Somalia and IMF Staff reach Staff-Level Agreement on the Second and Third Reviews of the Extended Credit Facility
Washington, DC: An International Monetary Fund (IMF) team, led by Laura Jaramillo, concluded virtual discussions with the Somali authorities and reached a staff-level agreement on the second and third reviews of the Extended Credit Facility (ECF) arrangement. This agreement is subject to approval of the IMF’s Executive Board.
At the conclusion of the discussions, Ms. Jaramillo issued the following statement:
“Somalia has been subject to multiple shocks, including COVID-19, climate shocks, and surge in commodity prices. As of May 13, 2022, only 8.7 percent of the population had been fully vaccinated, mainly due to lack of vaccine access. Somalia is also facing prolonged drought conditions that worsened since 2021. Pressures on food security have been compounded by the increase in global food and energy prices.
Notwithstanding these shocks, Somalia has preserved macroeconomic stability, supported in part by the IMF’s 2021 General SDR Allocation. Real GDP growth was estimated at 2 percent in 2021, given the recovery in household consumption. In the face of significant revenue shortfalls (including because budget support grants were on hold until elections were completed), the authorities intensified expenditure prioritization and financed the overall deficit of 1.1 percent of GDP with cash balances and SDRs.
Growth is expected to pick up modestly in 2022, but risks are elevated. Growth of 2.7 percent would be driven by private consumption, supported by remittances. However higher international food and fuel costs will dampen economic activity and will bring inflation to 8.5 percent in 2022.The fiscal deficit is expected to narrow to 0.6 percent of GDP, as revenues and budget grants recover. Near-term risks include the evolution of the pandemic, prolonged drought or new climate shocks, resurgence of desert locust infestation, security risks, and additional pressures on international food and energy prices. Shortfalls or delays in disbursement of budget support grants would also create risks for the budget and the program.
The 2022 budget is aligned with the ECF objectives and the medium-term fiscal framework. While domestic revenue collection will be supported by the implementation of 2022 budget measures, external budget support remains crucial. Expenditure will continue to be carefully prioritized, with a modest increase in social spending, keeping the deficit at 0.6 percent of GDP. The authorities continue to advance reforms on domestic revenue mobilization, including customs modernization and increasing revenue collection from the telecom sector. Public financial management has been strengthened, including improvements in reporting of aggregated FGS and FMS fiscal accounts. Issuance of the PFM Regulations and payroll integration are key. The authorities are also working towards harmonizing the legal framework for the extractive industries and refining the tender process to promote competition.
The CBS continues to advance institutional reform. The new National Payment System is a major milestone, and the two largest mobile money operators were granted licenses in 2021. The CBS should continue to enhance its supervisory capacity and monitor the financial system closely. Continued capacity building across all stakeholders is needed to improve AML/CFT compliance.
The government continues to make headway in the HIPC debt relief process. The authorities reached debt relief agreements with most Paris Club members, and continue to seek agreements with other creditors. Further progress on reforms is needed to achieve the HIPC Completion Point Triggers on a timely basis.
Timely support from development partners, both on financing and capacity development, is essential for the successful implementation of the authorities’ reform strategy. Contributions from Somalia’s partners to the Somalia Country Fund are also needed to ensure smooth delivery of IMF technical assistance to support the goals of the ECF-supported program and the HIPC Initiative.
The mission would like to thank our counterparts for a constructive and fruitful dialogue. Meetings were held with the President of the Federal Republic of Somalia, the Minister of Finance, the Central Bank Governor, other government officials, development partners, and representatives from private sector and civil society.”