INTRODUCTION

Somalia maintains an economy largely based on livestock, remittance/ money

transfer companies, telecommunications.
Agriculture is the most important sector:
1. Accounts for %40 of GDP and %50 of export earnings.
2. Principal exports: livestock, hides, fish, charcoal, and bananas.
3. Principal imports: sugar, sorghum, corn, machined goods.

Somalia as being a country that is coming out of two decades of civil war,
economic challenges are many and addressing them will not happen
overnight.
Security situation is improving but still volatile.
The governance is fragile and lacks the capacity to carry out basic
functions of governing in providing security and economic opportunity.
Credible public revenue “taxation” systems is not fully functioning. Without
taxation, creating jobs, reconstruction of infrastructure, health and education
is very challenging.

Somalia’s economy has managed to survive state collapse, maintaining reasonable

levels of output throughout the country’s two-decade-long civil war. Now, with
political recovery and transition slowly underway, the country’s economy faces
new hurdles.
Investors have come to Somalia looking to cash in on the rebuilding process and
abundant natural resources in areas such as agriculture and livestock, fisheries,
and oil and gas. More innovative fields, such as mobile technology, have also been
taking off, although they still only impact a minority of the population (22.5 out of
every 100 inhabitants have a mobile phone subscription in Somalia, significantly
lower than the developing world average of 84.3).

It is hoped these developments will lay the groundwork for broader economic
growth. The second pillar of the president’s Six Pillar Strategy to stabilize the
country is economic recovery.

In line with this, Somalia aims to build a transparent, formalized, globally

competitive economy that collects tax revenues.

But the government faces a number of challenges as it works towards these goals.
IRIN looks at some of the most pressing problems.
 1. Certification

 - Somalia’s government does not have the capacity to participate in

certification schemes to provide authenticity documentation that would enable
business to sell globally.

 - Ex: Sesame seeds are grown in large quantities in Somalia-in 2012 the country
was the 12th largest producer in the world- exporting them is a challenge.
 - No proper certificatory regime- EPA ( Economic partnership agreement)
between Somalia and Europe.

2. Trade difficulties

Somalia is not a member of any regional economic blocs, and it has few formal trade
deals with other nations. The US and the European Union currently have no trade
agreements with Somalia, and the country is not a member of the World Trade
Organization, compounding the difficulties local firms face when competing regionally
and internationally.

In 2012, Somalia exported goods worth US$693 million (509 million euros), according
to data from the European Commission’s Directorate-General for Trade. While this
represents a significant increase - in 2008, exports were less than half that number - the
country still runs a large trade deficit. In 2012, its imports were valued at $1,818 billion
(1,335 million euros).

It also exports less than other countries: Somalia is the 171st largest exporter in the
world, and it has the fourth lowest GDP per capita, according to the CIA World
Factbook.

Somalia’s biggest export market is to the United Arab Emirates (UAE), which takes in
more than half its total exports. Just three countries (UAE, Yemen and Oman) account
for 82.5 percent of all exports, predominantly in livestock, out of Somalia.

Regional partners often impose strict restrictions on Somalia, mainly out of security
fears. “Borders sometimes are closed,” said Hassan Noor, CEO of Hanvard Africa, a
consultant firm that focuses on East Africa. “People fly from Mogadishu direct to
Istanbul. They can fly to Dubai. But they can’t fly to the next-door neighbor.” (There
are no direct flights between Mogadishu and Ethiopia, for example, although there are
to Djibouti, Kampala and Nairobi.)
 3. Currency reform

Restoring the credibility of Somalia’s currency will also be crucial to economic

development. The Central Bank has identified “the introduction of new and unified
currency” for Somalia as one of its strategic goals for the next five years.“There were
(and still are) several versions of the same currency (Shilling) in circulation
concurrently, and most of them are fake currencies,” the bank noted in its Strategic
Plan 2013-2018.Since the early 1990s, no bank notes have been printed officially. “The
collapsing of the Central Bank and the banking system left a vacuum for monetary and
regulatory control and totally shattered the country’s payment system,” noted the
report. This led to “currency substitution and the growth of the parallel currency
market,” with warlords and militias issuing their own currency.This means that there is
a large black market for currency. Officially, Somalia’s shilling trades at around 1,200
to the US dollar, but it is about 15 times that rate on the black market.In mid-2013, the
International Monetary Fund resumed relations with Somalia after 22 years. For now, it
will not provide loans to the country, but it pledged to provide technical assistance and
highlighted currency reform as a major priority. But the Central Bank is still struggling.
Central Bank Governor Yussur Abrar resigned in November after just seven weeks,
citing claims of corruption and government interference, and while an interim leader
has been appointed, the Bank has yet to find a full-time replacement.“There’s a lack of
capacity, and also there’s huge corruption,” said Shirwa Jama, the International
Development Law Organization’s Somalia country representative. But he noted that
“all these things can really be addressed if the government has the commitment to
improve rule of law, to capacitate and work with international partners.”

4. Managing oil deals and revenue

Nowhere are the problems and potential of the Somali economy better
exemplified than in the oil and gas industry.
There are massive reserves, and even before the collapse of government, large
firms were exploring the possibility of mining oil and gas. But lack of legislation
and political wrangling at regional and national levels impede development in this
sector.

“There is currently growing hostility between the Federal Government of Somalia

and regional administrations that have signed oil deals independently of the
government,” a UN Monitoring group on Somalia and Eritrea noted in a
July letter to the Security Council. Divergence between the 2008 petroleum law -
which is invoked by Federal Government petroleum officials - and Somalia’s
Constitution is exacerbating this hostility.”

Some large firms, including BP, Chevron and ConocoPhillips still

hold exploration rights dating back to before the civil war and have had
discussions with the central government. In August, Soma Oil and Gas, a British
firm founded earlier in 2013, signed an agreement with Mogadishu to begin
exploring oil - much to the chagrin of the Puntland and Somaliland governments,
which have separate deals with other firms.

It remains unclear how old contracts will be resolved and who will have the
ultimate right to negotiate new deals. “Oil and gas has huge potential, but the
current uncertainty surrounding federal and regional states and the lack of
agreement over resource sharing and taxation means that it will be very difficult
for that sector to take off until those issues are resolved,” noted Haslam.

5. Social engagement

There is also a need to ensure that economic growth benefits the people, especially
as foreign direct investment grows.Following the collapse of the Siyad Barre
regime in 1991, the private sector stepped in to provide most basic goods and
services, and has actually performed relatively well throughout this period
despite rampant insecurity and lack of infrastructure.

“Everything is being provided by the private sector - water, electricity,

telecommunications, everything,” said Hanvard Africa’s Noor. “In the absence of
a government, in the absence of a regulatory framework, with nobody else coming
to provide those services, they had to do what they could do.”

“Businesses have created their own informal, enabling environment,” said

Haslam. “People form strong networks to overcome [poor] access to finance, for
example, relying on customary or Sharia law to overcome disputes, and local
knowledge is paramount.”

But while a system of customary law and close clan ties worked to support society
(through mechanisms such as Zakat - giving a proportion of one’s wealth to
charity), some of these networks are now being eroded, argues Alinovi. “Because
of a set of changing mechanisms in the inter-clan relations in the last 20 years, a
lot of the obligation that the businessmen used to have to the society, for the social
fabric surrounding [them], has begun disappearing,” he said.

“The businesses in Somalia are becoming less relevant for the society.”

6. Poor infrastructure
Poor infrastructure normally slows down the economic development; the provision of
infrastructure services to
meet the demands of businesses, households and other users was one of the major
challenges of economic development. Infrastructure services also contribute to improved
productivity of business, households and government services. The time spent obtaining
water and fuel or traveling to markets and service centers is often significant. When
household connections are available and transport and telecommunications services are
accessible, household members, particularly women and children, can engage in more
productive activities. The expansion in quantity and improvement in quality of
infrastructure services also lowers costs and expands market opportunities for
businesses. This contributes to increased investment and productivity which is essential
for sustaining economic growth (IMFcountry Report 2015).

7. High cost of lighting and energy

Energy plays a fundamental role in the economic growth process; Stern (2010) argues
that energy plays an important role in economic growth as production should be seen as
a function of capital, labor and energy.
Traditionally it is only seen as a function of capital and labor. However, energy is
required to power industrial processes and to produce goods, equipment and services in
the majority of productive sectors within an economy. The provision of energy is also
strongly associated with improved human development (Bergasse et al., 2013) Atif &
Siddiqi (2010) examine the link between electricity consumption and GDP, the study
finds that an increase in the use of electricity leads to an increase in economic growth.
Therefore, the research suggests that the slowdown in electricity consumption within the
country has hindered economic growth and the study finds that there is no long-term
link from energy consumption to GDP but there are some significant short-term links
from energy consumption to GDP. There are also long-term links from GDP growth to
energy consumption.

8. Dearth of the foreign direct investment (FDI)

Somalia has very low levels of investment, ranked approximately 180th in the World for
gross fixed capital formation as a percentage of GDP. Foreign Direct Investment (FDI)is
where a company from one country making a physical investment into building a
factory in another country, (FDI) plays an extraordinary and growing role in global
business. It provides countries with new markets and marketing channels, cheaper
production facilities, access to new technology, products, skills and financing. For a host
country or the foreign firm which receives the investment it can provide a source of new
technologies, capital, processes, products, organizational technologies and management
skills and as such can provide a strong impetus to economic development. Unlike other
African governments who get millions from the offshore investors, Somalia does not
receive any form of foreign direct investment except very little portion by the virtue of
lack of recognition, poor financial infrastructure and business environment, difficult of
doing business to mention a few. Since there are no insurance firms in Somalia no
company can risk it’s capital to invest in this young and fragile nation (world Bank).

9. High level of youth unemployment

The last assessment of the unemployment rate in Somaliland indicates among others, a
high rate of unemployment, high level of illiteracy, poor government policies/ strategies
and undeveloped economy are fueling unemployment in Somalia. Additionally, brain
drain is also characterized with professionals going abroad to earn a living. I believe the
last assessment needs to be revised to shed more light on the underlining issues that
cause unemployment. e.g hegemony and favoritism, Somalia has very low employment
to population ratios, Population: 10,616,380 .
Median age for men: 17,9 women:17,6

Conclusion and Recommendations

Somalia needs drastic economic reforms, particularly passing central bank act reforms,
and the formation of monetary and fiscal policy committees. These will set guidelines
that will enable the central bank and the Ministry of Finance to act as a watchdog of
market volatility. The government should come up with strategies and policies that will
strengthen the Somalia shilling and persuade citizens to use their local money for their
transactions. It is also obliged, to educate people on the significance and importance of
financial literacy and saving and depositing their surpluses in financial institutions and
not put under mattresses. This will eventually improve investment opportunities and
allow investors, households, small and medium entrepreneurs (SME’S) to get advance
loans from financial institutions. This will significantly enhance the economy, create job
opportunities and increase government income. It will also assist the government to
determine the amount of money in circulation and thus enable control of the economic
volatility.
The government needs to increase its income by improving tax collection techniques,
setting zero tolerance policy for graft, improving the skills and knowledge of the civil
servants and giving incentives that enhances the efficiency and effectiveness of revenue
collection and its services employing technology and computerized systems i.e.
Management information systems (MIS) and public financial management systems
(PFMS).
Moreover, there is a need to form Somaliland Revenue Authority (SRA) which will
particularly deal with collecting tax for the government.
To reduce the widespread youth unemployment, the government should take various
measures to tackle this issue by most importantly establishing Technical and Vocational
Education and Training Institutes (TVET) which will at the end of day, produce
graduates who are equipped with the skills needed in the job market thereby reducing
unemployment which is hostile to economic development.
A World Bank supported study shows the East Asian countries such as China, South
Korea and Malaysia all achieved their industrialization because they invested heavily in
vocational training, attaining a 50 percent enrolment compared to other disciplines.
Additionally, the ruling administration should institute saving and credit cooperative
societies (SACCOS) which will make a platform where the deficit and surplus holding
investors meet, thus creating a space for the young graduates and improving the
economy at large.