BREAKING THE CHAINS

SOMALIA THE NEXT FINANCIAL

HAVEN?

UNLOCKING FINANCIAL OPPORTUNITIES IN SOMALIA

Chukwuma .C. Benedict

SOMALIA Location: Horn of Africa• Eastern Africa, bordering the Gulf

of Aden and the Indian Ocean, east of Ethiopia

Area:• total: 637,657 sq km• land: 627,337 sq km• water: 10,320 sq kmLand boundaries:• total: 2,385 km• border countries (3): Djibouti 61

km, Ethiopia 1,640 km, Kenya 684 km

Coastline:• 3,025 km

SOMALIA• Its 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 influence

• weapons later fell into the hands of clan warlords when the regime fell.

SOMALIA - Military• There are no Somali armed

forces• Various groups throughout

Somalia are estimated to control militias ranging in strength from hundreds to thousands

• Some groups possess limited inventories of older armored vehicles and other heavy weapons

• Small 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 reservesLand 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)

SOMALIA• Population:• 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, English• Religions:• Sunni Muslim (Islam)

SOMALIA• Demographic profile:• Somalia scores very low for most humanitarian indicators; Sufferings from• poor governance• protracted internal conflict• Underdevelopment• economic decline• Poverty• social and gender inequality• environmental degradation.

• Despite civil war and famine raising its mortality rate, Somalia’s 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 Somalia’s population is younger than 25, and the fertility rate is among the world’s highest at almost 6 children per woman – a rate that has decreased little since the 1970s.

SOMALIA

Natural hazards:• recurring droughts• frequent dust storms

over eastern plains in summer

• floods during rainy season

Environment - current issues:• Famine• use of contaminated water

contributes to human health problems

• Deforestation• Overgrazing• Soil erosion• Desertification

SOMALIA• A lack of educational and job opportunities is a major source of

tension for Somalia’s 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 OPPORTUNITIES

• Somalia 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 Somalia

• Over 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 financing• This 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 suggestions• increase tax coverage

• Plug loopholes/ curb corruption

• Exploit natural resources

• Social / soft loans

• Create and grow industries to diversify the economy

Foreign flows

• Several foreign options are available for Somalia to get funds for development. They include the following;

Foreign financesFinances Source

Official development assistance OECD

Foreign direct investment Private international firms

Remittances Households

Concessions, loans Multilateral development financial institutions

Grants NGOs, foundations, private philanthropy

Climate finance Industrialized nations

Equity 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

Private finance

• Domestic

• Foreign (FDI)

FDI• Foreign direct investment in Somalia is low, 3% of

GDP.

• Foreign investors are reluctant to engage in Somalia because of

1. Perceived political risks2. Small size of markets limiting economies of scale and discouraging

competition3. Macroeconomic and regulatory uncertainty making business risky4. High transport costs and infrastructure bottlenecks elevating

production costs5. Information asymmetries and coordination problems making

pioneering investments difficult

Private finance

• The 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 financing

• This is potentially a HUGE source of financing for infrastucture

• The logic and psychology driving private finance is very different from the motivations for public finance

• Private 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 payoffs to an owner of an infrastructure project may not cover its costs, but the indirect externalities can still be hugely beneficial for the economy as a whole.

• Externalities include large benefits of infrastructure services to a wide range of other sectors. Such benefits are fundamentally difficult to measure.

• The development benefits from investments made by private firms come from:

(1) the contributions provided to government revenues

(2) the contributions provided to jobs and incomes(3) the expansion of access to and quality of

infrastructure and social services to serve a broader segment of the population, including many poor and near-poor households

(4) the innovation and cost competitiveness that private firms can generate.

• To accelerate support for the private sector in Somalia, the government would need to work more closely with multilateral development finance institutions, world bank group and other developmental agencies in order to channel resources in the right direction

• This will improve accountability, efficiency and prevent duplications

Innovative financing • Financing infrastucture and development in

Somalia would need a blend of public and private financing.

• Bold and innovative sources of finance may assist to address the infrastucture deficits.

• The Somali government may invest in international capital markets, trustfunds, and in other countries with potentially high returns using its savings or soverign wealth funds.

Equities and bonds now form a significant % of GDP of developing countries

• Innovative financing can be sourced domestically by taking advantage of large pools of monies not needed immediately. This includes

• Insurance funds• Contributory pension funds• Religious organizations• University / institutional trustfunds

CONCLUSION

• Unlocking financial opportunites in Somalia will require that several sources of financing be harmonized by the collaboration of public and private sectors

• The government of Somalia has alot to do to ensure it creates an enabling environment for private investors

• The private sector plays a critical role in development, creating sustainable pathways out of poverty for millions in Somalia.