Issue No. 500

Tax Reform and Nation-Building

In 2022, the Hiraal Institute, a Mogadishu-based think tank, released a report saying that Al-Shabaab collected almost as much in taxes as the government of Somalia. Based on interviews with 70 Somali businessmen, government officials, members and ex-members of Al-Shabaab, the insurgent tax collectors were bringing in USD 15 million per month. Today, Somalia’s tax revenue stands at 4.4 percent of its GDP, the lowest tax revenue in Africa.

Re-building Somalia after decades of conflict takes money. Somalia cannot counter its endemic fragility, enhance government legitimacy or deliver critical public services to the Somali people without adequate resources. But mobilizing domestic resources in such a fragile, conflict-ridden environment is a formidable challenge.

The news is not all bad, however. For the past ten years, excluding 2020 when the Covid-19 pandemic rolled across Africa, Somalia has consistently increased its domestic revenue toward the goal a 15 percent tax to GDP ratio in the medium to long term. And last year’s election brought hope that Somalia’s new government has the political will to sustain and improve tax collection.

The Federal Government of Somalia relies heavily on nominal types of domestic revenue, including income tax, customs, property taxes, fines and penalties, and fees imposed for government services. However, taxes collected have often been known to make their way into individuals’ accounts instead of the government’s. Somalia’s progress in tax reform over the last several years includes adopting new tax policy, updates to revenue law, and improvements to revenue administration.

These reforms have increased government revenue, resulted in a more simplified tax collection process based on self-assessment, increased operational efficiency through automation, and generally contributed to state-building.

Collecting taxes is more than just generating revenue. There are three responsibilities that differentiate the state from other actors in this regard. First, the government is exclusively charged with the collection and management of taxes. In addition, the government is tasked with financing public goods and services, including security. And, finally, the central government alone possesses enforcement authority.

In a 2019 IMF study on the experiences of Cambodia, Georgia, Guyana, Liberia and Ukraine in relation to tax reform, some lessons learned are also signficant for Somalia. Georgia, for example, following the collapse of the Soviet Union, experienced many of the same problems of current-day Somalia—rampant corruption, widespread tax evasion, distrust of the tax system, illegal tax credits, and outright theft of government tax revenue. But in 2004, Georgia’s Rose Revolution presented the government with a mandate to reform its economy and fight corruption. It adopted a policy of zero tolerance of corruption. As laws changed, so did the culture.

What can Georgia’s successful tax reform experience teach Somalia?

The necessity of a clear mandate. A government with a clear mandate to reform taxes can succeed. In the case of Somalia, the new president still enjoys the support and goodwill of his people. Fulfillment of his promise to transform Somalia into a country at peace with itself and the world depends on a functioning government that can provide its people with the public services that were denied to them for decades. The collection of taxes binds the government and its citizens together in a social contract, a prerequisite for successful nation-building.

The need for high-level political commitment to and buy-in from all stakeholders. A mandate is not enough. The government must effectively make its case to both regional and local leaders and its people.

Success also requires a simplified tax system. Especially in fragile states, a simplified tax system fosters compliance in an environment of still-weak institutions.

Management, governance and human resources are key. Tax offices should employ Somalia’s best and brightest talent, and Somalia’s youth need employment. The government should invest in education and training of the next generation of tax collectors and administrators.

Management information systems are also essential. Automated systems help prevent corruption. The government must invest in automated systems, and train youth in information technology to run them. 

Tax reform has the potential to generate critical resources for Somalia, and to transform the relationship between the state and its people. By building a fair and transparent system of tax collection, the Federal Government of Somalia can begin to re-establish its social contract with the Somali people.

The Somali Wire Team