 33 percent owed to bilateral creditors. - Text Table 2 — Decomposition of Total Public Debt (reported values) - Total Public Debt: 5,345.1 64.6% | 3,894.8 37.4% | 766.3 6.6% - Total External Debt: 5,268.1 63.6% | 3,827.0 36.7% | 698.4 6.0% - Multilateral: 1,535.7 18.6% | 1,074.9 10.3% | 467.7 4.0% - Bilateral: 3,730.1 45.1% | 2,749.5 26.4% | 230.3 2.0% - Paris club: 3,037.6 36.7% | 2,004.5 19.2% - non-Paris club: 692.6 8.4% | 745.0 7.2% - Commercial: 2.3 0.0% | 2.5 0.0% | 0.5 0.0% - Government wage arrears: 77.0 0.9% | 67.8 0.7% | 67.8 0.6% - (Columns reflect: Before HIPC, end-2018; After arrears clearance, end-2022; Estimated at end-2023 1/) ### Debt management capacity and recent developments - Institutional progress: - Debt Management Unit (DMU) established in December 2015. - Debt recording system installed with AfDB support; upgraded to the Commonwealth Meridien System (cloud-based). - DMU has been issuing quarterly debt bulletins since end-2020; quality improving with IMF technical assistance. - DMU committed to producing debt bulletins in a timely and regular manner within the month following the end of each quarter. - Technical assistance and reform priorities: - IMF technical assistance mission in February 2024 emphasized development of debt objectives (policy), a medium-term debt management strategy (MTDS), annual borrowing plans (ABP), annual reports on public debt management, and establishing a sound legal and institutional framework for debt management and coordination across MDAs. - Capacity building for gradual development of a domestic financial market is important given expected tightening of grant financing over time. *Source: IMF and IDA staff report excerpts as provided in the supplied content.* ### 6. Growth in 2023 improved modestly to 2.8 percent compared to 2.4 percent in 2022, ### 1somea2024001 - 6. Growth in 2023 improved modestly to 2.8 percent compared to 2.4 percent in 2022, ### Recent macroeconomic performance (2022–2023) - Real GDP growth: - 2022: 2.4 percent - 2023: 2.8 percent (supported by a rebound in agriculture production and exports as rains resumed) - Remittances: - Growth slowed in 2023 relative to 2022, partly due to the impact of global inflation on the purchasing power of the diaspora community. - Inflation: - December 2022: 6.1 percent (end-December 2022) - December 2023: 6.6 percent (inflation remains sticky despite moderating food and fuel prices) - Fiscal outturn 2023: - Domestic revenues performed strongly; expenditures were within the 2023 Supplementary Budget. - A small budget surplus of US$6 million was achieved for the year. - IMF disbursement at ECF approval in December 2023 and budget grant disbursements (including US$75 million from the World Bank and US$7.5 million from Türkiye) contributed to total cash balances. - Customs and trade: - Strengthened customs collections in H2 2023 following implementation of the Somalia Customs Automated System (SOMCAS). - January 2024: temporary modest impact on customs collections in Mogadishu due to shipment delays from the heightened security situation in the Red Sea; revenues recovered in February. - Based on IMF PortWatch data, more than 90 percent of imports in metric tons into Somalia (excluding Berbera port in Somaliland) went through Mogadishu port in 2023. - For Mogadishu, top five upstream port connections (shares): Mina Raysut, Oman (29 percent); Mombasa, Kenya (23 percent); Mina Jabal Ali, UAE (11 percent); Fujayrah Harbor, UAE (5 percent); Karachi, Pakistan (5 percent). ### 2024 near-term outlook and projections - Real GDP growth: - 2024: Growth is expected to rise to 3.7 percent (supported by continued recovery in agriculture, remittances, and investment). - Inflation: - End-2024: expected to fall to 4.8 percent (continuing downward trend as fuel and food prices decline, although at a slower pace than anticipated earlier). - Remittances and FDI: - Remittances projected to increase as global inflation moderates and growth outlooks in host countries improve. - Foreign direct investment expected to trend upwards in 2024 following Somalia’s achievement of the HIPC CP in December 2023. - Debt stock projection: - Total public debt projected to increase from US$766 (end-2023) to US$778 (end-2024), including projected purchases under the ECF worth US$19.9 million and amortization on existing debt. ### Medium- and long-term outlook and drivers (2024–2029 and beyond) - Growth trajectory: - Average growth projection for 2024–28: 4 percent. - Projected to gradually accelerate to 4.5 percent by 2029 and remain at 4.5 percent over the long term. - Inflation: - Long-term average inflation expected to be 2.2 percent. - Key drivers of medium- and long-term growth: - (i) Confidence effects from reaching HIPC Completion Point and enhanced access to international finance. - (ii) Continued political stability and reduced security risks. - (iii) Gradual scaling up of public spending in energy, transport, education, health—financed with domestic revenues and concessional borrowing—to support the national development plan and SDGs. - (iv) Financial deepening and financial inclusion as financial sector reforms pay off. - (v) Greater FDI and private investment supported by improvements in business environment, security, and governance. - External sector: - Somalia expected to continue running a structural trade deficit over the medium- and long-term. - Exports currently dominated by livestock (about 80 percent of total exports of goods). - Export diversification expected to improve volumes and markets beyond Saudi Arabia and the Hajj period; insurance products being prepared to mitigate livestock risks. - Pipeline investments in electricity and transport expected to support new productive sectors such as fisheries. - Revenues and public investment: - Domestic revenue to GDP projected to increase by around 0.3 percentage points of GDP, on average, per year over 2024–2028 due to broad-based revenue-enhancing reforms. - Trade-related revenues expected to increase from customs modernization (implementation of SOMCAS), improved data collection, and enhanced customs processes with IMF and World Bank technical assistance and SDFP support. - Approval of the new Income Tax Law and introduction of excise taxes on money transfer businesses, airtime, and telecommunications projected to increase income and sales tax revenues. - Projected overall deficit of about 2 percent of GDP by 2028. - Over time, grants are expected to decline and be replaced by concessional loans; sustained grant and highly concessional financing will remain important. ### Debt sustainability, DSA assumptions, and classifications - Debt-carrying capacity: - Classified as Weak; composite indicator score: 1.57 (based on October 2023 WEO and 2022 CPIA). - External debt projections and thresholds: - Extension of IDA20 grant status by one year induces a downward level shift in external debt profile. - External debt to GDP projected at 10.3 percent by 2028 in the current LIC-DSA (relative to 11 percent in December 2023 LIC-DSA). - PV of PPG external debt to GDP forecasted to rise from 4.7 percent to 6.7 percent in the medium-term baseline, and to 9.6 percent in the long term—well below the indicative threshold of 30 percent. - From 2025 to 2029, baseline assumes borrowing mix will be highly concessional with an estimated average grant element of 58.2 percent, projected to decline to around 48 percent by 2034. - DSA baseline assumptions: - Full impact of multilateral arrears clearance, debt relief under the Enhanced HIPC Initiative, MDRI and beyond-HIPC assistance at Completion Point in December 2023. - Current IMF ECF arrangement (approved December 2023) envisions total disbursements worth SDR 45 million (approximately US$60 million), distributed equally across 2024, 2025, and 2026. - Baseline assumes new financing in 2025–2028 shifts from grants to highly concessional loans, similar to IDA20; in 2030 mix begins to shift from highly concessional to concessional borrowing; from 2031 new borrowing only on concessional terms similar to IDA regular credits. - In the medium-term, grant disbursements for project commitments approved before end-June 2025 continue but decline over time; overall deficits of 2 to 3.5 percent of GDP over the medium-to-long-term expected without robust budget support from development partners. - Stress testing and vulnerabilities: - Standard LIC-DSA stress tests indicate vulnerability to unexpected shocks; combined shocks to real GDP growth, exports, and non-debt flows produce the most extreme stress, potentially causing external debt service to revenue to breach indicative thresholds. - A shock in current official transfers is a significant vulnerability due to high dependence on official development assistance. - Debt service ratios expected to increase toward the end of the projection period due to resumption of payments on restructured debt and IMF payments starting in 2026. - Public debt: - PV of total public debt to GDP remains contained in the baseline and stress scenario; PV of total public debt to revenue rises through the medium-term, peaking in 2030. - Baseline assumes nominal stock of domestic debt will significantly decline as a percentage of total debt over the medium-term. ### Data, realism tools, and analytical constraints - Data weaknesses: - Limit scope of macroeconomic analysis and complicate standardized stress tests in the LIC-DSA. - Limitations in national accounts data, substantial gaps in balance-of-payments data, heavy reliance on third-party trade and secondary transfer estimates, and direct investment data are currently estimated. - Realism tools application: - Forecast error realism tool shows a significant decline in debt in the 5-year historical period versus the 5-year projection period due to HIPC debt relief and restructuring. - Public investment-growth nexus tool inoperable due to gaps in investment data. - Fiscal adjustment realism tool suggests a fiscal expansion post-HIPC CP reflecting decline in above-the-line grants after HIPC CP even as expenditures decline as a share of GDP. - Fiscal adjustment and growth realism tool shows projected growth broadly in line with a range of possible fiscal multipliers. ### Risks and policy implications - Principal risks tilted to the downside: - Food insecurity if rainy seasons fail, or new natural disasters. - Deterioration of global and/or regional security situation (including Red Sea), risks related to the ATMIS transition, political risks linked to federalism, and lower global growth. - Any adverse shock would lower economic growth and domestic revenue (including port revenues), increasing financing needs. - Policy and financing needs: - Existing cash buffers, expenditure rationalization, and current financing commitments help mitigate some risks, but additional international support would be needed in a significant adverse scenario. - Continued need for grant-financing and highly concessional borrowing even beyond the medium-term to manage upward trajectories of debt-to-GDP and debt service. - Fiscal response options include introducing new revenue measures (turnover taxes), modernization of customs duties, fishing licenses, and automation of tax administration. - Monetary policy framework is non-existent; the economy is de facto dollarized. - Revenue administration reforms (adding taxpayers, digital tools, enforcement) and customs modernization (SOMCAS) are central to widening fiscal space. *Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1somea2024001.pdf* ### 21. Somalia is assessed to be at moderate overall risk of public debt distress. While key ### 1somea2024001 - 21. Somalia is assessed to be at moderate overall risk of public debt distress. While key ### Risk assessment and summary findings - Somalia is assessed to be at "moderate overall risk of public debt distress." - Somalia is at "moderate risk of external debt distress and at moderate overall risk of public debt distress." - The total public debt indicator remains under the benchmark across the baseline and stress scenarios. - Sustained breaches of the indicative threshold for the external debt service to revenue ratio under standardized stress tests suggest Somalia is at moderate risk of external debt distress. - The moderate risk rating tool mechanically indicates substantial space to absorb shocks, but Somalia remains vulnerable to significant shocks and highly dependent on external, concessional financing. ### Debt profile, outlook, and vulnerabilities - Debt relief through multilateral arrears clearance, the HIPC Initiative, MDRI, and beyond-HIPC assistance has substantially improved Somalia’s external debt position. - Debt judged to be sustainable in the medium-term, assuming continued highly concessional financing. - Inclusion of domestic debt does not materially impact the analysis. - Downside risks include security, international commodity price, and climate shocks that could negatively affect the revenue path. - Priority policy areas to mitigate risks: - Strengthen domestic revenue mobilization. - Strengthen debt management institutions and institutional capacity. - Secure highly concessional financing for expenditures in education, health, and security to prevent a spike in debt service over the medium-term. ### Authorities’ views - The authorities broadly concurred with staff’s LIC-DSA assumptions and conclusions. - Authorities emphasize reliance on concessional financing post-HIPC to contain debt sustainability risks. - Authorities agree on the need to monitor the external debt service-to-revenue indicator as an early warning sign. - Authorities agree to strengthen debt management capacity and ensure transparency on terms and conditions of all borrowings. - Authorities expect ongoing reforms, particularly domestic revenue mobilization, will improve debt servicing capacity. ### Key projections and indicators (selected exact figures from the External DSA table, baseline scenario, 2021–2044) - External debt (nominal) (percent of GDP): 2021: 39.93; 2022: 36.7; 2023: 6.0; 2024: 5.5; 2025: 6.1; 2026: 7.6; 2027: 9.0; 2028: 10.3; 2029: 11.7; 2034: 16.8; 2044: 31.0; 11.8; 11.3 - Change in external debt: -8.1; -3.1; -30.7; -0.4; 0.6; 1.5; 1.5; 1.3; 1.3; 1.1; 1.8 - Identified net debt-creating flows: -1.5; 0.6; 0.4; 3.1; 3.2; 4.9; 5.1; 4.6; 4.6; 6.6; 3.1; -0.7; 5.2 - Non-interest current account deficit: 6.8; 8.0; 9.6; 8.6; 8.7; 10.4; 10.7; 10.3; 10.4; 12.6; 9.4; 4.6; 10.9 - Exports (percent of GDP): 15.6; 17.3; 17.9; 18.9; 20.1; 20.9; 21.6; 22.0; 22.0; 22.0 - Imports (percent of GDP): 66.5; 78.5; 76.7; 77.1; 77.2; 77.3; 77.7; 77.8; 77.6; 78.0; 74.5 - Net current transfers (negative = inflow): -44.6; -53.6; -49.6; -49.8; -48.7; -46.3; -45.7; -45.8; -45.5; -43.6; -43.0; -44.8; -45.5 - of which: official: -23.0; -33.0; -30.8; -31.0; -29.8; -27.2; -26.4; -26.2; -25.9; -23.6; -23.0 - Net FDI (negative = inflow): -5.2; -5.2; -5.2; -5.4; -5.4; -5.4; -5.4; -5.4; -5.4; -5.4; -5.4; -4.8; -5.4 - Endogenous debt dynamics: -3.1; -2.2; -4.0; -0.1; -0.1; -0.1; -0.2; -0.3; -0.3; -0.5; -0.9 - Contribution from nominal interest rate: 0.0; 0.0; 0.0; 0.1; 0.1; 0.1; 0.1; 0.1; 0.1; 0.1; 0.4 - Contribution from real GDP growth: -1.5; -0.9; -0.9; -0.2; -0.2; -0.2; -0.3; -0.4; -0.4; -0.7; -1.2 - Contribution from price and exchange rate changes: -1.6; -1.3; -3.0 - Residual: -6.6; -3.8; -31.2; -3.5; -2.7; -3.4; -3.6; -3.3; -3.3; -5.6; -1.3; -10.9; -4.2 - of which: exceptional financing: -0.2; 0.0; -26.8; 0.0 - Sustainability indicators: - PV of PPG external debt-to-GDP ratio: 4.2; 4.7; 4.8; 5.3; 5.8; 6.3; 6.7; 9.6; 19.9 - PV of PPG external debt-to-exports ratio: 23.5; 24.7; 24.1; 25.5; 27.0; 28.4; 30.6; 43.4; 90.2 - PPG debt service-to-exports ratio: 1.1; 0.9; 0.7; 0.9; 0.9; 0.9; 0.9; 1.3; 1.6; 4.0 - PPG debt service-to-revenue ratio: 7.4; 6.2; 4.7; 6.0; 6.0; 5.5; 5.1; 4.7; 6.5; 6.2; 10.9 - Gross external financing need (Million of U.S. dollars): 174.8; 311.6; 525.6; 425.8; 489.6; 782.4; 891.9; 891.9; 994.6; 1979.5; 2430.2 - Key macroeconomic assumptions (selected): - Real GDP growth (in percent): 3.3; 2.4; 2.8; 3.7; 3.9; 4.0; 4.1; 4.3; 4.5; 4.5; 4.5; 2.8; 4.3 - GDP deflator in US dollar terms (change in percent): 3.5; 3.4; 9.0; 5.7; 4.4; 4.2; 4.0; 3.7; 3.0; 2.1; 2.1; 4.3; 3.3 - Effective interest rate (percent): 0.0; 0.0; 0.0; 1.8; 1.9; 1.7; 1.3; 1.2; 1.0; 1.0; 1.3; 0.0; 1.2 - Growth of exports of G&S (US dollar terms, in percent): 30.0; 17.7; 15.8; 16.0; 15.0; 12.7; 12.0; 10.4; 7.6; 6.7; 6.7; 8.7; 9.8 - Growth of imports of G&S (US dollar terms, in percent): 12.5; 25.0; 9.5; 10.2; 8.7; 8.5; 8.9; 8.3; 7.4; 6.6; 6.8; 8.7; 7.8 - Grant element of new public sector borrowing (in percent): 32.2; 53.9; 58.5; 58.6; 61.0; 58.8; 47.9; 39.2; 52.5 - Government revenues (excluding grants, in percent of GDP): 2.3; 2.5; 2.8; 2.8; 3.0; 3.3; 3.7; 4.0; 4.3; 5.5; 8.0; 2.1; 4.2 - Aid flows (in Million of US dollars): 64.4; 62.7; 418.5; 547.0; 524.3; 505.1; 468.6; 441.8; 478.4; 591.2; 2076.8 - Grant-equivalent financing (in percent of external financing): 97.6; 87.0; 75.9; 69.2; 67.8; 63.1; 47.9; 39.2; 65.0 - Nominal GDP (Million of US dollars): 9,839; 10,420; 11,680; 12,804; 13,891; 15,059; 16,310; 17,638; 18,985; 26,352; 50,377 - Nominal dollar GDP growth: 6.9; 5.9; 12.1; 9.6; 8.5; 8.4; 8.3; 8.1; 7.6; 6.7; 6.7; 7.2; 7.7 ### Public sector DSA selected figures (baseline, 2021–2044) - Public sector debt (percent of GDP): 2021: 40.6; 2022: 37.4; 2023: 6.6; 2024: 6.1; 2025: 6.1; 2026: 6.8; 2027: 8.0; 2028: 9.4; 2029: 10.7; 2034: 12.0; 2044: 17.0; 31.0; 42.5; 11.6 - Change in public sector debt: -8.2; -3.2; -30.8; -0.5; 0.5; 0.1; 0.4; 1.4; 1.4; 1.3; 1.3; 1.0; 1.8 - Identified debt-creating flows: -2.5; -2.3; -30.9; -0.1; 0.8; 1.4; 1.4; 1.3; 1.3; 1.0; 1.8; -11.5; 1.0 - Primary deficit: 0.8; 0.0; -0.1; 0.4; 1.2; 1.8; 1.9; 1.9; 2.0; 1.9; 3.2; -0.1; 1.6 - Revenue and grants: 3.8; 6.9; 6.3; 7.1; 5.9; 4.8; 4.4; 4.4; 4.5; 5.5; 8.0; 3.9; 5.1 - of which: grants: 1.5; 4.4; 3.5; 4.3; 2.8; 1.5; 0.7; 0.4; 0.3; 0.0; 0.0 - Primary (noninterest) expenditure: 4.7; 6.9; 6.3; 7.4; 7.1; 6.6; 6.4; 6.3; 6.5; 7.4; 11.2 - Automatic debt dynamics: -3.1; -2.3; -4.0; -0.5; -0.4; -0.4; -0.5; -0.6; -0.7; -0.9; -1.5 - Contribution from average real interest rate: -1.6; -1.3; -3.0; -0.2; -0.1; -0.2; -0.2; -0.2; -0.2; -0.2; -0.2 - Contribution from real GDP growth: -1.6; -1.0; -1.0; -0.2; -0.2; -0.3; -0.3; -0.4; -0.5; -0.7; -1.3 - Other identified debt-creating flows (debt relief HIPC and other): -0.2; 0.0; -26.8; 0.0 - Residual: -5.7; -0.9; 0.0; -0.4; -0.3; 0.0; 0.0; 0.0; 0.0; 0.0; -0.1; -0.1 - PV of public debt-to-GDP ratio: 4.8; 5.2; 5.3; 5.7; 6.2; 6.6; 7.0; 9.7; 19.9 - PV of public debt-to-revenue and grants ratio: 75.3; 73.7; 90.7; 119.4; 140.3; 148.8; 155.0; 176.5; 249.2 - Debt service-to-revenue and grants ratio: 4.5; 2.3; 2.1; 2.4; 3.1; 4.3; 4.7; 4.7; 6.5; 5.5; 11.0 - Gross financing need: 0.9; 0.1; -26.7; 0.2; 1.1; 2.0; 2.1; 2.1; 2.3; 2.2; 4.1 ### Stress tests, scenarios, and policy implications - Standardized stress tests show breaches for the external debt service-to-revenue ratio, signaling need for vigilant debt management. - The LIC-DSA stress test is not adjusted for the structural break, allowing past volatility to inform stress testing in the projection horizon. - Sensitivity analysis in LIC-DSA affected by constraints, producing results for debt indicators in outer years that can be challenging to interpret. - Note on stress-test mechanics: - The most extreme stress test is the test that yields the highest ratio in or before 2034. - All additional financing needs generated by shocks under stress tests are assumed to be covered by PPG external MLT debt in the external DSA. - Default terms of marginal debt are based on baseline 10-year projections. - Policy recommendation highlighted: maintain access to highly concessional financing and strengthen domestic revenue mobilization and debt management to absorb shocks and prevent medium-term debt-service spikes. *Source: Somalia—Debt Sustainability Assessment and public debt tables as presented in the source content.* ### 1990. The size of 3-year adjustment from program inception is found on the horizontal axis; the ### 1somea2024001 - 1990. The size of 3-year adjustment from program inception is found on the horizontal axis; the ### Fiscal adjustment and possible growth paths - 3-Year Adjustment in Primary Balance (Percentage points of GDP): horizontal axis displays size of 3-year adjustment from program inception; vertical axis displays percent of sample. - Projected 3-yr adjustment: 3-year PB adjustment greater than 2.5 percentage points of GDP is in approximately top quartile. - Time series markers shown: 2018, 2019, 2020, 2021, 2022, 2023, 2024, 2025. - Baseline and multipliers displayed: Baseline; Multiplier = 0.2; Multiplier = 0.4; Multiplier = 0.6; Multiplier = 0.8. ### Qualification of the Moderate Category, 2024–2034 (debt thresholds and space) - Threshold definitions (for PV debt/GDP and PV debt/exports): x is 20 percent and y is 40 percent. - For debt service/Exports and debt service/revenue thresholds: x is 12 percent and y is 35 percent. - Qualitative categories shown: Limited space; Some space; Substantial space. - Visual indicators (examples from charts): - Debt service-to-revenue ratio timeline points: 2024, 2026, 2028, 2030, 2032, 2034. - PV of debt-to-exports ratio timeline points: 2024, 2026, 2028, 2030, 2032, 2034. - PV of debt-to-GDP ratio timeline points: 2024, 2026, 2028, 2030, 2032, 2034. - Debt service-to-exports ratio timeline points: 2024, 2026, 2028, 2030, 2032, 2034. ### Sensitivity analysis for key indicators of public and publically guaranteed external debt, 2024–2034 (Table 3) - Table header: (In percent) 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 - Baseline row (first series): 5 5 5 6 6 7 7 8 8 9 10 - Section A. Alternative Scenarios - A1. Key variables at their historical averages in 2024-2034 2/: 5 3 1 -1 -2 -4 -6 -8 -11 -13 -15 - Section B. Bound Tests (examples) - B1. Real GDP growth: 5 5 6 7 7 8 8 9 9 10 11 - B2. Primary balance: 5 5 6 6 7 7 8 8 9 9 10 - B3. Exports: 5 6 9 10 10 10 11 11 11 12 12 - B4. Other flows 3/: 5 9 13 14 14 14 14 15 15 15 15 - B5. Depreciation: 5 6 -1 0 0 1 2 3 4 5 6 - B6. Combination of B1-B5: 5 5 12 14 14 14 15 15 16 16 16 - Section C. Tailored Tests - C1. Combined contingent liabilities: 5 7 8 8 9 9 10 10 10 11 12 - C2. Natural disaster: n.a. entries across period - C3. Commodity price: 5 5 6 6 7 7 8 8 9 9 10 - C4. Market Financing: n.a. entries across period - Threshold and Baseline markers for other panels shown (examples): - Threshold: 30 30 30 30 30 30 30 30 30 30 30 - Baseline (other indicator block): 25 24 25 27 28 31 32 35 38 40 43 - A1 (corresponding alternate): 2 5 1 6 7 -2 -10 -18 -27 -38 -49 -59 -68 (as presented in table sequence) - Notes: - 1/ A bold value indicates a breach of the threshold. - 3/ Includes official and private transfers and FDI. - 2/ Variables include real GDP growth, GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows. - 4/ Structural breaks in Somalia's historical series affect the DSA's sensitivity analysis. Negative values should be considered bounded at zero. ### Sensitivity analysis for key indicators of public debt, 2024–2034 (Table 4) - Table header: (In percent) 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 - Baseline row (first series): 5 5 6 6 7 7 8 8 9 9 10 - Section A. Alternative Scenarios - A1. Key variables at their historical averages in 2024-2034 2/: 5 4 4 3 3 3 3 2 2 2 2 - Section B. Bound Tests (examples) - B1. Real GDP growth: 5 5 7 7 8 9 10 11 12 13 14 - B2. Primary balance: 5 5 6 6 7 7 7 8 9 9 10 - B3. Exports: 5 7 10 10 10 11 11 11 12 12 12 - B4. Other flows 3/: 5 10 14 14 14 14 15 15 15 15 15 - B5. Depreciation: 5 6 6 6 6 5 5 5 5 6 6 - B6. Combination of B1-B5: 5 5 5 6 6 7 7 8 8 9 10 - Section C. Tailored Tests - C1. Combined contingent liabilities: 5 7 8 8 8 9 9 10 10 10 11 - C2. Natural disaster: n.a. entries across period - C3. Commodity price: 5 5 6 7 8 9 9 10 11 12 13 - C4. Market Financing: n.a. entries across period - TOTAL public debt benchmark: 35 repeated across the period. - PV of Debt-to-GDP baseline sequence extracted from table (nominal formatting preserved): Baseline 74 91 119 140 149 155 163 166 168 172 176 - Alternative and bound test sequences for PV of debt (examples): - A1: 74 75 83 83 74 63 57 49 43 38 35 - B1: 74 90 131 163 180 195 213 221 229 238 247 - B3: 74 114 200 224 230 232 238 235 232 228 226 - C3. Commodity price: 74 89 127 158 176 191 208 217 225 235 244 - Debt service indicators baseline sequence (examples): Baseline 2 3 4 5 5 6 7 7 7 7 6 - Ratio indicators baseline and scenario values shown across table panels; notes: - 1/ A bold value indicates a breach of the benchmark. - 2/ Variables include real GDP growth, GDP deflator and primary deficit in percent of GDP. - 3/ Includes official and private transfers and FDI. - 4/ Structural breaks in Somalia's historical series affect the DSA's sensitivity analysis. Negative values should be considered bounded at zero. ### Public debt holder profile, 2022–2024 (Table 5) - Totals and shares (In millions of U.S. dollars, unless otherwise indicated): - Total debt stock (2022): 3,894.8 (100.0 percent total debt; 33.3 percent GDP) - External debt (2022): 3,827.0 (98.3 percent total debt; 32.8 percent GDP) - Domestic debt (2022): 67.8 (1.7 percent total debt; 0.6 percent GDP) - Of which: in arrears (2022): 67.8 (1.7 percent total debt; 0.6 percent GDP) - Multilateral creditors (2022 totals, percent total debt, percent GDP): - Multilateral creditors total: 1,074.9 (27.6 percent total debt; 9.2 percent GDP) - IMF 2/: 370.5 (9.5 percent total debt; 3.2 percent GDP) - World Bank 3/: 104.6 (2.7 percent total debt; 0.9 percent GDP) - AfDB: 20.1 (0.5 percent total debt; 0.2 percent GDP) - Other Multilaterals: 579.6 (14.9 percent total debt; 5.0 percent GDP) - Arab Monetary Fund: 298.6 (7.7 percent total debt; 2.6 percent GDP) - Arab Fund for Economic and Social Development: 191.5 (4.9 percent total debt; 1.6 percent GDP) - International Fund for Agricultural Development: 26.2 (0.7 percent total debt; 0.2 percent GDP) - Islamic Development Bank: 27.2 (0.7 percent total debt; 0.2 percent GDP) - OPEC Fund for International Development: 36.1 (0.9 percent total debt; 0.3 percent GDP) - Bilateral creditors (2022 totals, percent total debt, percent GDP): - Bilateral creditors total: 2,752.1 (70.7 percent total debt; 23.6 percent GDP) - Paris Club 4/: 2,004.5 (51.5 percent total debt; 17.2 percent GDP) - Russia 7/: 711.1 (18.3 percent total debt; 6.1 percent GDP) — note: debt stock as of end-2022 consistent with HIPC Debt Reconciliation Exercise in 2023; bilateral agreement between Russia and Somalia was signed in 2023. - United States: 998.4 (25.6 percent total debt; 8.5 percent GDP) - Other international creditors 8/: 745.0 (19.1 percent total debt; 6.4 percent GDP) - Specific other bilateral entries include Iraq 201.9; Kuwait Fund and Central Bank 125.3; Saudi Arabia 118.9; United Arab Emirates 253.5 (individual percent shares shown in table). - Nominal GDP (used in table): 11,680 (implicit units consistent with table). - Footnotes and clarifications: - 5/ Debt cancellation of 100 percent of ODA debt became effective on March 2021. - 6/ No debt reduction at the HIPC Decision Point, Japan will cancel 100% of their debt stock under the HIPC Completion Point. - 7/ Debt stock as of end-2022, consistent with the HIPC Debt Reconciliation Exercise in 2023. The bilateral agreement between Russia and Somalia was signed in 2023. - 8/ The amount reported for non-PC creditors assumes PC comparable treatment and reflects estimates of interim debt relief under Cologne Terms computed as part of the HIPC DRA exercise. - Sources: Somalia Debt Management Unit; IMF; World Bank; and AfDB. - 1/ Debt records include loans contracted from 1965 to 2002; recognized debtor is the Ministry of Finance of the FGS or a line ministry of the FGS. ### Summary table on projected external borrowing program, January 1, 2024 to December 31, 2024 (Table 6) - PPG external debt contracted or guaranteed — Volume of new debt, USD million: 19.9 (100) - Sources of debt financing: - Concessional debt, 1/: 19.9 (100) - o/w IMF prospective: 19.9 - o/w Other 2/: 0.00 - Non-concessional debt: 0.00 - o/w Semi-concessional 3/: 0.00 - o/w Commercial terms 4/: 0.00 - Uses of debt financing (USD million, percent): - Project Financing: 0.00 - Budget Financing: 19.9 (100) - Type of interest rate: - Fixed Interest Rate: 19.9 (100) - Variable Interest Rate: 0.00 - Currency denomination: - USD denominated loans: 19.9 (100) - Loans denominated in other currency: 0.00 - Memorandum items: - Indicative projection FY2025: 153.3 - Indicative projection FY2026: 305.2 - Footnotes: - 1/ Debt with a grant element of at least 35 percent. - 2/ Can include multilateral lenders such as the World Bank and the AfDB. - 3/ Debt with a positive grant element that is lower than the minimum grant element of 35 percent. - 4/ Debt without a positive grant element. - 5/ HIPC Completion Point reached in December 2023. ### Progress on negotiations and program performance; staff and authority statements (Table 7 and statements) - Statement by the Staff Representative on Somalia (May 29, 2024) — factual update, additional information does not change staff appraisal thrust. - End-March 2024 outturns versus indicative targets: - Cumulative domestic revenue through end-March: US$ 91.7 million, exceeding program floor of US$ 69 million. - Cumulative spending through end-March on compensation of employees, goods and services, and contingency: US$ 98.5 million, below program ceiling of US$ 118 million. - Net international reserves (NIR) at US$ 12.1 million, above adjusted program floor of US$ 0.7 million. - As of end-April 2024: no new external non-concessional debt contracted; no new external arrears accumulated; no new domestic debt contracted. - As of end-April 2024: Article VIII commitments continuous conditionality met. - Legislative and policy developments: - In May 2024, the President signed into law a new pension scheme for civil servants; tentative time frame for launching new pension fund is mid-2025. Authorities requested FAD technical assistance for implementation. - Statement by Mr. Mahmoud Mohieldin, Mr. Ali Alhosani, and Mr. Abdulqafar Abdullahi on Somalia (May 29, 2024) — excerpts and context: - Authorities view Fund support under the ECF as instrumental in rebuilding economic institutions and fostering sustained, inclusive high economic growth. - Humanitarian context (2024): some 6.9 million people require some form of humanitarian assistance, including nearly 3.8 million internally displaced individuals. - Security: influence and reach of Al-Shabaab diminishing, but sporadic attacks persist; planned withdrawal of ATMIS forces in December 2024 will require continued partner support and have fiscal implications for the 2025 budgets and beyond. - Strategic planning: development of Centennial Vision 2060 and a new National Transformation Plan to replace the 9th National Development Plan; Food Security Crisis Plan launched December 2023; formal accession to the East African Community in March 2024 noted as potentially growth-enhancing but requiring significant structural and regulatory reforms. - Program performance and requests by authorities: - Program performance described as solid: authorities met all Quantitative Performance Criteria (QPC) and Indicative Targets (IT) for end-December; structural benchmarks due before end-March implemented; end-June SBs on track. - Authorities request Executive Board approval of completion of the First Review under the ECF program and associated disbursement. - Due to higher-than-expected revenue collection for 2023, authorities request a modification to increase the revenue floor for end-June and end-December 2024 QPCs and a technical modification to the floor of the net international reserves. - Recent economic developments: - Somalia’s economy resilient; 2023 economic growth estimated at 2.8 percent, up from 2.4 percent in 2022. *Sources: Country authorities; staff estimates and projections; Somalia Debt Management Unit; IMF; World Bank; and AfDB.* ### 2022. The economy is expected to pick up steam and grow at 3.7 percent in 2024, supported ### 1somea2024001 - 2022. The economy is expected to pick up steam and grow at 3.7 percent in 2024, supported ### Growth outlook - The economy is expected to grow at 3.7 percent in 2024, supported by the recovery in crop and livestock production, growth in foreign direct investment, and a rebound in remittances inflows. - Growth is expected to accelerate to 4.5 percent by 2029 as structural and institutional reforms take hold, bolstered by the anticipated expansion of both public and private investments. - Near-term risks are tilted to the downside owing to: - a possible less than ideal rainy season, - regional and global uncertain security developments including spillovers from the war in Gaza on the Red Sea trade routes, - possible deterioration of internal security and political dynamics. - End-December inflation increased slightly to 6.6 percent up from 6.1 percent at End December 2022, but is expected to fall through 2024 to 4.8 percent by the end of the year. ### Fiscal policy: recent performance and strategy - 2023 fiscal year ended with a small surplus due to higher domestic revenue mobilization and prudent expenditure management. - Domestic revenue outperformed both the budget and the program targets. - Revenue measures and reforms delivering better-than-expected revenue collection include: - streamlining tax exemptions and making them more transparent, - a new turnover tax, - digitalizing of rental income, - extending of sales tax to the service sector, - other actions. - Despite substantial spending pressure for security and social service delivery in recently liberated areas, authorities maintained strong expenditure controls to keep spending within the budget. - Domestic revenue mobilization remains central to fiscal strategy; authorities are finalizing a comprehensive medium-term tax policy and administration roadmap with Fund support. - The roadmap aims to raise annual revenue to GDP by 0.3 percentage point until 2027, at which point domestic revenues are expected to cover all basic government operations. - Customs modernization prioritized, including operationalization of the Somali Customs Administration System (SOMCAS) in all major ports in Federal Member States to ensure timely and successful implementation of ad valorem tariff structure. - Income tax law modernization and prioritization of revenue collection from large businesses, particularly the telecom sector, by raising effective tax rates to levels comparable to neighboring countries. - Tax administration reforms: - Finalize regulations of the Revenue Administration law. - Develop and operationalize a new integrated tax administration system (ITAS) to improve tax audits, automate collection processes, enhance effectiveness of inland tax administration, and facilitate collection of third-party data. ### Public financial management and debt - Authorities will continue public finance management reforms and expenditure rationalization to create fiscal space for social spending. - Integrate compensation of all employees into a single payroll to limit wage bill growth, reducing the ratio of non-payroll payments to less than one percentage on average compared to 10.9 percent on average in mid-2023. - Strengthen the Somalia Financial Management Information System (SFMIS) by streamlining budget execution and treasury management, accelerating automation of cash management and revenue management, and eliminating parallel paper-based processes. - Ensure SFMIS integration with SOMCAS and ITAS to enhance business process efficiency. - Since reaching the HIPC completion point, improving debt management is a priority: - A planned Cabinet decree will clarify and disseminate procedures for initiating loan negotiations and entering into loan agreements and debt guarantees. - PFM regulation will be amended to remove ambiguity regarding financial liabilities. - Develop legal and regulatory framework to better manage fiscal risks associated with Public Private Partnerships while promoting priority investments. - Authorities have requested a Public Investment Management Assessment to identify areas for improvement. ### Monetary and financial sector reforms - Authorities aim to transform the Central Bank of Somalia (CBS) into a modern monetary institution. - Legislation approved by the Cabinet and awaiting parliamentary approval includes: - revised Financial Institutions Law, - revised Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) Law, - National Payment Bill, - Insurance bill (Takaful). - Payment system reforms underway to facilitate domestic retail payments and interconnectivity of Banks, Mobile Payments, Wallets: - Development of a National QR Code and a National Switch. - Medium-term agenda includes integration with regional payment infrastructures (East African Community, COMESA, Arab Monetary Fund’s BUNA). - Progress made on management structure and regulatory framework in line with the Fund’s 2020 safeguards assessment; CBS recognizes further work as identified in the 2024 safeguards assessment. - Authorities committed to systematic and timely implementation of all 2024 safeguards assessment recommendations, particularly improving internal control, cyber security, business continuity, and approving the amended CBS Act. - Authorities are actively considering staff’s recommendation to adopt a Currency Board as the monetary and foreign exchange rate policy regime: - Internal consultations with stakeholders underway to build public support; communication will be carefully managed. - If decided, authorities intend to swiftly establish the required legal and regulatory framework and build macroeconomic data and institutional and human capacity for implementation and maintenance. - Authorities recognize capacity limitations and appreciate staff’s commitment to provide technical and capacity development support. - Currency reform: authorities determined to implement limited currency reform to replace old and debilitated counterfeit currency to facilitate economic transactions for the poor, but will proceed only when necessary safeguards, financial, and logistical requirements are in place. - Any adopted monetary and foreign exchange rate policy will not alter the fact that Somalia will remain a de facto dollarized economy in the near future. ### Structural reforms and governance - Authorities recognize broad-based structural reforms addressing governance weaknesses are necessary for sustained, high, and inclusive growth. - After accession to UN, African Union, and Arab Anti-Corruption conventions, authorities are systematically implementing requirements by aligning national laws to comply. - Commitment to develop a new anti-corruption strategy and increase capacity of the Anti-Corruption Commission. - Extractive industry framework: - Progress in creating a robust regulatory framework including a modern Extractive Fiscal Regime law, Petroleum Law, and a strong model Production Sharing Agreement (PSA). - Consistent, mutually supportive regulations for these laws are being created with Fund support. - Authorities committed to completing necessary legal framework before issuing new production sharing agreements. - March 2023 Prime Minister decree: any newly signed PSA will not be valid until reviewed and approved by the Inter-Ministerial Concessions Committee, chaired by the Minister of Finance. - AML/CFT improvements viewed as necessary for reintegration into the international financial system: - Since the 2022 National Risk Assessment, guided by the National Anti-Money Laundering committee (NAMLC), important reforms have been implemented. - In 2023, the targeted Financial Sanctions Act was enacted and its regulations completed; the first sanction list under the law was issued in April 2024. - Counter Terrorism Act enacted; important AML/CFT guidance and directives issued to financial institutions; capacity building steps taken for NAMLC member institutions and financial institutions. - The amended AML/CFT act approved by the Cabinet and expected to be approved by Parliament ahead of the MENAFATF mutual evaluation scheduled in August 2024. - Rollout of the Somali National Digital ID in September 2023 will enhance AML/CFT efforts by aiding Know Your Customers frameworks and strengthening targeting of social protection programs. ### Conclusion and donor engagement - Somali authorities are committed to implementing ambitious economic and institutional reforms to support sustained and high economic growth and reduce poverty. - Authorities appreciate financial and capacity development support from partners including the IMF and value engagements with IMF staff and extensive and timely CD delivery, which have been instrumental in implementing many challenging reforms. *Source: IMF staff report content provided in the supplied PDF excerpt.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1somea2024001.pdf_