International Monetary Fund (IMF) Executive Board Concludes 2019 Article IV Consultation with Somalia

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On July 22, 2019, the Executive Board of the International Monetary Fund (IMF) concluded the 2019 Article IV consultation [1] with Somalia.

Improved confidence, on the back of the continued implementation of reforms, and strong donor support continue to support economic activity, especially in the telecom, trade, construction, and financial sectors. However, poor rainfall in Spring weighs on the outlook and threatens food security. GDP growth is estimated at 2.8 percent in 2018 after 1.4 percent in 2017. If normal rains resume later this year, GDP growth could remain broadly unchanged at around 2.9 percent in 2019. Inflation is expected at 3.0 percent in 2019, following 3.2 percent in 2018.

The Federal Government of Somalia’s (FGS) continued efforts to broaden the tax base and strengthen tax administration has been reflected in increased domestic revenue (almost 30 percent higher than in 2017). This has supported a small expansion in spending on health and education. However, expenditures continue to be dominated by spending on salaries and other operating costs, especially on security-related expenditures, with little space for critical social and development programs.

Despite stronger growth and the improving fiscal position, per capita incomes remain very low and more resources are needed to achieve greater economic resilience and reduce poverty. With debt at unsustainable levels (at about $4.7 billion or 100 percent of GDP in 2018, of which 96 percent is in arrears), Somalia will need the continued support of the international community to help meet much-needed humanitarian and development needs.

Somalia’s fourth SMP (May 2019–July 2020) will support the authorities’ continued reform efforts, laying the foundation for greater self-sufficiency and higher and more inclusive growth. The program will expand and deepen measures to build fiscal sustainability, across the FGS and the Federal Member States, further improve financial stability, address residual anti-money laundering and combating the financing of terrorism (AML/CFT) gaps, and strengthen governance and the fight against corruption.

Executive Board Assessment [2]

Executive Directors agreed with the thrust of the staff appraisal. They commended the authorities’ strong commitment to implementing three consecutive staff‑monitored programs (SMP) in a challenging environment, noting that Somalia’s gradual economic recovery reflected the authorities’ sustained policy and reform efforts, coupled with strong donor support. Directors recognized the challenging security and political situation, and welcomed the authorities’ ongoing efforts to improve economic resilience and inclusive growth. Directors indicated that the forthcoming National Development Plan should provide a blueprint to support these goals, and encouraged consultation with a wide set of stakeholders.

Directors welcomed the continued improvement in fiscal performance. Efforts to broaden the tax base and strengthen tax administration have increased domestic revenues, supporting a small expansion in health and education spending. However, substantially boosting development spending and achieving fiscal self‑sufficiency will require more effort in terms of revenue mobilization. Directors encouraged continued public financial management (PFM) reforms, highlighting the need to strengthen commitment controls and embed improvements in procurement. They welcomed the cabinet approval of the airport‑fee contract and further progress on the renegotiation of the Mogadishu port contract. Directors stressed that implementing a strong fiscal framework, supported by effective natural resource management and revenue‑sharing frameworks with the Federal Member States, will be critical to realizing Somalia’s longer‑term potential.

Directors welcomed the authorities’ efforts to enhance financial sector stability and strengthen supervision, and agreed that bringing mobile money service providers under the regulatory umbrella is a key near‑term priority. Directors were encouraged by the progress in strengthening the anti‑money laundering and combating the financing of terrorism regime, and stressed the need to address the remaining legal and operational gaps.

Directors encouraged continued progress on addressing governance weaknesses and the risk of corruption. They emphasized that passage of key legislation—including on revenue, PFM, audit, petroleum, statistics, and anti‑corruption—would promote better governance and transparency. Directors encouraged further efforts to strengthen statistical institutions and address data gaps. They noted that intensive capacity development support will need to be sustained to bolster ongoing reforms.

Directors concurred that Somalia’s external debt is unsustainable, and supported the authorities’ continued efforts to make progress toward the Heavily Indebted Poor Country (HIPC) initiative Decision Point. In this context, Directors agreed that the macroeconomic and structural policies outlined under the fourth SMP meet the policy standards associated with upper credit tranche arrangements. Directors also welcomed the authorities’ intention to begin making token payments to the IMF in 2020, and stressed that these should be very small given Somalia’s limited resources and challenging circumstances. Directors considered that satisfactory implementation of the SMP will help establish a track record and pave the way toward arrears clearance and eventual debt relief under the HIPC initiative. They recognized that this will also require the concerted effort of the membership to mobilize the necessary financing for debt relief, including to meet the costs for the Fund. To this end, they looked forward to discussing possible financing options in the period ahead. 

Somalia: Selected Economic and Financial Indicators, 2015–22

(IMF quota = SDR 44.2 million; Population: 14.2 million, 2018 estimate) (Poverty incidence: 69 percent; Main Export: Livestock) Est. Proj. 2015 2016 2017 2018 2019 2020 2021 2022 National income and prices Nominal GDP in millions of U.S. dollars 1/ 4,049 4,198 4,509 4,721 4,958 5,218 5,507 5,816 Real GDP, annual percentage change 3.5 2.9 1.4 2.8 2.9 3.2 3.5 3.5 Per capita GDP in U.S. dollars 310 313 327 332 339 347 357 368 Consumer prices (e.o.p., percent change) 0.3 1.2 6.1 3.2 3.0 2.7 2.3 2.2 (Percent of GDP) Central government finances 2/ Revenue and grants 3.5 4.1 6.0 5.7 6.9 7.2 7.4 7.7 of which: Grants 0.7 1.4 2.8 1.8 3.0 2.9 2.9 2.8 Expenditure, of which: 3.3 4.1 6.6 5.7 6.9 7.0 7.2 7.5 Compensation of employees 3/ 1.3 1.3 2.8 3.0 3.2 3.3 3.4 3.5 Purchase of non-financial assets 0.1 0.2 0.1 0.2 0.5 0.4 0.4 0.3 Overall fiscal balance 0.0 0.0 -0.6 0.0 0.1 0.2 0.2 0.2 Drawdown of government deposits 0.0 0.0 0.7 0.1 0.0 0.0 0.0 0.0 Overall balance, net 0.1 0.0 0.1 0.2 0.1 0.2 0.2 0.2 Stock of domestic arrears 1.7 1.8 1.5 1.5 1.3 1.1 0.8 0.6 (Millions of U.S. Dollars) Central bank summary balances Foreign assets (gross) 68.6 60.9 89.2 118.9 … … … … Gross reserves of the central bank 42.6 41.8 48.1 51.1 Net foreign assets, excl. IMF 4/ 21.6 21.6 24.0 26.2 … … … … CBS liabilities to government 7.2 5.4 29.3 39.5 … … … … (Percent of GDP) Balance of payments Current account balance -6.0 -9.4 -9.0 -8.3 -8.3 -8.0 -8.0 -8.9 Trade balance -72.8 -74.5 -80.5 -73.7 -72.6 -71.1 -71.4 -70.6 Exports of goods and services 25.6 25.4 22.1 25.9 26.8 26.5 26.2 27.0 Imports of goods and services 98.5 99.9 102.6 99.6 99.4 97.6 97.6 97.6 Remittances 32.9 32.5 31.5 29.2 28.8 29.1 29.3 28.8 Grants 34.9 33.3 40.8 36.9 36.3 34.7 34.7 33.7 Foreign Direct Investment 7.4 7.9 8.2 8.6 9.0 8.9 9.0 9.0 External debt 108.2 105.3 103.3 99.5 99.5 99.5 99.4 99.3 Market exchange rate(SOS/USD, e.o.p.) 22,285 24,005 23,605 24,475 … … … … Sources: Somali authorities; and Fund staff estimates and projections. 1/ There has been a significant downward revision to GDP compared to  the last staff report that affects all ratios to GDP. 2/ Budget data for the Federal Government of Somalia. Fiscal operations are recorded on a cash basis. GDP data cover the entire territory of Somalia. 3/ Increase in compensation of employees in 2017 reflects the bringing onto budget military spending related to the loss of an  off-budget grant. 4/ Program definition per TMU ¶9.

[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 summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm.
Distributed by APO Group on behalf of International Monetary Fund (IMF).