IMF to Help Somalia Rebuild Its Economy
Recent international recognition of the Federal Government of Somalia has paved the way for the IMF to provide technical assistance and policy advice to the war-torn east African nation.
After a two decade-long interruption in relations with Somalia, the IMF is striving to arrive at a better understanding of the country’s current economic and institutional realities.
In an interview with IMF Survey online, Ralph Chami, Division Chief, IMF’s Middle East Department, and Rogerio Zandamela, IMF Mission Chief for Somalia, discuss their recent fact-finding mission to Somalia and the country’s priorities as it emerges from a prolonged period of internal conflict.
IMF Survey: Why did the IMF resume relations with Somalia after a 22-year-interval?
Chami: Somalia has been in a state of war and internal strife for over 20 years. During most of that period, Somalia did not have a central government that enjoyed broad international recognition. Accordingly, the IMF did not have a counterpart government in Somalia with which it could engage.
The situation started to improve in the summer of 2012, when a new Federal Parliament was elected with broad representation from across Somalia. In turn, it elected President Hassan Sheikh Mohamud to head the new Federal Government of Somalia (FGS), and his government was quite successful in establishing relations with the international community.
In April 2013, the IMF recognized the FGS, paving the way for the resumption of relations. The decision is consistent with broad international support and recognition of the Federal Government, which allows the IMF to offer Somalia technical assistance and policy advice.
IMF Survey: What are Somalia’s immediate priorities?
Zandamela: Somalia is one of the poorest countries in the world. Its long history of internal wars has taken a toll on the country’s infrastructure and human capital, with many Somalis having fled the country to live and study abroad. The economy—which primarily relies on subsistence agriculture and fishing—is still held back in its development by the fractured nature of the country and the poorly developed infrastructure.
Somalia’s immediate priorities are to restore peace and security and address the vast needs of a population that has been battered by the long civil war. The country’s humanitarian needs are enormous. So, too, is the need to build public institutions to deliver economic and social services to the people.
In the immediate future, the Federal Government of Somalia will thus require a lot of assistance from its international partners to provide humanitarian aid—such as food, medicine, and shelter—to its citizens, even as it builds the capacity to stand on its own feet.
The IMF’s recognition of the government is an important step that will provide confidence to international partners, and the IMF will work with the Somali authorities to set up a framework under which international assistance can be coordinated and prioritized.
Given the vast needs of the country, we are closely coordinating our efforts with other development partners, including the World Bank, the African Development Bank, and the European Union, as well as a number of traditional donors (Japan, Norway, the United States, and the United Kingdom) and “nontraditional” donors (such as China, Qatar, Saudi Arabia, Turkey, and the United Arab Emirates).
IMF Survey: What are some of the mission’s findings?
Chami: There is very active private sector resurgence in the services industry, driven mainly by a return of diaspora Somalis—notably in the communications, construction, and money transfer sectors.
Telecommunication companies have installed country-wide networks of wireless stations and provided affordable equipments that have enabled local communities and traders to stay connected with relatives and trading companies in Somalia and abroad.
The relative peace in the greater Mogadishu and elsewhere in Somalia has led to development of construction of shopping centers, supermarkets and housing. Economic activity has also benefited from increased foreign aid flows from Somalia international partners following their recognition of the Federal Government of Somalia as the government of Somalia.
In the absence of licensed commercial banks, a number of informal financial institutions have evolved in Somalia, most of which provide shadow banking services on a nationwide basis and deal in money transfer operations. In particular, money transfer companies have spread rapidly throughout the country, and are now estimated to handle more than US$2 billion in remittances and considerable more in commercial trade.
A reform of the national currency is a high political priority of the Somali authorities. Politicians have pressed the Central Bank of Somalia for an early issuance of a new national currency to replace the bank notes of the Somali shilling that have been in circulation for more than 20 years.
The Central Bank of Somalia has not issued new bank notes since 1990 and all the new bank notes that have been in circulation are non-official, most of them issued by warlords across Somalia. We have advised the authorities to consider introducing the new currency at a later stage, as it would require time because of technical considerations (design, printing, and most important needed legislation, etc.) and even more important, because of the need to establish sound and credible financial policies and an adequate institutional and legal framework to support the value of the new currency.
IMF Survey: How will the IMF engage with Somalia in the coming months?
Zandamela: In the near term, the IMF will engage with the authorities in helping to build capacity in the key economic agencies—namely, the ministry of finance, the central bank, and the statistics office.
We will focus our efforts on helping the ministry of finance build the capacity to raise revenue and manage public finances.
In the area of banking, we will help the staff of the central bank develop the ability to license and supervise commercial banks as well as establish functioning domestic and international payments systems. With regard to the national currency, we will assist the authorities address the challenges posed by the existence of many official and counterfeit currency in circulation. The authorities estimate that at least 60 percent of the banknotes in circulation are counterfeit
As regards statistics, our priority is to assist the authorities with establishing systems to collect and process vital economic data in the areas of national accounts and price statistics, money and banking, public finance, and the balance of payments.
Of course, we will coordinate with bilateral and multilateral donors to ensure that we are working toward common objectives and avoiding unnecessary duplication of effort.
IMF Survey: Will the IMF provide financial assistance to Somalia?
Chami: The IMF is for now precluded from providing new loans to Somalia, pending clearance of the country’s arrears to the IMF of about $353 million. But we will nevertheless now be able to provide the country with much needed technical assistance and advise the authorities on appropriate macroeconomic policies, including in the context of a staff-monitored program. The latter would also allow the authorities to establish a track record of implementing sound economic policies, which is one of the prerequisites for the resumption of program lending.
Somalia is eligible for substantial debt relief under the Paris Club and HIPC initiatives, after establishing a track record of cooperation with the Fund on policies and payments, including in the context of a staff-monitored program.
Source: IMF