BREAKING THE CHAINSSOMALIA THE NEXT FINANCIAL HAVEN?
UNLOCKING FINANCIAL OPPORTUNITIES IN SOMALIAChukwuma .C. Benedict
SOMALIA Location: Horn of AfricaEastern Africa, bordering the Gulf of Aden and the Indian Ocean, east of Ethiopia
Area:total: 637,657 sq kmland: 627,337 sq kmwater: 10,320 sq km
Land boundaries:total: 2,385 kmborder countries (3): Djibouti 61 km, Ethiopia 1,640 km, Kenya 684 km
SOMALIAIts strategic location made it the focus of contention during the cold war, with both the Soviet union and then the United states pouring in weapons to maintain their influenceweapons later fell into the hands of clan warlords when the regime fell.
SOMALIA - MilitaryThere are no Somali armed forcesVarious groups throughout Somalia are estimated to control militias ranging in strength from hundreds to thousandsSome groups possess limited inventories of older armored vehicles and other heavy weaponsSmall arms are prevalent throughout Somalia.
SOMALIAClimate:principally desert; northeast monsoon (December to February), moderate temperatures in north and hot in south; southwest monsoon (May to October), torrid in the north and hot in the south, irregular rainfall, hot and humid periods (tangambili) between monsoons
Natural resources:uranium and largely unexploited reserves of iron ore, tin, gypsum, bauxite, copper, salt, natural gas, likely oil reserves
Land use:agricultural land: 70.3%arable land 1.8%; permanent crops 0%; permanent pasture 68.5%forest: 10.6%other: 19.1% (2011 est.)
Irrigated land:2,000 sq km (2012)
SOMALIAPopulation:10,817,354 (2016 estimate)Ethnic groups:Somali 85%, Bantu and other non-Somali 15% (including 30,000 Arabs)Languages:Somali (official), Arabic (official, according to the Transitional Federal Charter), Italian, EnglishReligions:Sunni Muslim (Islam)
SOMALIADemographic profile:Somalia scores very low for most humanitarian indicators; Sufferings frompoor governanceprotracted internal conflictUnderdevelopmenteconomic declinePovertysocial and gender inequalityenvironmental degradation.
Despite civil war and famine raising its mortality rate, Somalias high fertility rate and large proportion of people of reproductive age maintain rapid population growth, with each generation being larger than the prior one. More than 60% of Somalias population is younger than 25, and the fertility rate is among the worlds highest at almost 6 children per woman a rate that has decreased little since the 1970s.
SOMALIANatural hazards:recurring droughtsfrequent dust storms over eastern plains in summerfloods during rainy season
Environment - current issues:Famineuse of contaminated water contributes to human health problemsDeforestationOvergrazingSoil erosionDesertification
SOMALIAA lack of educational and job opportunities is a major source of tension for Somalias large youth cohort, making them vulnerable to recruitment by extremist and pirate groups.
Somalia has a very low primary school enrollment rates just over 40% of children are in school
Among the highest youth unemployment rates
A low life expectancy as a result of high infant and maternal mortality rates, the spread of preventable diseases, poor sanitation, chronic malnutrition, and inadequate health services.
Third highest number of refugees after Syria and Afghanistan due to internal conflicts in the last decades
SOMALIA - Economy Despite the lack of effective national governance, Somalia maintains an informal economy largely based on livestock, remittance/money transfer companies, and telecommunications. Somalia's government lacks the ability to collect domestic revenue and external debt
Agriculture is the most important sector, with livestock normally accounting for about 40% of GDP and more than 50% of export earnings. Nomads and semi-pastoralists, who are dependent upon livestock for their livelihood, make up a large portion of the population.
Economic activity is estimated to have increased by 3.7% in 2014 because of growth in the agriculture, construction and telecommunications sector.
SOMALIA - Economy GDP$5.8 billion (2014 est.)
GDP - real growth rate:2.6% (2010 est.)
GDP - per capita (PPP):$400 (2014 est.)
UNLOCKING FINANCIAL OPPORTUNITIESSomalia is in dire need of infrastructure development and financing Very rough estimates indicate that at least $1 trillion of annual investment is required to attain sustainable development goals in SomaliaOver the years, Somalia has been large benefactors of official development assistance from developed countries
It is clear that official development assistance, on its own, would be incapable of meeting financing needs in Somalia.
This is not to let off the hook, the countries that have been helpful, as ODA could, through leverage and catalytic support, help mobilize substantially more private capital
It will need a more ambitious financing for development strategy that can mobilize much more public, private, and blended finance
Financing infrastructure projects would require a multi-pronged approach that combines and blends several forms of public, private domestic and private foreign investments.
Public financingThis is an important but highly limited source of financing.With a largely informal working class, the fiscal tax system is barely existent. The tax to GDP ratio dips well below the 10% seen in other developing countries.The low GDP and low per capital is further compounded by several systemic loopholes that drives corruption.A poor legal system ensures that corrupt individuals enjoy impunity and social idolization.
Increasing public finance towards infrastructure will require a committed and honest government with a strong respect for the rule of law.
Pastoral farming constitutes 40% of GDP and can be further improved. Nomadic farming in Africa has been associated with conflicts due to destruction of farmlands and encroachment into land territories. This is also seen by the activities of the fulani herdsmen in Northern Nigeria.
The government should introduce better and modern structure for pastoral farming. Grazing areas should be mapped out and use of irrigation and other modern tools to boost agriculture.
Natural resources if well managed, could be a good source of revenue. Investments into mining of uranium, iron ore, bauxite, tin etc may be a profitable both short and long term
Very importantly, the governmemt needs to plug loopholes and curb corruption. This can me done by strengthening the legal system and ending impunity
It is only after this, can it expand its tax coverage to include the informal majority class
With a coastline spaning over 3km, the trade and tourism potential is vast. The government should create an enabling environment to attract private investors and grow the commerce and hospitality industry
Public financing suggestionsincrease tax coverage
Plug loopholes/ curb corruption
Exploit natural resources
Social / soft loans
Create and grow industries to diversify the economy
Foreign flowsSeveral foreign options are available for Somalia to get funds for development. They include the following;
Finances Source Official development assistanceOECDForeign direct investmentPrivate international firmsRemittances Households Concessions, loans Multilateral development financial institutionsGrants NGOs, foundations, private philanthropyClimate financeIndustrialized nationsEquity International capital marketsDiaspora bondsSoverign wealth
The diaspora bond could potentially be a viable source of financing. Somalia recieves $1.6billion from remittances yearly. This is presently being threatened by several economies making it more difficult for money to leave their system
The government could set up a bond for the diaspora, that gives citizens living abroad the chance to invest in the development of their home country at an interest
FDIForeign direct investment in Somalia is low, 3% of GDP.
Foreign investors are reluctant to engage in Somalia because of
Perceived political risksSmall size of markets limiting economies of scale and discouraging competitionMacroeconomic and regulatory uncertainty making business riskyHigh transport costs and infrastructure bottlenecks elevating production costsInformation asymmetries and coordination problems making pioneering investments difficult
Private financeThe private sector lies at the center of a sustainable development model.
Recognizing the pivotal role of the private sector in supporting economic development is key to financing development
Private financingThis is potentially a HUGE source of financing for infrastucture
The logic and psychology driving private finance is very different from the motivations for public financePrivate investments are driven by two fundamental variables: risk and return.
Although infrastructure investments are potentially hugely profitable for the economy as a whole, they are especially subject to market failures.
Markets alone will often fail to provide these services either because an infrastructure project would not be profitable on its own, or because the associated risks are too large or too costly to insure.
As a result, infrastructure investment from the private sector in many cases cannot be realised without some form of public support.
Why must government support the private?The direct payof