IMF Survey : Somalia Reaches Milestone with First IMF Review in Decades

IMF News, July 29, 2015

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Somalia received its first regular IMF “health check” of the economy in over 25 years, marking the Fund’s first review of the nation’s economy in a generation.
The IMF notes significant progress since Somalia resumed relations with the international community in 2013, while stressing that the country’s situation "remains very fragile" and international support will be vital to rebuild institutions and restore normalcy.
The IMF has been assisting Somalia with central bank governance, central bank accounting and financial reporting, supervision of financial institutions, budget preparation, fiscal policy formulation, and development of statistical systems.

Humanitarian and social indicators:
- "Close to 4 million people—nearly a third of the population—are in need of food assistance."
- "Infant mortality is more than one in ten; and life expectancy is about 51 years."
- "According to the UNDP, an estimated 73 percent of Somalis live below the poverty line of $2 a day."
Recent macroeconomic performance:
- "Economic conditions improved rapidly in 2012-14, with real GDP rising by 3.7 percent during 2014."
- "The recovery was led by growth in livestock and fisheries, and a very active private sector resurgence of the services industry, notably telecommunications, construction, and money transfer services."
- "For 2015, growth is projected at 2.7 percent."
Structural features:
- The economy is "highly dollarized" and "the vast majority of the national currency in circulation is counterfeit."
- Many Somali families rely on remittances; the informal money transfer system known as hawala is widely used.

Data and institutions:
- When IMF work began in June 2013 there was "practically no data about the economy"; it took almost six months to compile preliminary information and focus on the federal government budget.
- The IMF was able to compile and analyze core data to conduct the first “health check” of the Somali economy in 26 years.
Role of partners:
- The African Development Bank, the World Bank, and bilateral donors including the European Union, Kenya, Norway, Turkey, the United Kingdom, and the United States are active in supporting Somalia; "no one institution can be expected to manage it singlehandedly."
Resource potential:
- Somalia has natural resources including "gas and petroleum, fisheries, and more," but "proper management of these natural resources is vital to the country’s success."

Governance and capacity building:
- "Building sound institutions and fostering good governance are paramount" to restore public confidence.
- Training and building the capacity of Somali personnel is "equally essential."
Revenue and fiscal policy:
- "Mobilizing government revenue is another key priority" given the absence of tax collection for a quarter of a century.
- The government must prioritize expenditures amid very large needs and will "have to rely on donor grants for a long time" while working to increase domestic revenue over time.
Financial sector and currency reform:
- Banks and other financial institutions "must be properly licensed, regulated, and supervised."
- The role of the central bank as "the sole manager of international reserves should similarly be strengthened."
- Currency reform is necessary because of high dollarization and counterfeit national currency; however, "a number of technical steps will be needed" and "it is important to be patient and first plan and prepare to do it right. A failed currency reform is an expensive venture."

IMF lending status:
- "The IMF is for now precluded from providing new loans to Somalia, pending clearance of the country's arrears of about $328 million."
Staff-monitored program:
- The IMF can "advise the authorities on appropriate macroeconomic policies, including in the context of a staff-monitored program, which is a kind of 'shadow program' involving a dialogue with the IMF on economic policies but which offers no financing."
- Developing a track record of performance through such a program "would pave the way for Somalia, in due course, to obtain debt relief."

Private sector role:
- If security improvements continue, "the entrepreneurial private sector will continue to be the most dynamic contributor to economic growth."
Progress to date:
- "To the authorities’ credit, the revenue performance has improved in Somalia—they have almost doubled what they began with in 2013."
Hope and risks:
- IMF mission chief expresses hope that the IMF can "make a contribution in our area of expertise" to help Somalis achieve peace, prosperity, and stability, while noting "it's very difficult for a country that still has relatively serious issues with security and rule of law."

Source: IMF Survey, July 29, 2015.