By Mohamed Abdurrahman Mohamed
Wednesday April 6, 2022

The electoral process in Somalia has been dragging on since the last year, due to multiple delays caused by stand-offs between politicians and technical teams. This drama seems endless as deadlock continues to disrupt the process in every stage. The latest is the fallout between PM Roble and the South West state of Somalia which suspended its cooperation with PM on election issues. Members of the Federal Electoral Implementation Team (FEIT) have also split into two parties.

This new dispute was sparked by the announcement of the results of parliamentary elections, in which four seats have been excluded from the list. In this article, we will discuss on repercussions and the unintended consequences of long-delayed elections which could harm the recovery and state-building efforts in the country particularly the most-likely scenario in which the economic reform agenda and debt relief efforts may suffer reversals. Hence, the adverse impact of vote delays and the magnitude of the potential damages that these political stalemates would cause are magnificent and could probably reverse the significant milestones the country had painstakingly achieved in recent years. Therefore, politicians should be aware that if the elections process will not be concluded by May, the price will be higher and the deadlock could cost our nascent state a decade of hard work. It is therefore, the progress that has been achieved on the economic reform agenda and debt relief process in the past 7 years or so are at high stakes!

The country is in a trap

Somali has come a long way and reached the Decision Point of the Heavily Indebted Poor Countries (HIPC) initiative on March 25, 2020. However, despite the significant technical and financial investments made by the Somali development partners including International Financial Institutions (IFIs) such as the World Bank, IMF, and African Development Bank (AfDB); bilateral (development agencies) and multilateral (EU & UN) donors in the past decade, to strengthen public institutions governance and foster socio-economic recovery and stabilization, the fact on the ground remains that today, due to repeated poll delays, the stakes could not be higher! The country could lose the level of progress it has achieved. On 24th February, Laura Jaramillo Mayor, IMF mission chief for Somalia warned that if a new government is not formed by May, the budgetary aid received by Somalia from partners will stop. She noted "Evaluation of IMF support programs must be completed by May 17, 2022. If it is not completed by that date, the programs automatically end," Jaramillo further stressed that an interruption of this evaluation would also affect the ongoing process of debt relief.

This concern was echoed by the finance minister Dr. Abdirahman Baileh on several occasions including in his recent interview with the African Report Magazine after he returned from his trip to Washington DC where he had met with the IMF managing director Kristalina Georgieva and the WorldBank vice president for Africa Hafez Ghanem. As well as the Special Representative of the United Nations Secretary-General (SRSG) for Somalia, James Swan, and

deputy SRSG, UN Resident Coordinator and Humanitarian Coordinator, Adam Abdelmoula in their meeting with the finance minister earlier this week. Although the EU has already withheld its budgetary support to FGS, the World Banks country manager for Somalia Kristina Svensson in her recent visit to Mogadishu had a meeting with the US ambassador to Somalia Larry Andre Jr. and they discussed “the concern that if a government is not in place soon the economic reform agenda could suffer a reversal and the debt relief efforts are at risk”.

Moreover, experts and insiders believe that the government may not be able to pay civil servants’ salaries in May without budget support from the international partners as the domestic revenue is not enough to cover the running costs of the government. This comes at a critical time that Somali struggles with various economic hardships including severe droughts and rising inflation. The humanitarian situation in the country remains extremely dire with only 3.8% of a total requirement of $1.5 billion for the humanitarian response plan (HRP) has been funded so far.

This begs several critical questions, chief among them are: what is the magnitude of “collateral” damages that would cause the long-delayed election process?! Is it possible that this political deadlock could wipe out the milestones that have been achieved in the debt relief efforts?! Who will take the responsibility if the country falls back into instability and turmoil?

In the following lines, we are going to highlight the ongoing economic reform programs in the country which are at risk if the political gridlock continues. Our focus will be on multilateral donors that provide budgetary support to Somalia, with particular emphasis on the two main actors in the debt relief process, the IMF and the World Bank.

Somalia’s re-engagement with the IFIs

The official engagement of Somalia with the International Financial Institutions (IFIs) dates back to the post-independence era of the 1960s. However, the 1969 coup in which the military has seized power and subsequently imposed socialism on the nation alienated these agencies. But the regime had normalized its relationship with the IFIs again during the 1980s. This has triggered structural reforms and heavily advancing loans to Somalia for economic transformation and development. However, due to multiple factors, the government could able to pay back the loans. In the aftermath of the collapse of the Somali state in 1991, the relationship has been halted due to a lack of official government in the country. Therefore, there has not been an official engagement with the IFIs until the end of the transitional period and the election of the official federal government of Somalia in 2012. The following year, 2013 Somalia restored its ties with the IFIs in particular the World Bank and IMF to strengthen government core functions; stabilize and reform key institutions; foster socio-economic recovery and stabilization; provide financing and technical assistance, and assist the country in the debt relief process for the realization of the peace-building and state-building goals of the Somali compact. The recovery and development conundrum in Somalia has been associated with being a heavily indebted country. Somalia’s external debt has ballooned from around $2 billion before the civil war to more than $5.3 billion by the end of 2018, due to interest arrears.

Economic reform agenda

With the support of international partners, Somalia has made significant strides in the debt relief process. This positive momentum toward the right direction brings to the nation and its people. The economic and institutional reform program has eventually yielded fruitful in achieving the remarkable milestone of the decision point of HIPC. This was a result of hard work and determination carried out by the consecutive administrations of the FGS especially the top officials of the government, civil servants, and technocrats of the relevant financial and economic entities including financial integrity institutions. However, the greatest credit goes to the current finance minister Dr. Abdirahman Beileh and his predecessor Mohamed Abrahim Fargeti. There are commendable achievements that have been accomplished since the approval of the IMF Staff-Monitored Program (SMP) in 2016. According to the finance minister, key reforms undertaken include 1. The successful conclusion of the IMF Staff Monitoring Program (SMP) and the commencement of the Extended Credit Facility (ECF) program. 2. Strengthening of the commitment control system through the SFMI functionalities. 3. Improvement in the payment process with the introduction of Electronic Funds Transfer (EFT), 4. Strengthening of treasury single account (TSA) framework.                5. Strengthening the payroll management and control with the competition of biometric registration for both non-security and security staff and also ensuring that all employee salaries are paid directly into their bank accounts. 6. Preparation of accounts by individual public bodies in full compliance with the Cash Basis IPSAS (2017).

Furthermore, the economic reform agenda comprised strengthening the institutional capacity of financial integrity institutions in particular the central bank of Somalia (CBS) and the office of the Auditor General (OAG). Also, the formulation and implementation of Federal budgets in line with a set of principles that have been agreed upon with the IMF under the SMP and ECF agreements including that “the annual Budget of the FGS must be credible and prepared based on conservative revenue projections, and the annual budget is limited to the funds that are under the direct control of the Federal Government. Hence, projections of grants from donors must be realistic and based on confirmed pledged grants and ideally cover discretionary spending”. Moreover, the new policies and instruments for public financial management (PFM) reforms in Somalia including the Procurement Act have been developed. Besides, other regulations have been also approved including the PFM bill, revenue management bill, customs bill, and national procurement bill.

But, despite these tremendous efforts, the budget of the FGS is yet dependent on donor grants and there is a long way to go to achieve the minimum thresholds for domestic revenue which is key to sustainable fiscal management. The domestic revenue, which represents 40% ($247m) of the total budget, is meager and the sustainability of the budget is heavily dependent on grants. However, several challenges are hampering increased domestic revenue mobilization. These obstacles must be tackled to reduce dependence on aid. There is always a massive gap between tax forecasts and realization. Most importantly, the tax gap in Somalia is so huge. According to the FGS, FY2022 Budget Strategy, “the tax burden only grew by 0.73 percent of GDP between 2016 and 2020. Based on this rate of growth, it would take nearly 49 years to reach a threshold of ten percent of GDP which is understood to be a minimum floor needed to ensure developmental progress”

The economic reforms implemented by the FGS under the IMF guidance and with the support of the World Bank are indeed remarkable achievements and can be characterized as huge strides in the right direction. These efforts have started following the formalization of the relationship between FGS and the IFIs. The commencement of the debt relief process to clear Somali arrears to the WB, IMF, and AfDB through the HIPC initiative is aimed at availing the FGS to access regular IDA assistance (and other IFIs funds) which was restricted to access since the collapse of the state in 1991. Hence, the Somali Multi partner fund (MPF) was established and activated in August 2014 to pursue the reform agenda; re-establish basic country systems; strengthen core state functions including the budget framework and PFM systems and socio-economic recovery;           ensure                mutual accountability and provide a platform for coordinated financing for the sustainable reconstruction and development of Somalia. The WB is the trustee and administrator of the fund which receives support and funding from the European Union, United Kingdom, Norway, Germany, Sweden, Denmark, Switzerland, Finland, the United States, Italy, and the World Bank State and Peacebuilding Fund (SPF). Further, the implementation modalities of the projects funded under MPF are classified into three categories: recipient-executed investment projects; Bank executed projects on behalf        of the recipient; and analytical/advisory projects executed by the Bank. However, there are other eligible recipients of the MPF funds including the UN agencies, sub-national governments, NGOs, and other implementation partners.

Of course, the MPF along UN Multi-Partner Trust Fund (MPTF) and African Development Bank Multi-Partner Somalia Infrastructure Fund (SIF) are pooled mechanisms for The Somalia Development and Reconstruction Facility (SDRF) which was established in 2014 to serve as a platform for the FGS and development partners to provide strategic guidance and oversight for development activities in Somalia over a ten-year period. SDRF “serves as both a coordination framework and a financing architecture for implementing the Somalia National Development Plan (NDP), in line with the principles of the New Partnership for Somalia”.

The MPF resources were initially directed to funding projects related to PFM reform and strengthening monetary and fiscal institutions, and other core state functions. These projects include RCRF project, DRM & PFMCSP, CIP, and ICT sector support. However, the scope and scale of projects were developed and expanded.

The first direct grants to Somalia in two decades

September 25^th, 2018 marks another remarkable milestone in the process of normalization of ties between the FGS and The World Bank. Somali had received its first direct World Bank grant in 27 years after the Board of Directors approved a total amount of $80 million to fund public finance reforms ($60M for the RCRF II, and $20M for DRM & PFMCSP II). This was a clear sign that the FGS had regained the trust of IFIs, albeit partially. Prior to that moment, and precisely on August 29^th, the bank has produced its first strategy for Somalia in three decades: The Country Partnership Framework (CPF) (FY19-FY22). Its main goal is to support priorities in two focus areas: 1- Strengthening Institutions to Deliver Services, and 2. Restoring economic resilience and opportunities. The CPF triggered the first IDA Pre-arrears Clearance Grants for Somalia which subsequently provided over $250 million to accelerate progress on key reforms and boost the delivery of basic services and financial inclusion for the Somali citizens. Notable projects in this regard include; the SCALED-UP project, BIYOOLE, Somali Shock Responsive and Social Safety Nets, and Somali Electricity Access Project (SEAP).

 

It’ is also noteworthy that, as trust in Somali institutions grow, the European Union signed a $116m budget support agreement for two and half years with the Somalia government on 14 Oct 2018, which was the EU’s first-ever budget support to FGS.

The Decision point

Building on the progress made in the spheres of economic reforms and institutional strengthening, Somali has successfully completed the required (83) benchmarks to reach the decision-point under the Heavily Indebted Poor Countries (HIPC) Initiative in March 2020, becoming the 37^th country to reach this milestone. Somalia cleared its arrears to World Bank Group, IMF, and AfDB, and reached an agreement with the Paris Club on terms of debt relief on 31 March. Also, Somalia has negotiated with other non-Paris creditors to reach similar agreements. By achieving this critical milestone, the external debt has been reduced from $5.3 billion to $3.9 billion (78% of the 2020 gross domestic product (GDP), and this opened the door for Somalia to access much-needed assistance from IDA, IMF, and other IFIs. Consequently, according to the finance minister, since 2020, the WBG has provided around $2 billion of financial assistance to Somalia, to further strengthen the reforms and deliver basic public services to the people. The decision point also allowed for the private sector to have access to debt and equity investments through the International Financial Cooperation (IFC) (one of the bank’s arms) and most importantly, it has allowed Somalia to gain political risk insurance provided by the Multilateral Investment Guarantee Agency (MIGA) to facilitate foreign direct investments. However, to achieve complete and irrevocable debt relief, Somalia must fulfill all requirements of the three-year Extended Credit Facility (ECF) program by IMF and maintain sound macroeconomic policies, implement its poverty reduction strategy - the Ninth National Development Plan (NDP9) - for at least one year. The country should complete a set of policy measures known as Completion Point triggers that are aimed at promoting inclusive, long term growth and poverty reduction.”

Extended credit facility to Somalia 

Upon the successful conclusion of the second review of the staff-monitored program, which has      been      endorsed      as      matching      the      standards      of      upper       credit tranche conditionality, Somalia has reached the decision point. At the same time, the country embarked on a new IMF supported program (ECF) aimed at assisting the implementation of the National Development Plan (NDP-9) and anchor reforms between the HIPC   Decision   and   Completion   Points.   The   program   comprises    structural benchmarks    (SBs),    indicative    targets    (ITs),    and     quantitative     performance criterion (QPCs).

Moreover, the three year ECF arrangement was originally approved by the Executive Board of IMF on March 25, 2020, for SDR 292.4 million (about US$395.5), and on November 18, 2020, it was completed the first review of the Extended Credit Facility (ECF) which enabled the immediate disbursement of required funds at the time.

However, with the second and third reviews to be held in mid-May, a new administration should be in place to conclude the review and confirm its commitment to the economic program. Otherwise, the budgetary aid received by the FGS from development partners could stop and the whole debt relief program is at risk

A press release issued by the IMF on 7 March read “Political uncertainty and election delays can result in the automatic lapse of the IMF-supported program, which will jeopardize the disbursement of budget support grants and derail the timing for full debt relief at the HIPC Completion Point.”

Nevertheless, once Somalia reaches the HIPC Completion Point in the next year or so, it is expected that the external debt of Somalia will be reduced from US$5.3 billion at the end of 2018 to US$557 million.

Completion point triggers are: Poverty reduction strategy (NDP-9) implementation, macroeconomic stability; public financial and expenditure management; domestic revenue mobilization, governance, anti-corruption, and natural resource management; debt management; social sectors (education, health, social safety net); private sector development (Growth/structural); and statistical capacity by publishing at least two editions of the “Somalia Annual Fact Book”.

The World Bank funded-projects in Somalia 

A variety of donor-funded projects are currently being implemented in Somalia. However, to get a clear picture of development projects that are subject to uncertainty in the case of continuation of the election delays, let’s take WB-funded projects as a case study.

The ongoing WB projects in the country are funded through MPF and grants by the International Development Association (IDA), which is part of the WB group. WB programs and projects in the country are guided by its country partnership framework and can be classified into three categories that fall into three different portfolios: 1. Effective accountable Government portfolio. 2. Enabling economic growth portfolio and 3. Urban infrastructure portfolio.

Projects financed under the first category, effective accountable government portfolio, which addresses strengthening governance with particular emphasis on fiscal reforms, social sector development, and resilience, are eleven active projects and programs. Seven of them are implemented by the FGS through its different institutions and federal member states. This category is known as recipient-executed investment projects. The remaining four are analytical advisory projects with a total budget of $883.6m co-financed by MPF and IDA ($216M and $667.6M respectively). This is considered the largest portfolio

Active projects are:

1.        CAPACITY INJECTION PROJECT (CIP): with a budget appraised at US$40 million. The project aims at strengthening the staffing and institutional capacity of selected line ministries and central agencies to perform core government functions.

2.       CIVIL SERVICE STRENGTHENING PROJECT (CSSP): Budget: US$14.5 million. Objectives: Strengthen basic functions for payroll, human resources, and policy management in selected central agencies and line ministries.

3.      3- DOMESTIC REVENUE MOBILIZATION AND PUBLIC FINANCIAL MANAGEMENT CAPACITY

STRENGTHENING PROJECT (DRM/PFM): Budget: US$50 million. Objectives: Strengthen systems of domestic revenue mobilization, expenditure control, and accountability in the Federal Government, Puntland State of Somalia, and Somaliland.

4.      DAMAL CAAFIMAAD: Budget: US$100 million. Project Development Objective is to improve the coverage of essential health   and   nutrition   services   in   project areas and strengthen stewardship capacity of Ministries of Health (MoHs).

5.      ENHANCING GOVERNANCE DIALOGUE ON SOMALIA: Timeframe: Budget: US$1.05M. Objectives Improve policy dialogue and coordination necessary for reform progress, achievement                                                           of         governance projects’ objectives and governance integration in sectoral operations.

6.      RECURRENT COST AND REFORM FINANCING (RCRF) PROGRAM: RCRF II and RCRF III with a budget of US$206 million and $68 million respectively. Objectives: Support the Federal Government of Somalia (FGS) and eligible Federal Member States (FMS) to strengthen resource management systems, the inter-governmental fiscal framework, and service delivery systems in health and education.

7.       A. SOMALIA SHOCK RESPONSIVE AND SOCIAL SAFETY NETS: SOMALIA SHOCK RESPONSIVE SAFETY NET FOR HUMAN CAPITAL PROJECT (SNHCP) Budget: US$175 million. Objectives: Provide cash transfers to targeted poor and vulnerable households and establish the key building blocks of a national shock-responsive safety net system.

B. SOMALIA SHOCK RESPONSIVE SAFETY NET FOR LOCUST RESPONSE PROJECT (SNLRP): Budget: US$115 million. Objectives: Protect food security and livelihoods of poor and vulnerable HHs affected by the locust outbreak and strengthen social protection (SP) systems for preparedness.

C. SOMALIA SOCIAL PROTECTION SUPPORT: BUILDING BLOCKS TOWARDS A NATIONAL SOCIAL                         PROTECTION SYSTEM (ASA) Timeframe: Budget: US$2 million, Objectives: Support the Government of Somalia to    develop    key    building    blocks of a national    SP    system     and support the design of a scalable social safety net program.

8.      SOMALI INTEGRATED STATISTICS AND ECONOMIC PLANNING CAPACITY BUILDING PROJECT. Budget: US$25 million. Objectives: strengthen the national statistical system in       the       collection,       processing,        and        dissemination        of        poverty and selected macroeconomic data to inform development policy and poverty reduction activities.

9.      SUPPORT TO FINANCIAL GOVERNANCE POLICY DIALOGUE (FGC): Budget: US$2 million. Objectives Provide technical advice and facilitate policy dialogue to strengthen transparency                                                       and     accountability in the areas of strategic public procurement and concessions, asset recovery, and other selected areas of financial governance.

10.   Somalia COVID-19 Emergency Vaccination Project: Budget: US$45 million. The Project Development Objective (PDO) is to support the Federal Republic of Somalia to acquire and deploy Project COVID-19 vaccines and to strengthen national immunization capacity.

11.     Somalia Education for Human Capital Development Project with a budget of US$40million. Development Objective is: Increase access to primary education in underserved areas, with a focus on girls, and improve the quality of instruction.

The second portfolio, which addresses economic resilience and growth, has five active projects that focus on                                                long-term poverty    reduction    and    inclusive    growth.    Three    of    these    are     recipient- executed, and two are Bank-executed with a total budget of $487.7m ($44m of MPF resources and $443.7m by IDA resources).

1.        SOMALI ELECTRICITY ACCESS PROJECT (SEAP): Budget: US$7.2 million. Objectives Expand access to electricity in targeted urban, peri-urban, and rural communities.

2.       SOMALI ELECTRICITY SECTOR RECOVERY PROJECT: Budget: US$ 150 million. The Project Development Objective is to increase access to lower cost and cleaner electricity supply in project areas and reestablish the electricity supply industry.