Issue No 603

Somalia's political economy and debt relief

 
Somalia's Gross Domestic Product (GDP) growth flatlined in 2022 at just 1.7%, down from 2.9% in 2021, as crushing drought, perennial insecurity, and inflation bit. Growth has recovered somewhat this year, estimated to be 2.8% in 2023 and slightly higher in 2024, largely attributable to improved rainfall and a relatively strong domestic private sector. While inflation dropped from 6.8% in 2022 to 4.2% in 2023, the economy remains highly susceptible to global energy and food price fluctuations. Somalia's dependence on imported oil and grain has seen it particularly negatively impacted by the ongoing Russian invasion of Ukraine.
 
Two prospects for 2024, however, are raising hopes of greater internal investment and regional trade. First, the completion of the International Monetary Fund's (IMF) Heavily Indebted Poor Countries (HIPC) Initiative will relieve a significant portion of Somalia's debt burden. The IMF has already slashed Somalia's external debt from over USD 5 billion to USD 3.3 billion, and by the end of 2023 will reduce it further to USD 557 million. The relief will mostly come from the African Development Bank, the IMF, the World Bank, and nearly two dozen members of the Paris Club. The hope is that by reducing Somalia's debt payments, it might better invest in poverty reduction and expand limited government services.
 
Second is Somalia's expected ascension to the East African Community (EAC) as its 8th member. Negotiations at the end of August 2023 have paved the way for a final decision by the regional body's Heads of State Summit in November. Democracy, rule of law, and good governance are all enshrined in the EAC's constitution, though their application is haphazard across the member states. The primary importance of the EAC is economic, with Somalia expected to join a common market of largely duty-free trade. But the country lags far behind its East African neighbours' development. The German Foreign Ministry has estimated that if Somalia is to reach a similar development level in "the foreseeable future," the country needs "growth rates of 10% or more."
 
The nature of Somalia's political economy starkly contrasts with neighbouring countries like Ethiopia, however. Massive state-stimulated growth like Ethiopia's 'developmental state' will not be unlocked by the ascension to the EAC and debt relief. Instead, since 1991, Somalia has provided a case study of how services and growth can develop in the absence of a central government, as a "functional failed state," as Ken Menkhaus termed it. State collapse has not meant economic collapse in Somalia; indeed, in the absence of a central state, several industries have flourished. Dynamic companies like Hormuud, the country's major telecommunications company, have partially filled the gap in basic services, acting as a de facto bank by distributing salaries. But the overwhelming dependence of livelihoods on agriculture, particularly livestock raising, has made Somalia extremely vulnerable to the climate crisis and external shocks.
 
Reforms that have enabled Somalia to access the HIPC Initiative seek to shift this dependence and create an environment more conducive to investment. Several laws have been passed to mobilise support for industries like fishing. The relationship between Somalia's government and the business sector has historically been strained, with attempts to centralise authority over the country's economy coming up against strong structural impediments.
 
Most significant is the outsized nature of external funding in Somalia's political economy, particularly remittances and various forms of international aid. Over USD 1 billion reaches Somalia in remittances yearly, estimated to be more than humanitarian and developmental aid combined. An estimated 40% of Somali households receive some form of remittance, and they finance roughly 80% of start-ups in the country. This has left the Federal Government of Somalia (FGS) just one, admittedly significant, economic actor and service provider among many in a chaotic political economy.
 
The deregulated market still dominates basic services like education and healthcare; for many Somalis, the FGS plays no discernible role in their lives. While the alleviation of Somalia's debt may begin to shift this dynamic, there is still little sign that the FGS is capable of independently filling the country's vast services vacuum. Government revenue is largely limited to tariffs imposed on imports where the federal and regional governments, such as the Port of Mogadishu, can exert a presence. With the FGS unable to sustain itself and fully provide for its citizens, Somalia’s external debt will likely continue to rise rapidly in the coming years.
 
Joining the EAC and the HIPC relief will not immediately usher in the economic investment and infrastructure development the country desperately needs. They are, however, important steps for Somalia. If funds can be freed up from debt repayments in 2024, the FGS should seek to better empower the country's Federal Member States and local communities to support themselves. Top-down development in Somalia has proven itself a misnomer, with international aid often inadvertently reinforcing the country's inequalities. In 2024, livelihood diversification and empowerment must be the economic priority of the FGS and Somalia’s international partners if they want to break the country’s cycle of debt and dependence.

By the Somali Wire team