Issue No. 869

HIPC hiccups or financial Armageddon?

With the war against Al-Shabaab stumbling dismally and the country locked in another, seemingly unending political crisis, the critical question of fiscal federalism and budgetary support can appear to be somewhat overlooked. With the unlocking of the Heavily Indebted Poor Countries (HIPC) initiative in December 2023 and the slashing of Somalia's outsized debt, the sunny uplands of domestic revenue mobilisation were promised, a weaning off of the annual estimated USD 5-7 billion that the country receives in humanitarian assistance, security aid, and budgetary funding. Though Mogadishu secured a continuation of preferential loans and grants from the World Bank and IMF for the months post-HIPC, such special treatment is nevertheless anticipated to end at the next round of International Development Association (IDA) funding. What that entails, with 70% of the federal government's budget still enabled by international partners, and with dwindling donor appetite towards throwing yet more cash at Somalia, could have immense consequences for the entire structure of the foreign-funded 'nation-building' project.

Much of the agreement between Somalia and its creditors to unlock HIPC and the waiving of its substantial debt related to 'fiscal federalism,' the tenets of revenue-harmonisation and rationalisation between the central and peripheral administrations that have bedevilled successive governments. The financial and political legacies of the endemic conflict have understandably proven hard to shake, not least the primacy of revenue-raising ports and checkpoints that are the lifeblood of the Federal Member States (FMS). In turn, squaring the centralising instincts of successive federal administrations and the devolved interests of the FMSs has come in fits and starts, possible only at moments of broader national cohesion. Subsequently, as part of the HIPC agreement, harmonising federal-state tax codes and particularly the tariffs and revenue streams from the aortic ports of Kismaayo and Bosaaso were especially highlighted. Some key reforms have been made, including improving the public financial management system of several member states. But more often than not, this has come despite— not because of— the federal government, which has simultaneously lagged behind issues such as the digitising of financial records. And while HIPC opened the door for genuine economic reform, it also placed further pressure on scaling up sustainable domestic revenue intended for service delivery. 

But with the current occupants of the federal government so rabidly centralising, much of the progress on fiscal federalism has stalled again. Negotiations over the politically fraught questions of tax harmonisation and financial management have inched along with Galmudug, Hirshabelle, and South West, but Puntland and Jubaland have baulked at handing over their limited resources to a government deadset on vandalising them. And having withdrawn recognition of Villa Somalia, both the Darood-majority Puntland and Jubaland have reported that Mogadishu has either denied or hijacked humanitarian and developmental assistance intended for their populations. 

The scale of the financial monopolisation has been vast, reflecting Villa Somalia's own political instincts towards a unitary model of government. For instance, the government's draft budget earlier this year allocated the lion's share of the budget support before distributing the remaining paltry amount to the FMSs. Even draft budgets and financial laws have not been shared with the FMSs, including a 5% sales tax last year that Jubaland rejected out of hand. And in November last year, Villa Somalia went as far as to block EU budgetary support dispensation intended for Jubaland, contravening the conditions agreed with the multilateral body. Thankfully, in recent weeks, that has shifted, and Mogadishu dispensed the support for the southernmost FMS, even while it has sought to cast its president, Ahmed Madoobe, as a criminal and seize control over Gedo.

Yet the federal government has routinely sought to instruct international partners to direct funding solely through its auspices, so as to better 'oversee' its implementation. Just this week, Somalia's Auditor General Ahmed Isse Gutale hailed an apparent increasing commitment from partners to channel their funding through the 'Country System.' But the government has simultaneously thrown up ever-increasing hurdles and complaints with foreign partners as well, protesting their decisions to work through state and local government or sidestepping the graft of the government. More equitable service delivery or best use of financing has meant little; it is all motivated by an insistence on the diaphonous sovereignty of this government. 

All the while, time is inching down towards an ending of some of the more preferential treatment from the World Bank that the federal government receives, one of the key sources of budgetary assistance. But there is little suggestion that Mogadishu is concerned about any sort of imminent financial collapse, even while expenditure far outstrips the government's own domestic revenue. Perhaps it is a mixture of buying the 'Mogadishu Rising' narrative-- itself indicative of a municipality rather than a country ascending-- as well as an expectation that the international community will continue to fund its machinations. Whatever the reason, the broader system remains dependent on the largesse of foreign powers to deliver education, healthcare, and infrastructure for the Somali people, rather than the federal government.

The short-termist thinking of this government makes the possibility of sustainable revenue generation an even taller task. Auctioning off potentially immensely profitable natural resources, such as its hydrocarbons, for a pittance to its Turkish allies helps spell economic suicide. Revenue generation has risen, but much of the burden has unfairly fallen on the citizens of Banaadir, an area that Villa Somalia considers an extension of its own authority. Protests have intermittently erupted at the new taxes on income and transactions that have been introduced in the past 18 months, levies that can not currently be expanded across the country with polarisation so dire. 

Tax sovereignty has long been a marker of a state's capacity and reach, expressed in the Roman levies on its colonies or the Domesday Book— the codification of 'who owned what' and what levies were owed to the Crown in 11th-century England and Wales. Apply this to Somalia's federal government, and it reduces it to essentially a municipal authority. While it may be Mogadishu that exerts de jure authority over Somalia's resources— a misreading of the Provisional Constitution— it is the FMS administrations that continue to exercise de facto control over many of the key sources of revenue collection- barring international assistance. Nevertheless, with the juridical authority vested in the federal government from external sources, the current occupants of Villa Somalia, and their predecessors, have aggressively sought to monopolise the sovereign rents of anything they can lay their hands on, such as overflight fees.  

These questions speak to the broader issues at the heart of Somalia's state-building process, about when— if ever— the current set-up will become sustainable. While domestic revenue continues to expand, it is highly doubtful that it will be able to reach sufficient levels to absorb the costs of the foreign humanitarian, development, and security assistance that is ploughed into Somalia every year. The optimistic projected figures for new tax opportunities from the World Bank and Mogadishu starkly contrast with the reality that Al-Shabaab controls much of the country's abundant agricultural areas in the Juba and Shabelle valleys. While the country's political elite has a clever way of finagling special treatment and external financing, there is undoubtedly a growing frustration at the perennial graft and politicisation of the development funding-- even if the IMF and World Bank differ in their apparently optimistic view of Somalia's trajectory.

Like so much else, progress on financial reform and revenue-sharing must now largely wait, with the cyclical-- if particularly extreme-- political crisis in Somalia absorbing the necessary oxygen to progress on these key issues. If the election is deemed 'fair' enough —perhaps a tall ask at this current juncture —a new government in Mogadishu may be imbued with the sufficient legitimacy with which to restart conversations and progress regarding fiscal federalism, and particularly revenue generation. But time is running out to realise such a vision. 
 
The Somalia Wire Team