Sunday August 4, 2024
An aerial view of Mogadishu Port, showcasing a bustling array of shipping containers and cargo vessels. The port, a vital hub for trade and commerce, plays a crucial role in Somalia's economic recovery and growth. (Photo credit: Abelhakim/World Bank)
Mogadishu (HOL) — Somalia is poised for a significant economic rebound in 2024, driven by a recovery in agriculture, services, and household consumption, according to the African Development Bank's (AfDB) latest report. The Country Focus Report 2024 projects GDP growth of 3.7 percent in 2024 and 3.8 percent in 2025, signalling a hopeful turnaround for the East African nation.
The agricultural sector's recovery from prolonged drought has been a major growth driver. Increased household consumption and investment have also bolstered the economy. The easing of food and fuel inflation, partly due to the geopolitical conflict in Ukraine, has brought inflation down from 6.8 percent in 2022 to 6.0 percent in 2023.
"Somalia's economic outlook is positive," the report states. "The recovery in livestock, services, private consumption, remittances, and investment are pivotal to this growth."
Somalia's qualification for $4.5 billion in debt relief following the Highly Indebted Poor Countries (HIPC) Completion Point in 2023 has significantly improved the country's debt sustainability. Admission to the East African Community (EAC) also positions Somalia to benefit from regional trade and security cooperation.
Despite these positive developments, Somalia faces several challenges. Insecurity, prolonged conflict, and regional geopolitical tensions, particularly with Ethiopia over the Red Sea port, pose significant risks. The proposed withdrawal of the African Transition Mission in Somalia (ATMIS) forces by December 2024 adds to these concerns.
The report warns that "Major downside risks to growth include Somalia's dispute with Ethiopia, climatic shocks, and low domestic revenues." Ongoing tax mobilization reforms are expected to mitigate some of these risks.
The report emphasizes the need for structural transformation in Somalia's economy. While there has been a shift from low productivity, labor-intensive agriculture to more productive industry sectors, the country remains at an early stage of structural change. The services sector, driven by trade, telecommunications, hotels, and financial services, has seen modest employment growth.
Somalia must develop a robust Domestic Revenue Mobilization (DRM) Strategy to sustain and accelerate economic transformation. The current tax-to-GDP ratio is insufficient to fund necessary development activities. Additionally, Somalia's ability to mobilize external financing is limited due to its high debt distress risk and minimal integration into the global financial system.
The report calls for reforms in the international financial architecture to provide Somalia with more affordable and sustainable financing options. These include leveraging external debt, Foreign Direct Investment (FDI), and Official Development Assistance (ODA).
Somalia's journey towards economic transformation requires significant investment in infrastructure, human capital, climate action, productivity, and technological advancement to meet its Sustainable Development Goals (SDGs) by 2030. The report advocates for repurposing Multilateral Development Banks (MDBs) and International Financial Institutions (IFIs) to provide concessional financing, which is crucial for the country's development.
"Somalia, alongside other African nations, must advocate for a reformed financial system to achieve equitable development financing," the report concludes.