Three signs of fundamental recovery in Somalia

Fundamentals are changing in Somalia. There is steady grind of technical reforms underneath the flow of bad news of turbulent politics, conflict, and terrorism.

The core machinery of the country is being rebuilt.

The outlook is positive.

Bank assets doubled

Banks in Somalia are growing rapidly. The formal banking sector attracts deposits of customers: business and individuals alike. Deposits have grown by 2.4 times since 2015.

This demonstrates return of confidence in formal institutions. There is a better business environment. And importantly, it shows return on investments of early day entrepreneurs, motivating others.

Banks are turning deposits into loans and investments. This enables growth of other business. Financial intermediation is growing indicating a underlying demand for loans. Banks hold more liquidity than they should, but they increasingly find investment opportunities.

There is much upside potential. We estimate the rapid growth to continue until current levels are tripled or quadrupled. At that point, the financial sector would be at levels seen in other frontier post-conflict states. The exponential growth rates should level off. We are now seeing the beginnings.

Growth is supported by a range of factors. Key is continued stability. Investments are in the pipeline. These focus on rebuilding the national financial infrastructure and payments systems. Formalization of assets, identity systems, accounting and audits are also needed.

There are hurdles to overcome. The sector remains vulnerable to a deteriorating security and political situation. Banks and big business in Somalia have interrelated ownership which is a problem if things go sour. And a whole lot remains to rebuild an effective business environment.

Yet, the steady growth seen over the last three years is a sure sign that fundamentals are changing. The sky is the limit. The upside potential far exceeds the downside risks.

Government revenue doubled

Since 2013 we have seen a steady growth of revenue. Government is asserting itself and collecting revenue to fund core services.

This is happening against a contrary trend across Africa of declining revenue and increasing debt. Somalia is a positive outlier.

Reassuringly, domestic revenue has grown steadily. Most is from trade tax. Its share of total is high compared to other countries, indicating that the revenue base is quite narrow.

Introduction of corporate and sales tax is on the horizon. This has been a priority for the last four Ministers of Finance, but yet not realized. The administration that manages to establish a broader tax base will be historical.

While growing steadily, the Federal Government Revenue remains small. It is the smallest government in the world, economically speaking. It presents bigger if we include revenue from the regional governments. With Puntland, Somaliland and the newer states included, the total public sector spending is about 6 percent of GDP. This is about half the size of other post-conflict states.

External international grants have also doubled. This indicates increasing international confidence. About half of the grants are tied to investment and conditional policy programs from the World Bank and others. These are quite predictable. The other half is dependent upon ad-hoc grants, that are very generous, but are less predictable. This results in volatility year-to-year and complicates planning.

The steady underlying growth indicates a state that is reasserting itself. It’s an extraordinary situation, nothing like it in the world, but the steady growth shows a return towards normalcy.

Government salaries delivered in full for first time in 2017

Salary payments to government civil workers were made in full for the first time during 2017. This is a staple indicator of government effectiveness and credibility.

The core government systems are increasingly working. Salary payments are made possible by the rebuilding a range of core systems. These investments have focused on HR, treasury, liquidity management, and bank payment systems.

The solutions are more digitized and integrated than in a typical post-conflict state. Payments are made to bank accounts of civilians, security personnel, and vendors.

These core government systems will support scaling of government services. Current operations are small, focused on core government and security. There is minimal provision of education, health and economic services.

Delivery of broader government services is increasingly a realistic vision. The core systems provides foundations for that, but much reinforcement of capabilities is needed to deliver on a broader policy agenda.

The glass if half full. Public finance management remains a challenge. While civil salaries are delivered in full, there are important difficulties across nearly every other area.

Governments focus is centered around an increasingly ambitious IMF coordinated process. The structural benchmarks are much focused on core government systems. The ultimate aim is debt relief, and as pre-cursors of that, demonstrating steady progress in rebuilding government and regaining financial control.

Things are changing. Developments of this nature would not have been possible without fundamental progress. The nation is being rebuilt.