Federal Republic of Somalia SOMALIA ECONOMIC UPDATE July 2017 | Edition No. 2 Mobilizing Domestic Revenue to Rebuild Somalia Federal Republic of Somalia Somalia ECONOMIC UPDATE Mobilizing Domestic Revenue to Rebuild Somalia July, 2017 GMF07 AFrICA TABLE OF CONTENTS ABBREVIATIONS .......................................................................................................................................... i ACKNOWLEDGEMENTS ............................................................................................................................... i FOREWORD.................................................................................................................................................. iii Arar ........................................................................................................................................................... iv EXECUTIVE SUMMARY................................................................................................................................. v Nuxurka Soo Koobidda....................................................................................................................... x PART I: Recent Economic Developments ................................................................................................... 1 1.1 The Recent Drought Has Led to Large-Scale Food Insecurity ............................................................ 2 1.2 Economic Recovery Has Been Underway In 2015 and 2016—Despite Significant Challenges ......... 2 1.3 Inflation Remains Low, But Food Is Unaffordable for Many .............................................................. 4 1.4 The Large External Imbalance Is a Source of Vulnerability ............................................................... 5 1.5 The Scope of Monetary Policy Is Limited .......................................................................................... 6 1.6 Implementation of Fiscal Policy Has Improved, But Challenges Remain .......................................... 6 PART II: Outlook and Risks, 2017–19 ......................................................................................................... 11 2.1 The Underlying Recovery Should Resume After Drought Impact Is Ameliorated ............................. 12 2.2 Reforms Are Needed for Sustainable Growth.................................................................................... 12 2.3 Risks Are Significant .......................................................................................................................... 13 PART III: Special Focus: Mobilizing Domestic Revenue in Somalia ........................................................... 15 3.1 Overview ........................................................................................................................................... 16 3.2 Historical Context.............................................................................................................................. 16 3.3 Legal Framework............................................................................................................................... 18 3.4 Revenue Performance Since 2012..................................................................................................... 22 3.5 Constraints ........................................................................................................................................ 23 3.5.1 Low and narrow tax base ......................................................................................................... 24 3.5.2 Weak tax administration .......................................................................................................... 24 3.6 Reforms Somalia Could Undertake ................................................................................................... 28 3.6.1 Measures that could be implemented in the short term ......................................................... 28 3.6.2 Deeper Measures for the Medium Term ................................................................................... 32 3.6.3 Towards a Comprehensive Tax System for the Long Term ........................................................ 32 3.7 Revenue Projections Under Alternative Reform Scenarios............................................................... 34 3.7.1 Individual and corporate income tax ........................................................................................ 34 3.7.2 Taxes on international trade ..................................................................................................... 36 3.7.3 Other domestic taxes ................................................................................................................ 36 3.7.4 Stamp sales and duty ............................................................................................................... 36 3.8 Limits to Revenue Mobilization ........................................................................................................ 38 Annex A: Recommended reforms for increasing domestic revenue mobilization in the short, medium, and long term................................................................................................................................ 42 LIST OF FIGURES Figure 1.1: Drought has triggered significant price increase on agricultural products in many regions.... 3 Figure 1.2: Somalia’s nominal GDP continues to rise................................................................................. 4 Figure 1.3: Commodity prices in Somalia are much higher than global prices.......................................... 4 Figure 1.4: Somalia imports more than four times as much as its exports, creating huge external account deficits ................................................................................................................................................. 5 Figure 1.5: Domestic revenue forecasts for the FGS have become more realistic..................................... 7 Figure 1.6: Monthly revenue mobilization by the FGS has increased ........................................................ 7 Figure 1.7: Taxes on international trade are the main source of domestic revenue in Somalia ................ 8 Figure 1.8: Actual disbursements by Somalia’s donors fell short of commitments ................................... 8 Figure 1.9: Spending by the FGS has increased—but actual spending still remains less than budgeted spending .................................................................................................................................. 9 Figure 1.10: Administrative and security services dominate FGS spending................................................. 9 Figure 1.11: The FGS spent less than US$2.5 million on education and health in 2016.............................. 9 Figure 1.12: Employee compensation and spending on goods and services accounted for 88 percent of FGS spending in 2016 .......................................................................................................... 10 Figure 1.13: The number of civil servants in the FGS has risen since 2013 ................................................. 10 Figure 3.1: Automation tax collection has increased notary revenues ..................................................... 27 Figure 3.2: Organogram for the FGS’s Revenue Department .................................................................... 28 Figure 3.3: Reforms could yield significant revenue growth by the long-term .......................................... 35 Figure 3.4: Reforms would increase revenues in all categories of taxes ................................................... 37 LIST OF TABLES Table 1.1: Revenue outturn by the FGS, 2012–16 .................................................................................... 7 Table 3.1: Selected revenue ratios in Somalia, 1985–89 (percent)........................................................... 17 Table 3.2: Central government tax revenues as percent of GDP in selected countries, 2003–15 ............ 22 Table 3.3: Domestic revenue collection in Somalia, 2012–16 (millions of current dollars)...................... 23 Table 3.4: Budgeted and actual revenues in Somalia, 2014–16 (millions of dollars, except where otherwise indicated) ................................................................................................................ 25 Table 3.5: Tax reform measures that could be implemented in the short term (within two years)......... 31 Table 3.6: Tax reforms that could be implemented in the medium term (between to five years)........... 33 Table 3.7: Projected tax revenues by 2019 and 2022 given short-, medium-, and long-term reforms .... 35 Table 3.8: Distribution of tax bases between the FGS and the states ...................................................... 38 Table 3.9: Conceptual basis of tax assignment......................................................................................... 39 Table A.1: Recommended reforms for increasing domestic revenue mobilization in Somalia in the short, medium, and long term ................................................................................................ 42 LIST OF BOXES Box 3.1: Types of fees and taxes in the FGS .......................................................................................... 19 Box 3.2: Turning revenues around: Lessons from Afghanistan ............................................................. 29 Abbreviations Af Afghan Afghani AfDB African Development Bank AML/CFT Anti–Money Laundering/ Combating the Financing of Terrorism BRA Benadir Regional Administration CBS Central Bank of Somalia COMESA Common Market for Eastern and Southern Africa FAO Food and Agriculture Organization FDI Foreign Direct Investment FEWSNET Famine Early Warning Systems Network FGS Federal Government of Somalia FMS Federal Member States FSNAU Food Security and Nutrition Analysis Unit GDP Gross Domestic Product HIPC Heavily Indebted Poor Countries IMF International Monetary Fund ICT Information Communication Technology ODA Official Development Assistance OECD Organisation for Economic Co-operation and Development OPEC Organization of the Petroleum Exporting Countries PFM Public Financial Management SFMIS Somalia Financial Management Information System SMP Staff Monitored Program SoSh Somali Shilling TIN Tax Identification Number VAT Value Added Tax UN United Nations July 2 0 1 7 | Edition No. 2 i ACKNOWLEDGEMENTS T his second edition of the Somalia Economic Update was prepared by a team led by John Randa and Catherine Ngumbau and supervised by Kevin Carey. The core team consisted of Abdulqafar Abdullahi, Aues Scek, and Barbara Karni. The team acknowledges contributions from Robert Waiharo, Hibak Kalfan, Hassan Hirsi, Nellie Gaithuma and Janerose Lubisia. The report benefitted from the insights of several peer reviewers, including Jean Pascal Nganou and Leif Jensen. The team received overall guidance from Abebe Adugna (Practice Manager, Macroeconomic and Fiscal Management) and Kevin Carey (Lead Economist, Macroeconomic and Fiscal Management); Yutaka Yoshino (Program Leader, Equitable Growth, Finance & Institutions); Bella Bird (Country Director for Tanzania, Somalia, Burundi, and Malawi); Preeti Arora (Country Program Coordinator, Tanzania, Somalia, Burundi, and Malawi); and Hugh Riddell (Country Representative for Somalia). ii S om a l i a Eco n om i c Update • 2017 FOREWORD It is my pleasure to present the second edition of the Somalia Economic Update. These reports are prepared in close partnership with Somali stakeholders and aim to contribute to government policy-making and to a national conversation on the economy. We are particularly grateful to our colleagues at the Ministry of Finance who have contributed and provided guidance throughout the process. This report coincides with the worst drought Somalia has faced since 2011 which has plunged over half the population into extreme need. The drought reflects Somalia’s continued exposure to the impacts of climate- related shocks, including rising levels of displacement-led urbanization. Resilience to future shocks – which are likely to increase in the coming years – requires considerable and longer-term investments in rural and urban livelihoods, services and infrastructure. More broadly, macro- economic stability, predictable and effective policies and functioning institutions will also be critical enablers for public and private investments. In that context, I am therefore pleased that this second edition of the Somalia Economic Update is focused on domestic revenue mobilization, analyzing historical and current trends and advancing concrete recommendations for government and its partners to consider. We hope all stakeholders find it a useful contribution and we look forward to engaging more fully in this critical endeavour. Bella Bird World Bank Country Director for Somalia July 2 0 1 7 | Edition No. 2 iii Arar W axay ii tahay farxad inaan soo bandhigo daabacaaddii labaad ee Dhaqaalaha Soomaaliya ee Xilligan. Warbixinahan waxaa la diyaariyay iyadoo lala kaashanayo saamileyda Soomaaliyeed loogana golleeyahay inay wax kageystaan siyaasadda dawladda iyo wada-hadalka dhaqaale ee qaranka. Waxaan si gaar ah ugu mahad-celinaynaa saaxiibadayada ka hawl-gala Wasaaradda Maliyadda, kuwaas oo gacan iyo talooyin ka geystay intay socotay hawshan. Warbixintani waxay kusoo hagaagtay xilli Soomaaliya ay ka jirto abaartii ugu xumeyd illaa 2011, taas oo ku aafeysay in ka badan kala badh dadka baahi xad dhaaftay. Abaartu waxay ka turjumeysaa siday Soomaaliya weli ugu dhacayaan saameynta mashaqooyinka isbedelka cimilada lala xidhiidhiyo sida kororka deegaameynta ka dhasha bara-kicidda. Ka kabashada deganaan-la’aanta mustaqbalka – taas oo loo badinayo inay kororto sanadaha soo socda – waxay u baahan tahay maal-gelin xoog leh oo muddo dheer loogu talo galay laguna sameeyo maciishadda magaalooyinka iyo reer-guuraaga, adeegga iyo kaabayaal-dhaqaale. Si guud, sal-dhigashada dhaqaalaha guud, saadaalinta iyo wax ku oolnimada siyaasado iyo hay’ado shaqeeya ayaa noqondoona suuro-geliyeyaal muhiim u ah maalgelinta guud iyo midda gaarka loo leeyahay. Iyadoo arrintaas laga ambaqaadayo, waxaan aad ugu faraxsanahay in daabacaaddan labaad ee Dhaqaalaha Soomaaliyeed ee Xilligan uu xoogga saarayo dar-dargelinta dakhliga gudaha, falanqeynta qaababkii hore iyo kuwa hadda jira iyo hordhigidda soo jeedinno cadcad oo dawladda iyo hay’adaha iskaashigu ka baaraan- degaan. Waxaan ku rajo weynahay in dhammaan saamileydu u arkaan wax ka geysasho loo baahnaa, waxaanana ku hanweynahay inaan si buuxda uga hawl-galno hawshan adag. Bella Bird Agaasimaha Guud ee Bangiga Aduunka ee Soomaaliya iv S om a l i a Eco no m ic Update • 2017 EXECUTIVE SUMMARY S omalia currently faces large-scale food insecurity, arising from the drought and poor rainfall conditions prevailing across much of the condition has led to up to 41,250 AWD/cholera cases including estimated 6,188 admissions by June 2017, and sharp increases in displacement. country. Following four consecutive seasons of poor rainfall and low river water levels in large swaths The new Somali leadership has highlighted drought of the country, a severe food crisis has hit in 2017. relief as a top priority. The peaceful and smooth The drought has led to near total crop failures transfer of power has allowed the government to and reduced rural employment opportunities, focus quickly on drought and the difficult fiscal widespread shortage of water and pasture, and situation, highlighting the combined humanitarian consequent increases in livestock deaths, which have and development challenges facing the country. in turn stretched the country’s coping mechanisms The Humanitarian Response Plan presented at the to the brink. Food access diminished rapidly among London Conference in May 2017 increased the poor households as staple food prices rose sharply appeal to US$1.5 billion to reach 5.5 million people and livestock prices dropped significantly as people with urgent life-saving humanitarian assistance. engaged in forced sales to cope with the effects of Still, according to the UN (2017), the humanitarian the drought. situation remained grim for millions as of mid-2017 with a significant risk of famine in many parts of According to a preliminary Rapid Drought Needs the country. Assessment (RDNA) by World Bank staff, which is based on a triangulation of secondary data1 through Macroeconomic Developments: remote-sensing techniques, the drought has led to: Data constraints make it difficult to comprehensively livestock-related losses of between US$1.3 billion assess the macroeconomic situation in Somalia. and US$1.7 billion for the period of the drought; crop Somalia does not have a national accounts production losses of up to US$60 million during the statistical framework and prevailing estimates of period of the drought; and depletion of nominally nominal GDP are based on sparse expenditure side functional water resources, over 50 percent of which information, notably a survey-based estimate of are located within highly drought stressed areas. household consumption and trade partner exports and imports. Thus, macroeconomic statistics are The drought has significantly impacted poverty and not comprehensive enough to capture growth of human welfare. The drought conditions left millions the economy accurately. While it is possible to of Somalis facing severe food and water shortages. produce one-off projections of GDP growth, these An estimated 6.2 million people are in need of aid in are highly qualitative and by necessity based on a 2017 (more than half of the total population), with few sectors where some proxy indicators for activity 2.9 million needing urgent life-saving humanitarian are possible, such as for ICT, construction, and trade. assistance. About 320,000 children under the age of But such estimates will miss much of the rural sector 5 years are acutely malnourished and are in need of and non-marketed output such as water, fodder, and urgent nutrition support. Of these, 50,000 children food grown for own-consumption. Furthermore, are severely malnourished and far more vulnerable lack of price data, including the GDP deflator, makes than any other group. The drought and famine it difficult to estimate real GDP growth. The RDNA relies on the following sources of information: Drought Severity data was derived from ENDVI 10-year historical anomaly data based 1 on LANDSAT 8 imagery. Displacement figures were derived from compiled IDP data from IOM, UN Habitat, UNHCR and local Ministries of Interior. Agriculture and livestock impact data heavily relied on expert judgment and data from FAO FSNAU database (2011-2017), UNFPA 2014 population data and LANDSCAN 2015 population density. Cholera/AWD forecasts and data was derived from World Health Organization (WHO) data, reporting and forecasting analysis. Water resources data was derived from UN SWALIM and ICRC databases. July 2 0 1 7 | Edition No. 2 v Executive Summary Nominal GDP is estimated to have grown by 5 management remain weak. On the expenditure percent in 2015 and by 6 percent in 2016. As in the side, recurrent expenditures account for almost all recent past, Somalia’s GDP growth continues to be expenditure, with capital spending accounting for urban-based, consumption driven, and fueled by just 3 percent of total spending in 2016. Unrealistic remittances and donor support. Over 70 percent of revenue projections, coupled with weak expenditure GDP is estimated to be generated in the urban areas. controls, contribute to the accumulation of arrears. Consumer price inflation fell from 4.5 percent in Development partners’ contributions to the budget 2013 to 1.5 percent in 2016 (IMF 2017), although big have been critical in recent years, although they spatial variation in prices remains. While dollarization remain unpredictable, making it difficult to execute and the sharp decline in oil prices have helped to the budget as planned. contain inflation, the drought and food insecurity have driven up food prices. As in other famines, Somalia’s current account deficit, at around 15 prices have to be seen in the context of affordability percent of GDP, remains large. The current account of food for vulnerable groups whose livelihoods have deficit is largely driven by imports, estimated at been eroded by agricultural collapse. 62 percent of GDP, and larger than exports by a factor of more than four. Exports of goods and Payments systems are the key driver of financial services remain low largely because of the cost of sector deepening, with the state still playing a conflict, including damage to vital infrastructure, small role. Multiple currencies, including airtime, security checks, roadblocks, and the shutdown of are used as mediums of exchange. trade routes—all of which constrain In addition to the Somali shilling exports. Remittances—estimated at and the U.S. dollar, Somalis regularly 24 percent of GDP in 2015—remain use the currencies of Djibouti, Current account deficit a lifeline for the economy. Most of Ethiopia, and Kenya as mediums of is largely driven by the current account deficit has been exchange in border areas. Mobile imports, estimated at financed by FDI (12 percent of GDP) airtime denominated in U.S. dollars 62 percent of GDP, and and ODA in recent years. is also widely accepted as payment larger than exports by a throughout the country. With factor of more than four Growth in 2017 will decelerate technical assistance from the IMF, to 2.5 percent in nominal terms the CBS has begun to engage in currency reform although it is expected to pick pace in subsequent prior to a planned issuance of a limited volume of years. Over the medium term, Somalia’s economy is thousand-shilling notes for circulation in an initial projected to grow at a steady nominal annual rate phase to restore the credibility of the domestic of 5–7 percent, driven by aggregate demand fueled currency as a first step toward allowing the CBS to by a vibrant private sector, remittances, lower oil engage in effective monetary policy. prices, and improved security. Reconstruction of the war-torn country will underpin growth as the Somalia’s fiscal situation remains challenging. new government consolidates peace and security. Domestic revenue (taxes plus fees) as a share of GDP With stronger security, Somalia is expected to enjoy remains very low, at just 2.7 percent of GDP in 2016, a peace dividend as the state extends de facto making it difficult to provide services.2 Revenue authority over an expanding territory. growth in 2016 was flat, reversing the growth in earlier years. Past forecasts were unrealistically Policies are required to stimulate economic growth high (as the differences between budgeted and over the medium term. As the drought subsides and actual revenues), a problem that led to ad hoc the agriculture sector begins to recover, the FGS can cash rationing. In addition, the basic norms of fiscal focus on implementing policies to ensure stability The base GDP excludes Somaliland. 2 vi S om a l i a Eco no m ic Update • 2017 Executive Summary as well as address weaknesses in the provision of rather than broad-based investment. The system’s infrastructure, security, and the regulatory and weaknesses reflect poor policy, weak administrative institutional environment. First, macroeconomic capacity, and inadequate coordination of institutions policies that continue to stabilize the economy are at all levels of governments and between the federal necessary (but not sufficient) to support recovery government and its Federal Member States (FMS). and economic diversification. Second, beyond stability, significant investments will be needed Sustainable and reliable domestic revenue is critical to close the country’s capital and infrastructure if Somalia is to implement the strategy laid-out in gap, improve resilience, and improve the business the National Development Plan and achieve the environment over the medium term. Finally, state-building, sustained rapid economic growth, reforms in public financial management (including and poverty reduction objectives of the National strengthened domestic revenue mobilization), and Development Plan 2017-2020. To support sustainable strengthened governance are needed to raise more expenditures, drive development, and reduce resources for development and ensure that the reliance on external sources, the FGS will need to increased resources are used wisely and efficiently. find ways to increase domestic revenue in a way that doesn’t disincentivize the private sector—a sector Notwithstanding the relatively robust growth that has been an engine of Somalia’s development in expected over the medium term, significant risks the past two and half decades. Enhanced domestic remain. On the domestic front, the ongoing conflict revenue mobilization–in particular a scenario where and insecurity in some areas of the domestic revenue could increase country and the threat of famine is more rapidly than administrative delaying and dampening broad-based expenditures--offers Somalia a growth prospects. Although Somalia’s On the external front, promising and sustainable source of economy remains adaptable, Somalia’s economy is home-grown development finance. simmering conflict continues to pose highly dependent on an important risk to economic activity foreign remittances, Improved revenue generation is key in the medium term. Terrorism has development partners’ to building both a sustainable state scared away both domestic and flows, and revenue and a durable peace. Mobilizing foreign potential investors and revenue is a cornerstone of state- from exports tilted FGS priority spending toward building. Building capacity to security rather than growth-enhancing activities. raise revenue through taxes is particularly crucial, On the external front, Somalia’s economy is highly because it reduces dependence on aid, helps finance dependent on foreign remittances, development service delivery, strengthens the contract between partners’ flows, and revenue from exports. Threats the state and its citizens, and fortifies intra-society to any of these sources will affect Somalia’s growth relationships. prospects. In Somalia’s case, domestic resource mobilization Enhancing Domestic Revenue Mobilization: cannot be delinked from security, the delivery of Total FGS tax revenue remained just over 2 percent essential services and the increased accountability of GDP in 2016. FGS revenue covers only around 60 of public finance management institutions. percent (US$ 113 million in 2016) of a small federal Somalia faces immense difficulties in rebuilding budget, and more than 80 percent of tax revenue confidence in the legitimacy and credibility of state comes from trade taxes. The FGS lacks the resources organs, particularly organs tasked with fiduciary to undertake major programs or investment functions, which are perceived as responsible for projects. Public investment has so far continued the transparent management of resources. The to rely heavily on official development assistance, ability of the FGS to mobilize revenue depends on which focuses on the social sectors and security how successful the government will be at reversing July 2 0 1 7 | Edition No. 2 vii Executive Summary pervasive tax evasion and lack of tax compliance. actors in each of the key sectors will be critical and The government needs to ensure peace and security have been initiated through the Somalia Public for legitimate economic activity and to enforce the Private Dialogue Forum. equitable payment of taxes. To do so, it will have to engage in intensive consultation with private Revenue administration and fragmentation of sector actors, educate taxpayers and raise general the tax instruments are binding constraints. For public awareness about the purpose and need for domestic revenue mobilization to take hold and taxation. This would include linking the benefits succeed, the FGS will need to address a number of security and essential services with taxpayer of challenges, including the low capacity of tax compliance, the proper collection of revenue, and administration, the lack of a framework to enable sound revenue management. taxpayers self-assessment, the presence of many low-yielding “nuisance” taxes, the illicit revenues The lack of an agreed upon revenue assignment collected by many local authorities, and double between the FGS and federal member state taxation (mainly by local authorities and the FGS). governments hampers mobilization efforts and The FGS and the Federal Member States (FMS) requires deepening the newly initiated dialogue should continue the discussions that have begun on among Ministers of Finance. The FGS currently intergovernmental fiscal federalism, initiated in the collects all its revenue from the capital city; states Finance Ministers’ Forum, in particular on tax and collect and retain revenue from territories under tariff harmonization. Addressing corruption in tax their control. The FGS has begun to transfer a administration and creating a well-managed, honest modest amount of domestic resources3 as well as professional tax cadre will also be key. externally financed resources to the states under the World Bank If appropriate measures are administered Multi Partner Fund adopted, the scope for increasing while the federal/sub-national level The government needs revenue mobilization is significant. expenditure responsibilities have to ensure peace and The World Bank simulation not been clearly defined. This de security for legitimate undertaken for this edition of the facto arrangement limits revenue economic activity Somalia Economic Update series mobilization. Agreement on tax and to enforce the shows that a gradual implementation assignment that allows the FGS to equitable payment of tax administration and customs collect taxes outside Mogadishu of taxes reforms could raise domestic would substantially increase revenue from around 2 percent potential revenue. of GDP in 2015 to more than 13 percent of GDP (US$1.1 billion) in 2022 if a sequenced reform The FGS can take a series of revenue mobilization package is implemented. This package begins with actions in the short and medium terms. These increased compliance and enforcement of existing actions include streamlining the tax laws; tackling taxes, broadening of the base for taxes already on the problem of the hard-to-tax informal sector of the books (e.g. wage and corporate income), and the economy, particularly agriculture and livestock; higher use of excises and some temporary taxes imposing and collecting income taxes on wages that would be removed in later phases of the and salaries in both the public, private, increasing plan when a broader range of tax instruments is tax compliance by large companies; and levying available. In the deepening medium-term reform departure fees and other sources of nontax scenario, there is further base broadening and revenue. The discussions with the private sector expanded territorial coverage, revamping of rates, In response to the 2017 drought, the Federal Government committed to make a regular transfer of US$150,000 to all Federal Member States. 3 In addition, the MPF funded Recurrent Cost and Reform Finance Project finances fiscal transfers for service delivery in FMS based on a set of Readiness Criteria. viii S om a l i a Eco no m ic Update • 2017 Executive Summary and reorganization of administration. Finally, the • The short-term package by itself yields increases long-term reform consolidates the earlier reforms of 6 percent of GDP by 2022. around a modernization of legislative and regulatory • The medium-term deepening package yields underpinnings of the tax system. increases of 9 percent of GDP by 2022. Without some reforms, Somalia will remain in a • The long-term package – cumulating and fiscal trap, while even modest reforms significantly consolidating the previous reforms--yields increases scale up FGS fiscal capacity. In the baseline scenario, of 13 percent of GDP by 2022. While significant, which assumes that change continues at its current this would still leave Somalia at the lower level of pace, the domestic tax revenue to GDP ratio increases from 2.0 percent of GDP in 2015 to 2.7 revenue performance in low income countries. percent in 2022. July 2 0 1 7 | Edition No. 2 ix Nuxurka Soo Koobidda S oomaaliya waxay xilligan wajahaysaa cunto yaraan lixaad leh, taas oo ka dhalatay abaarta iyo xaaladda roob yarida ee ku baahsan wadanka ah. Ilaa 320,000 oo caruur da’doodu ka hooseyso 5 jir oo nafaqo-xumo hayso ayaa u baahan kaalmo nafaqeed deg-deg ah. 50,000 oo caruurtaas kamid intiisa badan. Ka dib afar sanadood oo roob yari ah ahi ayay nafaqo-xumo aad u daran haysaa, wayna iyo webiyada oo meelo badan biyo yareeyay, waxaa ka liitaan koox kasta. Abaarta iyo macaluushu waxay ku dhuftay wadanka abaar aad u ba’an 2017. Abaartu sababtay 41,250 AWD/cholera dhacdo iyadoo ay ku waxay keentay in guud ahaan dalagii beeraha la jiraan qiyaas 6,188 la daaweeyay bishii June 2017, waayo iyo inay hoos u ridday fursadihii shaqada ee iyo baro-kac lixaad leh. miyiga, biyo iyo calaf yaraan baahsan, iyo wixii ka dhashay arrintaas oo ah xoolihii noolaa oo dhamaada, Hogaanka cusub ee Soomaaliyeed waxuu ku taas oo keentay iyaduna inay madhiso (gaadhsiiso nuux-nuuxsaday in gurmadka abaaruhu yahay heerkii ugu dambeeyay) siyaabihii kala duwanaa ee mudnaanta ugu sareysa. Kala wareegidii xilka ee wadanku kula tacaalayay dhibkaas. Waxaa si degdeg ku dhacday sida nabadda iyo dhibaato la’aanta ahi ah u yaraaday helitaanka cuntada ee dadka saboolka waxay dawladda u saamaxday inay xoogga si deg- ah iyadoo qiimaha cuntadu aad u kacay midka deg ah u saarto abaarta iyo dhibaatada xaaladda xoolaha noolna uu hoos ugu dhacay, dadka xoolaha dhaqaale, muujiyeenna caqabadaha isa saaran leh khasab ku noqotay iibinta xoolahooda si ay wax ee bani’aadanimo iyo horumarineed ee wadanka uga qabtaan saameynta abaarta. wajahayo. Qorshaha wax Kaqabad ee Bani’aadanimo ee lagusoo bandhigay Shirkii London bishii may, Sida ay sheegtay hordhaca Qiimeynta ee Baahida 2017 waxuu kordhiyay yabooha loo baahan yahay Degdega ah ee Abaaraha (Rapid Draught Needs illaa US$1.5 billion si loo gaadhsiiyo 5.5 million oo Assessment (RDNA) oo ay sameeyeen shaqaalaha qof kaalmo naf-badnaadin oo bani’aadanimo oo Bangiga Aduunka, taas oo ku saleysan farsamada deg-deg ah. Siday sheegtay Qaramada Midoobay sahanka ee saddex-xagaleynta1, abaartu waxay (2017) xaaladda bani’aadanimo ayaa weli ah mid horseeday: Waayidda US$1.3billion – US$1.7billion aad ugu fool-xum (mugdi kaga jirtaa) malaayiin dad oo walxaha la xidhiidha xoolaha nool intay abaartu ah maadaama badhtamaha 2017 ay weli jirto halista socotay; Waayitaanka wax soo saarka dalaga illaa macluusha ee qaybo badan oo wadanka kamid ah. US$60 million intay abaartu socotay; iyo gudhitaanka ilihii biyaha ee magac ahaan u shaqeynayay, kuwaas Horumarka Dhaqaalaha Guud: oo in ka badan 50% ku yaallay goobaha sida xoogga Xog darada jirta awgeed waxaa adag in la sameeyo leh abaartu ugu dhufatay. qiimeyn dhameystiran oo ku saabsan xaaladda dhaqaalaha guud ee Soomaaliya. Soomaaliya ma Abaartu waxay si muuqata saameyn ugu yeelatay laha qaab tira-koob ee xisaabaadka qaranka, qiyaasta saboolnimada iyo dadka daryeelkooda. Malaayiin Soomaaliyeed ayaa wajahaya cunto iyo biyo yaraan nominal (lacageed) ee wax soo saarka guud (WSG) abaarta daraadeed. Qiyaas 6.2 million oo ruux ayaa ama GDP ee ugu badanna waxay ku saleysan tahay u baahan kaalmo sanadka 2017 (ka badan kala badh warbixinnada kharashaadka oo kooban, kuwaas dadka wadanka), 2.9 million oo kamid ahi waxay u oo laga tilmaami karo qiyaasaha ku saleysan sahan baahan yihiin kaalmo bani’aadan oo naf-badbaadin lagu sameeyay isticmaalka qoysaska iyo ganacsiga RDNA waxay ku tiirsan tahay xogta ay ka hesho ilahan: Xogta Darnaanshaha Abaarta waxa lagasoo min-guuriyay ENDVI xog 10-sano si taariikh 1 ahaan loo aruuriyay salkana ku haysa muuqaalada LANDSAT 8. Tirade barakaca waxaa laga helay xog ay ka aruuriyeen IDP IOM, UN habitat, UNHCR iyo Wasaaradda arrimaha gudaha ee deegaanka. Saameynta Beeraha iyo Xoolaha waxay xogtoodu aad loo ictimaaday qiyaasta khubarada iyo xog laga helay FAO FSNAU database (2011-2017), xogta dadka ee UNFPA 2014 iyo LANDSCAN 2015 ee cufnaanta tirade dadka. Odoroska iyo xogta Cholera/AWD waxaa laga soo guuriyay xogta, warbixinada iyo falanqeynta odorosyada ee Ururka Caafimaadka Aduunka (WHO). Xogta ilaha biyaha waxaa laga soo xigtay UN SWALIM & saldhiga xogta ee ICRC. x S om a l i a Eco n om i c Update • 2017 Nuxurka Soo Koobidda dhoofinta iyo wax soo dejinta. Sidaa awgeed tira- bilaabay inuu isbedel ku sameeyo lacagta ka hor koobta dhaqaalaha guud ma aha mid dhammeystiran intaan suuqa lasoo gelinin lacagta kun-ka ah, taas oo oo ku filan in la helo kororka dhaqaale ee dhabta ah wejiga koowaad ee lagu ilaalinayo aaminaadda ah. Inkasta oo ay tahay suuro-gal in la sameeyo hal lacagta wadanka, ahaanaysana tallabada ugu mar qiyaasta kororka wax soo saarka guud, waxay horeysa ee CBS u ogolaaneysa in ku hawl-galo noqonayaan kuwo tayo ahaan ah kuna saleysan siyaasadda lacagta oo wax ku ool ah. qaybo dhawr ah oo tilmaamayaal aan dhab ahayn ee hawlaha sida ICT, dhismaha iyo ganacsiga. Laakiin Xaaladda kharashka iyo dakhliga dawlada qiyaastaasi waxay meesha ka saaraysaa in badan oo Soomaaliyeed waxay ahaaneysa mid Caqabad qaybaha reer-guuraaga ku saabsan iyo waxyaabaha hortaagnaato. Dakhliga gudaha (canshuuraha iyo aan la suuq-geynin sida biyaha, calafka iyo cuntada ijaarka) ee qaybta ka ah GDP waxuu ahaanayaa mid qofku iskiis u beerto. Intaas waxaa dheer xog ku hooseeya, sida uu u ahaa 2.7% GDP 2016kii, taas oo saabsan qiimaha, sida qiimo dhinka GDP, waxay adkeynaysa in la bixiyo adeegyadi2i. Kororka dakhliga adkaynaysaa in la helo qiyaas kobaca GDP dhab ah. ee 2016 waxuu ahaa mid siman, kaas oo ah caksiga kororkii sanadihii ka horeeyay. Odoroskii hore waxuu GDP aan dhabta ahayn waxa lagu qiyaasay ahaa mid si aan maangal ahayn u sareeyay (sida ku koboceeda 5% 2015 iyo 6% 2016. Siday ahayd cad farqiga u dhaxeeya miisaaniyadii la sameeyay iyo xilliyadan dhawba kororka GDP ee Soomaaliyeed dakhliga la hayo), dhibkaasina waxuu abuuray in la waxay sii ahaaneysaa mid magaalada ku saleysan, beekhaamiyo lacagta si kutalo-gal aan la hayn. Intaas uu dhaqaajiyo isticmaalka (kharash gareynta), kana waxaa dheer in dhaqamada maareynta dhaqaalaha shiidaal-qaadata kaalmooyinka xawaaladaha iyo ee aasaasiga ahi yihiin kuwo liita. Dhinaca deeq-bixiyayaasha. Ka badan 70% GDP waxaa lagu kharashaadka, kharashaadka joogtada ah ayaa ugu qiyaasay in laga dhaliyo magaalooyinka. Qiimaha badan kharashaadka la bixiyo, hantida labixiyaa sicir-bararka ee isticmaalku waxuu ka soo dhacay waxay u taagan tahay 3% kharashka guud ee 2016. 4.5% 2013kii illaa 1.5% 2016kii (IMF 2017), in kastoo Odoros dakhli oo maangal ahayn oo uu weheliyo farqi aad u balladhan oo qiimaha ahi weli ka jiro hubin xumo kharashaadka baxaya waxay qayb ka meela kala duwan ee dalka. Inkastoo wax kukala yihiin deynta is dul fuushay. Deeqda saaxiibada iibsiga doolarka iyo hoos u dhaca qiimaha saliidu horumarinta ee miisaaniyadda waxay ahayd mid ay caawiyeen xakameynta sicir-bararka, abaarta aad muhiim u ah sanadihii dhaweyto, inkastoo ay iyo cunto yaraantu sare ayay u qaadeen qiimaha iyaguba noqdeen kuwo aan lasaadaalin Karin sidaana cuntada. Sida macaluulaha kale ee dhaca, qiimaha u adkeynaya in loo dhaqan geliyo miisaaniyadii sidii cuntada waa in loo eegaa awoodda ay cuntada u loo qorsheeyay. leeyihiin qaybaha jilicsan ee bulshada kuwaas oo maciishadoodii la nabaad guurtay burburkii beeraha. Hoos-udhaca xisaab dibadeedka Soomaaliyeed ee xilliga oo qiyaastii ah 15% GDP way sii ballaadhan. Nidaamyada lacag-bixinta ayaa ah furaha wada Hoos-udhacan xilligan ku yimid xisaabta waxaa inta horumarka qaybta maaliyadda, dawladduse waxay badan wada keenidda badeecadaha oo lagu qiyaasay ku leedahay door yar. Lacago kala duwan oo ay ku 62% GDP, taas oo weliba ka weyn wax dhoofinta jiraan airtime (lacagaha mobil) ayaa loo isticmaalaa afar jibaar. Dhoofinta alaabta iyo adeegyadaba wuu sarifka ama wax isweydaarsiga. Kolka laga tago hooseeyaa sababtoo ah kharashka colaadu keeneyso shillinka soomaaliga iyo Doollarka, soomaalidu sida dhaawaca gaadhay kaabayaashii dhaqaalaha, waxay si joogto ah wax ugu kala sariftaan lacagaha hubinta amaanka, jid-gooyooyinka iyo xidhitaanka Jabuuti, Itoobiya iyo Kenya goobaha xuduudaha ah. dariiqii ganacsiga – dhamaantoodna ay xanibayaan Lacagaha mobil-ka oo dollar ah ayaa wadanka si aad wax dhoofinta. Xawaaladaha – lagu qiyaasay 24% wax loogu bixiyaa. Isagoo ka helayaa kaalmo farsamo GDP 2015kii –waxay ahaanayaan xadhiga-nolosha IMF, Bangiga Dhexe ee Soomaaliyeed (CBS) waxuu ee dhaqaalaha. In tabadan hoos udhaca xisaabta GDP aasaaska waa laga reebayaa Somaliland. 2 July 2 0 1 7 | Edition No. 2 xi Nuxurka Soo Koobidda waxaa lagu maalgeliyey maalgalin dibada ka tamid ka jirta wadanka qaybo ka mid ah, iyo cabsida (FDI) (12% GDP) iyo mucaawinada dibada (ODA) laga qabo macaluusha waxay dib u dhigayaan oo sanadihii dhawaa. yareynayaa himilada laga qabo koror sal balaadhan. Inkastoo dhaqaalaha Soomaaliyeed yahay mid la Koboca 2017 ayaa hoos ugu dhici doona 2.5% qabsada xaaladaha jira, qulqulatooyinku waxay xaaladahaas la magacaabay in kastoo la rajeynayo halis muhiim ah ku hayaan hawlaha dhaqaale inuu tallaabo horey u qaado sanadaha xiga. Xilliga ee xilliga dhexe. Argagixisadu waxay cabsi ku dhexe dhaqaalaha Soomaliya waxaa la saadaaliyey abuurtay maalgashadayaashii gudaha iyo dibedda inuu kordhayo si tartiib ah 5-7% sanadkiiba, waxayna u weecisay JFS mudnaateedii kharash kaas oo ay riixayaan celceliska baahida oo ka ku bixinta hawlaha amaanka meeshii lagaga bixin shiidaal-qaadanaya ganacsiga gaarka ah oo nool, lahaa hawlaha kororka dhaqaale sare u qaadaya. xawaaladaha, qiimaha saliidda oo hooseeya, iyo Dhinaca dibedda dhaqaalaha Soomaaliya waxuu ammaanka oo hagaagay. Dib-u-dhiska wadan dagaal si aad ah ugu tiirsan yahay xawaaladaha, qulqulka aafeeyay waxuu aasaas u noqon koboca iyadoo dhaqaale ee saaxiibada horumarinta, iyo dakhliga dawladda cusubi xoogga saarayso nabadgelyada dhoofinta kasoo xarooda. Cabsi lageliyo qaar kamid iyo ammaanka. Ammaanka oo xoogeysta waxaa la ah ilahaas waxay saameyn ku yeelan rajada kororka rajeynayaa inay Soomaaliya ku naallooto faa’iidada ee Soomaaliya. amniga mar walbana dawladda xukunkeedu kusii faafayo deegaanada ay isku fidisay. Sare u qaadidda Dardar-gelinta Dakhliga Gudaha: Wadarta guud ee dakhliga canshuuraha Waxaa loo baahan yahay siyaasado si loo godliyo Jamhuuriyada Federalka Somaaliaya waxuu ahaa koboca dhaqaale ee xilliga dhexe. Markay in kabadan 2 % GDP 2016kii. Dakhliga JFS waxuu abaartu sii yaraato waaxyaha beeruhuna soo daboolaa oo qudha 60 % (US$113 million 2016kii) kabtaan, Jamhuuriyada Federalka Somaaliaya (JFS) miisaaniyada yar ee federaalka, in kabadan 80 % waxay xoogga saari kartaa hirgelinta siyaasado dakhliga canshuurtu waxuu kayimaadaa ganacsiga. si loo xaqiijiyo degenaanta waxna looga qabto JFS waxaa ka maqan dhaqaalihii ay ku fulin habacsanaanta adeegga kaabayaasha dhaqaalaha, lahayd barnaamijyo waaweyn ama maalgelinta ammaanka, agaasinka iyo xaaladaha ku xeeran mashaariicda. Maalgelinta dawladda waxuu weli si hay’adaha. Midda koowaad siyaasado dhaqaalaha culus ugu tiirsanaan kaalmooyinka horumarineed, guud oo sii joogteeya deganaanta dhaqaalaha kuwaas oo iyaguna diiradda saara qaybaha waa lagama maarmaan (kumase filna) si ay gacan arrimaha bulshada iyo ammaanka meeshii ay uga geystaan soo kabashada iyo kala duwitaanka (noocya-noocyeynta) dhaqaalaha. Midda labaad ka saari lahaayeen maalgelinta salka balaadhan. deganaanta kadib waxaa loo baahan yahay maalgelin Habacsanaanta nidaamku waxuu marag ka yahay la taaban karo si loo awdo (daboolo) farqiga hantida siyaasadda liidata, awoodda maamul oo tabar daran, iyo kaabayaasha dhaqaalaha, la wanaajiyo adkaysiga iyo isku-xidhnaan xumada hay’adaha heer kasta iyo in la hagaajiyo xaaladaha ku xeeran ganacsiga ee dawladda iyo isku xidhnaan xumada dawladda xilliga dhexe. Ugu dambeyn isbadel lagu sameeyo federaalka ah iyo dawlad goboleedyada. maareynta maaliyadda dawladda (iyadoo lagu darayo xoojinta dardar-gelinta dakhliga gudaha), Dakhli gudaha oo waara layskuna hallayn karo ayaa iyo xoojinta dawladnimda ayaa loo baahan yahay lama huraan ah haddii la doonayo in Soomaaliya si loogu abuuro horumarka khayraad dheeri ah isla hirgeliso istiraatiijiyadii lagu dejiyay qorshaha mar ahaantaana la xaqiijiyo in khayraadkaas kordhay horumarineed ee qaranka iyo inay gaadho koror loo adeegsado si xikmadeysan oo wax ku ool ah. dhaqaale oo deg-deg ah oo waara, ujeedooyinkii yareynta saboolnimada ee qorshaha horumarineed Inkastoo la rajeynayo koror dhumuc leh xilliga ee qaranka 2017-2020. Si loo taageero kharashaad dhexe, hadana haliso dhab ah ayaa jira. Dhinaca joogteysan, loona wado harumarka iyo yareynta gudaha, qulqulatooyin socda iyo amaan-darro ku tiirsanaanta ilaha dibedda, JFS waa inay heshaa xii S om a l i a Eco n om i c Update • 2017 Nuxurka Soo Koobidda wadooyin ay ku kordhinayso dakhliga gudaha iyadoo dadweynaha ee ku saabsan sababta ay canshuurta u mareysa qaab aan wiiqaynin dhiirigalinta waaxda u bixinayaan iyo baahida loo qabo canshuurta. ganacsiga gaarka loo leeyahay – waaxdani waxay Waxaa ku jiri kara isku xidhka faa’iidooyinka ahayd matoorka horumarka Soomaaliyeed 25 sano ammaanka iyo adeegyada muhiimka ah lagu xidho ee lasoo gudbay. Sare u qaadida dardar-gelinta canshuur dhiibidda, habsami u aruurinta dakhliga dakhliga gudaha – gaar ahaan xaalad dakhliga iyo maareyn wanaagsan ee dakhliga. gudahu si degdeg ah ugu kobcayo kolka loo barbar- dhigo kharashaadka maamul – waxuu Soomaaliya Jiritaan la’aanta heshiis hawlaha dakhliga oo siinayaa dhaqaale horumarineed oo waara, laguna dhexmara JFS iyo dawlad goboleedyada waxuu tashan karo kaas oo laga tabcay wadanka gudahiisa. xagal-daacinayaa isku dayadii dardar-gelinta, sidaa awgeed waxaa loo baahan yahay kordhinta wada- Wanaajinta sameynta dakhli waxuu fure u yahay hadaladii u dhexeeyay wasiirada maaliyadda ee dhisidda qaran jira iyo nabad-gelyo waarta. Dardar- dhawaan la bilaabay. Xilligan lajoogo JFS dakhligeeda gelinta dakhligu waa dhagaxa aasaaska u ah dhisidda dhammaantii waxay ka uruursataa caasimadda; dawladda. Awoodda dhisid si looga abuuro dakhli dawlad goboleedyadu waxay ka uruursadaan, canshuur-qaadidda ayaa ah mid halbowle ah, waayo haystaanna canshuurta deegaanada hoos taga. waxay yareynaysaa ku tiirsanaanta kaalmada, waxay Dawladda Federaalku waxay bilowday inay tiro caawinaysaa bixinta adeegyada maaliyadeed, waxay kooban oo maaliyadda gudaha3 iyo dibedda ahba u xoojinaysaa heshiiska qandaraas ee u dhexeeya gudbiso dawlad goboleedyada iyadoo usii marinaysa dawladda iyo shacabkeeda, waxayna xoojinaysaa sanduuq uu maamulo bangiga aduunku, halka xidhiidhka bulshada dhexdeeda. aan si cad loo qeexin mas’uuliyadda kharashaadka federaalka iyo dawlad goboleedyada. Qaabka hada Arrinta Soomaaliya oo kale, dardar-gelinta jira waxuu xadidayaa dardar-gelinta dakhliga. Heshiis dakhliga gudaha lagama sidki karo (gooni yeeli la gaadho oo JFS u ogolaanaya inay canshuur ka karo) ammaanka, bixinta adeegyada muhiimka uruursato Muqdisho bannaankeeda waxuu si weyn ah iyo kordhinta isla xisaabtanaka hay’adaha u kordhinayaa dakhliga la helikaro. maareynta maaliyadda ummadda. Soomaaliya waxay wajahaysaa dhibaatooyin lixaad leh oo ku JFS waxay qaadi kartaa hawlo (tallabooyin) is saabsan dib u dhiska kalsoonida sharci ahaaneed dabayaalla oo lagu dardar-gelinayo dakhliga xilliga iyo aaminaadda hay’adaha dawladda gaar ahaan gaaban iyo midka dhexeba. Hawlahaas waxaa kuwa ku shaqo leh maaliyadda, oo loo fahamsan kamid ah meel-marinta sharciyada canshuuraha; yahay inay mas’uul ka yihiin daah-furnaanta wax ka qabadka dhibaatada ah inaan la canshuuri maareynta hantida. Kartida JFS ay ku dardar- karin qaybaha dhaqaalaha kamid ah sida beeraha iyo gelinayso dakhliga waxay ku xidhan tahay sida ay xoolaha; kusoo rogidda iyo ka qaadidda canshuurta dawladdu ugu guuleysato ka hortegidda canshuur la mushaarada iyo gunnooyinkaba ee shaqaalaha dhuumashada baahsan iyo canshuur bixin la’aanta. dawladda iyo kuwa gaarka ahba; kordhinta canshuur Dawladdu waxay u baahan tahay inay uxaqiijisaa bixinta shirkadaha waaweyn; canshuuridda nabadagelyo iyo ammaan hawlaha dhaqaale ee dhoofayaasha iyo ilaha kale ee dakhliga aan sharciga ah iyo inay dhaqangeliso canshuur-bixin canshuurta ahayn. Wada hadalka hogaamiyayaasha cadaalad ku dhisan. Si ay hadaba sidaa u sameyso ganacsatada aad ayuu muhiim u yahay, waxaana lagu waa inay wada-tashi xoog leh la yeelataa ganacsiga bilaabay iyadoo loo marayay golaha wada-hadalka gaarka loo leeyahay hormuudkiisa, waxbartaa dawladda iyo ganacsatada gaarka ah. canshuur-bixiyeyaasha, sarena u qaadaa wacyiga Iyadoo tixraacaysa abaartii 2017, dawladda federaalku waxay ballan-qaaday inay si joogto ah ugu gudbiso US$150,000 dhammaan dawlad 3 goboleedyada. Waxaa intaas raacda MPF inay bixisay kharashka joogtada ah iyo mashruuca isbadelka maaliyadda waxuu bixiyaa gudbinta siyaasadda maaliyadeed, gaadhsiin adeeg ahaan dawlad gobaleedyada iyadoo ku saleysan ka arkigga qodobadii diyaar noqoshada. July 2 0 1 7 | Edition No. 2 xiii Nuxurka Soo Koobidda Maamulidda dakhliga iyo kala jajabinta qalabka canshuuraha ee horey ugu yaalla buuggaagta canshuuradka waa caqabado isku xidhan. Si dardar- (tusaale: mushaaraadka iyo dakhliga shirkadaha), gelinta dakhligu u noqoto mid saameyn leh oo lagu iyo isticmaalka canshuurta gaarka ah iyo midda guuleysto, JFS waxay u baahan tahay inay diiradda kumeel-gaadhaka ah, taas oo hadhow laga saari karo saarto caqabado dhawr ah sida karti xumada kolka lagaadho wejiga qaybtiisa dambe kolka la helo maamulka canshuuraha, qaab canshuur bixiyeyaashu meelo kale oo badan oo canshuurta laga qaadi karo. canshuurtooda u qiimeysan karaan, jiritaan Qaabka isbedelka xilliga dhexe oo lasii balaadhiyo meelo canshuur hoose laga qaado, canshuuraha waxaa halkaas iman doono sal-balladhin iyo daboolid sharci darada ah ee ay aruuriyaan mas’uuliyiinta deegaano, si kale in loo qaabeeyo qiimaha iyo isku deegaanada, iyo laba jeer canshuuridda (badanaa habeyn maamulka. Ugu dambey isbadelka xilliga mas’uuliyiinta deegaanka iyo JFS). Dawladda fog waxuu dhidibada u aasayaa isbadeladii hore ee federaalka ah iyo dawlad goboleedyadu waa inay sii dhinaca casriyeynta sharciyadii iyo hubintii salka u wadaan wada-hadalkii bilaabmay ee ku saabsanaa dhigayay nidaamka canshuurta. federaaliisimka dhaqaalaha dawladda dhexdeeda, waxaana uu ka bilaabmay golaha wasiirada Isbadel la’aan, Soomaaliya waxay kusii jireysaa maaliyadda, gaar ahaan si la isula jaan-qaadsiiyo dabinka dhaqaale, xitaa iyadii oo isbadelo meel- canshuuraha iyo canshuuraha gaar ah. Wax ka dhexaad ahi sare u qaadi karaan awoodda dhaqaale qabadka musuqmaasuqa maamulka canshuuraha ee JFS. Sawirka aasaaska ahi, oo laga soo qaadayo iyo abuuritaanka hawl-wadeenno canshuureed oo inuu isbadelkaasi u tallabsanayo sida hadda uu yahay si wanaagsan loo agaasimay, daacad ah xirfaddanna dakhliga canshuuraha ee gudaha GDP-du waxay yaqaan ayaa iyaguna noqon kara fure. kordhaysaa kabilow 2.0% ee GDP sanadka 2015 illaa 2.7% sanadka 2022. Haddii la qaato tallaabooyin haboon, suuro- galnimada in dardar-gelinta dakhligu kordhaa waa • Xidhmada xilliga gaaban (soke) waxay dhalaysaa mid aad u weyn. Qaabkan matalaadda ah ee bangiga koror 6 % ee GDP sanadka 2022. aduunku u adeegsaday taxanahan daabacaadda labaad ee dhaqaalaha Soomaaliya ee xilligan • Xilliga dhexe horumarka xidhmadiisu waxay waxuu ku tusinayaa in si tartiib ah oo loo hirgeliyaa dhalaysaa koror 9 % ee GDP sanadka 2022. maamulka canshuuraha iyo isbadelka kastanada • Xilliga fog xidhmadiisa – isku ururinta iyo dhidib sare u qaadi karaan dakhliga gudaha laga bilaabo u adkeynta isbadeladii hore – waxay dhalaysaa qiyaastii 2% GDP 2015kii illaa in kabadan 13% GDP koror 13 % ee GDP sanadka 2022. Inkastoo wax la (US$1.1billion) sanadka 2022 haddii la dhaqangeliya tax xidhmooyin isbedel ah. Xidhmooyinkaas waxaa taaban karo ay tahay, hadana Soomaaliya waxay ugu horeeya kordhinta dabbaqaadda xeerarka iyo dhigaysaa heerka hoose ee hawlaha dakhliga ee dhaqangelinta kuwa jira hadda, balladhinta saldhiga wadamada dakhligoodu yaryahay. xiv S om a l i a Eco n om i c Update • 2017 Recent Economic Developments July 2 0 1 7 | Edition No. 2 1 Recent Economic Developments 1. Recent Economic Developments 1.1 The Recent Drought Has Led to Large-scale of the drought; (d) further depletion of nominally Food Insecurity functional water resources, over 50 percent of which S omalia faces large-scale food insecurity due to are located within highly drought stressed areas; drought conditions. The food crisis worsened (e) forecasts of up to 41,250 AWD/cholera cases in rural areas following four consecutive seasons including estimated 6,188 admissions by June 2017, of poor rainfall and low river water levels. The and; (f) sharp increase in displacement. country’s coping mechanisms were stretched and started to fail. The drought is leading to: near The humanitarian community initially sought total crop failures and reduced rural employment US$864 million to reach 2.9 million people with opportunities; widespread shortage of water and urgent life-saving humanitarian assistance. At the pasture; increased livestock mortality, and rapidly London Conference, the UN increased the appeal diminished food access among poor households for the remainder of 2017 to a total of US$1.5 as staple food prices continued to rise sharply and billion, targeting 5.5 million people – underlining the livestock prices declined significantly (see Figure sustained impact of the drought and the need for 1.1). Prices of cereals and milk significantly rose in more investments in lifesaving as well as resilience. most parts of Somalia experiencing drought, while According to the UN (2017), the humanitarian livestock prices declined as farmers destocked. situation remained grim for millions of Somalis who Total loss of livestock and destitution were were faced with a steady increase in the number of reported in some northern pastoral areas. There people in need, and faced significant risk of famine. was drought-related displacement from parts of The drought conditions left millions of Somalis facing Bakool and Bay regions towards urban areas in severe food and water shortages. The new Somali Gedo, Lower Shabelle and Banadir. In the lead up leadership highlighted the drought situation as a top to the start of the anticipated below-normal 2017 priority. Overall, some 6.2 million people are in need (April-June) season rainfall, staple food prices of humanitarian assistance. About 320,000 children rose sharply, and widespread livestock mortality under the age of 5 years are acutely malnourished occurred as pasture and water resources become and are in need of urgent nutrition support. Of depleted. Acute malnutrition remains high and these, 50,000 children are severely malnourished widespread across Somalia. and far more vulnerable than any other group. The drought is highly likely to have cast widespread 1.2 Economic Recovery Has Been Underway and lingering impacts across multiple sectors in In 2015 And 2016—Despite Significant Somalia. According to preliminary assessment Challenges from an internal Rapid Drought Needs Assessment (RDNA) by WB staff which is based on a triangulation of secondary data4 through remote-sensing S omalia’s economic growth remains steady, despite persistent and deep fragility in some parts of the country. Nominal GDP is estimated to techniques: (i) losses related to deceased livestock have reached US$5.9 billion in 2015, a 5 percent ranging between US$1.3 billion and US$1.7 billion increase over the 2014 estimate of US$5.6 billion for the period of the drought; (ii) losses in crop (Figure 1.2). GDP is estimated to have reached US$6.2 production of up to US$60 million during the period billion in 2016, a nominal growth of 6.2 percent. The RDNA relies on the following sources of information: Drought Severity data was derived from ENDVI 10-year historical anomaly data based 4 on LANDSAT 8 imagery. Displacement figures were derived from compiled IDP data from IOM, UN Habitat, UNHCR and local Ministries of Interior. Agriculture and livestock impact data heavily relied on expert judgment and data from FAO FSNAU database (2011-2017), UNFPA 2014 population data and LANDSCAN 2015 population density. Cholera/AWD forecasts and data was derived from World Health Organization (WHO) data, reporting and forecasting analysis. Water resources data was derived from UN SWALIM and ICRC databases. 2 S om a l i a Eco n om i c Update • 2017 Recent Economic Developments Figure 1.1: Drought has triggered significant price increase on agricultural products in many regions Average change in Maize Prices (Apr 2017 & Apr 2016) Average change in Sorghum Prices (Apr 2017 & Apr 2016) 100 140 100 80 80 60 Percent Percent 60 40 40 20 20 0 0 -20 y lle W an ee i ol ir M r ug do l d al ba ri a ol lle -20 lb ooy da e Ba ub uu ad Ba ga y a ug an ol ir ba er ud do al l ol le ko So he M ee i d be be da ud ra Ju Ge lb ooy Ba ub Aw ad lle ga el ko So .J ad he na Nu ud ra Ju Ga oq Ba du Ge .S d Hi gd Aw ha ha L. ab .J na be M Nu Ba Hi lg Ba gd Ga oq M L. lga To S .S M Sh Ga Ba ha To L. W M Ga L. Average change in Wheat Flour Prices (Apr 2017 & Apr 2016) Average change in Vegetable Oil Prices (Apr 2017 & Apr 2016) 35 70 30 60 25 50 20 40 Percent 15 Percent 30 10 20 5 10 0 0 -5 -10 -10 -20 an M al Sa g Ga aag d ol W ol ee i a L. Bari le Ba o L. r To ba . S er y lle al lb ooy i Ba u ub uu d ad d ga el ko So he M d be ud ra Ju Ge l ri l ug ol ag ba do an ol er ud Ga oq le ee i y ir le Aw da aa lb ooy n ab .J ad na Ba Nu Ba Ga oq Ba ad Hi gd W bel el ko So ha he d na ud Ju ra Ge du g Aw Sh lg ab na Nu Ba Hi gd Sa ha M L. lga Sh Ba M To .S Ga L. M Average change in Cattle Milk Prices (Apr 2017 & Apr 2016) 90 70 50 Percent 30 10 -10 -30 ug er ag W ud ee i y a an l ir do ba le le l lb ooy o da Ba ub ad el el ko he d na ud ra Ju du Ge Aw b ab .J na Ga oq Ba Hi gd Sa ha M L. lga M Sh Ba To .S Ga L. M Source: Drought has triggered significant price increase on agricultural products in many regions. Note: • Decline in prices (green bars) reflect the effects of relief food which makes prices to decrease. • Food deficit regions have higher price levels and lower price changes while regions where agricultural activities take place, grains tend to have lower price levels but higher price changes. • The price of livestock has plummeted and as a result milk prices have gone. July 2 0 1 7 | Edition No. 2 3 Recent Economic Developments A few sectors anchor economic activity in Somalia: concerns, and a difficult business environment The major economic activities are in services sector hinder investment in Somalia. Gross fixed capital with trade, telecommunications, and money formation grew just 6 percent on average over the transfer services being the main ones. Many Somalis past three years. depend on livestock, which also forms the main export base. The economic structure is profoundly Somalia remains highly dependent on imports, affected by conflict and aid, making the economy the value of which is equivalent to more than two- relatively urbanized and unevenly integrated with thirds of GDP. Exports account for just 14.5 percent the global economy. of GDP, creating a large trade deficit (47 percent of GDP in 2015), which is financed by remittances and Figure 1.2: Somalia’s nominal GDP continues to rise international aid. Direct donor support is equivalent Nominal GDP (billions of dollars) to 9 percent of GDP. 6.4 6.2 6.2 1.3 Inflation Remains Low, But Food Is Unaffordable For Many 6.0 5.9 5.8 5.6 5.6 C onsumer price inflation fell from 4.5 percent in 2013 to 1.5 percent in 2016 (IMF 2017), but this conceals big spatial variation in price levels. Inflation 5.4 5.4 has been contained by dollarization and the sharp 5.2 decline in oil prices. But commodity prices are still 5.0 much higher than global market prices. The average 4.8 2013 2014 2015 2016 price of maize fell from US$0.45 per kilogram in Source: World Bank and IMF estimates. 2014 to US$0.40 in 2015, but it was more than twice the global market price average of US$0.17 (Figure Investment remains low, contributing only 8 percent 1.3). The price of sugar was also much higher. High of GDP in 2015. Gross investment is picking up, local commodity prices are compounded by food however, driven by new building and construction, insecurity, which has become a recurring problem in urban infrastructure, and remittances. Security Somalia and throughout the Horn of Africa. Figure 1.3: Commodity prices in Somalia are much higher than global prices a. Maize Prices b. Sugar Prices 0.70 1.00 0.90 0.60 0.80 0.50 0.70 US$/Kg (Nominal) US$/Kg (Nominal) 0.60 0.40 0.50 0.30 0.40 0.20 0.30 0.29 0.10 0.10 0 - Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Mar Apr May Aug Jun Jul Aug Sep Oct Nov Dec Mar Apr May Aug Mar Apr Jan Feb Jun Jul Sep Oct Nov Dec Jan Feb Jun Jul Sep Oct Nov Dec Jan Feb Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr 2014 2015 2016 2017 2014 2015 2016 2017 Mogadishu Global Mogadishu Global 4 S om a l i a Eco n om i c Update • 2017 Recent Economic Developments c. Wheat Prices d. Sorghum Prices 0.90 1.20 0.80 1.00 0.70 0.60 0.80 US$/Kg (Nominal) US$/Kg (Nominal) 0.50 0.60 0.40 0.30 0.40 0.20 0.20 0.10 - - Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Mar Apr May Aug Sep Oct Nov Dec Jan Feb Mar Apr May Aug Jan Feb Jun Jul Sep Oct Nov Dec Mar Apr May Aug Jun Jul Sep Oct Nov Dec Jan Feb Mar Apr Jan Feb Jun Jul Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr 2014 2015 2016 2017 2014 2015 2016 2017 Mogadishu Global Mogadishu Global Source: Food Security and Nutrition Analysis Unit database and World Bank Commodity Price Data (Pink Sheet). 1.4 The Large External Imbalance is a Source of equipment rose 147 percent, machinery and Vulnerability electrical equipment rose 97 percent, and chemicals S omalia’s current account deficit remains large. rose 30 percent. Imports of vegetable doubled. The current account deficit was US$876 million Imports of animals (from Djibouti, Ethiopia, and in 2015 (14.8 percent of GDP), up slightly from Kenya) rose 147 percent, a response to the drought. US$827 million (14.6 percent of GDP) in 2014 (Figure 1.4). The trade deficit rose to US$2.8 billion, Somalia’s exports have stagnated while imports up from US$2.7 billion in 2014 (about 47 percent have increased rapidly. Exports of goods and services of GDP in both years). It is driven by imports, were just US$859 million in 2015, up 5 percent over estimated at US$3.7 billion (62 percent of GDP), the US$819 million exported in 2014. The figure is which exceeded exports (of US$859 million) by a low largely because of the cost of conflict. Damage factor of more than four. to vital infrastructure, security checks required to prevent violence, and the shutdown of trade Somalia is importing more merchandise for routes make it difficult to produce in and export consumption and investment. According to UN from Somalia. Higher trade costs disproportionately COMTRADE data, the value of merchandise imports disadvantage small and medium-size enterprises, increased 72 percent between 2010–12 and 2013– which lack the expertise and resources to overcome 15. This growth was driven not only by consumption these barriers. but also by capital goods: Imports of transport Figure 1.4: Somalia imports more than four times as much as its exports, creating huge external account deficits a. External accounts deficit b. Imports, exports, and current transfers -50 -47.2 -47.2 60 -45 40 -40 32.5 32.4 -35 20 Percent of GDP Percent of GDP -30 14.5 14.5 0 -25 -20 -20 -14.6 -14.8 -61.7 -61.7 -15 -40 -10 -60 -5 0 -80 2014 2015 2014 2015 Trade flow (million of dollars) Balance of Trade Current Account Exports Imports Current Tranfers (including Net Income) Source: World Bank and IMF estimates. July 2 0 1 7 | Edition No. 2 5 Recent Economic Developments The capital and financial account helped finance Multiple currencies, including airtime, are used as the current account deficit. The current account mediums of exchange. In addition to the Somali deficits of US$876 million (14.8 percent) in 2015 shilling and the U.S. dollar, Somalis regularly use and US$981 million (15.8 percent) in 2016 were the currencies of Djibouti, Ethiopia, and Kenya financed mainly by net foreign direct investment as mediums of exchange in border areas. Mobile (FDI). FDI reached US$666 million in 2015 (11.2 airtime denominated in U.S. dollars is also widely percent of GDP) and is estimated to have increased accepted as payment throughout the country.5 to US$756 million in 2016 (12.2 percent of GDP), according to the IMF. The main sources of FDI The CBS is engaging in currency and other reform. are diaspora firms and investment from Middle With technical assistance from the IMF, the CBS plans Eastern countries. The balance, financed by official to engage in currency reform later in 2017 provided development assistance and long-term capital policy preconditions are met, issuing a limited flows, is estimated to have reached US$150 million volume of thousand-shilling notes for circulation in 2015 and US$157 million in 2016. in the initial phase to restore the credibility of the domestic currency as a first step toward allowing the Remittances—estimated at US$1.4 billion (24 CBS to engage in effective monetary policy. percent of GDP) in 2015—remain a lifeline for the economy. A large portion of the population 1.6 Implementation of Fiscal Policy has Improved, is dependent on remittances from Somalis living but Challenges Remain S abroad and humanitarian aid. Funds from both omalia’s fiscal situation is improving. The FGS has sources finance consumption, including education presented a budget for parliamentary approval and health, and investment, mostly residential for four years in a row. Public expenditures have construction, helping Somalia sustain its high expanded almost fivefold, from US$35.1 million in consumption rates and finance a large trade deficit. 2012 to US$170.5 million in 2016, and budgeted for US$267.4 million in 2017. Spending depends heavily 1.5 The Scope of Monetary Policy is Limited on multilateral and bilateral donor inflows, however, T he economy continues to be highly dollarized, limiting the scope for monetary policy. The Central Bank of Somalia (CBS) has not issued new which are often late or do not materialize, creating uncertainty in budget implementation. notes since 1991, when the civil war began. A Domestic revenue (taxes plus fees) as a share of GDP large volume of currency printed by private actors, remains very low, at just 2.8 percent of GDP, making both locally and outside the country, is said to it difficult to provide services. Revenue mobilization exists, even while the old Somali shilling is still in improved significantly over the past five years, circulation. Because an estimated 95 percent of local however (Table 1.1). Domestic revenue grew 36 currency in circulation is counterfeit, however, most percent in 2015, rising from US$84.3 million in 2014 transactions, including all transactions by the federal to US$114.3 million in 2015, driven mainly by tax government, are in US dollars, limiting the scope for revenue, which contributed more than 70 percent of CBS monetary policy. total revenue in 2012–15. However, revenue growth was flat, declining 1.4 percent to US$112.7 million The Somali shilling—which is used only for small, in 2016. Past forecasts were unrealistically high face-to-face transactions—was relatively stable in (as the differences between budgeted and actual 2015, at about 22,200–22,300 Somali Shillings to revenues in figure 1.5 show), a problem that led to the US dollar. It depreciated 3.5 percent between ad hoc cash rationing. In addition, the basic norms December 2015 and December 2016. The stability of of fiscal management remain weak. Unrealistic the shilling reflects significant inflows of remittances revenue projections and weak expenditure controls and the fact that most transactions are in dollars. contribute to the accumulation of arrears, which The World Bank is undertaking a household survey of mobile money use in Somalia which estimates that very significant volumes of payments are 5 made on a monthly basis through mobile, based on the very high penetration of mobile telephony in Somalia. 6 S om a l i a Eco n om i c Update • 2017 Recent Economic Developments Table 1.1: Revenue outturn by the FGS, 2012–16 2017 Item 2012 2013 2014 2015 2016 Budget Millions of dollars GDP (excluding Somaliland) 3,458 3,695 3,935 4,031 4,193 4,440 Total Revenue 35.1 117.4 145.3 141.2 168.0 267.4 Domestic revenue 30.2 75.8 84.3 114.3 112.7 164.7 Tax revenue 25.3 65.1 73.8 82.4 88.6 132.9 Income and corporate taxes _ 0.7 1.1 1.9 2.4 6.6 Taxes on international trade 24.0 58.7 64.3 71.1 76.3 86.8 Other domestic indirect taxes _ 1.6 4.8 4.8 2.9 29.7 Other taxes 1.3 4.0 3.6 4.5 7.0 9.8 Domestic loan and grants 0.0 6.6 — — — — Nontax revenue 4.1 10.5 31.9 24.1 31.8 Donor funding 4.9 41.7 61.0 26.9 55.3 102.7 Bilateral assistance 4.9 41.7 59.03 2.87 31.3 18.5 Multilateral assistance _ 0 1.93 24 24.0 84.2 Percent of GDP Total revenue 1.0 3.2 3.7 3.5 4.0 6.0 Domestic 0.9 2.1 2.1 2.8 2.7 3.7 Donor funding 0.1 1.1 1.6 0.7 1.3 2.3 Source: Ministry of Finance. reached US$67.7 million in 2015. Historically, previous year. Nontax revenue tripled, to US$31.9 domestic revenue collection has been stronger in million in 2015, mainly as a result of new fees at the second half of the year (Figure 1.6). Mogadishu air and sea port and charges for visas and passports. The figure declined by 24 percent in International trade taxes, mainly customs duty, 2016, leading to a drop in total domestic revenue. remain the key source of domestic revenue, Personal and corporate income tax remains a drag accounting for 68 percent of the total in 2016 on revenue performance, bringing in only US$2.4 (Figure 1.7). Trade taxes grew 7 percent in 2016 to million in 2016. US$76 million, down from 11 percent growth the Figure 1.5: Domestic revenue forecasts for the FGS have Figure 1.6: Monthly revenue mobilization by the FGS has become more realistic increased 160 FGS Monthly Domestic Revenue, US$ millions 14 139.7 140 Domestic revenue (Millions of dollars) 12 114.3 120 115.3 113.9 112.7 10 100 84.3 8 80 75.8 60 53.9 6 40 4 30.2 20 2 0 0 2012 2013 2014 2015 2016 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Approved budget Actual 2014 2015 2016 Source: Ministry of Finance. Source: Ministry of Finance. July 2 0 1 7 | Edition No. 2 7 Recent Economic Developments Figure 1.7: Taxes on international trade are the main source of domestic revenue in Somalia 2015 2016 Income & Other taxes Income & Other taxes corporate taxes 6% corporate taxes 4% 2% 2% Other domestic Other domestic indirect taxes indirect taxes 3% 4% Non-Tax Non-Tax Taxes on Revenue Revenue 21% Taxes on international international 28% trade trade 62% 68% Source: Ministry of Finance. On-budget donor funding, which significantly Weak revenue mobilization hinders the ability of underperformed in 2015, more than doubled in the FGS to deliver services to citizens. The linkage 2016. Donor funding increased from US$27 million of revenue mobilization to service delivery and state in 2015 to US$55.3 million in 2016 (Figure 1.8). legitimacy is the focus of the special focus of this Development partners’ contributions to the budget Economic Update (chapter 3). For FGS and Somalia have been critical, but they are unpredictable, as a whole, poor collection capacity, a weak public making it difficult to execute the budget. Only 51 finance management system, a narrow tax base, and percent of donor commitments were realized in the absence of the necessary legal and regulatory 2016, an improved performance from the previous frameworks governing revenue collection and year, when only 32 percent of commitments were administration have created a tax gap (the difference realized. Bilateral donors executed 92 percent of between taxes actually paid and taxes that should be their commitments in 2016; multilaterals executed paid based on existing laws and statutes) of 70–80 32 percent. Total donor funding is budgeted to percent of revenue collections. increase to US$80 million in 2017. A tax reform agenda coupled with strengthened Figure 1.8: Actual disbursements by Somalia’s donors fell short of commitments public finance management could increase Donor Budget vs actual disbursement domestic revenue. Policy reform combined within 120 108.7 a regulatory environment and public financial 100 management are complementary. A pending 85.2 telecommunications bill will allow the FGS to raise 80 73.2 taxes on the vibrant telecommunications sector; Millions of dollars 61.0 60 55.3 the public financial management bill should reduce 41.7 revenue leakages and allow the government to 40 26.9 improve expenditure control and transparency. 20 Once passed, these bills offer good opportunities to 4.9 0 increase domestic revenue. Efforts supported by the 2012 2013 2014 2015 2016 World Bank and other donors should help improve Budget Actual revenue collection and administration. Source: Ministry of Finance. 8 S om a l i a Eco n om i c Update • 2017 Recent Economic Developments Expenditure is increasing, but budget execution is to improve. More than 80 percent of spending remains weak and sectoral allocations need in these sectors currently goes to compensation of readjustment. Recurrent expenditures account employees. for almost all expenditure, with capital spending accounting for just 3 percent of total spending Social services are underfunded, accounting for in 2016. Recurrent expenditure increased from just 2 percent of the budget in 2016. Education and US$117.4 million in 2013 to US$165 million in 2016; health combined received a mere 2.5 percent of the it averaged 3.6 percent of GDP during this period budget (US$6.2 million, of which only about US$1.5 (Figure 1.9). Total expenditure in 2017 is estimated million was budgeted to health)—and only 39 at US$267 million. percent of those funds were executed (Figure 1.11). Figure 1.9: Spending by the FGS has increased—but actual Compensation of employees and spending on goods spending still remains less than budgeted spending FGS total expenditure, US$ millions and services accounted for more than 80 percent 300 of expenditure. Compensation of employees grew 250 248.3 by 43 percent to reach US$79.3 million in 2016 (47 percent of total expenditure), up from 41 percent 199.0 200 188.5 170.5 in 2015. Use of goods and services declined by 150 144.3 151.1 135.4 3 percentage points to 41 percent (Figure 1.12). 117.4 Budget execution in these expenditure categories 100 was less than 85 percent, significantly contributing 50 to arrears. 0 2013 2014 2015 2016 The number of civil servants rose 64 percent in Approved budget Actual expenditure the past three years. The FGS employed 4,674 civil Source: Ministry of Finance. servants in 2015, up from 2,849 in 2013. Increases were large in the administrative and economic The administrative and security sectors account for sectors and small in the security and social sectors more than 85 percent of total spending. Together (Figure 1.13). The total number of civil servants is the economic and social services sectors account projected to rise 5 percent, to 4,927, in 2016. This, in for only about 10 percent of total expenditure part, reflects the lack of retrenchment policy which (Figure 1.10). More—and better allocated—spending is needed to ensure an efficient civil service. will need to go to these sectors if service delivery Figure 1.10: Administrative and security services dominate Figure 1.11: The FGS spent less than US$2.5 million on FGS spending education and health in 2016 FGS Sector Spending Expenditure in education & health (2016), US$ million 70 7.0 62 6.2 56 60 6.0 45 41 5.0 4.7 50 33 28 4.0 40 More Percent spending needed here 3.0 30 2.4 2.0 1.8 20 1.5 1.0 0.6 10 7 8 7 3 3 3 2 0 0 Education Health Total (Education Security Administrative Economic Contingency Social & Health) Services Services Services Services 2014 2015 2016 Approved Budget Actual Source: Ministry of Finance. Source: Ministry of Finance. July 2 0 1 7 | Edition No. 2 9 Recent Economic Developments Figure 1.12: Employee compensation and spending on goods and services accounted for 88 percent of FGS Figure 1.13: The number of civil servants in the FGS has spending in 2016 risen since 2013 FGS Expenditure, (%) FGS Civil Servants by sector 1 3,000 2,719 6 7 10 6 0.8 2,500 46 38 44 41 2,000 0.6 1,716 Percent 1,500 1,455 0.4 44 51 1,000 47 830 41 0.2 599 500 265 0 154 0 38 2013 2014 2015 2016 2013 2014 2015 2016 Goods and services Grants Repayment of arrears & advances Capital Economic Social Security Source: Ministry of Finance. Source: Ministry of Finance. The stock of domestic arrears continued to grow, that existing arrears are cleared and new arrears undermining the credibility of the budget. The total not accrued. Actions to reverse the growth in wages stock of arrears is estimated at US$67.7 million in and salaries could include rigorous assessment of 2015, up from US$45.3 million in 2014. Reducing staffing needs, examination of the reasons for the it requires improved cash management and better growth in staff numbers and assessment of whether controls to ensure that annual cash plans are realistic additional staff are justified, and analysis of the and linked to the allocation process and expenditures roles and responsibilities of institutions, in order to are not initiated if funds are not available. An arrears eliminate duplication. management plan needs to be developed to ensure 10 S om a l i a Eco n om i c Update • 2017 Outlook and Risks, 2017–19 July 2 0 1 7 | Edition No. 2 11 Outlook and Risks 2. Outlook and Risks, 2017–19 2.1 The Underlying Recovery Should Resume After In summary, measured GDP will reflect mostly Drought Impact Is Ameliorated the somewhat diversified urban economy where P rojections are subject to considerable remittances, trade, and donor flows can sustain uncertainty because Somalia’s statistical base is the current level of livelihoods. At the same time, very weak. Somalia does not have a national accounts conditions would be deteriorating for households in statistical framework and prevailing estimates of rural areas who lack access to coping mechanisms. nominal GDP are based on sparse expenditure side information, notably a survey-based estimate of Reconstruction will underpin growth if the household consumption and trade partner exports political transition is well managed. However, the and imports. Thus, macroeconomic statistics are government lacks the resources to undertake major not comprehensive enough to capture the effect programs or investment projects from its meager of drought. While it is possible to produce one- resources. Public investment will continue to rely off projections of GDP growth, these are highly heavily on official development assistance, which qualitative and by necessity based on a few sectors currently has a very low capital component. Import where some proxy indicators for activity are demand is projected to remain strong, thanks to possible, such as for ICT, construction, and trade. continued private investment including FDI. Our estimate of the GDP shows that just over 70 percent of all economic activities is generated in 2.2 Reforms are Needed for Sustainable Growth urban areas. As a result of sparse information, estimates will miss much of the rural sector and non- marketed output such as water, fodder, and food S ustainable growth will require investments in physical and human capital and the strengthening of institutions. Significant grown for own-consumption. investments to close the country’s capital and infrastructure gap will be needed to increase Within these limitations, the World Bank estimates economic growth in the medium term. Policies that that GDP growth in 2017 will decelerate as a result target access, quality, and inclusiveness of education of the severe drought but it is expected to revert could increase the contribution of human capital to to the post-2011 trend in 2018-19. Growth in 2017 growth. Reforms in public financial management is estimated at 2.5 percent in 2017 according to the and governance could improve the efficiency of IMF (2017) while Somalia’s economy is projected to public and private investment. Improvements to the grow at a steady nominal annual rate of 5–7 percent business environment—through stronger contract in the next three years, driven by aggregate demand enforcement and more efficient and reliable fueled by a vibrant private sector, remittances, lower electricity provision, for example—are essential to oil prices, and improved security. raise productivity. The effect of drought is manifested differently in To support diversification, policies should address Somalia than in Ethiopia or Malawi – other recent issues that hinder entry into new lines of economic examples of food insecurity. In those latter cases, activity. Fragility has impeded any form of structural monitoring systems for performance of crop-based transformation in Somalia; barriers to entry agriculture are able to reflect the loss of agricultural and investment include lingering insecurity, the production. There is no similar monitoring system in inadequate provision of infrastructure, the difficult Somalia, and the severest effects of drought relate regulatory and institutional environment, the lack of to scarcity of water for livestock. This loss of assets is human capital, and limited finance. difficult to estimate given the conditions in Somalia. 12 S om a l i a Eco n om i c Update • 2017 Outlook and Risks 2.3 Risks are Significant would affect Somalia’s growth prospects. Foreign N otwithstanding the robust growth expected for remittances are the main driver of both consumption Somalia over the forecast horizon, significant and investment. The fiscal budget and the activities risks remain on both the domestic and external fronts. of several NGOs depend on development partners’ inflows. Official development assistance faces The ongoing conflict in central and southern significant pressures given the tepid economy and Somalia is delaying and dampening growth refugee pressures in Europe. Somalia’s exports are prospects. Although Somalia’s economy remains concentrated in a few commodities (mainly livestock) stable, simmering conflict continues to pose an and exported to few countries (mainly in the Gulf). important risk to economic activity in the medium With livestock dominating exports, Somalia is highly term. Al Shabaab terrorists continue to threaten exposed to exogenous shocks, such as the current Somalia’s security. Terrorist activities have scared export ban due to disease outbreak. Strong livestock away both domestic and foreign potential investors disease surveillance is needed to reduce the and tilted FGS priority spending toward security. economy’s exposure to shocks from this sector. The uncertain stance towards economic integration and Financing is highly dependent on foreign development aid in high income countries poses a remittances, development partners’ flows, risk for Somalia, which relies on official development and exports revenue; declines in these sources assistance for both security and economic support. July 2 0 1 7 | Edition No. 2 13 14 S om a l i a Eco n om i c Update • 2017 Special Focus: Mobilizing Domestic Revenue in Somalia July 2 0 1 7 | Edition No. 2 15 Special Focus: Mobilizing Domestic Revenue in Somalia This special focus assesses the prospects for domestic revenue mobilization in the face of the many challenges Somalia faces. It identifies the priority needs for improving revenue mobilization and provides a timetable for actions and reforms. It assesses current tax laws and policies and identifies opportunities for broadening the tax base by introducing new taxes and fees and improving tax administration. The first section provides the environment in which revenue is being mobilized. The second section outlines the historical context of tax mobilization. The third section presents the legal framework for tax collection. The fourth section describes revenue performance since 2012. The fifth section reviews the constraints on revenue mobilization (the narrow base, inadequate tax policy, and weak tax administration). The sixth section outlines the reforms that could be implemented in the short medium and long term. The seventh section presents the results of an assessment of domestic revenue performance. It uses scenario analysis to show how Somalia could move toward fiscal sustainability in the short, medium, and long run. The final section examines challenges facing reform. 3.1 Overview Improved domestic revenue generation offers M ore than 25 years of civil conflict destroyed Somalia a promising and sustainable source of Somalia’s tax administration system. home-grown development finance. Because of Governments failed to provide public services, the unstable political and security situation, the and companies and individuals failed to pay taxes. government has focused on implementation of Reversing this state of affairs will be challenging. easy-to-adopt measures to promptly raise revenues There is currently a gap between demands for without developing a robust revenue mobilization the restoration of basic public goods and services strategy that would incorporate strong transparency (including security, education, and health) and the and accountability. Building capacity to raise government’s capacity to generate revenue to meet revenue through taxes is particularly crucial in these pressing needs. To close this gap, the FGS Somalia, because it reduces dependence on aid and state administrations must be able to ensure and helps finance basic service delivery, thereby sustainable funding to enhance public security, strengthening citizen/state relations. Low domestic fund social programs that ease tensions, and make revenue collection in Somalia makes it difficult to public investments that promote economic growth pay for essential needs; success in raising revenue and development. would allow the government to provide more and better deliver services. Developing policies and building institutions to collect and manage public resources is central to 3.2 Historical Context the recovery process. The government’s ability to collect taxes is critical to its fiscal viability in the medium term. The FGS views the sustainable rapid E ven before the civil war, Somalia had very low domestic revenue mobilization. The deterioration of domestic revenue began in the 1980s. In the first growth of domestic revenue as a central element half of that decade, the tax to GDP ratio was about in Somalia’s state-building and reconstruction. To 10 percent; it declined to 5–6 percent, one of the meet the growing demand for public services, it lowest rates in the world, in the second half (Table must be able to collect revenue, allocate resources, 3.1). As domestic revenue shrunk—mainly because and manage expenditure in a manner that citizens of growing noncompliance by taxpayers—the regard as effective and equitable. If they are to pay government became increasingly dependent on taxes, Somalis must see the FGS and other state external support, which was often motivated by Cold governments as legitimate and be confident that War geopolitical considerations. External flows into their money is being spent transparency and in ways Somalia undermined revenue collection by crowding that serve their needs. out domestic fiscal capacities. Building a sustainable 16 S om a l i a Eco n om i c Update • 2017 Special Focus Table 3.1: Selected revenue ratios in Somalia, 1985–89 (percent) Ratio 1985 1986 1987 1988 1989 Revenue/GDP 6.0 7.8 5.3 5.6 5.3 Tax/GDP 5.3 6.9 4.6 4.4 4.7 Nontax revenue/GDP 0.7 0.9 0.7 1.2 0.6 Grants/GDP 8.5 15.2 15.6 12.2 26.5 Source: World Bank 1991. revenue collection system was not a priority given sharp reductions in budgeted allocations for line the “rents” to be extracted by playing Cold War rivals ministries. The deterioration in domestic revenues against each other. was attributed largely to the decline in the collection of border taxes as a result of the worsening Several factors hinder revenue mobilization. security situation and other factors. Other sources Somalia’s economy is largely informal, with most of of revenue also declined in real terms, but their the population engaged in pastoral and agricultural impact on revenue performance was less dramatic. activities. As a result, the revenue base is narrow. Import duties declined during the 1980s despite a Most of the country’s ports and airports (its main generally increasing level of non-project imports revenue-generating assets) are not under the full and large real devaluations. This trend reflected the control of the FGS. Customs duties are inconsistent, government’s valuation of imports at an exchange and many goods enter the country without paying rate that was below the official rate, the imposition duties. Humanitarian airlines and ships are exempt of specific rather than ad valorem taxes on imports, from taxation. There is disagreement over where and increasing noncompliance. port fees should be remitted as well as the level of fees that port management should retain. Heavy reliance on indirect taxes dates to the pre- Mechanisms for ensuring that revenue is collected crisis period. The share of income tax in total tax and fully accounted for are weak, creating loopholes. revenue declined during the 1980s. Excise tax was No reliable database on taxpayers exists. There is no levied on about 30 locally produced commodities at clear revenue assignment between the FGS and state different rates, and countervailing duties were levied governments; the current situation, in which the on similar imported goods. Sale taxes were levied FGS collects all its revenue from Mogadishu, is not on selected imports, wholesale trade, industrial sustainable. All of these issues need to be addressed products, and selected services. if more domestic revenue is to be mobilized. Weaknesses in tax administration were not Low revenue collection reflected the weak design limited to import duties. The poor performance of the tax system and problems in tax and customs of income and business taxes largely reflected the administration. Import duties made up almost 60 failure to incorporate inflation into the assessment percent of revenue just before the collapse of the of such aggregates. The system did not call for central government. Additional taxes on imports— a reassessment of the levels of annual earnings including stamp duties and excise, sales, and other (declared and agreed to years before) for individuals taxes—made the tax burden on trade very high. and businesses that remained up to date in payment of their tax liabilities. As a result, throughout the Poor revenue performance had a negative impact 1980s the relatively low business profit levels on the budgetary process and expenditure declared 5 or 10 years earlier remained to a large patterns. At the time of budget preparation, ordinary extent unchanged in nominal terms, despite high expenditures were limited to projected domestic inflation. Tax assessors only pursued those who revenues. The decline in domestic revenues caused were delinquent in tax payments, and even then, July 2 0 1 7 | Edition No. 2 17 Special Focus assessment was arbitrary, because of the absence negotiated presumptive tax. The remaining taxes of clear guidelines and the potential for corruption, are stamp duties and the road tax (Box 3.1). given the extremely low pay of tax assessors. The federalism framework that guides taxation The government made several attempts to revamp powers is not yet clear on revenue assignment and the tax system in the late 1980s. It increased sales clarification of taxation powers. The provisional and rental income tax rates, extended services tax constitution provides general guidance that revenue- to cover products with ad valorem rates, imposed raising responsibility should be assigned to the level an airport departure tax, and levied a withholding of government that can handle it most effectively. tax on the sales of bananas. In 1990 the government It also provides for the laws existing before the introduced additional revenue measures, including provisional constitution was adopted to remain in a revised tariff structure with lower rates across the force until they are brought in line with the new board and a 30 percent withholding tax on the rental federal constitution. In addition, federal member income of expatriates. It reorganized the Revenue states and Somaliland have their own constitutions, Department of the Ministry of Finance, established tax laws, and decrees. a taxpayer identification system, and contracted with a foreign firm to establish an import verification The federal government has been trying to update system. All these measures disappeared with the and adjust the rates of old laws through budget collapse of the central government in 1991. appropriation laws. Parliament has not enacted the public finance management and audit bills, which 3.3 Legal Framework could help enhance oversight of public finances. The B y early 2017, Somalia’s tax system is characterized cabinet approved the Public Finance Management by outdated legislation, poor enforcement, and Law in March 2016, which had been in development almost nonexistent administration. Excluding a for more than two years, but parliament’s term few updates of tax rates, its tax legislation has not expired before it could adopt it. Parliament approved been revised for more than 20 years, and the extent the National Audit Bill in the first quarter of 2016; to which it is has been implemented since 2012 is it has been sitting on the president’s desk since unclear. The tax legal framework is based on the then. Both laws may have to be reconsidered by the legal structure that existed before 1990, including incoming administration and parliament. some features that date from the 1960s. Laws based on a system in place when Somalia was a The functional assignment between the FGS and unitary state are not practical in a federal system member states needs to be clarified. In order to of government and will be not possible to enforce expand the scope of public services, the FGS and beyond the capital city without clear parameters for various regional entities have to establish the legal revenue assignments negotiated by stakeholders foundations of a fiscally decentralized system, in and established in the constitution. which expenditures and revenues are assigned to different levels of governments. The legal basis of taxation is not fully established yet. Customs duties are collected on a weight, Different local administrative structures exist across volume, or unit basis. Personal income taxes are Somalia. Individual states (Jubbaland, Somaliland, levied only on government and selected private and Puntland) and local governments keep the taxes sector employees. Profits taxes are fixed amounts they collect, including customs revenues, rather negotiated by the government and enterprises; than sharing them with the federal government. All they vary by industry and physical size. FGS revenue comes from Mogadishu. Telecommunications companies pay a lump-sum 18 S om a l i a Eco n om i c Update • 2017 Special Focus Box 3.1: Types of fees and taxes in the FGS Rental Income The legal basis stems from Act Number 5, issued November 5, 1966. The introductory rate is 5 percent, but the real rate will change per the rates ratified by the council of ministers in 2015. Taxes are collected every three months. Box table 3.1.1: Tax rates on rental income Annual taxable income (dollars) Rate (percent) 500–20,000 15.0 More than 20,000 22.5 Wages and Salaries (Public and Private) The legal basis stems from Act Number 5, issued November 5, 1966. Taxes are collected every three months. Box table 3.1.2: Tax rates on wages and salaries Annual taxable income (dollars) Rate (percent) 0–200 0 201–800 6 801–1,500 12 More than 1,500 18 Income from Business/Corporate Tax The legal basis stems from Act Number 5, issued November 5, 1966. Tax is to be applied once a year on income from factories, farms, professionals. Seasonal business, services, education activities, merchandise trade and others. Tax is captured annually as a percentage of income. Box table 3.1.3: Business income tax rates Income (dollars) Percentage 2,400 - 3,600 9 3,620 - 4,800 11 4,820 - 6,000 13 6,020 - 7,200 15 7,220 - 8,400 17 8,420 - 9,600 19 9,620 - 10,800 22 10,900 - 18,000 25 18,100 - 30,000 28 Sales Tax The legal basis stems from Act Number 2, issued January 7, 1984. The schedule was approved by the Council of Ministers in 2015. July 2 0 1 7 | Edition No. 2 19 Special Focus Box table 3.1.4: Sales tax rates Tax head Rate (percent) Banks and money transfers 25 Communications 15 Logistics companies 10 Education and health services 5 Hotels 5 Utilities 5 Stamp Duty The legal basis stems from Act Number 6, issued December 6, 1966. The common rate for stamp duty is 2 percent of the value of the document. Duties on applications are shown in Box table 3.1.4. Box table 3.1.5: Stamp duties Stamp duty Type of document (dollars per application) Civilian application 5 Administrative application 10 Court documentation 10 Foreign documentation 20 Road Tax The legal basis for the road tax stems from Act Number 4, issued on December 28, 1965. Taxes are collected every four months. Box table 3.1.6: Fees on passenger buses (dollars) Horse power Annual fee Trimesterly fee 15-20 280 70 20-30 300 75 30-40 320 80 40-50 340 85 More than 50 360 90 Box table 3.1.7: Fees on passenger vehicles (dollars) Annual Public Trimesterly Public transport vehicle Transport vehicle Horse power Annual fee Trimesterly fee fee fee 8–11 120 30 220 55 11–14 140 35 240 60 14–18 160 40 260 65 18–22 180 45 280 70 22–26 200 50 300 75 26–30 220 55 320 80 30–35 240 60 340 85 More than 35 260 65 360 90 20 S om a l i a Eco n om i c Update • 2017 Special Focus Box table 3.1.8: Fees on trucks (dollars) Trimesterly Horse power Annual fee Trimesterly fee Annual trailer fee trailer fees 20–30 200 50 160 40 30–40 200 50 160 40 40–50 200 50 160 40 50–60 200 50 160 40 60–70 200 50 160 40 More than 70 200 50 160 40 Excise Duty The legal basis for this tax stems from Act 3, issued May 23, 1985. The tax is payable on local produced goods and imported products and taxation is applied at the point of importation. Despite the following schedule as per the act, a uniform introductory rate of 5% is currently applied to all products. Box table 3.1.9: Production Tax (Excise Duty) Description Percentage (%) Confectionery such as candy, chocolate, chewing gum; marmalade/jam 15 Soft drinks 12 Fresh fruit and a fruit sweetener 10 Cakes, biscuits and similar items 5 Other imported items with sugar except medicine 10 Matches 80 Cigarettes and tobacco 100 Shampoo & hair oil 20 Locally produced sugar (imported sugar is exempt) 60 Mineral waters 10 Wine 80 Pure alcohol 100 Cosmetics 15 Tomato & vinegar 10 Skin care products 15 Perfume 20 Sponges 15 Utensils 10 Clothes 5 Milk and milk products 5 Plastic bags and similar items 5 Furniture and office equipment 5 Maintenance equipment 5 Other unspecified locally produced goods except meat, fish, pasta and oil 5 Presumptive Tax The government accepted a lump-sum amount from companies. Nontax Revenue Ministries, departments, and agencies collect various user fees. Source: Ministry of Finance. July 2 0 1 7 | Edition No. 2 21 Special Focus There are no intergovernmental fiscal relations state capacities are exacerbating the challenge of between the FGS and the federal member states. rebuilding the revenue system. Jubbaland, Puntland, and Somaliland have a few rules, but neither has objective criteria regarding Somalia has significantly improved its tax yield, the allocation of financial resource to the districts. in relative terms, since 2012 without undertaking Significant harmonization and intergovernmental any significant reforms and with only minimal financial relationships based on objective criteria for efforts to increase mobilization. Revenue remains allocating resources allocation to local administrative extraordinarily low by international standards— units (such as a revenue-sharing formula) is required just 1.9 percent of GDP in 2015 (Table 3.2)—but it to make the system efficient and functional. has increased dramatically. Total revenue increased 22.3 percent between 2013 and 2015, rising from The private sector is an important stakeholder in US$117.4 million to US$141.2 million (Table 3.3). domestic revenue mobilization efforts. However, Domestic revenue increased 50.8 percent in the same due to the lack of clarity around tax legal frameworks period, from US$75.8 million to US$114.3 million. and policy, the government lacked the means to These increases suggest that simple short-term enforce payment of taxes, particularly from large reforms could increase the tax to GDP ratios. Sustained private sector actors. Going forward, the state political commitment at the highest levels will be authorities will need to engage business leaders needed to sustain these increases, and entrenchment and adopt a consensus-based approach in the early of reforms will be required to prevent slippage. stages of mobilizing revenue. There is a consensus among the government and the private sector The Ministry of Finance collects virtually all FGS that the private sector needs to pay taxes for the revenue in the Mogadishu area (administratively state to deliver services – however, deepening the under the control of the Benadir Regional dialogue to build trust among the different actors Administration (BRA)). Municipalities also collect will be critical. some revenues. As well as the 15 percent of Mogadishu port revenues it receives from the 3.4 Revenue Performance Since 2012 Federal Government, the BRA collects revenues from M ore than 25 years of conflict has severely affected the three components of revenue mobilization: tax policy (which establishes rates of business licenses, property deeds, fees for services, rents and proceeds from the sale of land, and taxes on markets and contracts. Most taxes collected taxation and identifies the goods and services that bring in very little revenue and are costly to collect— are taxable and exempt from taxation), revenue in many cases, the cost of collection exceeds the administration, and economic activity. Weak revenue collected. Table 3.2: Central government tax revenues as percent of GDP in selected countries, 2003–15 Description 2003–08 2009 2010 2011 2012 2013 2014 2015 Afghanistan 6.7 10.3 11.0 11.2 10.1 9.8 8.5 10.1 Burundi 14.0 13.9 14.5 16.2 15.6 14.2 14.6 10.3 Congo, Democratic Rep. 8.3 10.7 12.1 11.8 14.4 12.9 13.3 13.6 Kenya 16.8 18.1 19.2 19 18.7 19.3 19.4 19.8 Liberia 15.2 20.6 25 24.3 26 25 23.5 21.3 Sierra Leone 8.8 9.1 9.9 11.5 11.4 10.8 10.1 10.6 Somalia — — — — 0.6 1.4 1.5 1.9 Sub-Saharan Africa average 24.1 19.8 20.6 23.3 21.8 20.1 19.4 17.9 Source: IMF 2014 and Ministry of Finance Appropriation Act 2015–2016. Note: — Not available • Somalia GDP base includes Somaliland figures (see Table 3.3 below). 22 S om a l i a Eco n om i c Update • 2017 Special Focus Table 3.3: Domestic revenue collection in Somalia, 2012–16 (millions of current dollars) Item 2012 2013 2014 2015 2016 Total revenue (domestic revenue and grants) 35.1 (0.7) 117.4 (2.2) 145.3 (2.5) 141.2 (2.4) 168.0 (2.7) Domestic revenue 30.2 (0.6) 75.8 (1.4) 84.3 (1.5) 114.3 (1.9) 112.7 (1.8) Tax revenues 25.3 (0.5) 65.1 (1.2) 73.8 (1.3) 82.4 (1.4) 88.6 (1.4) Taxes on income, profits, and capital gains — 0.7 1.1 1.9 2.4 Taxes on goods and services 1.3 5.6 8.4 9.3 9.9 Taxes on trade 24.0 58.7 64.3 71.1 76.3 Nontax revenue — 4.1 14.2 31.9 24.1 Domestic loans and grants — 6.6 0.0 0.0 0.0 Total GDP, including Somaliland 5,008 5,352 5,707 5,953 6,217 Source: World Bank 2015 and Ministry of Finance Appropriations Act 2015–2016 Note: Figures in parenthesis are percentages of GDP. — Not available. Illicit taxes and double taxation are rampant. expenditures, including public sector salaries. Donor The authorities—and people pretending to dependency has constrained the ability of the be authorized, including militias and security government to rebuild and operate key institutions, personnel who set up roadblocks—often collect including the police and armed forces. It is of critical taxes illegally. Double taxation also occurs. Both the importance that the FGS commit to urgent measures FGS and local authorities tax rental and property to rebuild tax institutions with strong and reliable income, for example. capacity for tax collection and to develop its own sources of revenue. 3.5 Constraints T he FGS lacks full control over ports, airports, and Despite its more than 230 tax collectors, the Inland other entry points in Somalia. Currently different Revenue Department is able to collect almost no ports and border crossings are administered by tax. It has no information system, no established different State authorities with different tariffs with procedures, and no enforcement capacity. Most of FGS having full control of only Mogadishu port. The the taxes collected are not really taxes, in the sense FGS does not the de jure control over other territories that they are not the compulsory contributions such as Puntland and other Federal Member States established by laws but rather voluntary including Somaliland. This has resulted lower revenue contributions whose value is agreed upon by the collection by FGS. In addition, despite the de jure FGS and taxpayers (IMF 2015). Contributions are control over Mogadishu port, de facto full collection paid directly to a tax collector, with little control of revenue into the treasury account is not assured. over how much is received or remitted. If tax This negatively impacts both the amount collected collectors cannot return to the office by the end as well as the credibility of the system. Harmonizing of the day, which is not uncommon, they keep the tariffs at borders and gradually integrating them amount collected overnight. into a single customs system would produce more revenue from trade for all parties – but will require Customs does not have an information and political will and sustaining the dialogue among the communications technology (ICT) system; all Ministers of Finance. work is done manually. Until recently, import duties were charged per package, whatever the To date, the Federal Government has yet to fully package contained. About 600 commodities and reestablish the institutions necessary for effective their corresponding tariffs are now listed, but no revenue mobilization. As a result, development information on the value of imports is collected. partners have paid for critical government All tariffs are “specific” (that is, based on weight, July 2 0 1 7 | Edition No. 2 23 Special Focus volume, or number of units or cartons). IMF (2017) 3.5.2 Weak tax administration notes that customs is consistently neglected in many 3.5.2.1 Problems with the system fragile states, despite its clear revenue potential. The government faces serious challenges in 3.5.1 Low and narrow tax base collecting revenue. It lacks a coherent tariff system for assessing custom duties, and it is unable to Somalia’s economy has many features commonly prevent many goods from entering Somalia through associated with a low tax base. They include a unapproved border points (thereby avoiding paying large informal sector, including large agriculture and duties). It lacks modern collection procedures. livestock sectors, which are hard to tax; an extremely Logistics are inadequate, staff capacity is low, low level of development; and institutional capacity despite significant staffing on the books, and the constraints that hinder the government’s ability to legal framework for revenue management is weak, collect taxes and taxpayers’ ability to comply with leading to weak compliance. tax regulations. The gap between budgeted revenue and revenue The formal sector, made up of companies and actual collected is wide. The government lacks individuals in urban areas, has greater potential for the capacity to estimate the amount of revenue it taxation. But financial records are absent, and audits can collect under existing legislation or suggested are rarely if ever conducted, forcing the government legislative changes. Given weak capacity and to collect corporate income taxes presumptively, taxpayers’ resistance to paying taxes, the amounts based on informal negotiated contributions from a proposed in the main budget are unrealistically few large corporations. high. Actual total revenues were just 77 of budgeted levels in 2014, and domestic revenues were just Import duties are the main source of revenue, 73 percent (Table 3.4). In 2015 overall revenue because they are relatively easy to monitor and performance declined to 59 percent, while collect. They account for more than 80 percent domestic revenue rose to 93 percent. The shortfall of total revenue, but the overall tax imposed on in overall revenue partly reflected donors’ failure imports is very low. Import tax revenue of the federal government comes exclusively from the Mogadishu to fulfill their pledges. The largest gaps were in port and Mogadishu International Airport. Other income taxes (for which actual receipts were just 22 ports and airports in Somalia are under control of percent of budgeted receipts) and corporate taxes member states and local governments; the import (41 percent of budgeted receipts). FGS collection of taxes they collect are not remitted to the federal domestic indirect taxes, including taxes on goods, government. Custom duty is supplemented has been very poor. Trade tax collection was also by a harbor fee (5 percent) and a stamp duty weak, at a mere 16 percent of budget in 2014 and (2 percent), both assessed as a percent of the 21 percent in 2015. customs duties paid. The government still mobilizes and collects far less International trade taxes are specific rather than revenue than it could. Income taxes underperformed ad valorem (based on value). Import duties range the budget by 79 percent in 2014 and 60 percent from zero (for some food items) to more than in 2015. Collection of income tax on private sector US$1,000 (for imported vehicles and some luxury employees was weak, and collection of taxes on items). The specific nature of the tax system reduces corporations and rental income was even lower, the problem of under-invoicing, but it prevents the given the inability of the FGS to administer the tax system from responding to inflationary pressures, and enforce the law. adversely affecting the real value of tax collections. 24 S om a l i a Eco n om i c Update • 2017 Special Focus Table 3.4: Budgeted and actual revenues in Somalia, 2014–16 (millions of dollars, except where otherwise indicated) 2014 2015 2016 Deviation Deviation Item Budget Actual (percent) Budget Actual (percent) Budget Actual Tax revenues 108 73.8 68 85.9 82.4 96 101.3 88.6 Tax on income, profit, and 5.1 1.1 22 4.7 1.9 40 5.0 2.1 capital gains Taxes on wages and salaries (public sector 1.5 0.9 63 3.2 0.7 22 2.8 1.3 payees) Taxes on wages and salaries (private sector 1 0.1 13 1 0.4 41 1.4 0.5 employees) Corporate profit tax 2 0 0 0.5 0.8 154 0.8 0.3 Rental income 0.6 0 0 0.1 0 0 0.3 0.1 Taxes on goods and 34 8.5 25 10.7 9.3 87 0.5 0 services Excise tax (mineral water, 1 0 0 0 0 — 0.1 0 mattresses, other items) Sales tax (petroleum and its products, hotels, mineral water, textiles 3.8 0 0 0 0 — 0.4 0 and clothing, electronic materials, household materials) Turnover tax on services 25 4.8 19 6.4 4.8 75 7.3 2.9 (presump-tive tax) Taxes on 12 4.8 40 4.8 4.8 100 5.8 2.8 telecommunications Taxes on money transfer companies, consumer 13 0 0 1.6 0 0 1.5 0.1 light industries, con- sumer water industries Stamp sales and duty 4.1 3.6 88 4.3 4.5 105 7.8 7.0 Stamp duties of food 1.4 0 0 0 0 — — — items Road tax 1 3.3 329 3.7 3.1 84 3.0 2.5 Other stamp duties 1.7 0.4 21 0.7 1.5 222 4.8 4.5 Taxes on international 69 64.3 93 70.3 71.1 101 80.4 76.3 trade and transactions Nontax revenue 7.3 10.5 144 28.1 31.9 113 38.5 24.1 Administrative charges 0.7 0.8 114 1.3 0.6 49 0.5 0.2 Airport and harbor fees 3.2 4.2 129 21.5 25.1 117 26 19.5 Visa charges and 3.3 5.5 166 5.4 6.2 116 1.2 4.4 passports & others Source: Ministry of Finance Appropriations Act 2014, 2015. Note: — Not available. July 2 0 1 7 | Edition No. 2 25 Special Focus Taxation of goods and services is also of the tax code. The practice fuels tax evasion underperforming. Taxes underperformed the and avoidance and criminal activities, such as budget by 75 percent in 2014. Improvement in smuggling, with highly negative effects that go far 2015 reflected the reduction in the target by a beyond lost revenue. The government has tried third. For three years in a row, the FGS has been to introduce direct taxes on wages and business unable to collect excise tax on mineral water and income to lay the foundation for greater reliance mattresses, and it has been unable to collect sales on such taxes over time. tax on petroleum, hotels, mineral water, textiles, and household materials. Presumptive taxes are The customs valuation of imports is one of the assessed in the telecommunications sector but not weakest areas of Somalia’s tax system. Since the on money transfer companies, light industries, or collapse of the state, in 1991, no banks have operated water companies. in Somalia, preventing valuations from being based on letters of credit. The prices of invoices are not Nontax revenues exceeded budgeted levels in 2014 reliable, because importers can manipulate them. and 2015. Nontax revenue from administrative The authorities resort to discretionary measures charges, airport and harbor fees, and fees from visas to assess and collect taxes, which are prone to and passports exceeded budgeted levels, thanks corruption and mismanagement. in part to the contracting of a private company contracted to collect taxes at the Mogadishu port and 3.5.2.2 Success of recent reforms airport (see Table 3.4). It has performed effectively, The Ministry of Finance developed a domestic depositing the funds into the Single Treasury Account revenue mobilization strategy in 2015 that has of the Ministry of Finance at the CBS. Concerns have started to yield results, even though the strategy been raised, however, about the contracting process is not backed by legislation. The government is used to bring the private partners on board. improving tax administration and enforcement through automation and by focusing on revenue The revenue office is relatively well staffed, but sources that are considered “low-hanging fruit.” It lack of capacity and absenteeism are concerns. is engaging the private sector and increasing public The Inland Revenue Department has about 230 awareness through media and forums such as the employees and the Customs Revenue Department Chamber of Commerce. about 100. Many of these employees are not permanent, however, and records reflect low The government identified automation as the best attendance (about 15 percent at the Inland Revenue way to increase efficiency and transparency in Department) according to Senior Ministry of Finance collection. Automation reduces revenue leakages officials. Staff lack the skills, systems, and capacity associated with manual and opaque processes. to discharge their duties. With improved capacity Once rates and revenue streams are automated and and discipline, far more revenue could potentially tax proceeds are recorded into the system, there will be collected. be less room for manipulation and anomalies. Weak technical and institutional capacity makes Automation will also help the government conduct it challenging to introduce direct taxation. Taxes the analysis necessary for planning and measuring have been collected by tax administrators with little compliance. Automation has long been important experience or knowledge of the tax system and in tabulating and analyzing statistical data, which collection procedures. All taxes have been collected are necessary for tax planning and compliance manually, without ICT or means of transportation. measurement. It yields a clear picture of revenue Except for import taxes, most tax revenues are sources, which enables Inland Revenue to conduct based on agreements between companies and tax detailed analysis and forecasting. Automation collectors rather than on explicit interpretation also allows revenue to be captured at the point 26 S om a l i a Eco n om i c Update • 2017 Special Focus of payment (the current manual process delays is recruiting experienced talent locally and from revenue posting, which can lead to data inaccuracy the diaspora. The Revenue Mobilization and Tax or manipulation). Administration project funded by the World Bank Multi Partner Fund is studying the tax policy gap and Automation of property transfer tax has been revenue policy potential; supporting tax education piloted. It yielded significant increases in the and awareness campaigns for the legislature, cabinet, level of revenue collected and increased taxpayer businesses, citizens, professional organizations; and satisfaction. Revenue increased by 74 percent in the engaging in other reforms. first four months of automation compared to the last four months before automation, rising from an Revenue organization is improving. Until recently average of US$52,300 to US$91,100 (Figure 3.1). there were two tax directorates within the Ministry of Finance—the Inland Revenue Directorate and Public-private partnering has delivered immediate the Customs Revenue Directorate, led by separate results. The government has partnered with the directors, both reporting to the Director General of private sector to provide automated solutions for the Ministry. In August 2016, a new structure elevated tax reforms. A private company is automating the the Revenue Department. Two new positions— registration and collection of property transfer tax. the Permanent Secretary and the Director General It has helped the Ministry of Finance develop a of Revenue—were created (Figure 3.2). Directors database registering all public notary companies, set of both the Inland Revenue Directorate and the rates, and issue authenticated transfer certificates. Customs Revenue Directorate now report to the Director General of Revenue. This new structure The FGS has taken several measures to improve improved the coordination and sharing of resources mobilization and tax collection in recent years. It of the two directorates. This gives issues of revenue has tried to establish the basic infrastructure for mobilization prominence within the Ministry. a functioning revenue administration, including There are plans to further strengthen the Revenue buildings, equipment, and skilled professionals. Department by creating new large-taxpayer unit, Through the Somalia Financial management which will focus on large corporations in the information system (SFMIS), funded by development telecommunications, remittances, and electricity partners, it has begun creating a basic management generation and distribution sectors. These large information system able to produce revenue corporations have the potential to contribute far statistics and monitor operations. With the support greater revenues than currently. of development partners, the Revenue Department Figure 3.1: Automation tax collection has increased notary revenues Before Automation After Automation 140 124.7 120 Thousands of dollars 100 93.9 84.9 80 69.2 61.0 60 55.9 43.8 40.4 40 20 0 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Source: Ministry of Finance. July 2 0 1 7 | Edition No. 2 27 Special Focus Figure 3.2: Organogram for the FGS’s Revenue Department yield significant revenue in an equitable manner without hampering business activity. To create Minister of Finance such a system, the government should identify and engage with the key sectors in the economy such as Permanent Secretary the telecommunications, money transfer, and hotel and restaurant sectors. Director General of Revenue The focus should be on taxes that are easiest to administer and collect. In the short run, the Director – Inland Revenue Director- Customs Revenue (220 employees) (100 employees) government should concentrate on taxes on economic transactions, especially imports. Over Large Tax Payer Unit (planned) time it can expand the tax base and modernize the system. The tax system needs to be simple, Source: Ministry of Finance FGS. transparent, and rule based. The strategy should focus on increasing compliance by taxpayers with the 3.6 Reforms Somalia Could Undertake highest revenue yields, eliminating nuisance taxes, S tepping up revenue mobilization in Somalia is achievable. Several countries—including Afghanistan (Box 3.2)—have significantly improved curbing illicit levies, and avoiding double taxation. Revenue mobilization reforms are not a one- their tax performance over relatively short periods. off occurrence. Reforms need to be sequenced Many lower-income countries, including Somalia, over time, building on current revenue sources. have increased their tax ratios by 2–4 percent of The following sections identify policy options and GDP in the short run (IMF 2011). cumulative reforms that could be implemented in the short term, medium term (between two and five Demonstrating clear links between tax revenue years), and long term (five years and beyond). and service delivery, including security provision, is critical for revenue mobilization. The government 3.6.1 Measures that could be implemented in needs to boost tax morale by establishing clear links the short term between tax revenue and local benefits. It needs Table 3.5 describes an initial set measures that the to convince citizens that the government does not government could implement within two years; misappropriate public funds and that it uses them in they would yield additional revenue in their own ways that reflect their wishes (OECD 2014). Without right, while also setting the foundation for deeper a functioning security sector, the enforcement and reform scenarios below. compliance activities needed to operate a revenue system will be inadequate. In the absence of revenue Policy measures include the following: collection, the security sectors will look to finance themselves through unofficial means. • Focusing on taxes that are easy to administer— namely, import duties, excise and other The government needs to overhaul the tax system, consumption taxes, and services taxes. Customs redesigning it in a way that is consistent with its duties, which account for more than 80 percent of desire to limit its role to activities and services it can tax revenues, should be revised upwards gradually. perform better than other players and concentrating • Reintroducing domestic taxes once the Inland on providing an enabling environment within which Revenue department is restructured, and properly the private sector can prosper. The tax system should staffed. To improve compliance, the government not be a constraint on private sector growth and could make some activities contingent on development. The objective should be to make the payment of profits or income taxes. Businesses, tax base as broad as administratively feasible while for example, could be allowed to import only if keeping initial tax rates low. Such a system could they pay all their tax liabilities. 28 S om a l i a Eco n om i c Update • 2017 Special Focus Box 3.2: Turning revenues around: Lessons from Afghanistan After growing rapidly after 2001 and peaking at 11.6 percent of GDP in 2011/12, total budgetary revenue in Afghanistan fell to 9.7 percent of GDP in 2013 and 8.7 percent in 2014. These developments precipitated a fiscal crisis toward the end of 2014, with a large estimated year-end budgetary shortfall, accumulation of arrears, and “emergency” requests for aid. Sharply lower GDP growth also constrained revenue potential. Revenue mobilization efforts weakened as well, reflecting the lack of high-level government focus on and prioritization of revenue collection. The long, drawn-out election process may have led to revenue leakages to fund political activities. The short time horizons for government officials may also have played a significant role: Thinking they might be replaced after the election, some officials may have tried to increase their incomes through corrupt activities. Mechanisms for monitoring and enforcement in the Ministry of Finance may have been weakened. The recovery of revenue from the 2014 nadir gained momentum during 2015. For the year as a whole, revenue reached Af 121.8 billion, an increase of close to 22 percent. As a share of GDP, revenue recovered to 10.3 percent in 2015. The increase was the result of the tax measures introduced in 2015, which had a positive impact on revenue (23.5 percent of the total increase in revenue). These measures included doubling the business receipts tax, from 2 percent to 4 percent; increasing levies on imported fuel and gas; imposing a 10 percent tax on mobile phone top- ups; and increasing the overflight fee for commercial airliners. Some of these measures were unpopular; political will and outreach on the part of the government were required to get Parliament to pass them. Afghanistan’s impressive revenue turnaround predominantly reflected better collection efforts as well as new tax measures rather than revenue inflation attributable to currency depreciation or other macroeconomic trends. It was engineered by the Ministry of Finance, a relatively well-established agency with low staff turnover and considerable capacity. In this largely stable institutional context, the most salient factors behind the substantial progress achieved in 2015 included the following: • Strong leadership, focused attention, and follow-up from the top level of government and in the Ministry of Finance itself were key. Provincial governors and other subnational officials were ordered to support revenue collection, and the minister of finance personally followed revenue developments closely. • The unprecedented firing of 40 corrupt or inefficient senior staff, including 10 customs and revenue directors and 30 managers, sent a powerful signal to improve tax collection efforts and discouraged corrupt behavior among other staff. • Tight monitoring of revenue collection by Ministry of Finance leadership created pressure to improve performance. • The end of uncertainty over the election and the formation of the national unity government, however protracted and imperfect, put an end to some major sources of distraction and politicization. • Adroit political outreach to the legislature and other stakeholders enabled Parliament to enact significant new revenue measures, albeit with some delay; consistent engagement with Parliament also helped minimize political blowback from the large-scale firing of senior Ministry of Finance staff. • Building on a sound base, the Ministry of Finance’s technical systems and processes continued to be reformed and improved, and its human capital remained relatively strong among Afghan ministries. This experience demonstrates that targeted progress can be achieved, even in a challenging political and security environment. Focused leadership and prioritization make a major difference when complemented by solid implementation capacity and processes. The pursuit of institutional strengthening and capacity development in the Ministry of Finance for well over a decade paid off when combined with the other elements required to address revenue issues. Political management and outreach clearly are important as well. They are possible even in a fractured political context. Source: Byrd and Payenda 2016. July 2 0 1 7 | Edition No. 2 29 Special Focus • Exploring opportunities to collect additional information systems, and strengthening customs revenue, by improving and consolidating administration. Experience from other countries collections under the existing tax code, has shown that automating routine tasks increases collecting more income tax by directing private tax effectiveness. sector employers to withhold it from their • Harmonizing taxes between the FGS and the workers, and temporarily increasing fees on states. Agreement on fiscal relations in Somalia passports and remittances. using the Intergovernmental Fiscal Forum would • Strengthening, consolidating, and harmonizing bring coherence in the face of highly mobile tax the system by expanding the tax base to include bases for FGS and the federal member states. all large taxpayers not currently paying taxes; Harmonization is critical to avoid predatory extending coverage of tax collection outside tax competition, which can end in a race to the Mogadishu and Benadir; improving compliance bottom (IMF 2015). among potential taxpayers and locations with • Building the capacity needed to implement the highest revenue yields; and eliminating reforms, including by putting in place a senior nuisance taxes, curbing illicit levies, and staff, providing training, clarifying roles and avoiding double taxation. responsibilities, introduce performance • Crafting and passing needed legislation. management measures. Development Partners • Reducing loopholes, removing exemptions, and providing support in this area should ensure introducing strict control through the Accountant the support is coordinated, not duplicative and General and other institutions to reduce focused on immediate needs. mismanagement and corruption. • Improving the capacity of tax and customs • Strengthening the Single Treasury Account. All tax administration. Measures include providing revenue to be deposited into single treasury account. the tools, training, and knowledge necessary to achieve an efficient and equitable modern tax system. Key areas identified by the IMF for Administrative measures include the following: technical assistance are training staff on the • Increasing tax effectiveness by automating introduction and implementation of short term routine tasks. Measures to improve revenue revenue measures and increasing the knowledge administration should focus on establishing and tools needed to design and introduce a simple basic infrastructure, developing management tax system. 30 S om a l i a Eco n om i c Update • 2017 Special Focus Table 3.5: Tax reform measures that could be implemented in the short term (within two years) Type of tax Suggested reform Customs duties • Strengthen customs administration and automation of routine tasks. • Reduce exemptions. • Tax imports at a uniform ad valorem (percentage) rate of 5–8 percent. • Increase the customs surcharge to at least 10 percent. Export taxes • Impose an export tax as a temporary measure. As capacity is being built to introduce a broader income tax on exporters, consider imposing a 5 percent export tax on livestock, which constitute 80 percent of exports and production; hides and skins; frozen meat; fish; and fruit and vegetables. Sales tax on domestic • Consider levying a 5 percent tax on the sales of goods and services identified in production of goods the Appropriation Act to include among others these categories: Petroleum and and services Its Products, Hotels, Mineral Water, Textiles and Clothing, Electronic Materials, and Household Materials. • Withhold the bulk of the sales tax at customs. Excise taxes • Introduce excise tax on petroleum products, khat, tobacco, and motor vehicles. Items that have harmful effects on health or the environment (khat, cigarettes, gasoline, diesel fuel, motor vehicles) could be taxed at higher rates (10–50 percent). Rates should be low enough that they do not induce smuggling or bribing of customs officials to undervalue the goods. Income tax • Widen the tax base to include wages and business income. Increase coverage of direct taxes to cover wages and business income for all employees (public and private) and business income to lay the foundation for a transition to greater reliance on these sources in later years. A flat withholding tax on wages is relatively easy to administer in a formal workforce dominated by civil servants, international organizations, and telecommunication workers. • Create a special unit for large taxpayers, in order to concentrate on the small number of taxpayers likely to have the largest tax bills. Allocate resources where the risks to revenue are greatest by tailoring intervention and services to the challenges posed by different groups, starting with a large taxpayer office. Telecommunications • Impose a 5–10 percent tax on the value of airtime sold by cellphone companies, taxes and impose charges on landlines and revenue received by telephone companies for handling incoming international calls. Currently, no taxes are currently collected from the telecommunications sector, although companies voluntarily pay a negotiated lump sum of about US$4.8 million (as presumptive tax) a year to the Treasury. Tax on remittances • Levy a tax of 0.5–1.0 percent on the value of remittances made through money exchange companies. For amounts above US$1,000, the rate could be cut in half. Annual turnover of money transfer companies is estimated at more than US$2 billion. A presumptive tax of US$13 million a year is thus recommended. Airport fees and visas • Increase the airport usage fee to US$40 a passenger on all passengers, including diplomats and UN staff. Such a levy could contribute about US$10 million year. • Consider doubling visa fees to US$100. Source: World Bank 2015 and Ministry of Finance Appropriations Act 2015–2016, Note: Figures in parenthesis are percentages of GDP. — Not available. July 2 0 1 7 | Edition No. 2 31 Special Focus 3.6.2 Deeper Measures for the Medium Term • Continuing to encourage voluntary compliance Several tax reforms could be implemented in with simplified self-assessment procedures and the medium term (between two and five years), better taxpayer education. building on gains achieved in the short term. Policy measures include the following: 3.6.3 Towards a Comprehensive Tax System for the Long Term • Continuing to simplify the tax system, by reducing the number of taxes, harmonizing rates, reducing Further reforms could be implemented in the long exceptions, and eliminating illicit charges and term (five years or more), to entrench the previous double taxation. reform scenarios through consolidation, and broadening their scope nation-wide. Policy measures • Increasing indirect tax rates. include consolidating, harmonizing, and making • Further strengthen the discussions already consistent tax legislation amendments, in order to underway on fiscal federalism, including type of reduce exemptions and improve compliance. tax assignments and revenue sharing. • Proposing new legislation to regulate and tax Administrative measures include the following: natural resources. Oil drilling and exploitation of • Creating a taxpayer database based on the mapping other minerals are likely to generate tax and other exercise being undertaken by UN Habitat and the revenues once the legislative instruments are government, which will provide district-level detail processed and approved. Similar potential exists about the location, size, number of employees, in the telecommunications sector: the critical access to basic infrastructure, and goods or services telecommunications bill is currently pending sold by enterprises in Mogadishu. parliamentary approval for enactment in 2017. • Completing the hiring of senior staff to entrench the reforms in place. Administrative measures include the following (Table 3.6 describes several specific measures): • Expanding tax collection throughout the country, including by opening tax offices in the regions, • Continuing to focus on large taxpayers, by based on agreed revenue assignments. developing a collaborative and effective • Continuing to educate the public about the relationship with them in order to increase importance of taxes for development. compliance, allocating more resources to the large taxpayers’ office, and adopting risk • Deepening the reforms outlined in tables 3.6 management strategies. and 3.7. • Hiring senior technical staff capable of implementing reforms. 32 S om a l i a Eco n om i c Update • 2017 Special Focus Table 3.6: Tax reforms that could be implemented in the medium term (between to five years) Suggested reform Type of tax Policy Administration Customs • Raise the tax rate on most imports to 8–10 percent (ad • Introduce simplified duties valorem). The tax on luxury goods and goods that have customs clearance harmful effects on health or the environment could be documentation and taxed higher. procedures, and establish a • Extend FGS authority over all ports and airports, system of customs brokers establish modern customs codes, and improve customs to facilitate a speedier infrastructure throughout the country. transit process. • Start aligning the tax system to the Common Market • Gradually introduce a for Eastern and Southern Africa (COMESA) if Somalia computerized recording intends to join the regional block (rates under COMESA and management are 0 percent for raw materials and capital goods, 10 information system, build percent for intermediate goods, and 25 percent for technical capacity, and finished goods). pass legislation to establish effective enforcement mechanisms. Personal • Introduce a taxpayer income tax identification number system. • Continue to collect income tax from more private employees and business people. Corporate • Expand the tax base by focusing on large taxpayers. • Introduce a taxpayer income tax Differentiate the treatment of taxpayers by their identification number revenue potential by creating a large-taxpayer office system. and adopting risk management strategies. Sales tax on • Consider levying a 5–7.5 percent tax on sales of selected domestic domestically produced goods and the services provided production by luxury hotels. of goods and services Excise tax • Consider imposing an excise tax of 10 percent or more on bottled water, carbonated drinks, and related products. Telecommu- • Levy a 5–10 percent tax on the total value of cell phone nications airtime sold by companies, and impose charges on land lines and the revenue received by the telephone companies from handling incoming international calls. • Telecommunication-specific taxes (could be collected under the Budget Appropriation Act): o Incoming international calls (deferred to long term). • Impose a Mobile money transitions: o Airtime charges. o Universal service. • Regulatory fees. • one-time licensing fees and annual fees on mobile phone operators International fiber license. July 2 0 1 7 | Edition No. 2 33 Special Focus Type of tax Policy Administration Business • Consider having the central government issue licenses annual business licenses for telecommunications companies, money transfer companies, airlines, large manufacturers, and import and export firms. Local governments could issue licenses to all other businesses with fixed premises. Offshore • Design a revenue-sharing formula for fishing licenses. fishing rights Source: World Bank 2015 and Ministry of Finance Appropriations Act 2015–2016. Note: Figures in parenthesis are percentages of GDP. — Not available. 3.7 Revenue Projections under Alternative Reform than the US$481 million achieved in the short-term Scenarios scenario. Under the long-term scenario, revenue The combined set of reforms would dramatically reaches 7.9 percent of GDP (US$559 million) by scale up tax revenues relative to the current 2019 and 13.2 percent of GDP (US$1.1 billion), by situation, yet would still fall short of the necessary 2022, equivalent to the lower end of the observed basis for long term sustainable development. With range in low-income countries. short, medium and long term reform packages all implemented in the five years through 2022, tax 3.7.1 Individual and corporate income tax revenue could increase to 13 percent of GDP (US In the short-run scenario, income tax on wages $1.1 billion), permitting much larger government salaries and corporate profits is projected to expenditures. However, it should be noted that this increase from US$2 million (less than 0.1 percent remains at the low end of revenue mobilization of GDP) in 2015 to US$18 million (0.3 percent of worldwide. GDP) in 2019, mainly as a result of withholding taxes from the public, private, and NGO sector There is no revenue buoyancy in the baseline, but and enforcement of the corporate income tax law. the returns to effort under the reform scenarios By 2022 short-term measures could yield US$60 are high.6 Under the baseline scenario, the FGS million (0.7 percent of GDP). As a result of these continues to operate as it has in past, taking no measures, the share of income taxes in total tax meaningful reform action (Figure 3.3). Revenues revenue increases from 2.3 percent in 2015 to 7.9 reach 2.4 percent of GDP in 2019 (US$166 million), percent in 2019 and 16.2 percent by 2022 (Table an increase of 0.4 percent of GDP, and 2.7 percent of 3.7 and Figure 3.3). GDP (US$220 million) in 2022, an increase of just 0.6 percentage points or around 0.1 percentage points a In the medium-term scenario—in which a large- year – even with substantial growth in nominal GDP taxpayer unit is created, the taxpayer identification during that period. If only short-term measures are number starts to function, and awareness of the taken, revenues almost double, reaching 4.3 percent important of paying taxes increases as a result of of GDP (US$305 million) by 2019 and 5.9 percent of taxpayer communication—revenues from income GDP (US$481 million) by 2022, an increase of 3.9 and corporate tax jump to US$30 million (0.4 percentage points. If medium-term measures are percent of GDP) by 2019 and US$103 million (1.3 taken as well, domestic revenues reach 5.6 percent percent of GDP) by 2022. The share of income taxes of GDP (US$392 million) in 2019 and 7.9 percent of in total revenues jumps to 10.1 percent in 2019 and GDP (US$712 million) in 2022—50 percent higher 17.9 percent by 2022. A tax is said to be buoyant if tax revenue increases more than proportionately in response to an increase in GDP or output. 6 34 S om a l i a Eco n om i c Update • 2017 Special Focus Figure 3.3: Reforms could yield significant revenue growth by the long-term a. Dollar value of projected revenues b. Projected revenues as a percent of GDP 1200 1,136 16 13.9 1000 14 12 Millions of dollars Percent of GDP 800 712 10 8.7 7.9 600 559 8 481 5.9 392 6 5.6 400 4.3 305 220 4 2.7 200 114 166 114 114 114 2.0 2.4 2.0 2.0 2.0 2 0 0 Baseline Short term Medium term Long term Baseline Short term Medium term Long term 2015 2019 2022 2015 2019 2022 Source: World Bank staff estimates. Table 3.7: Projected tax revenues by 2019 and 2022 given short-, medium-, and long-term reforms Level of revenues Percent of total tax (millions of dollars) revenue Percent of GDP Item 2015 2019 2022 2015 2019 2022 2015 2019 2022 Income tax Baseline 2 2 3 2.3 1.9 1.7 .. .. .. Short-term measures 18 60 2.3 7.9 16.2 .. 0.3 0.7 Medium-term measures 30 103 2.3 10.1 17.9 .. 0.4 1.3 Long-term measures 45 182 2.3 10.2 19.7 .. 0.6 2.2 Trade taxes Baseline 71 104 139 86.4 87.1 87.5 1.2 1.5 1.7 Short-term measures 174 247 86.3 76.6 66.7 1.2 2.5 3.0 Medium-term measures 203 309 86.3 67.4 53.9 1.2 2.9 3.8 Long-term measures 273 415 86.3 62.6 44.9 1.2 3.9 5.1 Other domestic taxes Baseline 4.8 7 9 5.8 5.9 5.9 0.1 0.1 0.1 Short-term measures 24 47 5.8 10.7 12.8 0.1 0.3 0.6 Medium-term measures 45 117 5.8 14.9 20.4 0.1 0.6 1.4 Long-term measures 77 211 5.8 17.6 22.8 0.1 1.1 2.6 Other taxes Baseline 4.5 6 8 5.5 5.1 4.9 0.1 0.1 0.1 Short-term measures 11 16 5.5 4.8 4.2 0.1 0.2 0.2 Medium-term measures 23 44 5.5 7.6 7.8 0.1 0.3 0.5 Long-term measures 42 116 5.5 9.7 12.5 0.1 0.6 1.4 Nontax revenue Baseline 32 47 62 — — — 0.6 0.7 0.8 Short-term measures 78 111 — — — 0.6 1.1 1.4 Medium-term measures 91 139 — — — 0.6 1.3 1.7 Long-term measures 123 212 — — — 0.6 1.7 2.6 Source: World Bank staff. Note: .. Negligible. — Not available. July 2 0 1 7 | Edition No. 2 35 Special Focus In the long-run scenario, individual and corporate mineral water, textiles and clothing, electronic incomes tax yield US$45 million (0.6 percent of goods, or household goods. The sole source of GDP) in 2019 and US$182 million (2.2 percent of revenue under the turnover taxes category was GDP) by 2022. The share of income tax revenue from telecommunication companies, which paid a increases to 10.2 percent in 2019 and 19.7 percent presumptive tax of US$400,000 a month. Mobile by 2022. transfer companies, consumer light industries, and water companies paid no turnover taxes in 2015. 3.7.2 Taxes on international trade Taxes on international trade currently contribute 86 Adoption of the proposed short-term measures percent of total tax revenue in Somalia. Automating, would propel other domestic taxes from US$5 conducting pre-shipment inspections, and moving million (0.1 percent of GDP) to US$24 million from specific taxation based on volume to taxation (0.3 percent of GDP) by 2019 and US$47 million based on the value of goods being imported (ad (0.6 percent of GDP) by 2022. As a share of total valorem) could vastly increase these revenues. taxes, other domestic taxes increase from 5.8 Implementing only the short-term measures would percent in 2015 to 10.7 percent in 2019 and 12.8 more than double the yield on trade taxes, from percent in 2022. US$71 million (1.2 percent of GDP) in 2015 to US$174 million (2.5 percent of GDP) in 2019 and If medium-term measures are implemented, the 247 million (3.0 percent of GDP) by 2022. Although yield would reach US$45 million (0.6 percent of the dollar value of trade taxes is increasing, other GDP) by 2019 and US$117 million (1.4 percent of revenue streams are increasing at a faster rate. As GDP) by 2022. The share would increase from 5.8 percent in 2015 to 14.9 percent in 2019. a result, the share of trade taxes is projected to decline from 86.3 percent in 2015 to 76.6 percent In the long-term scenario, other domestic tax in 2019 and 66.7 percent in 2022 if only short-term revenue increases to US$77 million (1.1 percent measures are made. of GDP) in 2019 and US$211 million (2.6 percent of GDP) by 2022. As a share of total tax revenue, Medium-term measures would see trade tax domestic taxes increases to 17.6 percent in 2019 and revenues increase to US$203 million (2.9 percent 22.8 percent in 2022. of GDP) by 2019 and US$309 million (3.8 percent of GDP) by 2022. As a share of total taxes, trade 3.7.4 Stamp sales and duty taxes decline to 67.4 percent in 2019 and 53.9 percent in 2022. Stamp duties have traditionally been a significant revenue earner. They are relatively simple to collect, because information on transactions and individuals Long-term measures would increase the revenue is relatively easy and cheap to obtain. yield to US$273 million (3.9 percent of GDP by 2019 and US$415 million (5.1 percent of GDP) by 2022. Short-term reforms are projected to increase As a result of the increase in other taxes, the share revenues from stamp sales and duty from US$4.5 of trade taxes in total revenue is projected to decline million (0.1 percent of GDP) in 2015 to US$11 million from 86 percent in 2015 to 62.6 percent in 2019 and (0.2 percent of GDP) in 2019 and US$16 million 45 percent in 2022 if all reforms are implemented. (0.2 percent of GDP) by 2022. As a percentage of total tax revenue, stamp duty revenue declines from 3.7.3 Other domestic taxes 5.5 percent in 2015 to 4.8 percent in 2019 and 4.2 In 2015 the government collected no excise tax percent in 2022. and no sales tax on petroleum products, hotels, 36 S om a l i a Eco n om i c Update • 2017 Special Focus Medium-term reforms would raise the figure to implemented in the long term, stamp duties could US$23 million (0.3 percent of GDP) in 2019 and generate US$42 million in 2019 (0.6 percent of GDP) US$44 million (0.5 percent of GDP) by 2022. Stamp and US$116 million (1.4 percent of GDP) in 2022. duty revenue rises to 7.6 percent of total tax revenue Their share in total taxes would rise to 9.7 percent in in 2019 and 7.8 percent in 2022. If all reforms are 2019 and 12.5 percent in 2022. Figure 3.4: Reforms would increase revenues in all categories of taxes Income Tax Trade Taxes 2.5 6 2.2 5.1 5 2 Percent of GDP Percent of GDP 4 3.8 3.9 1.5 1.3 3.0 2.9 3 2.5 1 0.7 2 0.6 1.5 1.7 1.2 1.2 1.2 1.2 0.5 0.4 0.3 1 0.0 0.0 0.0 0.0 0.0 0.0 0 0 Baseline Short term Medium term Long term Baseline Short term Medium term Long term 2015 2019 2022 2015 2019 2022 Nontax revenue Other domestic taxes 3 3 2.6 2.6 2.5 2.5 Percent of GDP Percent of GDP 2 2 1.7 1.7 1.5 1.4 1.5 1.4 1.3 1.1 1.1 1 1 0.8 0.6 0.7 0.6 0.6 0.6 0.6 0.6 0.5 0.5 0.3 0.1 0.1 0.1 0.1 0.1 0.1 0 0 Baseline Short term Medium term Long term Baseline Short term Medium term Long term 2015 2019 2022 2015 2019 2022 Other taxes 1.6 1.4 1.4 1.2 Percent of GDP 1 0.8 0.6 0.6 0.5 0.4 0.3 0.2 0.2 0.2 0.1 0.1 0.1 0.1 0.1 0.1 0 Baseline Short term Medium term Long term 2015 2019 2022 Source: Ministry of Finance FGS. July 2 0 1 7 | Edition No. 2 37 Special Focus 3.8 Limits to Revenue Mobilization de facto geographical base revenue assignment. T he de facto arrangement in which states Unless the federal government is able to reach essentially function as autonomous entities agreement with regional governments on revenue presents a challenge for FGS revenue mobilization assignment its ability to extend its revenue base will efforts. The FGS collects all its revenue from continue to be limited. Mogadishu, while states collect revenues from territories under their control. Agreements on roles The absence of an agreed upon revenue assignment in and responsibilities for service delivery and access could undermine the FGS’s efforts to increase its to revenue sources between levels of government revenues. Interference from the states could reduce are yet to be negotiated. The Provisional Constitution the federal government’s ability to increase revenues of 2012 left questions on functional and revenue from the largest potential sources (corporate assignments largely unaddressed. The two issues, income tax, personal income tax, and customs). along with revenue sharing, are critical elements of Without a tax assignment agreement, the FGS will any federation and affect the ability of all levels of not be able to tax individuals outside the capital, government to collect revenues and deliver services. and corporations with operations throughout the In all federations, there is a clear definition of country could be taxed by multiple states as well taxation powers either enshrined in the constitution as the federal government. Uncoordinated multiple or legislated. It defines what level of government is taxation regimes would reduce potential revenues permitted to have access to what type of tax bases. for the federal government. An increase in the federal custom tariff increase at the Mogadishu Revenue collection is fragmented and port without corresponding increases at other ports geographically based. Both the federal and state of entry controlled by the states could lead some governments collect revenues from territories under businesses to shift their imports and exports away their control (Table 3.8). However, not all tax bases from the port of Mogadishu. Imports of khat and yield revenue at this point in time. The fact that states cigarettes could easily be imported through airports reserve the sole right to collect all revenues from throughout the country, including some makeshift the territory under their control, even if a particular airports just outside Mogadishu. revenue does not yet yield any revenue, creates Table 3.8: Distribution of tax bases between the FGS and the states Type of tax Federal Government of Somalia States Customs duty Sales tax Telecommunications charges Corporate income tax Turnover tax Personal income tax (public sector) Personal income tax (private sector) Land/property taxes Stamp duty Vehicle taxes Departure/visa fees Airport/harbor fees and charges Administrative fees Source: Somalia Economic Update 2015. Note: Table indicates presumed allocation, based on type of taxes currently being raised or planned to be raised by different levels of government. No level of government is fully collecting these taxes. 38 S om a l i a Eco n om i c Update • 2017 Special Focus Agreement on functional and tax assignment would negotiations and accommodation between levels increase revenues at all levels of government. of government determines which tax bases will be Tax assignments vary from country to country, but assigned to different levels of government. Even if some tax bases are generally assigned exclusively to a tax base is assigned to one level of government, the federal government and others to subnational revenue streams from the tax base may be shared by governments (Table 3.9). Central governments different levels of governments. generally collect customs revenues, because they have implications for international trade agreements The projections presented in this update assume no and obligations. Subnational governments almost change in the current de facto arrangements. If an always collect other taxes, such as property taxes. agreement is negotiated and the federal government Although tax assignment theory and international is able to collect tax outside Mogadishu, revenue best practices provide guidance, political collection would be much higher. Table 3.9: Conceptual basis of tax assignment Determination of Collection and Type of tax Tax base Tax rate administration” Customs Federal Federal Federal Corporate income Federal Federal Federal Resource taxes Rent (profit) tax Federal Federal Federal Royalties/fees State, local State, local State, local Conservation charges State, local State, local State, local Personal income Federal Federal, state, local Federal Wealth (including capital, inheritance) Federal, state Federal, state Federal Payroll Federal, state Federal, state Federal, State Value added Federal Federal Federal Alcohol and tobacco Federal, state Federal, state Federal, state Gambling and betting State, local State, local State, local Lotteries State, local State, local State, local Carbon Federal Federal Federal Motor fuels Federal, state, local Federal, state, local Federal, state, local Congestion tolls Federal, state, local Federal, state, local Federal, state, local Parking fees Local Local Local Registration State State State Driver’s licenses State State State Other taxes Business State State State Excise State State State Property State Local Local Land State Local Local User charges Federal, state, local Federal, state, local Federal, state, local Source: Broadway, Roberts, and Shah 1994. July 2 0 1 7 | Edition No. 2 39 ANNEXES Annex Annex A: Recommended reforms for increasing domestic revenue mobilization in the short, medium, and long term Table A.1: summarizes this report’s recommendations for increasing domestic revenue. Table A.1: Recommended reforms for increasing domestic revenue mobilization in Somalia in the short, medium, and long term- Responsible Time frame/action Baseline (2015) Recommended action institution Output Challenges Short-term (next 24 months) Craft a credible and Revenue • Establish income tax Department Income taxes Taxes on fair revenue policy institutions rates. of Revenue collected from wages and function poorly. • Collect income tax on (Ministry of public and salaries System is wages and salaries of all Finance), private sectors should cover fragmented. employees in the public, customs and NGOs civil servants, private, and NGO sectors. employees of large and • Consolidate and simplify medium- tax measures, eliminating size private “nuisance” taxes. firms, and employees of NGOs. Private companies must comply with rules and regulation. Establish Revenue • Sharpen the focus on Department Revenue Recruiting effective revenue and customs large taxpayers. of Revenue administration and retaining administration administrations • Develop enforcement (Ministry of operating com-petent barely function powers of customs and Finance), efficiently staff is revenue administrations. customs difficult. • Strengthen accounting mechanisms for revenue collection. • Consider placing young graduates and advisors in revenue departments, using funds from donor funded projects on capacity building. Increase nontax Nontax revenue • Impose airport and port Ministry of revenue represents just service charges. Finance, port X percent of • Impose airport departure and airport total domestic fees. authorities revenue. • Impose motor vehicle licensing and registration fees. • Impose fees on royalties for fishing and mining licenses. • Charge for passports and visas. 42 S om a l i a Eco n om i c Update • 2017 Annex Responsible Time frame/action Baseline (2015) Recommended action institution Output Challenges Medium-term (24–60 months) Harmonize Taxation • Consolidate collection Department • Income Compliance tax system by system is highly of taxes on wages and of Revenue system and political eliminating tax fragmented salaries. (Ministry of consolidated support are fragmentation • Streamline registration Finance), for public, weak. and licensing system. customs private, and NGO sectors • Establish standardized rate structure and • Tax classify businesses by registration category and sector. system established • Reduce rent-seeking and bribery. • Tax rates harmonized • Improve compliance through awareness- • Transparent building and and dissemination of accountable information. taxation system in place Improve the Every institution • Streamline tax and Department Revenue Tax collectors institutional or agency is a tax nontax collection and of Revenue administration are resistant capacity of federal, collector administration. (Ministry of strengthened to change; state, and local • Create a transparent and Finance), and streamlined pressure is governments accountable system. customs likely to come from political • Develop policy proposals and interest for tax policy for excise groups. taxes and simple broad- based consumption tax. Introduce ICT is very limited • Establish computerized Department ICT system Officials are information and taxpayer registers of Revenue established and resistant to communication including enterprises, (Ministry of operationalized change. technology (ICT) motor vehicles, and Finance), agriculture and livestock customs, Resources are owners. state and local lacking • Introduce cash registers authorities for value added tax. • Start establishing a tax identification number (TIN) system. Draft medium-term No plan is in • Implement medium- to Ministry of Implementation Needed skills tax and customs place. long-term tax plan (and Finance, state of three- to five- are lacking plans revise as needed). and local year tax and • Implement customs plan. authorities customs plans Formalize large Legislation • Formalize large Ministry of Legal Companies firms operating governing sector firms operating Finance, line framework in are resistant informally is weak informally, including ministries, place to change. telecommunications Parliament and money transfer companies. • Pass legislation Parliament Comprehensive • Introduce taxes on taxation system mobile phones and Ministry of in place mobile money. Finance July 2 0 1 7 | Edition No. 2 43 Responsible Time frame/action Baseline (2015) Recommended action institution Output Challenges Long term (more than 60 months) Craft medium- to No strategy • Implement medium- Department Transparent, long-term tax and exists. and long-term tax and of Revenue comprehensive, customs strategy customs plans. (Ministry of and accountable Finance), system of customs revenue in place Develop phased • Prepare and implement Ministry of System strategy for plan to modernize Finance modernized modernizing the tax revenue collection by system federal, state, and local authorities. Enhance tax • Improve accountability Ministry of Tax compliance compliance. of revenue collection Finance enhanced and institution. applied widely • Show taxpayers how in all areas; money is used. taxpayers willing to pay • Reduce or eliminate corruption. Link federal, state, Little • Establish mechanisms Ministry of Fiscal and local tax coordination of communication and Finance; state decentralization systems takes place. coordination between and local system federal, state, and local authorities authorities; ensure that federal and state governments share information on all relevant transactions. Improve Revenue • Establish an information Department Consistent and information and information is management system for of Revenue reliable revenue statistical capacity archaic and relies revenue. collection and (Ministry of data compiled; on management related data. Finance), estimates of remnant books • Establish guidelines customs improved and handling of and harmonize data cash. collection procedures to be followed by all institutions involved in revenue mobilization and collection. Source: Somalia Economic Update 2015. Note: Table indicates presumed allocation, based on type of taxes currently being raised or planned to be raised by different levels of government. No level of government is fully collecting these taxes. 44 S om a l i a Eco n om i c Update • 2017 References • Broadway, Robin, Sandra Roberts, and Anwar Shah. 1994. “Fiscal Federalism Dimensions of Tax Reform in Developing Counties.” Policy Research Working Paper 1385, World Bank, Washington, DC. • Byrd, W. A., and M. K. Payenda. 2016. “Afghanistan’s Revenue Turnaround in 2015.” Peace Brief 201, United States Institute of Peace, Washington, DC. • IMF (International Monetary Fund). 2011. “Revenue Mobilization in Developing Countries.” Washington DC. • IMF (International Monetary Fund). 2014. “Regional Economic Outlook, Sub-Sahara Africa.” Washington, DC. • IMF (International Monetary Fund). 2017. “Building Fiscal Capacity in Fragile States.” Washington, DC. • International Dialogue on Peacebuilding and State-Building. 2011. “A New Deal for Engagement in Fragile States.” Available at www.newdeal4peace.org/wp-content/temes/newdeal/doc/new-deal-for- engagement-in-fragile-states-en.pdg • OECD (Organisation for Economic Co-operation and Development). 2011. “Supporting State-Building in Situations of Conflict and Fragility: Policy Guidance.” DAC Guidelines and Reference Series. Paris: OECD Publishing. • OECD (Organisation for Economic Co-operation and Development). 2014. “Fragile States 2014: Domestic Revenue Mobilization in Fragile States: Policy Guidance.” Paris: OECD Publishing. • World Bank. 1991. “Crisis in Public Expenditure Management.” Washington, DC: World Bank. • World Bank. 2015. “Somalia Economic Update.” Washington, DC. July 2 0 1 7 | Edition No. 2 45 Mobilizing Domestic Revenue to Rebuild Somalia The recent drought has led to large-scale food insecurity in Somalia. Following four consecutive seasons of poor rainfall and low river water levels in large swaths of the country, a severe food crisis hit Somalia in 2017. The drought has led to near total crop failures and reduced rural employment opportunities, widespread shortage of water and pasture, and consequent increases in livestock deaths, which have in turn stretched the country’s coping mechanisms to the brink. Food access diminished rapidly among poor households as staple food prices rose sharply and livestock prices dropped significantly as people engaged in forced sales to cope with the effects of the drought. The drought conditions left millions of Somalis facing severe food and water shortages. The new Somali leadership highlighted the drought situation as a top priority with about 6.2 million people in need of humanitarian assistance. As the drought begins to subside and the agriculture sector begins to recover, the FGS focus will be on implementing policies to ensure stability as well as address weaknesses in the provision of infrastructure, security, and the regulatory and institutional environment. First, macroeconomic policies that continue to stabilize the economy are necessary (but not sufficient) to support recovery and economic diversification. Second, beyond stability, significant investments will be needed to close the country’s huge capital and infrastructure gap, improve resilience, and improve the business environment over the medium term. Finally, reforms in public financial management (including strengthened domestic revenue mobilization), and strengthened governance are needed to raise more resources for development and ensure that the increased resources are utilized efficiently. Sustainable and reliable domestic revenue is critical if Somalia is to implement its development agenda including state-building, sustained rapid economic growth, and poverty reduction. To support sustainable expenditures, drive development, and reduce reliance on external sources, the FGS will need to find ways to increase domestic revenue in a way that doesn’t disincentivize the private sector—a sector that has been an engine of Somalia’s development in the past two and half decades. Enhanced domestic revenue mobilization–in particular a scenario where domestic revenue could increase more rapidly than administrative expenditures offers Somalia a promising and sustainable source of home-grown development finance. World Bank Group SOMALIA ECONOMIC UPDATE Delta Center Menengai Road, Upper Hill Join the conversation: P. O. Box 30577 – 00100 Twitter Nairobi, Kenya @mpfsomalia Telephone: +254 20 2936000 Website: www.worldbank.org/somalia Find out more on: #SomaliaEconomicUpdate Macroeconomics and Fiscal Management Global Practice Photo credits: AU/UN IST and Hassan Hirsi/World Bank