Issue No. 744

Fantasy Economics in Somalia's Budget Strategy

In a Cabinet session earlier this month, Somalia's 2025 national budget of USD 1,342,476,311 was approved. Presented by the Finance Ministry, next year's budget represents a 24.4% increase or USD 263,160,528 from 2024-- a historic budget that surpassed USD 1 billion for the first time. Though the budget still needs to be published and approved by the federal bicameral parliament, the significant jump in expenditure when so few services are provided and such little tax is collected raises several questions. 

While federal officials have attributed the rise to broader plans to become financially 'self-sufficient,' details on new avenues for raising domestic revenue remain scarce. And though the budget itself is not yet accessible, the 'Budget Strategy for Fiscal Year 2025' is, and, when drilling down into the detail, reveals an almost fantastical economic approach. The "key priority interventions in improving domestic revenue mobilisation" include digitising the non-tax revenue management system, building revenue staff capacity, harmonising federal-state level tax systems, and strengthening the "social contract of the tax system." On paper, this all makes sense as Somalia seeks to develop its domestic revenue collection and state-building capacity. 

But it is also stripped of the political and economic reality that Somalia's federal government finds itself in, and much of the draft strategy reflects a barely disguised attempt at further centralisation and resource monopolisation. Per the document, each Federal Member State (FMS) is entitled to a share of the confirmed budget support directed through the federal government, according to the allocated percentage in the equal share parameter. Here, the Federal Government of Somalia (FGS) retains a whopping 60% of the budgetary support, with the rest, 40%, distributed equally between the FMS and the Banaadir regional administration. Consequently, this allocates just 6.6% to each FMS, with no consideration of Somaliland, a meagre amount and hardly indicative of interest in a genuine federal system. Moreover, the proposed measures for 'Revenue Enhancement' and 'Expenditure Management' are made in the absence of any agreed model for fiscal federalism, the arrangements that would rationalise income and expenditure between the federal government and the member states, so references to FMS budgets make no sense at all. And with Puntland and Jubaland both boycotting the National Consultative Council (NCC), harmonising federal-state tax codes is an extremely distant prospect.  

Moreover, any notion of a "social contract" underpinning the taxation system remains improbable. Villa Somalia's flagship policies, including aggressive centralisation of power, monopolisation of development aid and security assistance, and expulsion of Ethiopian troops by the end of 2024, have alienated much of the Somali population. With no prospect of fiscal federal agreements on the horizon, that leaves Villa Somalia reliant on the municipality of Mogadishu for the overwhelming majority of its income – a profoundly unbalanced situation that many residents and political leaders of the capital resent and desire to change. 

The draft strategy appears to acknowledge that this is unlikely to shift demonstrably in the coming months. Handling fees seem only to apply to the 'Seaport' and 'Airport' of Mogadishu, indicating that no other facility is under government control or is likely to contribute before 2027. Moreover, sales taxes on airline tickets, electricity companies, and TV cable providers are all under USD 1 million per year, suggesting they only apply to the capital. This is reinforced by the estimated number of cable subscribers-- 84,000 households or roughly 500,000 people.

While the federal government aspires to raise taxes on electronic transactions, this, too, is aspirational. Neither Puntland nor Jubaland is eager to augment the tax burden on their citizens to bail out an adversarial federal authority. When the recent 5% digital tax was announced, Jubaland's Finance Ministry simply refused to participate and urged businesses not to comply. Several major banks and remittance firms have already issued statements that they don't hold electronic merchant accounts, signalling their discomfort with the proposed levy. Al-Shabaab also opposes the tax, which will likely discourage many from complying with the directive. In recent months, the extremist group has stepped up its campaign against businesses installing CCTV cameras as directed by the government, killing several owners and bombing stores.

Other measures touted by the draft budget strategy for 2025 range from "prioritise spending on investments and poverty reduction" to "reconstructing Somalia's energy and road infrastructure" to "building resilience to shocks." Again, all are initiatives that make sense on paper and are surely needed to tackle Somalia's extreme climate vulnerability. However, it does not appear that the FGS will be the one to stump up the necessary cash. Instead, the budget planning document proposes that over the 'medium-term,' the government will allocate just USD 10 million annually for education, USD 5 million for health, and USD 3 million for agriculture development. Though the document is a draft, such meagre amounts from its coffers for core services are alarming, to say the least. 

Ahead of the USD 1.3bn budget being published, the question arises about where exactly the money is going. Twelve years after the recognition of the FGS, the services provided remain extremely limited. Even the security establishment, which is Villa Somalia's supposed highest priority, is funded almost entirely by international partners, and the Somali National Army is still essentially a highly varied group of militias. The education and healthcare sectors are almost wholly privatised and vary immensely in quality from region to region, while the judicial system is so widely disregarded that communities turn to Al-Shabaab or the traditional 'xeer' system for dispensed justice.

Moreover, the fact that just 25% of the federal budget stems from its own domestic revenues jars with Villa Somalia's optimistic budget planning scenarios. While domestic revenue collection has grown in recent years, the projected figures for GDP growth and expanded tax opportunities are largely based on desktop studies and contrast with reports of a potentially catastrophic humanitarian situation that estimates 4 million people at risk of starvation. Possible Turkish investments in offshore oil and gas development and, more recently, the Hobyo port certainly seize the headlines, but the truth remains that nearly four million people are displaced in Somalia and that almost 70% of Somalia's population still has a daily income of less than USD 1.90. And Al-Shabaab still controls – and taxes - most of southern Somalia, challenging rosy predictions for an expanded revenue base. 

Compare this to administrations in Jubaland, Puntland, and Somaliland, operating with far smaller budgets and much less international assistance. Somaliland, for instance, administers far more territory than the FGS with roughly USD 400 million per year, relying almost entirely on domestic revenue, and will finance the upcoming party and presidential elections on 13 November from its own taxation. Puntland operates on slightly more than USD 300 million per year, also largely from its own income. And both administrations have done a far better job of containing Al-Shabaab and providing services for their respective populations than the FGS has managed to do with USD billions of foreign aid.

When it comes to financing Somalia, there can be a kind of 'sunk cost' fallacy at work, with the incremental state-building progress making the vast sums ploughed in 'worth it.' But while more money comes in, fuelling the social media narrative about 'Mogadishu Rising,' there is also growing donor fatigue among those frustrated with going through the same motions again and again. As fatigue sets in and major crises in Ukraine, the Middle East, and Sudan place greater demands on Western capitals, it is clear that dwindling assistance budgets and diminishing returns on foreign aid to Somalia are beginning to bite.

While the USD 1.3bn budget may undoubtedly sound impressive, Villa Somalia's draft budgetary planning document exposes a government in deep crisis, including the broadening centre-periphery schism. The publication of the full budget, which will likely be waived through parliament in the coming weeks, will reveal more. However, this early glimpse portrays a federal government whose fiscal authority is not only confined to the national capital but is not expected to extend any further in the immediate years. Tax sovereignty is a central expression of a state's sovereign authority-- specifically, its ability to govern itself independently, make its own laws, and exercise control over its territory and population. For all its bluster, Villa Somalia's own figures acknowledge that the FGS remains essentially a municipal government, a fact those providing budgetary support would be wise to consider before ploughing billions more into Banaadir's sands.

By the Somali Wire Team