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Somalia: IMF Staff-Monitored Program Summary

Core Content Overview

This document outlines the second and final review of the first Staff-Monitored Program (SMP) for Somalia, completed on June 22, 2017, and the approval of a new 12-month SMP covering May 2017–April 2018. It provides an analysis of economic developments, performance under the previous program, and the key policy areas for the new program. The report also highlights the challenges facing Somalia, including fragile security, ongoing drought, and weak institutional capacity, and underscores the importance of continued donor support and international cooperation for program success.

Main Points and Key Information

1. Political and Institutional Context

• The 2016 presidential election resulted in the election of Mohamed Abdullahi Mohamed, who received broad support from the Somali people and the international community.
• A roundtable in Washington, D.C. and a Somalia Conference in London reaffirmed donor support for macroeconomic reforms and HIPC Initiative debt relief.
• State-building is progressing with donor assistance, but the security situation remains fragile, limiting the government's ability to govern effectively.
• Institutional capacity is still weak, affecting public financial management (PFM) and revenue mobilization.

2. Economic Developments and Outlook

• Economic growth is expected to decline from 3.2% in 2016 to 2.4% in 2017, due to the impact of the ongoing drought on agriculture and livestock.
• Inflation is projected to rise to 2.9% in 2017, up from 2.3% in 2016, driven by higher food prices.
• Trade deficit remains significant, with remittances and donor grants playing a crucial role in financing the budget.
• External debt stood at 81% of GDP at the end of 2016, and the Central Bank of Somalia (CBS)'s net foreign assets are stable at 21.6% of GDP.

3. Performance Under the First SMP

• The first SMP (May 2016–April 2017) had broadly satisfactory performance, despite challenging conditions such as a prolonged electoral period, drought, and slow donor disbursements.
• Four out of five indicative targets and all but one structural benchmarks were met by December 2016, and all targets were met by March 2017, with some delays.
• The missed target on domestic arrears was attributed to weak tax collection, lower-than-expected grants, and poor PFM.
• The Domestic Arrears Management Committee (DAMC) was not established, which hindered monitoring and stocktaking of arrears.

4. New 12-Month SMP (May 2017–April 2018)

• The new SMP is based on three pillars: fiscal policy and reforms, monetary and financial sector policies, and governance and capacity development.
• The program aims to maintain macroeconomic stability, rebuild institutions, and lay the foundation for future debt relief under the HIPC Initiative.
• Key focus areas include:
  • Fiscal discipline and revenue mobilization.
  • Currency reform and financial sector development.
  • Effective regulation of money-transfer businesses (MTBs), including anti-money laundering (AML) and counter-terrorism financing (CTF) measures.
  • Improved governance and capacity development through technical assistance from the IMF.

5. Program Risks and Challenges

• Major risks include:
  • Fragile security and weak institutional capacity.
  • Persistent drought and humanitarian crisis.
  • Slow progress in policy and reform implementation.
  • Donor shortfalls in support for the Federal Government of Somalia.
• The continued commitment of the authorities and coordinated international support are critical to mitigating these risks.
• Improved ownership of the program and political support for reforms will be essential for its success.

6. Staff Appraisal and Recommendations

• The IMF staff supports the completion of the first SMP and the approval of the new SMP, given the positive performance and remedial measures.
• The strategy to address domestic arrears includes:
  • Including all new domestic arrears and delayed payments in the stock of arrears.
  • Establishing and empowering the DAMC to monitor and finalize arrears stocktaking.
  • Avoiding new domestic arrears and using revenue windfalls to reduce existing arrears.
• The non-salary Recurrent Cost and Reform Financing (RCRF) reimbursement was not fully achieved, and the authorities agreed to revise eligibility criteria for contracts over $50,000 and modernize payment processes.

Summary of Key Targets and Status

Conclusion

The new SMP is a critical step in rebuilding Somalia's economic institutions, improving macroeconomic management, and securing donor support. Despite ongoing challenges, the IMF staff encourages continued reform efforts and international collaboration to ensure program success and long-term stability.