On February 3, 2017, the Executive Board of the International Monetary Fund
(IMF) concluded the Article IV consultation
[1]
with Somalia.
Over the past five years, Somalia has marked important milestones in
rebuilding its economy and normalizing relations with international
financial institutions. In 2012, Somalia emerged from nearly two decades of
civil war. However, the post-war social and economic conditions remain
difficult, poverty is widespread, and more than half of the working-age
population is unemployed. The Federal Government of Somalia (FGS), elected
and recognized by the international community in 2012, continues to face
weak institutional capacity, fragile security, and complex clan politics
which complicate economic reconstruction. With donors’ support, progress is
being made in the FGS’s efforts to improve security, capacity development,
and state building.
The IMF resumed its relationship with Somalia in 2013 and has since been
heavily involved in the provision of policy advice and technical
assistance. The IMF Executive Board concluded the 2015 Article IV
Consultation with Somalia in July 2015, the country’s first in more than a
quarter-century. And the IMF Managing Director approved a Staff-Monitored
Program (SMP) in 2016, covering the period May 2016 through April 2017. The
SMP aims to help Somalia’s economic reconstruction efforts and focuses on
reforms to strengthen macroeconomic policy management, economic governance,
and institutional capacity. Given Somalia’s weak administrative capacity,
technical assistance is an integral part of the program.
Despite a very difficult political environment, the FGS continues to make
significant efforts toward restoring its key economic and financial
institutions. The government approved a public financial management (PFM)
law, initiated electronic payments of civil service and police wages,
submitted the 2015 financial statements of the FGS to the auditor general,
approved the 2016–20 PFM reform action plan, and adopted a draft National
Development Plan (NDP). In connection with the authorities’ currency reform
plan, the Central Bank of Somalia (CBS) was recently reconstituted and has
since fully staffed its cash management department, prepared a draft
anti-counterfeit strategy, and adopted a detailed roadmap for currency
reform. In addition, an external audit of the CBS’s 2014 financial
statement was completed.
The Somali economy is expected to continue to be sustained by donors'
grants, remittances, and foreign direct investment, mostly by the Somali
diaspora. Economic activity is projected to decelerate in 2016–17. Growth
is projected to be 3.4 percent and 2.5 percent in 2016 and 2017,
respectively. The deceleration in growth mainly reflects the impact of the
drought on the agriculture sector, which will be partially offset by
activities in the construction, telecommunications, and service sectors.
Meanwhile, inflation is estimated to be 1.5 percent in 2016 and projected
to pick up to 2.7 percent in 2017. The annual trade deficit during 2014–15
was about 55.5 percent of GDP and was largely financed by remittances and
grants. For the same period, the current account registered an annual
deficit of 8.6 percent of GDP and was covered mostly by foreign direct
investment, mainly by Somali diaspora.
The fiscal position was strained in 2016. Budgetary grants and tax revenue
fell short, reflecting delayed disbursements and weak tax collection
performance. Meanwhile, expenditure on goods and services continued to
increase, in part due to the election and security spending.
Going forward, the FGS will continue to implement measures to improve the
fiscal framework, raise tax revenue, and implement structural reforms. The
authorities plan to revise their National Development Plan, allowing it to
become the FGS’s key development policy tool.
Executive Board Assessment
[2]
Executive Directors commended the authorities for the significant progress made in rebuilding
the economy and restoring key economic and financial institutions in a
difficult political and security environment. Directors emphasized that
strong policy implementation is necessary to address the challenges ahead,
boost economic activity, and improve livelihoods. Continued support by the
donor community would also be vital in this regard.
Directors noted that budget execution remains difficult because of weak tax
collection, poor public financial management, and delays in grant
disbursements. They stressed that greater fiscal discipline and stronger
budget execution would improve fiscal performance. Directors welcomed the
authorities’ continued efforts to improve public financial management and
contingent measures to deal with domestic arrears and limit delayed
payments.
Directors underscored that steady improvement in tax collection would help
mitigate the impact from volatility of grants and meet security and social
spending needs. To broaden the tax base, they encouraged the authorities to
swiftly adopt the Appropriation Bill to endorse the tax code.
Directors supported the authorities’ currency reform strategy. They noted
that this reform would limit counterfeiting, restore credibility of the
national currency, and allow the central bank to conduct monetary policy.
Directors concurred that sound and successful implementation of the
currency reform hinges on careful preparation and planning. They advised
the authorities to follow through on the currency reform roadmap as agreed
with the staff.
Directors welcomed the plan to overhaul the financial sector and improve
the operations of the central bank, as well as commercial bank accounting
and reporting standards. They stressed that jump starting financial
intermediation is critical to enhancing Somalia’s economic growth.
Directors welcomed the progress in advancing financial sector reform,
including efforts to bring banks into compliance with prudential norms, and
combating the financing of terrorism (AML/CFT). They stressed that aligning
the AML/CFT law with international standards and ensuring an effective
risk-based implementation would safeguard the flow of remittances into
Somalia.
Directors welcomed the authorities’ plan to continue to improve the
national development plan (NDP). They emphasized that the NDP should give
priority to social safety net and pressing humanitarian conditions.
Directors agreed that a steadfast effort to rebuild Somalia’s key
institutions and governance remains critical. They were encouraged by the
increasing focus of the Financial Governance Committee (FGC) on institution
building, governance, and reorganization of the Ministry of Finance and the
central bank. Noting the significant shortcomings in economic data
provision, they called for swift adoption of the long-delayed statistical
law.
Directors urged continued strong policy implementation under the
Staff-Monitored Program (SMP) and subsequent SMPs. This would help
establish a durable economic track record as a basis for future program
engagement with the Fund and eventual debt relief.
[1]
Under Article IV of the IMF's Articles of Agreement, the IMF holds
bilateral discussions with members, usually every year. A staff
team visits the country, collects economic and financial
information, and discusses with officials the country's economic
developments and policies. On return to headquarters, the staff
prepares a report, which forms the basis for discussion by the
Executive Board.
[2]
At the conclusion of the discussion, the Managing Director, as
Chairman of the Board, summarizes the views of Executive Directors,
and this summary is transmitted to the country's authorities. An
explanation of any qualifiers used in summing up can be found here:
http://www.imf.org/external/np/sec/misc/qualifiers.htm
.