By Abdi Ali
Thursday May 19, 2022
Good leadership, policy substance and setting the right tone from the top will help the new president turn the country’s economic fortunes around. He does not have much time.
The presidential honeymoon will be short-lived and the euphoria that greeted president Hassan Sheikh’s election victory will fade away very soon. When the dust is settled, he will find a country that has ground to a halt and an in-tray full of issues: from resurgent terrorism; severe and catastrophic drought and hunger that is costing lives and livelihoods; poisoned political landscape; resetting Somalia’s diplomatic posture; delivery on political and constitutional priorities; to re-building the structural foundation of economic reform. Separating the delivery of the country’s economic priorities from the political maze he found himself in will no doubt stress test the new president’s leadership skills to the limit.
The biggest issue, with the most corrosive impact on delivering economic change, is the gene pool from which key decision-makers of critical government institutions are drawn. This is the country’s soft infrastructure. A new government cannot move forward, nor can economic reform initiatives gain legitimacy in the eyes of the public, if key decision-makers are people whose only claim to expertise is their 4.5 tag. Expertise, competence and ability to deliver on the county’s priorities must always trump misplaced sensibilities about the hideous 4.5 gene pool. The president also needs advisors that can challenge him and bring expertise to the table, not cheerleading bag carriers.
First, economic reforms naturally cut across a number of government functions and departments. The responsibility for delivering reform programmes, including debt relief milestones is currently scattered and lies with individual minsters in government departments who are often at war with each other. Ministerial revolving door pushes political office holders to make political calculus. They will not have the incentive to see through difficult challenges, prioritizing their own personal interest above all else instead. This why most reform programmes in Somalia end in failure. The new government must establish “Office for Financial & Economic Reform” led by a competent technocrat who acts the ultimate accountable executive for all reform programmes, has a cabinet seat and is a member a reformed National Economic Council (NEC). Creating clear layers of accountability and oversight means progress can be pushed through fast, taking politics out of the process.
Second, in just over two years, Somalia faces a critical international assessment by the Financial Action Taskforce – the global anti-money laundering watchdog. If Somalia were to fail this assessment, as is almost certain, it could lead to the country becoming a financial pariah, cut-off completely from the global financial plumbing. This has obvious and catastrophic consequences for Somali banks, money remittance companies and will materially impact the flow of investment and finance in and out of the country. This also means global investors and financial institutions will be deterred from dealing with Somali businesses, leading to further deterioration of the country’s financial markets. Somalia’s Financial Reporting Centre (FRC) is main government department in scope for this review – an agency that is crying out for reform. Bringing the FRC into a wider financial crime framework regime with the necessary leadership and expertise will be critical indeed if Somalia were to avoid a blacklisting.
Third, Somalia does not have a viable national currency, nor a functioning central bank. A central bank is the lifeblood of an economy whose influence impacts people’s lives on a daily basis. However, the Central Bank of Somalia (CBS) is an ossified institution which largely acts as a cash counter for the government, and exists only on paper. Through a combination of incompetent leadership, political interference, lack of expertise, operational dysfunction and absence of local and international credibility, the CBS has been unable to deliver on any of its economic and monetary policy objectives, including financial systems oversight. Somalia’s lack of national currency is another testament to how a nationally important project failed under the CBS. Without a functioning central bank, the financial centre potential of Somalia Plc is damaged; ruinous overreliance on a dollarized economy is perpetuated; and leadership credibility problems mean its industry oversight role is at best incoherent, or non-existent at worst. The CBS is therefore unfit for purpose and requires new competent leadership.
Fourth, the new government needs to establish a new Somali Investment Fund as a way of raising desperately needed investment funding that channels capital investments into reconstruction and development. The Fund can provide much needed centralised oversight over all funding inflows and how they are spent, which key areas - including poverty reduction, infrastructure development, etc - need to be prioritised; and provide systematic evaluation of actual outcomes. It will mean spending based on viability, and social impact needs, will increase, bringing in enhanced credibility that will further facilitate domestic and foreign direct investment into the country.
The Fund can also be used to create financial instruments by securitising the country’s balance sheet and income sources (for instance, fisheries, livestock, sea ports, etc) without comprising sovereignty and raising much needed billions of dollars in local and international funding. Spending on local projects will also create spill-over benefits for Somali businesses and help create millions of local jobs.
Fifth, Somalia tax-to-GDP ratio (i.e., taxation relative to the economy) is pitifully low at less than 2%, reflecting the fact the government is not collecting an adequate share of the country’s output. This means the new government is unlikely to be in a position to fund economic development through taxation for a very long time. The ability to lock in economic progress depends on a stable and efficient tax system, including expanding the tax base. The key priority must be to set up an Internal Revenue Agency which works to develop a coherent tax system that brings the large and medium enterprises, high earners and key services providers, into the tax perimeter.
President Hassan Sheikh has an opportunity to show he can make a difference and that Somalia can succeed. Reliance on external budgetary support is never a badge of progress, economic self-sufficiency is. Time is of the essence indeed.