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Inflation and conflict fuel Somalia's economic downturn


Wednesday August 7, 2024


Stacks of Somali shillings are displayed at a currency exchange market in Mogadishu, Somalia, as a trader speaks on the phone. The country's economy has been struggling with high inflation and unemployment, impacting the livelihoods of many citizens. (AFP/Getty Images)

Mogadishu (HOL) — Somalis are experiencing an economic downturn characterized by declining purchasing power and high unemployment. Multiple factors, including conflicts, climatic shocks, and global economic changes, have compounded these issues, affecting many Somalis' livelihoods.

Over the past couple of years, the economic landscape has shifted, leading to a drop in income levels. This has directly affected people's ability to afford basic goods and services. Adan Bakar Ali, a currency exchange trader, told the BBC that he's seen a stark reduction in market activity, with his customer base dwindling from 30 people a day to just 10 or 15. The once vibrant Bakara Market now stands as a testament to these broader economic challenges, with fewer buyers and a palpable sense of struggle.

Several factors contribute to this economic decline. Ongoing conflicts have disrupted the flow of goods from Mogadishu to other regions, reducing commercial activities. According to Dr. Shafi'i Sharif Mohamed, an economic researcher, many areas depend on the capital for commerce, but the number of people transporting goods has significantly decreased due to insecurity.

The Somali diaspora plays a crucial role in supporting the local economy. However, rising inflation in countries where a large segment of higher-earning Somalis live, such as the US, UK, Canada, and Australia, has impacted the amount of money they can send back home. High inflation rates in these countries have increased living costs, leaving less disposable income for diaspora members to remit to Somalia. Consequently, fewer diaspora members are sending money back or returning to invest in local businesses, reducing a significant source of financial support for many Somali families and the overall economy.

High unemployment levels have worsened. Dr. Abdiaziz Ahmed Ibrahim, an economist in Mogadishu, emphasized that job opportunities are limited, with thousands of young people graduating each year but finding no available jobs. Persistent climatic shocks, such as severe droughts, floods, and locust infestations, continue to pose significant economic risks.

According to the World Bank, an estimated 55% of the population lived below the national poverty line in 2022, with higher rates among nomadic populations. Due to high urbanization, most of the poor reside in urban areas. Nearly half of those employed live below the poverty line, indicating low-productivity jobs.

Despite these challenges, Somalia has made progress in creating a business-enabling environment to attract foreign direct investment, particularly in oil and gas, telecommunications, and other services. The Somali diaspora remits approximately $2 billion annually, constituting about 20% of GDP and driving investments in key sectors.

Somalia reached the Heavily Indebted Poor Countries (HIPC) Initiative Completion Point in December 2023, resulting in debt service savings of $4.5 billion and improved access to financial resources. The country's external debt fell from 64% of GDP in 2018 to less than 6% by the end of 2023. Somali economists warn that prudent fiscal policy will be essential to managing budget deficits, strengthening domestic resource mobilization, and containing the wage bill and security spending. Analysts believe advancing discussions on federalism can improve stability and enhance the business environment.

Somalia's GDP is expected to grow by 3.8% by 2025, up from 3.1% in 2023, driven by exports thanks to improved weather conditions and policy reforms. The medium-term growth outlook remains modest, with projected growth of 3.7% in 2024 and 3.9% in 2025. The agriculture and livestock sectors showed significant recovery in 2023 due to favourable rains. However, the economy remains vulnerable to global economic fluctuations, climatic shocks, and security threats.



 





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