This week in Mogadishu, the World Bank launched the second in our Somalia Economic Update series, “Mobilizing Domestic Revenue to Rebuild Somalia.” The series aims to support policymakers and other stakeholders with analysis of trends in the Somali economy. What is starting to emerge is a picture of a country undergoing three parallel (and linked) transitions: political, security, and economic.
Somalia’s new economy is decentralized and privatized. Long years of conflict dislodged Mogadishu from its dual position as political and economic capital and, in turn, reinforced the economic power of port cities and urban hubs like Kismayo (in southern Somalia), Berbera (in Somaliland), and Bosaso (in Puntland), giving rise to the powerful logic of federalism.
At the same time, new technologies, a large Somali diaspora, and a regulation-free environment facilitated large scale telecoms and banking businesses to emerge. (Today, Bank research shows that over 70% of Somalis are using mobile phones to make payments!)
To a large extent, it is these economic dynamics that set the terms for the future political settlement. With de jure authority but limited de facto economic power, the Federal Government of Somalia urgently needs to increase its revenues from the current 2.7% of GDP in order to sustain its running costs, including for the critical security sector, and deliver basic services to a desperately vulnerable population. Over the last few years, the Federal Government has increased its revenues from US$30 million in 2012 to US$113 million in 2016—good progress, but more can still be done. That is why this edition of the Economic Update series series focuses on the potential for revenue generation.
Revenue generation needs a business case. The government must offer value for money—in Somalia, that means maintaining a level of security (both physical and in terms of contracts) better than what private means can provide. It also means well-managed and open public finances.
Meanwhile, to convince its regions, Somalia’s central government needs to demonstrate that a coordinated federation (for example, one that coordinates fiscal transfers from better-resourced to poorer regions) works better for everyone than fragmented entities.
Our work attempts to support this gradual rebalancing—from private to public goods, and from fragmented governance to a coherent federation—by combining analytics, Technical Assistance, and investment operations to tackle Somalia’s deep-seated challenges from more than one angle.
Two examples of this:
- The Governance Global Practice has formed a “troika” of projects, packaging recurrent cost financing with targeted injections of technical assistance to build up capabilities in public finance and core functions. This year, the Governance team has negotiated a package of policy measures with government linking recurrent disbursements to revenue and expenditure management policy measures, an approach that builds on the Afghanistan Reconstruction Trust Fund Incentive Program.
- At the sector level, our Global Practices are collaborating closely with IFC investment and advisory teams. Whether it’s the passage of critical telecoms legislation, the establishment of a payment system or a National ID, our teams are only making progress when both government and key business actors come together.
The approach is starting to show results. Public finances today are managed with increasing levels of automation, from budget development to execution and payment. Revenues have increased year on year. An emerging financial sector is regulated by a Central Bank, for which it provides payment services. Somalia has successfully delivered its first IMF Staff Monitoring Program in years, and has now entered into a second program. And, in what is expected to be a critical indicator of the legitimacy and authority of the new government, in the coming weeks the Somali parliament is expected to vote on the Telecommunications Act.
As Somalia’s own history shows, political settlements will ultimately fail unless they generate inclusive economic outcomes. Today, Somalia’s Federal Government has a unique opportunity to harness a steadier source of income; its success or failure will likely depend on managing an inclusive process with its regions and business community. We will be working alongside it to help it do so.