An International Monetary Fund (IMF) team led by Rogerio Zandamela held discussions in Nairobi from June 8–18, 2015 on the Article IV Consultation with Somalia, the first such discussions in over 25 years.
At the end of the talks, Zandamela said that Somalia needs financial help, technical assistance and capacity building from the international community following a long civil war that left the economy and infrastructure weak.
“Even though the political and security situations remain challenging, Somalia has made tremendous progress since resuming relations with the IMF,” Zandamela said. Since relations began again on 12 April 2013, the Fund has been providing technical assistance and policy advice that “laid the groundwork for these discussions”, Zandamela said, though source data and coverage make it this challenging.
“Economic activity is estimated to have expanded by 3.7 per cent in 2014, driven by growth in agriculture, construction, and telecommunications. CPI inflation was 1.3 per cent. For 2015, real growth is projected at 2.7 and inflation should remain subdued at about 4 percent. With modest progress on the security front and an absence of drought, medium-term annual growth should be about five per cent. Nevertheless, growth will remain inadequate to redress poverty and gender disparities,” Zandamela said.
“The government is undertaking an ambitious reform programme. Progress toward good governance—with sound and accountable institutions—is important for the restoration of public confidence in government. Since Somalia has large potential for revenue from natural resources, effective concession management and a suitable fiscal regime are critical for peace and prosperity. The natural resource management strategy should incorporate best practices while facilitating private sector participation and ensuring transparency. Somalia also needs consensus regarding fiscal federalism, including responsibilities for service delivery, and revenue collection and sharing,” he added.
Zandamela said that despite notable progress in strengthening fiscal institutions, public finance management and budget prepartion still needs significant reform.
“The 2015 federal budget was prepared on a zero cash balance basis with optimistic revenue forecasts and weak commitment control. Deficiencies in revenue mobilization, considerable expenditure pressure, and unfulfilled pledges of donor support have led to extraordinary difficulties in budget execution. The funding shortfall has led the federal government to ration cash and incur arrears to the defense forces, civil servants, and suppliers,” he said, noting that the sheer amount of government employees limits the state to a payroll-centric budget—wages account for 45 per cent of spending, while foreign grants account for 40 per cent.
“In light of lower domestic revenue and shortfalls in donor support, IMF staff projects a significant budget deficit in 2015. Accordingly, Somalia needs to boost revenue and revise the budget to align spending commitments with available resources. Going forward, Somalia should adopt policies to address important budget vulnerabilities. Fiscal rules, such as targets for the share of wages and capital, can help ensure fiscal sustainability and a desirable composition of spending. These rules should be accompanied by a medium-term fiscal framework to guide their realisation,” Zandamela said.
Source: CPI International