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Somalia Economic Update Summary (November 2023, Edition No. 8)

Core Content

This Somalia Economic Update is dedicated to the late John Randa, a key figure in the Somalia Program who contributed significantly to economic analysis and policy development. The report focuses on the integration of climate change with Somalia's development, particularly emphasizing the role of water in fostering resilience and sustainable growth.

Main Viewpoints

• Economic Recovery Amid Shocks: Somalia has remained on a reform path despite recurrent global and exogenous shocks, such as droughts, floods, locust infestations, and the impact of the global pandemic. However, the economy has been significantly affected by these shocks, particularly in 2022, with GDP growth slowing to 1.7% from 2.9% in 2021.

• Climate Change and Water: Climate-related shocks, especially droughts, have severely impacted Somalia's economic and social stability. Water is presented as a central enabler of development, influencing food security, public health, and economic resilience. The report highlights the need to harness both green and blue water resources for long-term growth and poverty reduction.

• Fiscal and Financial Challenges: The Federal Government of Somalia (FGS) has maintained fiscal performance, but fiscal space remains limited to address shocks and invest in public goods. The current account deficit widened to 16.8% of GDP in 2022, driven by increased food and energy imports. Remittances and donor grants have played a key role in financing the budget, but domestic revenue mobilization is still insufficient.

• Financial Sector Growth: The financial sector has shown growth, with commercial bank assets increasing by 25% in 2022. However, banks remain risk-averse, focusing mainly on short-term trade finance and large loans. Financial inclusion is improving, but access to credit for households and small businesses is still constrained.

• Medium-Term Outlook: The World Bank projects modest growth of 2.8% in 2023, which is slightly below the population growth rate, leading to a per capita GDP contraction of 0.1%. Growth is expected to gradually increase to 3.7% and 3.9% in 2024 and 2025, respectively, assuming improved climatic conditions and global stability. However, downside risks remain, including climate shocks, global recession, and geopolitical tensions, which could dampen recovery.

• Policy Priorities: The report outlines key policy areas for post-HIPC transition, including:

  • Enhancing fiscal space for development by improving revenue collection and expenditure controls.
  • Strengthening financial integrity and integrating Somalia into the global financial system.
  • Improving debt management and promoting public-private partnerships.
  • Supporting financial inclusion and reducing barriers to credit for entrepreneurs.

Key Information

Economic Performance

• GDP Growth: 1.7% in 2022, down from 2.9% in 2021.
• Inflation: Rose significantly in 2022, reaching a peak in July, driven by high food and energy prices.
• Current Account Deficit: Increased to 16.8% of GDP in 2022.
• Remittances: Growth slowed in 2022 due to global financial conditions and high inflation in host countries.

Climate and Water

• Drought Impact: The 2022 drought was the longest and most severe in recent history, lasting five seasons and worsening food insecurity and displacement.
• Water Scarcity: Water is a critical resource for development, with per capita water consumption remaining low and demand outpacing supply.
• Water Balance: Estimated water balance in 2020 showed significant deficits, highlighting the urgency for better water management.

Fiscal and Institutional Challenges

• Fiscal Space: Limited to address shocks and public investment.
• Revenue Performance: Domestic revenue could only cover one-third of total expenditures in 2022.
• Expenditure Trends: Public spending is shifting toward social programs and intergovernmental grants, with wage bill being the largest component.

Financial Sector

• Banking Growth: Commercial banking assets increased in 2022, with 15.4% of GDP in total domestic assets.
• Credit Expansion: Private sector credit increased by 25%, but banks remain cautious, focusing on short-term trade finance.
• Financial Inclusion: Efforts are underway to improve financial inclusion and system stability, including supervision of MTBs and enacting legal frameworks.

Risks and Scenarios

• Downside Scenario: Projected GDP growth of 2.1% in 2023 and 2.9% in 2024, driven by poor climatic conditions, continued agricultural decline, and global recession.
• Upside Scenario: Growth could reach 3.3% in 2023 and 4.2% in 2024, assuming improved weather, resolution of the Ukraine conflict, and no global recession.

Policy Recommendations

• Fiscal Reforms: Focus on revenue enhancement and expenditure control.
• Debt Management: Improve debt sustainability and borrowing frameworks.
• Financial Integration: Enhance financial integrity and access to global financial systems.
• Water Management: Prioritize sustainable water use, infrastructure development, and institutional capacity building.

Conclusion

This report underscores the critical role of water in Somalia's development and highlights the need for integrated policies to address both climate change and economic challenges. The HIPC Completion Point in December 2023 presents an opportunity for inclusive growth and debt relief, but the country's vulnerability to shocks remains high. Strengthening institutions, improving fiscal and financial management, and enhancing water security are key to building resilience and achieving long-term prosperity in Somalia.