IMF Executive Board Concludes 2017 Article IV Consultation with Somalia, and Completion of the First Review under the Staff-Monitored Program (SMP) 1
February 23, 2018
On February 21, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Somalia. 2
Despite a severe drought and sporadic terrorist attacks, Somalia avoided a significant economic slowdown in 2017 with support from the national and international community.
The authorities’ commitment to the staff-monitored program is strong and they are implementing difficult reform measures.
In 2017, Somalia faced a severe drought and sporadic terrorist attacks. These developments hurt economic activity, particularly in the north of the country and in rural areas, and temporarily impacted the tax collection efforts of the Federal Government of Somalia. However, the authorities have navigated through these challenges and, with sustained national and international community support, the country avoided a severe humanitarian crisis and a significant economic slowdown.
Nevertheless, economic activity in 2017 is expected to have slowed. The drought that hit the country since late 2016 has receded, but it took a considerable toll, particularly in the remote areas. GDP growth is projected to have remained subdued at 1.8 percent in 2017 (down from 2.2 percent in 2016). Driven by higher food prices, year-on-year inflation increased to 5.2 percent (compared to a 4 percent annual average) at the end of December 2017.
Meanwhile, a small budget surplus was achieved by the end of September 2017, even though domestic revenue fell short of the program target. The surplus of $3.8 million was due in part to a slower-than-expected pace of budget execution. For the period ending in December, preliminary information indicates that implementation of critical tax measures, and higher-than-programmed bilateral grants, have helped generate a budget surplus of about $1.8 million. Domestic revenue is also estimated to have met the program target.
Despite the challenging environment, the Somali authorities remain committed to reform implementation under their program. On June 21, 2017, IMF management approved a second 12‑month SMP covering the period May 2017–April 2018, following Somalia’s successful completion of its first SMP. The program is designed to help economic reconstruction efforts and assist the country in establishing a track record of policy and reform implementation. We are encouraged by the authorities’ commitment and the pace of reforms to restore key economic and financial institutions, and welcome their efforts to keep the program on track.
The IMF is helping Somalia reach debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative as soon as feasible within established HIPC procedures. The HIPC process is designed to help countries avoid slipping back into arrears while putting them on a path to sustainable debt and reducing poverty. The authorities are normalizing relations with the international community and establishing track record of reform implementation, developing adequate policy instruments, tackling Somalia’s low institutional capacity and fragile security situation to help the country to achieve arrears clearance and debt relief. During this period, Somalia can continue to receive substantial grants from donors. The IMF is also assisting the authorities in addressing outstanding concerns by major creditors, such as weak governance and institutional capacity, and establishing a track record of implementing strong economic policies. Somalia is among the largest beneficiaries of the IMF’s technical assistance (TA) and training work, with 87 TA missions since late 2013.
The authorities are continuing to improve Somalia’s fiscal framework, including its revenue collection performance. They have taken steps to reform the national currency and developing the country’s financial sector. The authorities are also making progress on addressing significant shortcomings in economic data, and making efforts to develop coherent social programs and address corruption.
Executive Board Assessment 3
Executive Directors commended the authorities’ strong commitment to the staff monitored program (SMP) and their efforts to implement important reforms in a difficult environment. Directors noted that Somalia confronted a severe drought and sporadic terrorist attacks in 2017, and with support from the international community, avoided a significant economic slowdown and famine. Going forward, they underscored the importance of continued implementation of reforms to improve the fiscal framework, strengthen the financial sector, and enhance institutions and governance to set the foundation for sustained and inclusive growth.
Directors welcomed the significant improvement in budget execution and fiscal performance in 2017 as well as the authorities’ drive to implement several important tax reforms that contributed to improving the fiscal outturn. They were encouraged by the continued progress on public financial management (PFM) reforms and stressed that building on the reform momentum will be essential to strengthen the fiscal framework. Directors emphasized that, while the government’s overall budgetary resources are limited, increased budgetary allocation to social spending is needed.
Directors welcomed the progress toward the launch of the new national currency, which is an essential component of the authorities’ economic reform program. They commended efforts to implement the currency reform roadmap, including the development of the legal and anti-counterfeit frameworks, and lauded the federal government for reaching an agreement with Somali federal member states to support currency reform. The successful launch of the new currency will hinge on the development of an appropriate communication strategy and accountability framework.
Directors welcomed the authorities’ recent work to improve financial intermediation and the anti-money laundering and combating the financing of terrorism (AML/CFT) framework. They saw merit in the roadmap for financial sector development, and encouraged the authorities to finalize the Targeted Financial Sanctions Regulation Law.
Directors agreed that the renewed focus on governance and corruption is timely. They encouraged the authorities to focus particularly in the areas of PFM, revenue collection, treasury management, and domestic arrears and cash management. Directors stressed that improving the business environment is essential for sustained and inclusive growth and job creation.
Directors welcomed efforts to strengthen statistical institutions and data production, and encouraged the authorities to take further steps to address data gaps.
Directors supported the role of the Fund and the international community in helping Somalia reach debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative as soon as feasible within established HIPC procedures. The HIPC process is designed to help countries avoid slipping back into arrears while putting them on a path of maintaining sustainable debt dynamics and reducing poverty. Directors welcomed that, even before it reaches the HIPC Decision Point, Somalia is receiving substantial grants from the international community. In addition to securing broad based donor support, the establishment of a satisfactory track record of cooperation with the Fund on policies and payments under this and subsequent SMPs would be a critical step in the process of arrears clearance and normalization of relations with the international community which would pave the way to an eventual IMF supported program and HIPC debt relief.