100964 October 2015 | Edition No. 1 Transition amid Risks with a Special Focus on Intergovernmental Fiscal Relations Macroeconomic and Fiscal Global Practice Transition amid Risks with a Special Focus on Intergovernmental Fiscal Relations TABLE OF CONTENTS ABBREVIATIONS ............................................................................................................................................................ i FOREWORD ................................................................................................................................................................... iii ACKNOWLEDGEMENTS ................................................................................................................................................. v MAIN MESSAGES AND KEY RECOMMENDATIONS ....................................................................................................... vi EXECUTIVE SUMMARY .................................................................................................................................................. ix PART I: Social, Economic, and Governance Status ....................................................................................................... 1 1. Context and Objectives ......................................................................................................................................... 2 2. Social and Poverty Status ...................................................................................................................................... 3 2.1 A Young and Rapidly Growing Population ............................................................................................ .......... 4 2.2 Weak Social Indicators ............................................................................................................................. ....... 4 3. The State of the Economy ..................................................................................................................................... 8 3.1 The Real Sector ............................................................................................................................................... 8 3.2 The Monetary and Financial Sector ................................................................................................................ 11 3.3 International trade a key feature of the Somali economy .............................................................................. 13 3.4 Fiscal Policy ......................................................................................................................................... ............ 15 3.4.1 Improved revenue mobilization efforts are paying off .............................................................................. 16 3.4.2 Expenditure is concentrated on salary and security and weak budgetary controls and execution have led to buildup of arrears ............................................................................................................................ 20 3.4.3 Arrears in the FGS and Puntland are significant ........................................................................... ............ 23 3.5 Debt Arrears and Eligibility for Debt Relief (HIPC) .......................................................................................... 24 4. Governance ........................................................................................................................................................... 26 4.1 The Public Financial Management (PFM) System ........................................................................... ................ 26 4.1.1 The legal and regulatory framework for PFM is inadequate and is being revamped ............................... 26 4.1.2 Procurement rules need strengthening ..................................................................................................... 27 4.1.3 Oversight institutions are being put in place ............................................................................. ............... 28 4.1.2 Procurement rules need strengthening 4.1.3 Oversight institutions are being put in place 4.2 Anticorruption and Accountability ................................................................................................................. 30 5. The Outlook for 2015–17 ...................................................................................................................................... 32 5.1 The Importance of Security ............................................................................................................................ 32 5.2 Reforms Needed to Spur Growth ................................................................................................................... 32 PART II: Special Focus: Intergovernmental Fiscal Relations in Somalia - Challenges and Lessons from International Experience ................................................................................................................................. 35 6. Key Principles Governing Intergovernmental Relations ........................................................................................ 36 7. From Unitary to Federal Government ................................................................................................................... 41 7.1 The Long Road to the Provisional Constitution ................................................................................. ............. 41 7.2 Municipal and District Governance ................................................................................................................ 43 7.3 Formation of the Federal State ........................................................................................................ ............... 44 7.4 The State of State Formation ............................................................................................................ .............. 45 8. Designing Intergovernmental Financing Arrangements for Somalia .................................................................... 49 8.1 Functions and Spending Responsibilities: The Theory ...................................................................... .............. 50 8.2 Functions and Spending Responsibilities: Current Practice in Somalia .......................................................... 52 8.3 Assignment of Revenues: The Theory ............................................................................................................ 53 8.4 Assignment of Revenues: Current Practice in Somalia ......................................................................... ........... 54 8.5 Transfers: The Theory ........................................................................................................................... ........... 55 8.6 Addressing Interregional Inequity Through Transfers: Scope to Apply theory to Practice in Somalia ............. 57 8.7 Case Study of Oil and Gas ............................................................................................................. .................. 60 8.8 Conclusion: Choices and Options .................................................................................................................... 61 9. Institutions and Processes ...................................................................................................................... ................ 64 REFERENCES ................................................................................................................................................. ................. 67 Annex A: Excerpts of Relevant Articles from the Provisional Constitution .................................................................... 70 Annex B: Revenues of the Federal Government of Somalia and Puntland, 2013 .......................................................... 73 LIST OF FIGURES Figure 2.1: Both the size of the population and life expectancy have been rising in Somalia ..................................... 4 Figure 3.1: Somalia’s GDP amongst the lowest in the region .................................................................... .................. 8 Figure 3.2: Somalia’s GDP per capita is the 5th lowest in the World ............................................................................ 8 Figure 3.3: Somalia’s economy remains consumption driven ..................................................................................... 9 Figure 3.4: Consumption is the main contributor to GDP in Somaliland and Puntland ............................................... 9 Figure 3.5: Livestock and Services are the key drivers of Somaliland’s GDP ................................................................ 10 Figure 3.6: The Central Bank recognizes 48 financial institutions in Somalia .............................................................. 12 Figure 3.7: Imports dominate Somalia’s economy ................................................................................. ..................... 14 Figure 3.8: Somalia exports far fewer goods than it imports .................................................................... ................... 14 Figure 3.9: Long-term flows finance Somalia’s current account deficit ....................................................................... 15 Figure 3.10: The Federal Government of Somalia’s efforts to mobilize revenue are paying off .................................... 16 Figure 3.11: Development partners continue to support Somalia’s reconstruction and development ........................ 18 Figure 3.12: Actual revenue collection by the FGS exceeded budgeted amounts in 2013 but fell well short in 2014 .. 18 Figure 3.13: Despite high expenditure needs, Somaliland has been able to spend within its means ........................... 19 Figure 3.14: Puntland budget on upward trend ............................................................................................................ 19 Figure 3.15: Monthly expenditures by the Federal Government of Somalia closely matched monthly revenues in 2014 ...................................................................................................................................................... 21 Figure 3.16: Wages and salaries eat up a significant portion of the Federal Government of Somalia’s recurrent budget 22 Figure 3.17: Security and administrative services accounted for the lion’s share of total expenditure in 2014 ........... 22 Figure 3.18: By far the largest spending category in Somaliland is security .................................................................. 23 Figure 3.19: Somalia owes an estimated $5.3 billion to multilateral and bilateral creditors ........................................ 24 Figure 4.1: Somalia has adopted new laws, regulations, policies, and procedures governing public financial management ............................................................................................................................................. 27 Figure 4.2: Fiscal balance is set to be restored in 2015 ................................................................................. .............. 27 Figure 7.1: Somalia has experienced a full range of government systems since Independence ................................. 45 Figure 8.1: Intergovernmental fiscal architecture should be designed sequentially ................................................... 49 Figure 8.2: Assignment of revenue powers to different levels of government involves trade-offs ............................. 54 Figure 8.3: Allocation across sub-national units can help solve inequity between them, or make it worse ............... 56 LIST OF TABLES Table 2.1: Social indicators in Somalia .......................................................................................................................... 5 Table 3.1: Actual and budgeted revenue and grants of the Federal Government of Somalia, 2012–14 ...................... 17 Table 3.2: Composition of expenditure by the Federal Government of Somalia, 2012–15 .......................................... 21 Table 3.3: Security sector budget of the FGS, 2014 and 2015 (millions of dollars) ...................................................... 23 Table 7.1: State of state formation ............................................................................................................... ................ 46 Table 8.1: Assignment of governmental responsibilities in five countries .................................................................... 51 Table 8.2: Unbundling the education function: Theoretical assignment of responsibilities across levels of government 52 Table 8.3: Distribution of tax bases in Somalia ............................................................................................................. 54 Table 8.4: Population and economic base of Somalia’s regions ................................................................................... 58 LIST OF BOXES Box 3.1: How is “derisking” affecting Somalia? .......................................................................................... .................. 13 Box 6.1: What is a federal system? ............................................................................................................................... 37 Box 7.1: Constitutional provisions chart the gradual emergence of a federal state ..................................................... 41 Box 7.2: A note on terminology .................................................................................................................................... 45 Box 8.1: A technical committee could help unbundle shared functions using the following terms of reference ........ 50 Box 8.2: Chile and Germany have fraternal intergovernmental transfer systems ........................................................ 56 Box 8.3: Australia’s fiscal architecture has evolved ............................................................................................ .......... 62 Box 8.4: Bosnia and Herzegovina gradually achieved fiscal integration through tax reform ........................................ 63 Box 9.1: Three types of institutions can support dynamic and responsive intergovernmental fiscal relations ............ 64 Abbreviations AMISOM African Union Mission in Somalia AML/CFT Anti–Money Laundering/ Combating the Financing of Terrorism CBS Central Bank of Somalia CDD Customer Due Diligence COFOG Classification of Functions of Government FAO Food and Agriculture Organization FATF Financial Action Task Force FDI Foreign Direct Investment FIA Financial Institutions Act FGC Financial Governance Committee FGS Federal Government of Somalia FMS Federal Member States GDP Gross Domestic Product GFS Government Finance Statistics HIPC Heavily Indebted Poor Countries IDPs Internally Displaced Persons IMF International Monetary Fund ICU Islamic Courts Union IJA Interim Jubba Administration ISWA Interim South West Administration JPLG Joint Program on Local Governance and Decentralized Services KYC Knowing Your Client MDA Ministries Departments and Agencies MoPIC Ministry of Planning and International Cooperation MTBs Money Transfer Businesses MTOs Money Transfer Operators OAG Office of the Auditor General ODA Official Development Assistance PFM Public Financial Management PSG Peace and State-building Goals SEMG Somalia and Eritrea Monitoring Group SFMIS Somalia Financial Management Information System SlSh Somaliland Shilling SNA Somali National Army SOS Somali Shilling SPS Sanitary and Phytosanitary VAT Value Added Tax UN United Nations UNDP United Nations Development Programme UNFPA United Nations Population Fund UNICEF United Nations Children’s Fund USAID United States Agency for International Development October 2 0 1 5 | Edition No. 1 i ii S o m a l i a Econ o m ic Update • 2015 FOREWORD Iam very pleased to introduce the first in a series of Somalia Economic Updates. With this series, the World Bank aims to shine a spotlight on Somalia’s economy, assess economic trends, and provide regular analysis that we hope generates debate among Somalis both inside and outside the country. The first edition is titled Transition amid Risks. Like others, the Bank is encouraged by the progress that Somalis have made in the last three years to rebuild their country. Against immense challenges, reforms to economic and public finance management are setting new standards of accountable governance and sustainable development for Somalia. These changes are essential if the country is to generate the investment, services, and jobs that its youthful population need. So far, there are positive signs that the economy is responding: Somalis are returning from abroad, shops are opening, new financial institutions have been licensed,and property markets are booming. However, the challenges are still daunting. Macro-fiscal management, revenue mobilization, and the enactment of key legislation are all still in need of continued attention and support. Businesses, as vibrant and as central as they have been in Somalia’s story, may soon reach the limits of their growth if the state fails to provide the public goods that any private sector needs: physical security, security of contracts, and regulation that ensures fair competition, a level playing field, and the basis for investment. The first in this series of economic updates features a Special Focus on Intergovernmental Fiscal Relations. It is timely that Somalis engage in a structured and technically informed debate about the nature of economic and fiscal relations within Somalia. At its heart, intergovernmental fiscal relations is about economic solidarity. Like any country, Somalia will have natural inequities across regions and among people. The response to these inequities will lay the foundations for longer-term development. We hope you find this first edition valuable and look forward to our continued engagement in Somalia. Bella Bird World Bank Country Director for Somalia October 2 0 1 5 | Edition No. 1 iii GOGOLDHIG W axaan aad ugu farax sanahay inaan idiin soo bandhigo taxanihii koowaad ee Warbixinta Dhaqaalaha Soomaaliya, Bangiga Adduunka isagoo ka duulaya qoraaladan taxana ah ujeedadiisuna tahay inu ifiyo dhaqaalaha Soomaaliya, si uu u baaro aragtiyaha dhaqaale ee jira, soona gudbiyo falanqayn joogta ah taas oo aan rajaynayno inay ka soo baxaan doodo dhex mara dhamaan dadka Soomaaliyeed ee dal iyo dibadba joogta. Qoraalka kowaad waxaa cinwaan looga dhigay MAAREYNTA KHATARTA XAALADA KALA GUURKA. Sida qolyaha kaleba qabaan, wuxuu Bangiga Adduunku bogaadiyay horumarka ay Soomaalidu ka samaysay xaga dib u dhiska dalkeeda saddexdi sano ee la soo dhaafay. Ka sakow caqabadaha baaxada leh ee jira, isbedelada dhaqaale iyo maaraynta nidaamka maaliyadeedba waxay jaangoynayaan heerarka isla xisaabtanka, maamul-wanaaga iyo joogtaynta horumarka Soomaaliya. Isbedeladdani waa kuwo muhiimad u leh marka dalku abuurayo maalgashi, adeegyo, iyo shaqooyinka ay u baahan yihiin dadweynaha dhalinyarada u badan. Inta la ogyahay, waxaa jira calaamado muujinaya in dhaqaaluhu soo hagaagayo: Soomaalidii dibadaha ayey ka soo noqonayaan, waxaa la furanaya Dukaamo, hay’ado maaliyadeed oo cusub baa ayaa ruqsadihii samaystay, iyo suuqa hantida ma guurtada ah oo sare u sii kacay. Si kastaba ha ahaate, caqabaduhu weli waa kuwa jira. Maaraynta dhaqaalaha guud, dakhli uruurinta, iyo fulinta shuruucda muhiimka u ah oo ay xeer-dejintu ansixiyeen waa kuwa weli u baahan taagerid iyo feejignaan joogta ah. Ganacsigu, waa mid kobcaya wuxuuna tiir dhexaad u noqday waxyaabaha ay Soomaalidu aad u hadal hayso, haddii ay dawladdu ku guul-daraysato inay fuliso baahida guud ee laga mamaarmanka u ah ganacsiga gaarka loo leeyahay, waxaa durbadiiba xadidmaya kobacii inuu qof waliba u helo fursad uu ku guulaysan karo, taaso ah saldhiga maalgaashiga. Muuqaalada taxanaha ee warbixinta dhaqaalaha Soomaaliya waxay si gaara diirada u saaraysaa nidaamka maaliyadeed ee federaalka. Waa waqtigii ay Soomaalidu si habaysan oo farsamo ku dhisan u qaban lahayd doodo la xiriira nooca dhaqaale iyo xiriirada maaliyadeed ee Soomaaliya ka dhaxayn kara. Gunaanadkii, tani waa dhaqaalaha oo la wadaago. Sida dal walba, Soomaaliya waxaa ka jira isu dheelitir la’aan u dhaxaysa xaga khayraadka dadka iyo Goboladaba. Ka jawaabida isu dheelitir-la’aantani waxay aasaaska u dhigaysa horumarka mustaqbalka fog. Waxaan idin rajaynayaa inaad qoraalkan ka heli doontaan waxyaabo muhiim ah, Isla mar ahaantaana annaga oo joogtayn doona xiriirka Bangiga Adduunka iyo Soomaaliya ka dhexeeya. Bella Bird Agaasimaha Bangiga Adduunka ee Soomaaliya iv S o m a l i a Econ o m ic Update • 2015 ACKNOWLEDGEMENTS T his first edition of the Somalia Economic Update was prepared by a team led by John Randa, Kathleen Whimp, and Abdulqafar Abdullahi and supervised by Paolo Zacchia. The core team consisted of Catherine Ngumbau, Geoff Handley, Matthias Mayr, Winston Cole, Louis Alexandre Berg, Osman Abdulahi, Alireza Zadeh, and Barbara Karni. The team acknowledges contributions from Robert Waiharo, Janerose Lubisia, Aidah Bunoro, and Salome Aganda. The report benefitted from the insights of several peer reviewers, including Yutaka Yoshino, Nadia Fernanda Piffaretti, Geoff Handley, and Gianni Zanini. The team received overall guidance from Albert Zeufack (Practice Manager, Macroeconomic and Fiscal Management); Kevin Carey (Lead Economist, Macroeconomic and Fiscal Management); Bella Bird (Country Director for Tanzania, Somalia, Burundi and Malawi); Preeti Arora (Country Program Coordinator, Somalia); and Hugh Riddell (Country Representative for Somalia). October 2 0 1 5 | Edition No. 1 v MAIN MESSAGES AND KEY RECOMMENDATIONS Somalis face a daunting development challenge to overcome the legacy of two decades of sustained conflict and fragility—but substantial progress is now being made. The new government inherited a dysfunctional economy facing high levels of poverty and inequality, a youth bulge, high unemployment, and large infrastructure gaps. The Federal Government of Somalia (FGS) has embarked on a process of structural, legislative, and institutional reform. The economy is starting to respond: Somalis are returning from abroad to invest, shops are opening, and the property market is booming. The International Monetary Fund (IMF) and the World Bank estimate Somalia’s GDP at about $5.7 billion in current dollar terms in 2014. Somalia’s vibrant private sector may reach the limits of its potential if further reforms to the enabling environment, particularly to security and access to finance, are not pursued. Throughout the years of conflict and fragility, Somalia’s private sector helped maintain economic activity. However, in the absence of appropriate sector regulation, the emergence of monopolistic or anticompetitive behavior may be discouraging new businesses from entering the market and small and medium-size business from growing. The de facto intergovernmental fiscal arrangements that are emerging as interim state administrations are formed will affect what is politically possible to negotiate as part of the constitution-making process. In particular, state administrations are occupying most available tax bases, limiting the scope for the federal government to play its proper role in redistribution. It will be challenging for states to give away these revenue bases unless they also hand over cost responsibilities. For its part, the federal government is not in a fiscal position to accept the handover of functions to the federal level, unless it also gains control over more revenue bases to pay for them. Inequitable distribution of resources was a fundamental cause of conflict in Somalia; it must be addressed in the design of the new arrangements. The distribution of the main revenue bases—in particular, customs revenue—is likely to be creating inequality across states. Addressing inequality requires that poorer states receive transfers, either from the central government (provided it has sufficient revenues to do so) or from other states that are better off. The design of intergovernmental fiscal arrangements for Somalia must address this challenge. In the absence of a solution, it seems likely that states will erect domestic customs barriers, which will undermine growth of Somalia’s small and fragile economy. Enhancing growth and macroeconomic stability The rehabilitation of public institutions that can generate public goods and services will be an enabler of long-term economic development, but it will rely on increasing the state’s fiscal capacity. Meeting Somalia’ssocioeconomic challenges is difficult, given the legacy of weak institutions and regulatory frameworks, weak governance, and limited public services delivery. The reform of public institutions takes 20 years even in the fastest-reforming countries. The FGS and subnational governments are prioritizing the establishment of credible public finance institutions for macro-fiscal management. Revenue mobilization of additional business turnover taxes is a critical priority if the state is to increase its fiscal capacity and extend services to the population. In parallel, the authorities are trying to attract new talent into reformed civil service institutions at the federal and subfederal levels, in line with fiscal space. Improving human and economic development outcomes is central if Somalia is to sustain its transition from conflict to stability. With estimated per capita GDP of $435 in 2013, Somalia is the fifth poorest country in the world, reflecting two decades of conflict.During this time, physical infrastructure was destroyed or not maintained, and two generations of Somalis went without education. Only 42 percent of school-age children are estimated to be enrolled in primary school, of which just 36 percent are girls. Youth are disproportionately affected by poverty and unemployment and areprey to recruitment into militia or radicalized groups.About 67 percent of 14- to 29-year-olds are believed to be unemployed. More spending to the social sectors is key to addressing these major developmental challenges. Developing intergovernmental fiscal arrangements Somalia’s new fiscal arrangements should be designed to (a) work as a coherent system, preserving a strong common economic space across the country, and (b) provide scope to address inequities across regions.These objectives reinforce each other. If states without access to strong revenue bases are supported through transfers, they will be less likely to look for economically harmful ways to raise revenue. As political bargains are struck, efforts should be made to achieve balance between functional responsibilities and the availability of revenue to fund them. Somali stakeholders should be prepared to develop a sustainable fiscal bargain incrementally, renegotiating as fiscal circumstances and the interests of states and federal government change over time. It may not be possible to reacha permanent fiscal bargain immediately. The focus now should be on developing robust intergovernmental institutions to facilitate ongoing negotiation and negotiating a way forward rather than finding a final fiscal arrangement. vi S o m a l i a Econ o m ic Update • 2015 TALO SO JEEDINTA IYO FARIIMAHA UGU MUHIIMSAN Soomaali waxay wajahaysa caqabado ba’an si horumar u gaadho uguna guulaysato raadadki ay ku reebeen nuglaanshaha iyo colaadii ay labaatankii sanno ee la soo dhaafay- laakiin waxaa hadda la sameeyey horumar la taaban karo. Dawladan cusub waxay dhaxashay dhaqaale aan shaqayn oo ay soo wajahday saboolnimo iyo sinnaan la’aan heerarkoodu sarreeyo, da’yartii oo badatay, shaqo la’aan baahsan, iyo dayac balaaran o ku dhacay kaabayaashi dhaqaalaha. Dawaladda Federaalka Soomaaliya (DFS) waxay dardar gelisay hannaanka geedi-socodka ee qaab- dhismeedka, shuruucda, iyo dib u habaynta hay’adaha dawliga ah. Dhaqaalihi wuxu bilaabay ka soo kabasho: Somaalidi waxay ka soo laabteen dibadihii si ay dalka maalgashi ugu sameeyaan, ganacsigiina wuu xoogaystay, iyo weliba hantidi ma guurtada ahayd oo qiimaheedui uu sare u kacay. Hay’adaha Lacagaha Adduunka (IMF) iyo Bangiga Adduunka waxay Soomaaliya ku qiyaaseen wax soo saarkeeda (GDP) $5.7 Bilyan marka loo eego sarifka dollarka ee sanadkii 2014kii. Kobaca wax soo saarka gaarka loo leeyahay ee Soomaaliyeed wuxuu gaari lahaa meeshiisa ugu sarraysa haddi lagu samayn laha isbedello xaaladaha u saamaxaya kobocooda, gaar ahaan nabadgelyada iyo helitaanka maaliyadeed, mana aha kuwo la dabagalay. Tan iyo sanadihi colaada iyo nugaylka lagu jiray, waxaa hawlaha dhaqaalaha gacan ka gaysta inay sii socdaan ganacsiga ama laamaha gaarka loo leeyahay ee Soomaaliyeed. Si kastaba ha ahaatee, maqnaashaha hay’adihii sida saxda ah wax u ilaalin lahaa ee waaxdan, waxay dhalisay in suuqyadi ganacsiga cid gaar ah ay u xiran tahay iyo in suuqyadii ay yeeshaan dabeecad aan tartan ku dhisnayn, waxayna taasi niyad jab ku keenaysa ganacsiyada cusub ee suuqa ku soo biiri laha iyo in ganacsatadii dhexdhexaadka ahayd uu kobacoodii hakad galo. Sharciyada xiriir-maaliyadeedka ay yeelanayaan maamul-Goboleedyada hada dhismay, iyo Dawaladda Federaalka waxay saamayn ku yeelan doonaan suurtogalnimada wada xaajoodka siyaasadeed marka laga hadlayo geedi-socodka diyaarinta Dastuurka. Gaar ahaan, waxay hadda maamuladani canshuuro ka uruuriyaan dhamaan inta badan goobihi canshuuraha laga qaadi jiray, taasina waxay xadiday doorkii ay Dawaladda Federaalku wax ku kala qaybin lahayd. Sidoo kale waxaa caqabad noqonaysa Dawlad Goboleedyadu inay wareejiyaan goobaha saldhiga u ah dakhli ururintooda inta ay ka helayaan wax u damaanad qaada mas’uuliyada bixinta kharashkooda guud. Sidoo kale, Dawlada Federaalku ma ogolaan karto inay ku wada wareejiso Dawlad-Goboleedyada nidaamka maaliyadeed ilaa ay iyado mas’uuliyada goobaha saldhiga u ah canshuur uruurinta la wareegto ka dibna ay dib u qaybiso. U Sinaan la’aanta khayraadka waa sababta saldhiga u ah colaada Soomaaliya; waana in laga hadlaa marka la diyaarinayo nidaam cusub. Wax ka qabashada sinaan la’aanta waxay u baahan tahay inuu jiro dakhli ku filan oo ay qaybin karto ama maamulada kale ee uu dakhligoodu sareeyo. Astaynta xiriir-maaliyadeedka maamulada Soomaaliya ka dhexeeya waa inuu ku dhiirada wax ka qabashada caqabadahan. Haddaan la samayn xal waxay u ekaanaysa in maamuuladu ay samaystaan gidaarro ay kastamadooda ku ilaashadaan. Dhaqaalahoo saldhiga iyo kor u qaadidda kobaca Dib u habaynta hay’adaha dawlada iyo dayac-tirka kaabayaasha dhaqaale waxay wax ka tarayaan horumarinta dhaqaale ee mustaqbalka fog, laakiin taas waxay ku xiran tahay sida ay dawladu karti ugu yeelato kobcinta dakhligeeda guud. Wax ka qabashada caqabadaha ku xeeran nidaamka dhaqan dhaqaale ee Soomaaliya waa mid adag, iyado laga eegayo liidaashada hay’adaha dawliga iyo nidaamka wax lagu ilaaliyo, maaumul xumo iyo adeega bulsho oo xadidan. In dib loo habeeyo dawligu waxay qadataa 20 sano xita dalalka ay dib u habayntooda hawli ku socoto. Dawlada Federaalka iyo maamul-goboleedyada waxay ku hawlan yihin dhisida hay’adoodihi maaliyadeed oo hufan si ay u maareeyan miisaanyidahooda. Dakhli uruurinta oo canshuuraha logu kordhiyo ganacsatada waa mid ku adag dawlada si ay u kordhiso miisaaniyadeeda iyadoo mudnaanta siinaysa adeega bulsho. Sido kale, waxay maamuladu isku dayayaan in soo jiitaan soomalida aqoonta u leh inay dib u habayn ku sameeyaan Hay’adaha shaqaalaha rayidka min heer federal ilaa mid maamul iyagoo ku xisaabtamaya misaaniyadahooda. Natijooyinka ku aadan hagaajinta nolosha dadka iyo horumarinta dhaqaalaha waa u udub dhexaad Soomalia si ay u adkayso kala guurka laga guurayo coolada loona guurayo deganaansho. Soomaaliya waxay noqotay dalka shanaad ee ugu saboolsan dunida marka la eegay qofka Soomaliga dakhliga soo galay oo ahaa $435 sanadki, 2013. Markaad dib u milicsatid labadi rubuc qarni ee colaadu jirtay xiliyadan waxaa burburay kabayaashi dhaqaaalaha ama lama dayactirin iyo waliba laba jiil oo Soomaaliyeed oo aan waxbarasho helin. Waxa lagu qiyaasay 42% keliya oo da’di wax barashada gaadhay ayaa is qortay dugsiyada hoose oo ay 36% ay hablo yihiin. Dhalinyarada ayey si aan xad lahayn u saamaysay saboolinmadi iyo shaqo la’aanti waxaana ugaarsaday maleyshooyinki iyo kooxaha xagjirka ah. Da’ada u dhaxaysa 14 ila 29 jirka ayaa la rumaysan yahay in ay shaqo la’yihiin qiyaasti 67%. Waxaana lagaga bixi karaa haddi kharash badan loo qoondeeyo qaybaha arrimaha bulshada. October 2 0 1 5 | Edition No. 1 vii Diyaarinta nidaamka maaliyadeed ee ka dhaxaya dawladaha Nidaamka misaaniyadeed ee Soomaaliyadeed waa in loo asteeya (a) in loo shaqeeyo nidaam isku xiran, si loo ilaaliyo dhaqaale xoogan oo dalkoo dhan ka wada dhaxeeya, (b) diyaarin qaab wax looga qabto sinaan la’aanta ka jirta gobolada. Ujeedooyinkani waa kuwo midba midka kale kaabaya. Haddi maamuladu ayan lahayn saldhig xoogan oo dakhligoodu ka soo galo waxaa lagu caawimiyaa nidaamkan oo wax loogu soo diro (transfer) si ayan qaab khatar ah dhaqaale ugu raadin inay dakhli ku helaan. Haddi u gorgortanka siyaasadeed u hakad galo waan in juhdi la geliyaa sidii horumar looga samayn laha isu dheelitirka wixii waajibaad fulineed ah iyo helitaanka dakhligii lagu fulin lahaa hawlahaasi. Daneeyayaasha Soomaaliya waa inay u diyaar garooban sidii loo diyaarin lahaa joogtaynta gorgortanka misaaniyad kordhinta, iyo in dib looga wada xaajoodo hadba xaalada miisaaniyadeed iyo danaha maamulada iyo ta federaalka oo isbdelo ku yimaada. Suurtogal noqon mayso in heshiis joogto ah laga gaaro gorgortanka maaliyadeed waqtigan dhow. Balse waa in diirada la saara diyaarinta hay’ado wax qaban kara ee maamulada iyo dawlada federaalka kuwaaso fududeeya wada xaajoodyada hadda soo socda iyo in laga xaajoodo sidii horay loogu sii socon laha si loo gaaro heshiis kama dambays ah oo ku saabsan maaraynta maaliyadeed ee ugu dambaysay. viii S o m a l i a Econ o m ic Update • 2015 EXECUTIVE SUMMARY S omalis face a daunting development challenge of the population lives on less than $1 dollar a day. to overcome the legacy of two decades of Youth are disproportionately affected by poverty sustained conflict and fragility—but substantial and unemployment and are prey to recruitment progress is now being made. Since 1991 and the into militia or radicalized groups. About two-thirds collapse of the Siad Barre regime, Somalia has of people 14–29 are believed to be unemployed. experienced cycles of conflict and fragility that fragmented the country, undermined legitimate Diaspora remittances have played a vital role in institutions, and created widespread vulnerability. sustaining the economy and supporting household The new government that emerged following incomes. Somali’s diaspora is estimated to have the Transitional Federal Government and the sent more than $1.3 billion home in 2014—nearly Roadmap to End the Transition in 2012 inherited a twice the level of development aid ($642 million) dysfunctional economy facing high levels of poverty and five times the level of humanitarian aid ($253 and inequality, a youth bulge, high unemployment, million). Remittances account for about 24 percent and large infrastructure gaps. Against a backdrop of GDP, far outweighing government revenues, of political progress marked by the emergence of and help to support livelihoods for an estimated new Federal Member States (FMSs) within the 40 percent of the population. Remittances help new constitutional framework and continued finance Somalia’s large trade deficit of more than insecurity, the Federal Government of Somalia 50 percent of GDP, paying for about 40 percent of (FGS) has embarked on a process of structural, total imports. legislative, and institutional reform. The economy is starting to respond: Somalia’s growing isolation from Somalis are returning from abroad the global financial system and to invest, shops are opening, and Even though economic the perceived exposure of money the property market is booming. activities in various transfer businesses (MTBs) to sectors are recovering, terrorist financing jeopardizes Improving human and economic Somalia remains one of this crucial source of finance. development outcomes is central if the poorest countries in The phenomenon of financial Somalia is to sustain its transition the world “derisking” following enforcement from conflict to stability. With an actions against some international estimated per capita GDP of $435 in 2013, Somalia banks has affected Somali MTBs in Australia, the is the fifth poorest country in the world, reflecting United Kingdom, and the United States, prompting two decades of conflict. During this time, physical new initiatives by the FGS and its partners to infrastructure was destroyed or not maintained, redouble their efforts to address domestic and two generations of Somalis went without regulatory gaps. The pending passage of the education. Only 42 percent of school-age children anti–money laundering and countering terrorist are estimated to be enrolled in primary school, of financing bill is a critical priority if these initiatives which only 36 percent are girls. Infant mortality are to become fully functional. rates of about 92 per 1,000 live births and under- five mortality rates of 150 per 1,000 live births are Somalia’s vibrant private sector may reach the higher than Sub-Saharan averages. Somalia’s very limits of its potential if further reforms to the high fertility rate (6.2 births per woman) mean that enabling environment, particularly security and the country is young, with more than 70 percent of access to finance, are not pursued. Throughout the population under 30. An estimated 43 percent the years of conflict and fragility, Somalia’s private October 2 0 1 5 | Edition No. 1 ix Executive Summary sector helped maintain economic activity. Some Unpacking the fiscal architecture and five entrepreneurs flourished by providing money key principles T transfer, transport, and telecommunications he politics of state formation requires a parallel services. However, in the absence of appropriate effort to establish functional intergovernmental sector regulation, the emergence of monopolistic fiscal relations based on economic solidarity. or anticompetitive behavior may be discouraging The need for progress is increasingly apparent: new businesses from entering the market and The FGS, Puntland, and the Interim Jubbaland small and medium-size business from growing. The Administration are dependent on port revenues. lack of financial intermediation has constrained The Interim South West Administration, the business growth, as businesses must rely on Galmudug Interim Administration, and the their own funds or borrow from friends or family remaining central state (expected to form this year) members to expand—a constraint that favors the will not have access to a major port from which to rich. Access to affordable and predictable power draw revenues. Significant fiscal inequity across sources is also a major constraint on business—a states seems likely to emerge. Without access subject that will be covered in more detail in future to other revenues, poorer states are resorting to editions of this series. erecting domestic trade barriers, with damaging effects for the The rehabilitation of public broader economy. In such a context, institutions that can generate Mobilization of some degree of fiscal consolidation public goods and services will be additional business through an intergovernmental fiscal an enabler of long-term economic turnover taxes is a framework is necessary, but forging development, but it will rely critical priority if the such a framework requires political on increasing the state’s fiscal state is to increase agreement, state capacity, and fiscal capacity. Addressing Somalia’s socioeconomic challenges is its fiscal capacity and space. A durable intergovernmental particularly difficult given the extend services to the fiscal architecture will involve population the distribution of spending legacy of weak institutions and responsibilities, the assignment of regulatory frameworks, weak governance, and revenue-raising powers, and a system of transfers limited public services delivery. The reform of that can address inequality across regions. Such public institutions takes time—an estimated 20 arrangements are complex. In other countries they years even for the fastest-reforming countries. The have emerged not through formal agreement but FGS and subnational governments are prioritizing through an incremental process overseen by a set the establishment of credible public finance of flexible institutions. institutions for macro-fiscal management. The federal budget represents a very small share of GDP Unpacking the elements of fiscal architecture (3 percent), most of it going to salaries. Revenues into functions and spending responsibilities are growing year on year, but their sole source is and the tax and transfer system may help trade taxes, which are likely to be distortionary. focus stakeholders on the fiscal implications of Mobilization of additional business turnover taxes political bargains. Intergovernmental financing is a critical priority if the state is to increase its fiscal arrangements operate as a system; decisions on capacity and extend services to the population. At some components thus circumscribe the design the same time, the government is trying to attract options for other components. Five principles new talent into reformed civil service institutions maybe useful to inform the development of the at the federal and subfederal levels, in line with new intergovernmental architecture. fiscal space. x S o m a l i a Econ o m ic Update • 2015 Executive Summary 1. A dynamic, organic approach should be 4. Resources should be distributed in an grounded in cooperative intergovernmental equitable and inclusive manner. Resource institutions. In all countries, intergovernmental competition and unequal access to limited fiscal arrangements often evolve over time. Such resources prolonged the conflict in Somalia. evolution is particularly likely in fragile contexts, Unequal access to resources is also likely to where the fiscal landscape and balance of trigger the movement of people across regions, interests among stakeholders is likely to change. as insecurity has already prompted migration to Given the dynamic conditions, an incremental urban areas. Addressing inequality will require approach, under which fiscal design evolves a significant redistribution of revenues among through successive agreements over time, may FMSs. This redistribution could be achieved be more realistic. The immediate focus should through sharing arrangements agreed upon therefore be on nurturing intergovernmental by the states or through transfers from federal mechanisms through which these agreements to state governments. If the transfers are the can be negotiated on an ongoing basis. preferred option, the FGS will need additional 2. Intergovernmental financing arrangements revenues—either by quickly mobilizing work best as a coherent whole. Decisions on additional revenue bases or by transferring the design of one component will affect what is revenue bases from states to the center. feasible for other components. Fundamentally, 5. The assignment of functions should aim at resources and cost responsibilities should be efficiency. The more functions lower levels matched. A degree of political expediency or of government are responsible for, the more compromise is inevitable and indeed important, responsive services will be to the needs of but some regard for how those decisions affect citizens. But Somalia is a poor country with the overall balance in the system should be limited capacity. At least in the short term, maintained. it does not make sense to have 3. Fiscal arrangements should multiple organs of government support a strong and unified developing the capacity to do the economic space. Given the small Given the small size of same things. size of its economy, Somalia its economy, Somalia cannot afford to put obstacles in cannot afford to put This is the first Economic Update for the way of the free movement obstacles in the way Somalia since the 2005 World Bank of goods, services, and labor. of the free movement Country Economic Memorandum First principles suggest that of goods, services, for Somalia. The long conflict made mobile bases should be taxed and labor monitoring of economic and social at the national level, but doing socould data nearly impossible since the late 1980s. With leave states more dependent on the central the relative stability of the past few years, new data government, which may not be politically have become available. The update is divided into acceptable. Considerations of efficiency suggest two parts. Part I presents information on the social, harmonization of tax administration functions, economic, and governance status of Somalia. Part even if not of taxing powers; they also suggest II focuses on intergovernmental fiscal relations. that there may be some asymmetry in state functions, at least in the interim, given that states have highly variable levels of capacity. October 2 0 1 5 | Edition No. 1 xi NUXUR URURIN H orumarka Soomaaliya wuxu wajahaya caqabado ba’an si u uga gudbo raadadki ay reebeen nuglaanshaha iyo colaada mudadi burburay kabayaashii dhaqaalaha ama aan la dayactirin, iyo waliba laba jiil oo Soomaaliya ayaan waxbarasho helin. Boqolkiiba 42 caruurta da’ada labaatanka sanadood ka badnayd - laakiin hadda waxbarashada gaartay ayaa Dugsiyada hoose la waxaa la gaaray xooga horumar ah. qoray oo ay boqolkiiba 36 gabdho yihiin. Heerka dhimashada caruurta 1000 ki caruura oo ay Tan iyo 1991ki iyo ka dib burburki Dawladdii da’doodu ka yartahay shan sano ee dhalata waxaa Maxamed Siyaad Barre, Soomaaliya waxay waayo- geeriyoota 92 , waxayna heerka dhimashada 150 arag u noqotay colaad iyo nuglaansho isdaba jooga ka sareeyaan 1000 ki caruura ee dhalata dalalka taaso dalkii kala qoqob ku riday, waxaana meesha ka hooseeya Saxaara Galbeedka Afrika. Soomaliya ka baxay sharciyadi ay lahaayeen hay’adahi dawliga heerka taranteeda aad buu u sareeya oo (Qofki ahaa iyo inay abuurantay taag darnaan baahsan. Dumara waxay dhasha 6.2 ) taa macnaheedu Dawladan cusub ee Federaalka waxay timi ka dib waxa weeye Soomaaliya waa dal curdin ah , halka marki Dawladdii hore ee ku meel gaarka ahayd boqolkiiba 70 ay dadku da’doodu ka yar tahay 30 u waqtigeedi dhamaaday lagagana baxay geedi- jir, Waxaa kaloo lagu qiyaasay boqolkii 43 dadka socodki la magac baxay ( Roadmap ) sanadki, nolol maalmeedkoodu inay ka yar tahay wax 2012 ki, waxayna ka dhaxashay dhaqaale aan dhan hal doolar maalintii. Dhalinyaradu waxaa shaqaynaynin oo ay soo wajahday saboolnimo iyo aad u saameeyey saboolnimada iyo shaqo la’aan sinaan la,aan heerarkoodu sareeyo, dhalinyarro taaso sababtay inay qortaan Maleeshooyinki iyo shaqo la,aani hayso iyo kabayaashi dhaqaalaha kuwa xagjirkaba iyagoo markoodi horaba laba oo gaabis balaaran ku yimi. Inkasto xaladahaasi dalool saddex dalool 14 – 29 la aaminsanaa inay o dhan jiraan, haddana yagleelida maamul- shaqo la’aayeen. goboleedada cusub waxay calaamad horumar siyaasadeed u noqotay in la raaco sida u qabo Lacagaha ay Qurbo joogta soo diraan waxay Dastuurka cusub iyado ay jirto nabadgelyo daradii, door muhiim ah ka qaateen tageeridda dakhliga waxay kallo Dawlada Federaalka dejisay hab lagu qoysaska iyo joogtaynta dhaqaalaha. horumarinayo qaab-dhismeedka, shuruucda iyo dib u egis lagu sameeyo hay’adaha dawliga. Dhaqaalihi Soomaalida Qurbo joogta ah lacagaha ay dalka wuxuu bilaabaya inu ka jawaabo: In Soomaalidi ay usoo diraan waxaa lagu qiyaasay in ka badan $ ki1.3 dibedaha ka so labanayaan si ay dalka maalgashi bilyan sanadki, 2014 – taaso ku laba jibaarantay ugu sameeyaan, waxaa furmaya ganacsi cusub iyo in lacagta deeqda horumarineed ku baxady ($642 qimihii hantida ma guurtada ahayd uu sare u kacayo. milyan) iyo shan jibaar heerka lacagta gargaarka aadaminimo iyana ku baxday ($253 milyan). Natijooyinka ku saabsan hagaajinta nolosha dadka Xawilaaduhu waxay dakhliga guud ee dalka ka iyo horumarinta dhaqaalaha waa u tiir dhexaad yihiin boqolkiiba 24 taaso in badan ka miisaan Soomaaliya si ay u adkayso kala guurka oo laga wayn dakhliga dawladda, waxay kalo xawaalduhu guurayo colaada loona guurayo degenaansho. dadweynaha ka sacidaan xagga nolosha qoysaska boqolkiba 40. Xawaaladaha waxay taageero Soomaaliya waa dalka shanaad ee dunida ugu maaliyadeed ka geystaan faraqa balaaran ee ka saboolsan iyado lagu qiyaasay in qofka Soomaaliga jira ganacsiga Soomalida boqolkiiba 50 ee GDP, ay ku soo beegmayso $435 dakhliga guud ee dalka waxay kalo bixinayeen boqolkiiba 40waxa dalka u sanadkii, 2013, markaynu dib u milicsano labadi soo dega. rubuc qarni ay colaadu jirtay. Waxaana xiliyadan xii S o m a l i a Econ o m ic Update • 2015 Go’doonsanaanta ay Soomaaliya kaga jirto ehelkooda – dabranaantaas waxunba ka faa’idaya Nidaamka Lacageed ee dunida iyo tuhunka ah in kuwa tujaarta ah. Waxa kalo ganacsiga caqabad Xawaaladaha (MTBs) ay argagisaxida lacagaha u weyn ku ah helitaanka iyo awoodi maaliyadeed gudbiyaan ayaacuryaamisay lacagahi dibeda laga ee lagu heli lahaa dabka korontada- waana maado soo diraayey. aynu uga hadali doono si faahfaahsan mustaqbalka qoraalada cutubyadeena dambe. Waa ifafaale cusub, xanibaadaha lagu soo rogay xawaaladaha iyo talaabooyinkii sharciyadeed oo Dayactirada dhismayaasha hay’adaha dawliga ay adeegsadeen qaar ka mid Bangiyo Caalamiya waxay wax ka tarayaan adeega bulsho iyo taaso saamayn ku yeelatay Xawaladihii Soomaalida kabayaasha kuwaaso suurtogal ka dhigaya eek a jiray Australiya, Boqortooyada Ingriiska, horumarka dhaqaale ee mustaqbalka, laakiin iyo Maraykanka , waxay dhiirgelisay in Dawlada waxay ku xirnaan doonta awooda miisaaniydeed Federaalka iyo bah-wadaagteeda ay hal abuuraan ee dawlada. inay dardargeliyaan wax ka qabashada xeerarka maaliyadeed ee iyo dalka waxyaabaha aan u Wax ka qabashada caqabadaha ku xeeran habka qabsoomin. Hindise sharciyeedyada la xiriira dhaqan- dhaqaale ee Soomaaliya waa kuwo lacagaha sida sharci darada laysu daba mariyo iyo adag gaar ahaan waxyaabihi ay dhaxashay ka hortaga lacagaha loo xawilo argagixisada waxay sida, hay’ado taag daran iyo qaababki wax lagu noqon lahayd talaabo mudnaanteeda leh haddi la ilaalinayey, maamul xumo iyo adeeg bulsho oo dhaqan geliyo hindiseyaashas. kooban. In dib loo eega hay’adaha dawliga ah waqti bay qaadanaysa – Dawladda Federaalka Wax-so-saarka gaarka loo leeyahay ee Soomaaliyeed iyo dawlad goboleedyadu waxay Soomaaliyeed ee kobcaya wuxuu gaari lahaa dhisanayaan nidaam maaliyadeed oo wax ku ool ah meel sare haddii dib u eegis lagu samayn lahaa kaaso maareeynaya miisaaniyada guud ee dalka. xaaladaha u saamaxaya koriimada gaar ahaan Qoondada miisaaniyada Federaalka wax yar bay ka nabadgelyada iyo helitaanka maaliyadeed- weli tahay dakhliga guud GDP (Boqolkiiba 3) inta badan ma’aysan hanan. waxay ku baxda mushahar shaqaale. Dakhligu wuu kobcaya sanadba sanadka ka dambeeya, Tan iyo intii colaada iyo tabardaridu lagu jiray wax- laakin wuxu ka soo gala keliya canshuuraha so-saarka gaarka loo leeyahay ee Soomaaliyeed ganacsiga iyado xad dhaaf ah. Ururinta canshuurta wuxuu si waday hawlihii dhaqaale ee dalka. macaashul macaashka ee laga qaadayo Qaar ka mid ah ganacsatada yaryar waxay ka ganacsatada waa mid aad muhiim u ah waa haddi macaasheen dirida lacagaha xawaalada, gaadiidka ay dawladu mudnaanteedu ay tahay in kordhiso iyo adeegyada isgaarsiinta. Sidaa darted, misaaniyadeeda si ay adeeg bulsho u qabato. maqnaashaha xeerarkii wax kala xadidi lahaa ayaa Sidoo kale, haddi ay dawladu ugagoleedahay waxay sababtay inay soo ifbaxaan kuwo aan cidina inay ku soo jiidato Soomaali aqoon leh si loogu la tartamin (Monopolistic) oo aan ogolayn tartanka meeleeyo hay’adihii dib u eegistu lagu sameeyey xorta ah waxayna niyad jab ku riday ganacsatadii min federal ilaa dawlad-goboleedyada iyadoo lagu yaryareed inay suuqaba soo galaan iyo inay kobcaan xisaabtamayo misaaniyad sanadeedka. kuwi meel dhexaadka ahaa. Maqnaanshaha ay hay’addi maaliyadeed oo wax kala nidaamin Siyaasada lagu dhisayo dawlad-goboleedyada lahayd ay meesha ka maqan tahay waxaa hakad ku waxay u baahan tahay in dedaal la mid ah dhacayaa in ganacsigii uu koro, sida hada wax ku lagu bixiyo samaynta nidaam miisaaniyadeed socdaan waa ganacsatadii oo lacagteedi is kharash oo ka dhaxeeya dawladaha taaso ku dhisan garaysa ama amaah u doonata saaxibadood ama dhaqaale wadaag. October 2 0 1 5 | Edition No. 1 xiii Baahida loo qabo in horumar la gaadho waa mid 1. Waa inay hay’adaha ka dhaxaynaya dawladaha cad oo muuqda. Dawladda Federalka, dawlad loo dhisa qaab iskaashi uu ka dhaxeeyo, goboleedyada Puntland iyo Jubbaland dakhligoodu firfircoon oo isku wada xiran. Dalalko idil, wuxuu ku xiran yahay dekedaha. Maamulada nidaamka miisaniyaeed ee dawladaha ka ku meel gaarka ahi ee Koonfur Galbeed iyo kan dhaxeeya badanaaba si tartib tartiib ah ayu u Galmudug iyo ka dhimane ee maamulka bartamaha horumara waana xaalad ugaara dalalka colaada (kaaso la filaayo sanadkan) iyagu ma laha dekedo ka soo doogaya, waana meel la doonayo in waaween uu dakhli ka so gallo. Waxaa dhici karta loo sameeyo miisaaniyad wanaagsan iyo in la sinaan la’aan xagga maaliyadeed inay ka soo baxdo isu-dheelitiro danaha ay daneeyayaashu (bah- maamulada. Haddayan lahayn ilo kale oo dakhli ka wadaagta) leeyihiin waana tan la doonayo in soo gallo maamulada aan haysan tabar dhaqaale isbedel lagu sameeyo. Marka la helo hay’addo oo badan waxay miciin bididoonan inay gidaarro u firfircoon oo si qaabaysan oo heshiisyo u gaaraya markaasaa xaqiiqada loo dhawaanayaa. dhistaan ganacsiga isaga kala goosha dalka taaso Diiradda hore waa in la saara sidii loo horumarin keeni karta dhibaato saamaynteeda ku yeelata lahaa nidaamka ka dhaxeeya dawladaha ee dhaqaalihi guud ee dalka. Xaaladan oo kale waxay wada xaajoodka xagga heshiisyadda uu u noqon u baahan tahay in laysu taago oo lala habeeyo lahaa mid sal leh oo si socda. miisaaniyadaha maamuladani waana lagamamaarn, laakiin farsamada noocani waxay u baahan tahay 2. Nidaamka maaliyadeed ee ka dhaxeeya marka hore heshiis siyaasadeed, kartida maamulka dawladaha wuxuu si wanaagsan u shaqayn iyo farqiga ka jira miisaaniyadooda. Qaabaynta karaa markay isku wada xiran yihiin miisaaniyadaha maamulada oo waara waxay la dhamaantood. falgalaysa mus’uuliyada qaybinta kharashaadka, cidda loo xilsaarayo awoodaha dakhli ururinta iyo Go’aanada wax loogu qoondaynayo qayb waxaa habka wax loogu wareejinayo si wax loogu qabto surtogal ah inu samayn ku yesho qayb kale, gobolada ay sinaan la’aantu ka jirto. Habkan oo asal ahaan dhaqaalaha la haysto iyo mus’uulida kale waa mid murugsan, wadamada kale oo Sida kharashka waa inay isku jaan go’an yihiin, ilaa Soomaaliya soo maray kagama ay soo gubin hab heer hadday duruuf siyaasadeed timado ama heshiis la wada galay balse waxay kaga gudbeen is-afgarad la gaarro waa lama huraan waana hab geedi-socoda oo wax kordhin ah iyado ay muhiim. Laakiin qaarba waxay tixgelinayaan dusha kala socdaan hay’ado loo dhisay. sida ay go’aanada oo kale ay saamayn ugu yeelan karaan nidaamka xisaab xirka iyana waa Kala saaridda qodobada asaaska u ah naqshada in la ilaaliya. miisaaniyadeed loona kala qaado- waajibaadka, cidda mas’uulka ka ah kharashaadka iyo 3. Nidaamyada misaaniyadeed waa inu tageersan canshuurta iyo habka lacag wareejinta taaso ka yahay dhaqaale midaysan oo xooggan. caawinaysa daneeyayaasha in gorgortankooda siyaasadeed saamayn ku yeelato miisaaniyada. Soomaaliya iyado dhaqaalaheeduba uu aad u yar yahay ma awoodo inay caqabado hordhigto Nidaamka maaliyadeed ee maamuladda ka isu socodka badeecadaha inay si xor ah isaga kala dhexeeya waa in uu u shaqeeya hab la yaqaan gooshaan, adeegyada iyo shaqada. Mabaad’ida go’aanada laga qaadanayo qaybo waa in loo dejiya kowaad waxay ku talinaysa alaabada ama in qaybo kale lagu wareejinkarro. Shan mabaadi’ badeecadaha guur guura (mobile bases) waxaa baa faa’ido u yeelan karta in lagu wargeliyo marka laga canshuuraya heer qaran, laakiin hadday lo horumarinyo naqshada cusub ee dawlada ka taasi dhacdo waxay u ekaanaysa in dawlada dhaxaynaysa. goboleedyadu ay ku xirnaadan dawladi dhexe xiv S o m a l i a Econ o m ic Update • 2015 taaso noqonaysa siyaasad ahaan midaan la qaybsigan waxaa lagu gaari karaa hab lagu aqbli karin. Waxaa aad u shaqaynaysa in laysu heshiiyey oo wax lagu qaybsado oo lala galo soo dhaweeyo maamulida canshuuraha waana maamulada ama ay dawlada federaalku ku so talo tixgelinteeda mudan xita hadaysan ahayn wareejiso dawlad goboleedyada. Haddi wax soo kuwii awooda u lahaa canshuur qaadista, waxay wareejintu laysku raaco, dawlada federaalku kaloo talo ku soo jeediyen in ay dawladu laba waxay u baahanaysa dakhli dheeri ah-laba dhinacba u kala shaqayso ugu yaraan xiliga midood ama waxaa si dhakhsi ah dakhliga ku meel gaarka si ay dawlad goboleedyadu dheeriga ah looga soo ururinaya saldhigyada karti ugu yeeshaan ka gudbida maraaxilka kala dakhliga ama waxa laga soo diraya saldhigyada duwan ee ay marayaan. dakhliga ee dawlad goboleedyada. 4. Khayraadka waa in si caddaalad ah loo qaybiya 5. Waajibaadyada la qaybsaday waa inay loona dhan yahay hufnaani ku dheehan tahay. Ku tartanka kheyraadka iyo u sinaan la’aanta Inta ay dawladu laamaheeda hoose ay si helitaanka kheyraadka kooban waa wixii si daba mas’uulid leh ay u shaqaynayaan, ayaa wax dheereyey colaada Soomaaliya, waxay kalo u badan oo baahiya adeega bulshada loo sinaan la’aanta keentay dadko si baahsan isugu qabanaya muwaadininta, walo Soomaaliya kala gooshay goboladi, nabadgelyo daradii ay tahay dal sabool ah oo ay kartideeda iyo in dadkii soo hayaamay ay magaalooyinka waxqabad ay xididan tahay. Ugu yaraan buux dhaafiyeen. Wax ka qabashada sinaan waqtiga dhaw macne samayn mayso inay la’aanta waxay u baahan tahay in ahmiyad la dawladu yeelato hay’ado badan oo hawlo isku siiyo qaybinta dakhliga loona qaybiyo dawlada wada mid ah fuliya. goboleedyada iyo federaalka (FMSs). Wax October 2 0 1 5 | Edition No. 1 xv PART I: Social, Economic, and Governance Status 1. Context and Objectives T wo and a half decades of conflict, concentrated mainly in southern Somalia, destroyed much of the country’s governance structure, economic Meanwhile, in 1998, in north-eastern Somalia, Puntland proclaim edits autonomy. It built administrative structures and a system of self- infrastructure, and institutions. Following government based on democratic norms. As this the collapse of the Siad Barre government, report documents in its Special Focus Section, in January 1991, Somalia experienced deep Puntland’s constitution allows the government cycles of internal conflict that fragmented the to perform all the functions of a state, including country, undermined legitimate institutions, and revenue mobilization to support basic services, created widespread vulnerability. The prolonged including security. Puntland is the prototype for conflict transformed the economy, with many Somalia’s new FMSs. economic and political actors facing incentives to perpetuate conflict in order to sustain and After a turbulent period of transitional divert associated revenue streams. governments, in 2012 a new Federal Government emerged in Mogadishu within the framework During the conflict, some parts of Somalia were established by the Provisional Constitution. A able to attain relative stability. When the central successful political transition was matched by government collapsed, in 1991, it lost its authority parallel progress on the security front. With the in many parts of the country. In this vacuum, help of the 22,000-strong African Union Mission to the regional states of Puntland and Somaliland Somalia (AMISOM) force, Somali forces, including emerged. They established basic political and aligned clan militia, liberated parts of southern administrative institutions, provided social and Somalia, including strategic urban centers, from educational services, facilitated an active civil Al Shabaab. Though weakened, Al Shabaab retains society, supported a growing private sector, and significant terrorist capacity and has focused on maintained security. asymmetric attacks targeting government and international targets, including in Kenya. While In May 1991, the north-western regions of Somalia southern Somalia is still experiencing active (encompassing the former British Somaliland) conflict, Somaliland and Puntland have remained unilaterally declared themselves independent relatively peaceful, although Al-Shabaab infiltration of the rest of Somalia. Within years Somaliland into Puntland’s mountainous areas has been succeeded in achieving reconciliation among its growing. Following the political transition in 2012 clans and establishing the basic apparatus of a the international community agreed to the Somali functioning state, including new security forces and Compact with the FGS, based on the principles of a taxation system.1 Successive electoral processes the Busan New Deal.2 The Compact, which was have seen the emergence of political parties, an agreed to at the Brussels Conference in September opposition, and a tradition of peaceful transfers 2013, provides an organizing framework for the of power. The private sector plays a key role in delivery of assistance to Somalia in line with Somaliland, including providing the government national priorities and increasingly delivered by with both political backing and the funds needed Somali institutions. for main state-building initiatives. 1 Somaliland’s claim to independence from Somalia has not been recognized. The territory therefore remains legally a region of Somalia. Under the New Deal Compact for Somalia, the international community agreed to a “Special Arrangement for Somaliland,” recognizing its special circumstances. Political talks between Somalia and Somaliland are ongoing. 2 The New Deal for Engagement in Fragile States was agreed to at the Fourth High-Level Forum on Aid Effectiveness in Busan, the Republic of Korea, in 2011. It is an agreement between fragile and conflict-affected states, international development partners, and civil society to improve current development policy and practice in fragile states. 2 S o m a l i a Econ o m ic Update • 2015 1. Context and Objectives The Provisional Constitution establishes federalism regulate how the FGS and FMSs will work together as the basis of Somalia’s new governance are taking place and are expected to be finalized framework, providing for the emergence of by 2016. Once formed, FMSs will (a) become new FMSs.3 Under this arrangement, the federal counterparts for the Federal Government in the government and the FMSs are to share power and constitutional negotiations as representatives deliver services to benefit all their citizens in a of the wishes and aspiration of the people they cooperative manner. The Provisional Constitution represent; (b) allow the formation of the Upper left many areas open for further negotiations, Chamber of the Parliament (Senate), which will be particularly questions relating to allocation of law- key to ratifying agreements; and (c) allow for the making, revenue-raising, and spending powers. formation of legitimate constitutionally required Negotiations over a final constitution that would commissions. 2. Social and Poverty Status S omalia is one of the world’s poorest countries; extreme income poverty is prevalent throughout the country. Based on the findings of population in Mogadishu live in significantly larger households. Among these people, 38 percent live in a household headed by a woman, and only 15 the 2013 Somaliland Household and Enterprise percent have. Half of household in IDP camps drink Survey, a household needs So.Sh. 207,300 (about untreated water, 90 percent of household heads $1.00) per adult per day in urban Somaliland and never attended school, and only one out of five So. Sh180,900 (about $0.90) per adult per day in children currently attends school. rural Somaliland to meet basic need. Households living on less than this are considered poor, which The World Bank will undertake critical surveys to results in poverty rates of 37 percent in rural plug the data gaps. The innovative approach to Somaliland and 30 percent in urban Somaliland. collect critical socioeconomic data from households Only 26 percent of 15- to 55-year-olds in rural will be scaled up in October and November 2015 Somaliland and 33 percent in urban Somaliland are across Somalia, including in Mogadishu and urban employed (wage or self-employment). and rural areas in Somaliland and Puntland.4 These data will be critical to improve the understanding People living in camps for internally displaced of the size and structure of the Somali economy, persons (IDPs) are significantly poorer than update the consumer price index, and estimate the people who live in residential neighborhoods extent of poverty and inequality in the country. The of Mogadishu. The Mogadishu High Frequency data will also inform the formulation and setting Survey was piloted in October and November 2014. of priorities in the National Development Plan and Data from the pilot suggest that, compared with help rebuild statistical capacity and infrastructure the rest of the city, the poorest 40 percent of the in Somalia. 3 The Interim Jubba Administration was created in 2013 as a result of agreement between the Federal Government and Jubba delegations. In 2014, the Interim Southwest Administration was created, through a process supported by the Federal Government. In July 2015, the Interim Galmudug Administration was formed. The process of achieving reconciliation, electing legislative assemblies, and establishing functioning regional governments is still ongoing. 4 The Somalia High Frequency Survey is highly innovative. It leverages private sector know-how and open-source applications to collect high-quality data under difficult field conditions. In fragile states and areas beset by conflict and insecurity, safety and risk considerations limit the time available for face-to-face interviews. These concerns make it difficult to supervise the quality of data collection in the field and prevent administering detailed household consumption recall modules and using traditional poverty and inequality measurement methods. The Somalia High Frequency Survey embodies a number of innovations to overcome these constraints. It provides the authorities with a new approach to collect the data required to estimate a reliable poverty profile of the population in such a context. October 2 0 1 5 | Edition No. 1 3 2. Social and Poverty Status 2.1 A Young and Rapidly Growing Population including areas newly recovered from Al Shabaab. I Sustainable job creation is a central challenge for n 2014 the United Nations Population Fund’s Somalia’s leadership and its international partners. Population Estimate Survey (PESS) produced the first population estimates for Somalia in many 2.2 Weak Social Indicators years. It estimated Somalia’s total population at 12.3 million in 2013 (Figure 2.1, panel a.). It is important to note that these results were widely contested in Somalia. The population estimate C onflict, poverty, and limited access to health care are responsible for very weak health outcomes. High mortality rates are driven by reflects an annual average population growth high death rates in the early stages of life. In 2012 rate of about 2.9 percent between 1990 and infant mortality was estimated at 92 per 1,000 2013, driven by high fertility rates of 6.2 births live births, and under-five mortality was 150, far per woman. Life expectancy is improving after a in excess of the Sub-Saharan average (Table 2.1). decline during the war period, reaching 55 years in Maternal mortality was 850 deaths per 100,000 2012 (Figure 2.1, panel b), slightly lower than the live births. These rates have changed only slightly Sub-Saharan Africa average of 56. since 1970, despite a functioning government until the early 1990s. The civil war reduced these rates. Somalia’s very high fertility rates mean that the In 1991 and 1992,crude mortality rates surpassed country is young, with more than 70 percent of those in Ethiopia during the famine of 1984–85. the population under the age of 30. About half the Access to an improved water source and sanitation female population is of child-bearing age (15–49). remains below the Sub-Saharan average, with just Therefore population growth will remain strong for 36 percent of Puntland’s rural population and 61 many years to come. Poverty and unemployment percent of its urban population having access to disproportionately affect young people: about improved water resources. Access to improved two-thirds of Somalis 14–29 year unemployed. water source in Somaliland remains an even greater Unemployment leaves youth vulnerable to challenge, with only 3 percent of households in recruitment by militia and radical groups and rural areas obtaining water from improved sources can undermine efforts to stabilize the country, compared with about 47 percent in urban areas.6 Figure 2.1: Both the size of the population and life expectancy have been rising in Somalia a. Distribution of population, 2013 b. Life expectancy, 1960-2012 60 Displaced 50 9% 40 Years Urban 30 Nomadic 42% 26% 20 10 Rural 23% 0 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Source: World Development Indicators (2015) and UNFPA (2014) estimates 6 World Bank (2015): Somaliland Poverty Profile and Overview of Living Conditions. 7 UNICEF (2011): Somalia Multi‐Cluster Survey. 4 S o m a l i a Econ o m ic Update • 2015 2. Social and Poverty Status Table 2.1: Social indicators in Somalia Sub-Saharan Indicator Somalia Africa Life expectancy at birth, 2012 (years) 55 56 Mortality rate, 2012 (per 1,000 live births) Infant 92 63 Under five 150 96 Maternal mortality, 2012 (per 100,000 live births, 2013) 850 — Access to improved sanitation, 2011 (percent) 23 30 Access to improved water source, 2011 (percent) 32 64 Gross primary school enrollment, 2007 (percent) 29.2 — Gross secondary school enrollment, 2007(percent) 7.3 — Source: World Development Indicators 2015. Note: — Not available. Somalia’s health care system was wiped out These statistics are particularly worrisome given during the conflict and remains weak today. evidence that for every extra year of education Most hospitals and health centers face equipment young women become literate child mortality shortages, have poor infrastructure and weak decreases by 9.5 percent. management capacity, and depend on donor funding or out-of-pocket patient expenditure for Despite improvements in recent years, school their functioning. As a result, access is particularly enrollment in Somalia remains low. Only 42 limited for the poor. percent of school-age children are enrolled in primary school, of which only 36 percent are girls. Literacy rates are low, especially among women UNICEF estimates the number of out‐of‐school 15–24. Ninety percent of all schools were children and youth (people 6–18) at 4.4–5.9 destroyed during the war. With no functioning million. Less than 8 percent of secondary school– public education system, two generations of age children attend secondary school. Overall, 80 Somali children missed out on education. As a percent of school-age children in Somalia do not result, adult literacy in Somalia is just 38 percent, go to school. Children who do attend school face one of the lowest rates in the world. The rate of many obstacles, including inadequate facilities, literacy among women 15–24 is just 44 percent a shortage of qualified teachers, inadequate in Somaliland and 37 percent in Puntland. In both textbooks, lack of a standardized curriculum, and regions, the lowest literacy rates are in rural areas. gender disparity in enrollment. October 2 0 1 5 | Edition No. 1 5 6 S o m a l i a Econ o m ic Update • 2015 II. Special Focus: Agricultural Sector Risk Assessment The State of SOMALIA’S Economy October 2 0 1 5 | Edition No. 1 7 3. The State of the Economy 3.1 Real Sector GDP per capita).The recent estimate of Somaliland’s T GDP by the World Bank put it at $1.6 billion in 2012. he national accounts data for Somalia are Estimates by the authorities in Puntland estimate outdated; only very preliminary estimates its GDP at $1.3 billion in 2010. of GDP are available. Comprehensive official statistics for Somalia, including national accounts, Somalia’s GDP is dominated by private exists through 1990. In 2002 the United Nations consumption and imports (Figure 3.3). Household Development Programme (UNDP) estimated consumption, financed by remittances, was household per capita income at $226. In 2014 the International Monetary Fund (IMF) and the equivalent to more than 100 percent of Somalia’s World Bank produced a set of preliminary national nominal GDP in 2014, with food and beverages accounts. All of these data should be interpreted accounting for about 60 percent of the total. with caution, given the difficult circumstances in Nonfood goods (cleaning products, medication, which they were collected. paper and paper products, office supplies, and other nondurables) accounted for about 34 Somalia’s GDP in 2013 was estimated at about percent of the total consumption. Net investments $5.4 billion. In current dollar terms, Somalia’s accounted for only 8 percent of GDP. Exports were economy is larger than the economies of the equivalent to about 14 percent of GDP, while Central African Republic, Djibouti, Burundi, Eritrea, imports accounted for more than two-thirds of and Malawi (Figure 3.1). Out of 46 Sub-Saharan GDP. The large trade deficit was financed mainly by African countries, Somalia’s economy ranks 16th remittances and international aid. from bottom in terms of size. Total GDP estimates imply a per capita GDP of $435, making Somalia the Consumption was already the key driver of fifth-poorest country in the world (after Malawi, the economy in the prewar period, accounting Burundi, the Central African Republic, and Niger) for almost 98 percent of GDP on average in the (Figure 3.2). Somalia’s per capita income is 20– period 1985–90 (Figure 3). The situation is similar 40 percent higher than GDP per capita, because in Somaliland and Puntland, where the share of massive inflows of remittances allow households household consumption is equivalent to 130 and to top up own-generated income (used to measure 112 percent of GDP, respectively; government Figure 3.2: Somalia’s GDP per capita is the 5th lowest Figure 3.1: Somalia’s GDP amongst the lowest in the region in the World GDP in selected African countries, 2013 GDP per capita in selected African countries, 2013 60 55.2 1,800 1668 50 47.5 1,600 Billions of US dollars 1,400 40 1245 1,200 US dollars 30 1,000 800 20 600 505 544 435 7.4 415 10 400 333 3.7 5.4 267 2.7 3.4 226 1.5 1.5 200 0 Central Djibouti Burundi Eriteria Malawi Somalia Niger Ethiopia Kenya 0 African Malawi Burundi Central Niger Somalia Ethiopia Eriteria Kenya Djibouti Rep. African Rep. Source: World Development Indicators 2015 and World Bank and IMF staff estimates Source: World Development Indicators 2015 and World Bank and IMF staff estimates 2014. 2014. 8 S o m a l i a Econ o m ic Update • 2015 3. The State of the Economy Figure 3.3: Somalia economy remains consumption driven a. Contribution to GDP, 1985-1990 b. Contribution to GDP, 2014 120 150 132 100 98 130 110 80 90 60 Percent Percent 70 40 50 24 20 30 10 7 8 0 Consumption Investment Net exports -10 Household Government Investment Net Exports -20 consumption consumption -24 -30 -40 -50 -47 Source: World Development Indicators 2015 and World Bank staff estimates 2014. expenditure accounts for 6 percent of consumption However, the incumbent private sector that in Somaliland and 8 percent in Puntland. Net emerged during the conflict has sometimes and exports (exports minus imports) reduce GDP in some sectors tended toward anticompetitive by 45 percent in Somaliland and 22 percent in behavior, blocking competition in key markets, Puntland (Figure 3.4). Investment was higher in including the supply of electricity and water, and Somaliland (10 percent of GDP) than in Puntland opposing the need for sector regulation. These (2 percent of GDP). actions can discourage the establishment of new businesses and hinder small and medium-size ones The private sector proved resilient during the from growing. conflict. Through droughts and the civil war, Somali entrepreneurs adapted and some even With political stability, government expenditure flourished in a regulation-free environment. In has started to expand as a share of GDP. The FGS the 1970s and 1980s, the public sector provided accounted for only about 1 percent of total GDP most of the output of the small industrial sector in 2012. However, this share is rising: Federal and many services; during the conflict, private expenditure increased from $35.1 million in 2012 sector economic activity, particularly in financial, to $117.4 million in 2013 (a 234 percent increase) transport, and telecommunication services, grew. and stood at $151.1 million in 2014. This increase Figure 3.4: Consumption is the main contributor to GDP in Somaliland and Puntland a. Somaliland: Contribution to GDP, 2012 b. Puntland: Contribution to GDP, 2010 140 120 112 130 120 100 100 80 80 60 60 Percent Percent 40 40 20 10 20 6 0 8 2 Private Government Investment Net exports 0 -20 consumption consumption Private Government Investment Net exports consumption consumption -40 -20 -22 -45 -60 -40 Source: World Bank estimates 2013 and Puntland Ministry of Planning and International Cooperation October 2 0 1 5 | Edition No. 1 9 3. The State of the Economy was driven mainly by compensation of employees Livestock is the largest sector in Somalia, the largest and use of goods and services. The same scenario employer in rural areas with nomadic cultures, is observed in Somaliland, where government and the largest export. While engaging much of revenue increased from $84 million in 2011 to the population nationally, livestock is concentrated $114 million in 2014 and is projected to reach $152 in the arid and semi-arid north (Somaliland and million in 2015. Puntland expenditures increased Puntland). It is the major export commodity, from $52.7 million in 2012 to $62.0 million in 2013. accounting for more than 80 percent of total Continued improvement in the security situation exports. According to FAO (2015), Somalia exported in Somalia is attracting business activities, as more a record 5 million heads of livestock to markets in areas come under government control. the Gulf of Arabia in 2014 (4.6 million goats and sheep, 340,000 cattle, and 77,000 camels), with an Diaspora remittances are central to Somalia’s estimated total value of $360 million. The livestock economy, providing a lifeline to large segments industry has been recovering following the lifting of the population. Remittances are estimated at of a nine-year ban on the import of livestock from $1.2—$2.0 billion, equivalent to 23–38 percent Somalia (aimed at preventing the spread of Rift of GDP. Remittances have been important in Valley fever),with exports of live animals on the cushioning household economies, creating a buffer increase at both the Berbera and the Bosaso ports. against shocks (drought, trade bans, interclan The resurgence of the livestock sector reflects the warfare). They fund direct consumption, including large investments being made to help make the education and health, and some investment, sector more competitive in international markets. mostly in residential construction, allowing With donor support, investments in livestock Somalia to sustain its high consumption rates infrastructure, fodder production, and livestock and to finance a large trade deficit. As in many vaccination and treatment services are paying off. other developing countries, remittance flows in (Vaccination aims at limiting transboundary animal Somalia outweigh both international aid flows diseases, which can kill large numbers of animals, and foreign direct investment (FAO2013. Although resulting in food shortages, market disruptions and some remittances are invested, most are spent on trade and export barriers.) consumption, with significant subsequent effects Figure 3.5: Livestock and services are the key drivers of on poverty and inequality. Evidence from the Somaliland’s GDP 2013 Somaliland Household Survey, shows that Sector contribution to GDP in Somaliland 31 percent of urban households and 16 percent of 35 rural households received remittances (World Bank 30 29.2 27.6 27.5 26.5 2015a). Households that received remittances 25 tended to work fewer hours and to consume more 20.2 21.1 Percent 20 than households that did not, particularly in urban Somaliland. Laborforce participation rates among 15 11.4 11.1 remittance receivers were half those of people who 10 6.3 6.5 did not receive remittances. In urban Somaliland, 5 average household consumption was 21 percent 0 higher among remittance-receiving households. In 2012 2013 the absence of robust domestic regulation in the Industry Agriculture, forestry & fishing Trade, transport, hotels & restaurants Other services Livestock activities sector, this critical resource for Somali households Source: World Bank 2013. Note: Figures are in constant 2012 prices. is under threat, as Part II of this report shows. 10 S o m a l i a Econ o m ic Update • 2015 3. The State of the Economy Crop-based agriculture and fishing could play a to exist at the outset of the civil war in January significant role in driving economic growth. In 1991, the Transitional Government of Somalia southern Somalia, the Juba and Shebelle rivers reopened the CBS in 2009. Despite serious capacity provide constant supply of water for crop farming. gaps and high turnover of governors (three in 2013 But lack of extension services and modern farming alone), new reform efforts are gaining momentum. techniques, dilapidated irrigation infrastructure, The governor and board of directors appointed in in addition to the general insecurity and disputed 2014 are operating in line with requirements of the property rights in the region, have led to low Central Bank of Somalia Act, structures and policies productivity and low yields. Somalia’s long coastline are in place to improve core transaction processes, is home to some of the richest fishing grounds in a first set of financial statements were produced in the world, with large tuna shoals migrating from 2013, and the CBS is now starting to act as the fiscal north to south and back. Deep-sea fishing in the and financial agent for the FGS. With support from Indian Ocean has been limited, however, with the World Bank, the CBS will put in place a core local communities fishing the shallow water close banking software and associated software in 2015 to the shore in small boats, partly because of the to improve its support to government payments. collapse of government, the failure to adequately police coastal areas, and the lack of regulation in Somaliland and Puntland have established their a sector that has consequently been dominated own banks (a central bank in Somaliland and a by illegal fishing. Despite substantial potential, the state bank in Puntland. The banks have several contribution of fishing to GDP remains minimal. branches and offer very limited commercial banking services in deposit accounts and trade finance. 3.2 The Monetary and Financial Sector Their primary function is to serve as treasurer of T he financial system in Somalia that emerged from the conflict is dynamic but very narrow. In January 1991 all state institutions that provided their regional governments. The private financial sector is modernizing and regulated financial services, including the rapidly, putting pressure on CBS regulatory and Central Bank of Somalia (CBS) and the entire supervision capacity. In 2012 the government banking system, collapsed. The collapse of the passed a Financial Institutions Act (FIA 2012), commercial banks in the 1990s—and the loss of which created a national framework for financial depositors’ money—eroded public confidence institutions to operate in Somalia, supervised by the in government and banks. During the long CBS. Before 2012 and in the absence of a domestic conflict, private money transfer businesses banking system linked to the global financial (MTBs, or hawalas)—and more recently, mobile infrastructure, an extensive network of MTBs money operators—emerged and flourished in developed to facilitate international remittance an unregulated environment, but they provided flows and domestic financial transactions. That neither deposit-taking nor banking services. With network of MTBs is in the process of becoming no functioning commercial banks in Somalia, the regulated and supervised under the FIA 2012. In monetary stock consisted exclusively of cash. 2015 the CBS issued registration regulations and licensing regulations for MTBs. Figure 3.6 shows The CBS is gradually starting to reestablish its the financial institutions operating in Somalia that authority and institutional capacity. After ceasing the CBS recognizes.8 8 The CBS is focusing on registration. Under the regulations, licensing demands a higher standard to be met by the applicant and more information disclosures to test the fitness and propriety of owners, partners, directors, and officers. Others measures include mandatory requirements to have an in-house Anti– Money Laundering (AML) program with training and an AML officer. AML also requires validation and verification of the information and statements made by applicants. Under these regulations, the CBS is also required to review risk and risk-management elements and to modulate the level of sophistication needed on an institution-by-institution basis commensurate with the level of risk. The review process under the registration regulation is limited to CBS officials checking the content of information in order to confirm the completeness of applications. October 2 0 1 5 | Edition No. 1 11 3. The State of the Economy Figure 3.6: The Central Bank recognizes 48 financial institutions in Somalia 4 MTOs have received a license and are CBS issued licenses to 6 banks (Dahabshil registrered by the CBS (DahabshilMoney Licensed & Bank International, Salam Somali Transfer, Kaah Express, Tawakal Registered Bank, International Bank of Somalia, Trust Express, Jubba Express) MTOs: Africa Bank, Premier Bank). However, one 4 license has expired (Amal Bank Group). The quality and soundness of banking Applications (& interest) Licensed banks services is unclear. To date, no financial for bank licenses: (1 expired): institution examination has been 12 6 conducted by the CBS. CBS notes that there are 12 banks who have submitted an application for a license or have expressed an interest Registered MTOs: 9 MTOS are registered (Hodan 9 Global, Horyaal Money Transfer and Identified unregistered Exchange, Ladan Express, Beso Xpress and unlicensed MTOs: Money Thansfer Ltd, Amana Money 17 Transfer, Nationlink Money The CBS estimates that there are an additional 17 Transfer, Towfliq Express, Mustaqbal MTOs thata have not (re -) applied for registration Express, Amal Express or licensing, but are operating as MTOs. In addition there may be unknown MTOs (In the past, 5 of these MTOs were operational. licensed) Note: Data are as of March 2015. The CBS does not have the capacity to perform the CBS would need to substantially enhance due diligence or supervise banks to give security its capacity to manage the financial sector and to Somalis about the financial health of licensed monetary policy. In the region, Somaliland has banks. No financial institutions in Somalia can adopted the Somaliland shilling (SlSh), which is issue letters of credit (the standard trade financing used only in Somaliland. instrument) to banking institutions abroad. Exporters and importers must work through banks The lack of banks is a binding constraint to in third countries to process letters of credit, businesses. Lack of financial intermediation in which adds costs and takes time. The situation Somalia has constrained business growth, as is expected to improve as the CBS continues to businesses are forced to use their own funds implement much-needed reforms in the financial or borrow from friends or family members to sector by modernizing the licensing, regulation, expand. The lack of credit facilities perpetuates and supervision of banks. elite capture, as people with resources or access to resources remain in a better position to invest. Somalia’s economy remains highly dollarized, Most business owners use their own funds, borrow leaving the CBS with no capacity to manage from friends and family, or rely on remittances for the national currency. All major transactions in investment funds (World Bank 2013). Access to Somalia are undertaken in US dollars. The monetary finance is a major binding constraint to growth authorities cannot directly affect the volume of for small and medium-size enterprises in Somalia, foreign currency in circulation. As long as there is with less connected businesses and businesses little or no bank credit outstanding, they cannot owned by women at a particular disadvantage influence interest rates or affect the money supply (USAID 2014). by changing bank reserve requirements. The last official Somali shilling note was printed during the The number of MTBs has increased, easing Siad Barre regime. The stock of Somali shillings payments, but they are inefficient and costly, and consists of a mix of official and counterfeit bank the sector is under pressure from international notes accumulated over the years; 95 percent of “derisking.” Hawalas process transactions and the local currency in circulation maybe counterfeit. payments only between people within their Local currency is used only for transactions under networks. Using Hawalas to transfer large amounts the value of $1. The largest Somali shilling note of funds is expensive, because, unlike banks, which (1,000) is worth just $0.05. To introduce a new charge a fixed fee, their fees are a percentage of currency to replace the counterfeit or old currency, the value transferred. 12 S o m a l i a Econ o m ic Update • 2015 3. The State of the Economy Box 3.1: How is “derisking”affecting Somalia? The Financial Action Task Force (FATF) defines derisking as “the phenomenon of financial institutions terminating or restricting business relationships with clients or categories of clients to avoid, rather than manage, risk.” Banks in Australia,the United Kingdom,and the United States, among others,have closed the accounts of money transfer operators because of perceived legal and regulatory problems, sanctions, and anti–money laundering/combating the financing of terrorism (AML/CFT) risks. Account closures have caused changes in how the market works in the United Kingdom and the United States, but anecdotal evidence collected by the World Bank and data from Remittance Prices Worldwide indicate that costs to consumers have not changed significantly. Costs could rise if competition in the remittance market in Somalia falls substantially. The British government, in conjunction with the World Bank, is developing the Safer Corridor Initiative. This effort aims to tackle key deficiencies in the UK-Somalia remittance corridor until a sounder financial system is in place in Somalia and to accelerate and support the development of that financial system. Any measures to improve transparency and compliance will involve taking actions at the first mile (the United Kingdom), second mile (the United Arab Emirates), and third mile (Somalia). Third-mile measures will be the most difficult to implement, because Somalia’s financial sector has not developed in a formal way and the country remains extremely isolated from the global financial infrastructure. In 2014 the FGS took measures to formalize Somalia’s financial sector. The CBS licensed and registered six banks and nine MTBs and registered nine MTBs under the registration and licensing regulations passed by the CBSin 2014, developed with the support of the World Bank. Somalia does not yet have a system in place for knowing your client (KYC) or customer due diligence (CDD) requirements. Some money transmitters are considering using biometric identification to meet KYC requirements. The FATF recommends the application of a risk-based approach to address AML/CFT risks. This approach allows countries and financial institutions to apply simplified AML/CFT measures when risks are assessed to be low. However, major financial institutions are currently operating in a risk-averse environment. Given the complexities of this corridor, they seem unwilling to try to mitigate the risks associated with servicing these money transfer operators. Source: Cirasino and Pesme, 2015. 3.3 International trade a key feature of the so even during the years when Somali livestock to Somali economy Saudi Arabia was banned), followed by charcoal, I fish, and hides and skins. nternational trade appears to have grown steadily over the past six years, although the The economy is highly dependent on imports. absence of reliable data makes trade difficult In 2013 Somalia ran a trade deficit of 39 percent to assess. Data on exports and imports through of GDP, after importing goods and services worth major ports are collected in physical quantities 62 percent of GDP and exporting goods worth but are not reliable. More reliable aggregate trade just 14 percent. The deficit was financed through data reported by trading partner countries show remittances (equivalent to 41 percent of GDP) and that imports reached $3.3 billion in 2013 and are direct donor support(equivalent to 9 percent of projected to reach $3.7 billion in 2015. The largest GDP) (Figure 3.7). The large trade deficit signals recorded imports through the Berbera and Bosaso opportunities for Somalis to produce for the ports are food (sugar, khat, wheat and wheat flour, domestic economy, boost exports, and reduce rice, and cooking oil); building materials; and fuel. reliance on imports. Somalia’s imports of $705 Khat, a mild narcotic, is the second top import million in 2010 comprised basic consumer goods, product after sugar. Exports almost tripled during such as vegetables (28 percent), raw sugar cane (10 the past six years, reaching $779 million in 2013. percent), and rice (7 percent). These imports came Livestock continues to dominate exports (and did from Ethiopia (32 percent), Kenya (23 percent), October 2 0 1 5 | Edition No. 1 13 3. The State of the Economy China (10 percent), Oman (9 percent), and Brazil in late 1990s. In 2010 the total value of exports (9 percent). Given Somali’s climate and floods in was $232 million, made up of goats and sheep river areas, heavy reliance on domestic production (61 percent), bovines (13 percent), live animals would expose Somali households to much greater except farm animals (8 percent), wood charcoal volatility and price shocks. At the same time, heavy (7 percent), and oil seeds (4 percent) (Figure reliance on imports leaves the economy vulnerable 3.8). In Somaliland these sectors provide half of to external price shocks. economic value added and create 80 percent of job opportunities. In Puntland livestock accounts Figure 3.7: Imports dominate Somalia’s economy for an estimated 40 percent of GDP, 60 percent 60 of employment opportunities, and 80 percent of 40 foreign exchange earnings (MoPIC 2013b). 31.4 31.4 20 The potential to increase exports is substantial, Percent of GDP 14.3 14.1 as fisheries and horticulture remain under 0 exploited. Success will depend on the ability of -20 producers to meet international standards for -53.0 -52.1 food safety and develop a quality control and -40 sanitary and phytosanitary (SPS) certification -60 system (USAID 2014). 2013 2014 Exports Imports Current transfers (including Net income) Lack of access to foreign capital limits Somalia’s Source: Somalia authorities and estimates by the International Monetary Fund and World Bank 2015. current account financing options mostly to foreign direct investment (FDI), heightening Somalia is highly dependent on a small number of exposure to unpredictable project finance. The export products and overseas markets. Livestock current account deficit was 7.2 percent of GDP accounted for more than 80 percent of total in 2013 and 6.6 percent in 2014. It comprised a export earnings in 2012. About 80 percent of trade deficit of 38.7 percent of GDP, net income total exports go to the United Arab Emirates, of –8.9 percent of GDP, and net current transfers Yemen, Saudi Arabia, and Oman. With such (including remittances, off-budget grants, and dependence on a narrow export market, a single direct donor support) of 40 percent of GDP. The disruption can create havoc, as it did when Saudi size of the current account deficit is associated Arabia banned animal imports from Somalia with external vulnerability Somalia faces in the very Figure 3.8: Somalia exports far fewer goods than it imports a. Export shares, 2010 b. Import shares, 2010 Other exports, Other imports, specified, 10.8% Other imports, 3.3% 13.9% Wood charcoal, 6.6% Pasta, 2.6% Live animals Palm oil, crude, Other vegetables, except farm 2.7% 28.4% animals, 7.9% Cement, 3.3% Telephones, 3.3% Sheep/Goats, Bovines, 3.4% 61.4% Bovines/Camel, Wheat or meslin 13.3% flour, 3.6% Cigars, 4.1% Raw Sugarcane, 20.0% Vegetable products not elsewhere specified, Rice, 6.9% 4.5% Source: MIT Economic Complexity Observatory 14 S o m a l i a Econ o m ic Update • 2015 3. The State of the Economy short to medium term. Long-term flows, including Potential reserves of oil and gas provide Somalia FDI of 4.2 percent of GDP and capital flows of 3.0 with opportunities to boost economic growth, percent, financed the current account deficit in but in the absence of an agreed regulatory 2013 (Figure 3.9). If FDI were to slow, the economy framework, they could rekindle internal conflict. would have no mechanism for mobilizing foreign Seismic studies suggest that the Somali basin capital inflows. may contain hydrocarbon reserves. Although commercial exploitation would be decades away, Figure 3.9: Long-term flows finance Somalia’s current account deficit if well managed these resources could fund Current account deficit and its financing economic development. During the Siad Barre 8 regime, foreign companies acquired exploration 6 1.1 1.1 licenses. Subsequently, regions and states entered 4 1.9 1.8 into their own contracts with oil companies, sometimes overriding licenses issued by the former Percent of GDP 2 4.2 3.8 regime. This practice continues today and poses 0 real risks to the successful outcome of the state -2 formation and constitutional negotiations. Somali -7.2 -6.6 -4 stakeholders need to agree on a shared vision for -6 the sector’s development, based on technically -8 2013 2014 dialogue and best practices. Current account Capital account Foreign Direct Investment Other net capital flows Source: Estimates by the International Monetary Fund and World Bank (2015). 3.4 Fiscal Policy Local conflicts and political competition have weakened formal trade integration between P ublic budgets have expanded significantly in the Federal Government of Somalia (FGS), Puntland, and Somaliland, driven by some year- Somalia and the wider Horn of Africa. The on-year increases in revenue. FGS total revenue Horn of Africa is home to 140 million people, (including grants) grew by more than 300 percent, many of whom depend on pastoralism and from $35.1 million in 2012 to $145.3 million in earnings from livestock. The region has weak 2014 (these revenue outturns still reflect very formal trade integration but intensive informal low shares of GDP: 1.0 percent and 3.7 percent of trade, facilitated by interlinked communities. GDP, respectively). FGS expenditure also expanded Fluid social and economic patterns amid scarce by the same margin during this period, from resources lead to frequent local conflicts over $35.1 million to $151.1 million. The same trend is rangeland, water points, and trade routes, which observed at the regional level: Puntland’s revenue create instability and political tension. Despite and expenditure have grown significantly with the considerable economic benefits that would revenue growth averaging 13 percent in 2007 to result, these factors, combined with broader 2013 and expenditure growth averaged 19 percent interstate competition over access to markets in this period. Somaliland’s revenue has grown and resources, have stalled formal economic considerably, from $19.4 million in 2002 to $123.3 integration. Sustained peace in Somalia, which is million in 2013, while total expenditure followed strategically located as a trade gateway, could help a similar trend, recording a 22 percent average reshape wider relations within the Horn of Africa, growth during this period. Overall, the budgets unlocking the region’s trade potential.9 are expected to expand significantly as service delivery is extended across the country. The basic norms of fiscal management are weak with 9 Ethiopia is still quite restrictive regarding trade policy, but more formal trading arrangements with neighbouring countries may cut down on the thriving re- export business through Somalia ports. October 2 0 1 5 | Edition No. 1 15 3. The State of the Economy unrealistic revenue forecasts compounded by weak FGS revenue forecasts in the 2015 budget though expenditure, lack of staffing controls and ad hoc revised downwards remains high compared to cash rationing. This has led to a structural budget outturns in both 2013 and 2014. The 2014 revenue deficit at the federal level and arrears accumulation projection was $188 million, a 60 percent increase undermining budget credibility: the FGS’s stock of from the 2013 outturn of $117 million. The revenue arrears reached $30.4 million in 2013. outturn for 2014 was $145.3 million, a shortfall of $43 million, or 23 percent, of budgeted levels. 3.4.1 Improved revenue mobilization efforts are The 2014 budget was predicated on significant paying off increases in revenue from income and corporate F taxes and taxes on goods and services, which did GS revenue and grants outturns rose 24 percent not fully materialize. Consequently, the FGS has in 2014 in nominal terms. In 2012, the FGS now passed a revised budget with revised total mobilized only $30 million in domestic revenue, revenue in 2015 amounting to $199 million down equivalent to 0.9 percent of GDP, and $5 million from the original budget of $240 million. Total in external assistance to the budget (Table 3.1). revenue in 2015 is mainly driven by domestic Revenues and grants rose from 1 percent of GDP revenue at 57 percent while donor grants account in 2012 to 3.7 percent in 2014 and are projected to for 43 percent. Producing the 2015 revised budget reach $199 million in 2015, up from $145.3 million by the FGS signals the government’s commitment in 2014. However, domestic revenue collection to responsible macro-fiscal management. and grants underperformed in 2014, particularly indirect and other taxes. Taxes on international trade drive total tax revenue, accounting for 91 percent of total taxes Domestic revenue (excluding grants) increased by on average between 2012 and 2014. International 11 percent in 2014 to $84.3 million (2.1 percent trade tax revenue rose from $24 million in 2012 of GDP), financing 56 percent of recurrent to $64 million in 2014, an increase of more than expenditure. Domestic revenue contributed 70 160 percent (see Table 3.1). It is expected that as percent of total revenue on average in 2012–14, governments exert increased effective territorial driven mainly by tax revenue. This trend is expected authority, they will be able to collect more taxes. to continue, with domestic revenue projected to Since April 2013, the FGS has been collecting tariffs reach 2.8 percent of GDP in 2015 (Figure 3.10). at the Mogadishu port and airport, which raised Figure 3.10: The Federal Government of Somalia’s efforts to total domestic revenue to $84 million in 2014. In mobilize revenue are paying off 2013, 90 percent of all tax revenue was derived Revenue performance 6 from taxes on international trade but this fell to 87 percent of total tax revenue in 2014. 5 Personal and business income taxes as well as Percent of GDP 4 indirect taxes bring in limited revenue. Although 3 income tax revenues rose by 57 percent and taxes on goods and services by 50 percent in 2014, the two 2 sources brought in less than $10 million, against a 1 target of $39 million. Income taxes were 78 percent below target and taxes on goods and services 75 0 2012 2013 2014 2015 percent lower. Income tax receipts contributed Domestic revenue Donor funding Total revenue only 1.5 percent and other taxes (except taxes on Source: FGS Ministry of Finance (2015). international trade) contributed 11.4 percent (Table 3.1). 5 While Ethiopia is still quite restrictive regarding trade policy, more formal trading arrangements with neighbouring countries may cut down on the thriving re-export business through Somali ports. 16 S o m a l i a Econ o m ic Update • 2015 Table 3.1: FGS Actual and budgeted revenue and grants, 2012–14, (Millions of US dollars) 2012 2013 2014 2015 Million US$ Growth in Revenue Item Actual Budget Actual Budget Actual Budget Revised 2012-2013 2013-2014 Revenue and Grants 35.1 114.3 117.4 188.5 145.3 239.9 199.0 234% 24% 3. The State of the Economy Domestic Revenue 30.2 53.9 75.8 115.3 84.3 123.4 113.9 151% 11% Tax Revenue 25.3 51.4 65.1 108.0 73.8 103.1 85.7 157% 13% Tax on Income, Profit and Capital Gains 3.5 65.1 5.1 1.1 4.6 4.7 57% Taxes on goods and services 1.3 14.4 0.7 33.9 8.4 25.8 10.7 331% 50% Trade taxes 24.0 33.4 5.6 69.0 64.3 72.7 70.3 145% 10% Non-Tax Revenue 2.5 58.7 7.3 10.5 20.3 28.1 156% Domestic loan and grants 0.0 0.0 4.1 0.0 0.0 0.0 0.0 -100% Grants 4.9 41.7 73.2 61.0 116.5 85.2 751% 46% Bilateral 4.9 41.7 64.0 59.0 39.9 35.4 751% 42% Multilateral 0.0 9.2 1.9 76.7 49.8 % of GDP Revenue and Grants 1.0 3.1 3.2 4.8 3.7 5.9 4.9 Domestic Revenue 0.9 1.5 2.1 2.9 2.1 3.0 2.8 Tax Revenue 0.7 1.4 1.8 2.7 1.9 2.5 2.1 Tax on Income, Profit and Capital Gains - 0.1 0.0 0.1 0.0 0.1 0.1 Taxes on goods and services 0.0 0.4 0.2 0.9 0.2 0.6 0.3 Trade taxes 0.7 0.9 1.6 1.8 1.6 1.8 1.7 Non-Tax Revenue - 0.1 0.1 0.2 0.3 0.5 0.7 Domestic loan and grants - - 0.2 - - - - Grants 0.1 - 1.1 1.9 1.6 2.9 2.1 Bilateral 0.1 - 1.1 1.6 1.5 1.0 0.9 Multilateral - - - 0.2 0.0 1.9 1.2 Memorandum Total GDP (Current US$Millions) 5,008 5,352 5,352 5,706 5,706 5,953 5,953 Somaliland 1,550 1,657 1,657 1,771 1,771 1,894 1,894 October 2 0 1 5 | Edition No. 1 The Rest 3,458 3,695 3,695 3,935 3,935 4,059 4,059 Source: Appropriation Act for 2015 .Budget and various budget documents from the FGS Ministry of Finance 17 3. The State of the Economy Figure 3.11: Development partners continue to support Figure 3.12: Actual revenue collection by the FGSexceeded Somalia’s reconstruction and development budgeted amounts in 2013 but fell well short in 2014 Reported Aid Flows in Somalia, 2014 Difference between budget and actual revenues 50 700 642 40 600 41.7 30 21.9 Millions of US dollars 500 20 Million $ 439 10 400 3.1 0 300 253 -10 -12.2 200 -20 -30 100 -31.0 -40 0 -43.2 Development Support to Humanitarian Total Revenue Domestic Donor funding peacekeeping forces 2013 2014 Source: 2015 Aid Flows Draft Report by the Somalia Aid Coordination Unit (Office Source: FGS Ministry of Finance (2015). of the Prime Minister). Development partners have continued to support at the levels pledged. The 2014 and 2015 budgets Somalia’s reconstruction and humanitarian have been characterized by overly optimistic activities with reported total aid amounting to revenue forecasts often resulting from political about $1.3 billion in 2014. This comprised of pressures, leading to severe cash rationing and nearly $700 million in aid for development, about generation of expenditure arrears and domestic $253 humanitarian, and about $439 support to borrowings. peacekeeping forces (Figure 3.11). It is important to note that not all of the development aid are Revenues in Somaliland and Puntland have channeled through treasury thus these funds increased significantly in line with the high remain off-budget. Although domestic revenues expenditure needs. Since 2002, the Somaliland remain the dominant source of revenue for the government only incurred a deficit twice—in 2008 government, the FGS still relies heavily on external and 2011 (Figure 3.13, panel a.) and has financed assistance, which rose by 46 percent of total them through domestic borrowing from businesses revenue ($42 million) in 2013 to $61 million in 2014 and money transfer companies. and its estimated at 43 percent of total revenue ($85 million) in 2015 (Table 3.1). Somaliland’s domestic revenue is driven by tax revenue, mainly import duty. Sales tax, harbor Although revenue collection has improved tax, export levy (livestock), and administration tax significantly, Somalia still faces serious revenue are the other key drivers of revenue. These five mobilization challenges. At the federal level, tax sources contribute about 80 percent of the revenue collection capacity is weak, and the total revenue on average between 2002 and 2013. absence of a legal and regulatory framework Though declining in share, import duty contribution constrains revenue mobilization from the dynamic to total revenue averaged 48 percent in 2002 to telecommunication and financial sectors. In 2012 2013. Sales tax contribution has remained steady the FGS received only $1 million in direct tax from during this period averaging 10 percent, except in businesses. Donor on-budget grant whilst providing 2010 when its share declined to 7.9 percent. Port about half the revenue, is increasingly unreliable, as and administration taxes are declining as a share of pledges for assistance fail to materialize in time or the total as other revenue sources increase. 18 S o m a l i a Econ o m ic Update • 2015 3. The State of the Economy Figure 3.13: Despite high expenditure needs, Somaliland has been able to spend within its means a. Nominal budget surplus, 2002-13 b. Revenue and expenditure, 2012-14 12 10 10.6 9 8.6 8.6 10 9.3 8 7.4 8 7 6.9 Millions of US dollars 6.5 6.1 Percent of GDP 6 6 4.8 5 4 4 3.3 3.1 2.8 2 1.9 2.0 0.7 3 1.8 2 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1 -2 (2.1) (2.2) 0 2012 2013 2014* -4 Revenue Expenditure Source: World Bank calculations based on Somaliland Ministry of Finance data (2014) Puntland’s budget continues to grow though it Puntland revenue collection increased, but the faced deficits in 2012 and 2013 (Figure 3.14). As base remains narrow. Revenues increased from a result, arrears (both payroll and running costs) $20 million in 2007 to $40.9 million in 2012 (an have now reached significant levels. Although increase of 104 percent) before declining 6 percent accurate accounting is not available, the arrears as in 2013. Most of Puntland’s revenues come from of December 2014 were estimated at $24.9 million customs and related taxes on international trade, (63 percent of the average total revenue for 2012 which together accounted for 63 percent of total and 2013). There are many contributing factors revenues in 2012 and 67 percent in 2013. A narrow to Puntland’s current fiscal situation, including: base renders Puntland’s revenues vulnerable to declining revenues, exchange rate fluctuations, external shocks. In 2014 the government initiated reallocation of budgetary funds leading to a revenue mobilization campaign to increase tax overspending on discretionary expenditures, revenue. Results are yet to be seen. growth of the public payroll, and poor public finance management. In the FGS major issues with domestic revenues Figure 3.14: Puntland budget on upward trend include overreliance on taxes on trade and critical mobilization issues concerning income 45 and corporate taxes and domestic indirect taxes. 40 The effective income tax rate on government -1% 35 9% employees is about 5 percent. In the private sector, 30 almost no income tax is collected, and no taxpayer Millions 25 registration system is in place. Zero corporate tax 20 was reported in 2014, against a budget projection 15 of $2 million. As with income tax, no taxpayer 10 registration system appears to be in place. 5 0 2007 2008 2009 2010 2011 2012 2013 Budgeted Expenditure Actual Revenue Source: World Bank calculations based on 2014 Ministry of Finance data. October 2 0 1 5 | Edition No. 1 19 3. The State of the Economy Turnover taxes on businesses are another potential alignment of a tax-to-GDP policy objective that is source of domestic revenue, but a legal framework in line with regional benchmarks. Clarification of and buy-in from the private sector are missing. revenue assignments across levels of government Under the current arrangement, introduced in (see Part II) will also be essential. Increased 2014, one of the five telecoms operators (Hormuud) revenue mobilization in Somalia will require pays $400,000 a month in turnover taxes. This building stakeholder support through dialogue; arrangement is an interim measure until the new adopting transparent public finance management; communications law is passed (a step envisaged and visibly delivering public goods, including for 2015) and the ministry can begin collecting security, physical infrastructure, and basic services, license fees, taxes, and spectrum fees. Once the especially in the education and health sectors. law is passed, telecommunications revenues are expected to reach $1 million a month, with annual 3.4.2 Expenditure is concentrated on salary and telecommunications revenue projected at $10 security and weak budgetary controls and million for 2015. Only $4.8 million was collected execution have led to buildup of arrears F from telecommunications in 2014, against a target GS total expenditure grew from 1 percent of $12 million. Projected revenue collection from of GDP in 2012 to 3.8 percent in 2014, with money transfer companies in 2014 was estimated almost 100 percent of the budget going to at $12 million, but no money had been collected recurrent costs (Table 3.2). Expenditures more from this sector by December. The 2015 draft than quadrupled, rising from $35.1 million in 2012 budget envisages $3.6 million in revenue collection to $151.1 million in 2014. According to the 2015 from this source, but there does not appear to revision, the FGS budget is expected to reach $199 be a clear plan for realizing this target. Turnover million (4.9 percent of GDP). The budget is subject taxes on electricity companies were projected at to sharp volatility, however, depending on the $500,000 in the 2014 budget, but no revenue was security situation and the availability of funds from collected. The projection for 2015 is $2.5 million, development partners. Only 56 percent of the total but no plan appears to be in place for collection. recurrent expenditure was financed by domestic revenue in 2014. Based on the 2015 revised budget, The challenge of low revenues and pressing needs domestic revenue could finance all compensation to deliver public services has made budgeting of employees and about 46 percent of goods and difficult. With territorial gains, the FGS is facing services, leaving donor funds to finance the rest of pressure to deliver services, as evident from its the budget. budget proposals, which show rising budgeted expenditures and optimistic revenue expectations. Monthly expenditures closely matched monthly The result is that spending is trimmed based on revenues during 2014, reflecting the cash-based realized revenue in a cash budget situation in nature of budget management, but arrears which borrowing is not possible. continued to accumulate. Expenditures averaged $12.5 million a month, while revenues averaged Revenue collection is a sensitive area and will $12.6 million. Budget figures in 2014 suggest that require substantial public-private dialogue. It is a total monthly expenditures on compensation of priority for sustainable state-building in Somalia. employees (including security sector allowances) The development of a realistic revenue mobilization averaged $6.4 million, including $2.0 million in plan could include a focus on simple-to-administer wages and salaries and $4.3 million in allowances. taxes of selected types of businesses, including Revenues and expenditure outturns tend to be slow hotels and telecom, electricity, money remittance, at the beginning of the year, picking up toward the and water companies. Key priorities will be the end of the year (Figure 3.15). passage of a telecommunications act and the 20 S o m a l i a Econ o m ic Update • 2015 3. The State of the Economy Table 3.2: Composition of expenditure by the Federal Government of Somalia, 2012–15 2012 2013 2013 2014 2014 2015 2015 Item Actual Budget Actual Budget Actual Budget Revised Million US$ EXPENDITURE 35.1 144.3 117.4 216.2 151.1 239.9 199.0 RECURRENT EXPENDITURE 35.1 137.1 117.4 203.9 150.9 226.0 184.5 Compensation of employees 13.5 70.4 51.9 91.0 77.2 108.3 79.1 Use of goods and services 18.9 62.7 54.5 67.4 57.6 82.7 75.8 Grants 2.7 0.0 7.5 11.5 10.1 14.8 15.2 Contingency 0.0 3.6 3.5 3.6 3.8 3.2 2.7 Repayment of arrears and advances 0.0 0.0 0.0 30.4 2.2 17.0 11.7 CAPITAL EXPENDITURE 0.0 7.2 0.0 12.4 0.2 13.9 14.5 Capital 0.0 7.2 0.0 12.4 0.2 13.9 14.5 % of GDP RECURRENT EXPENDITURE 1.0 3.7 3.2 5.2 3.8 5.6 4.5 Compensation of employees 0.4 1.9 1.4 2.3 2.0 2.7 1.9 Use of goods and services 0.5 1.7 1.5 1.7 1.5 2.0 1.9 Grants 0.1 - 0.2 0.3 0.3 0.4 0.4 Contingency - 0.1 0.1 0.1 0.1 0.1 0.1 Repayment of arrears and advances - - - 0.8 0.0 0.4 0.3 CAPITAL EXPENDITURE - 0.2 - 0.3 0.0 0.3 0.4 Capital - 0.2 - 0.3 0.0 0.3 0.4 Memorandum GDP (excl. Somaliland) 3,458 3,695 3,695 3,935 3,935 4,059 4,059 Source: FGS Ministry of Finance (2015). Figure 3.15: Monthly expenditures by the Federal Compensation of employees and purchases of Government of Somalia closely matched monthly goods and services consume a significant portion revenues in 2014 of FGS expenditures. Wages and salaries accounted Monthly revenue and expenditure in 2014 (US$ millions) 25 for 44 percent of expenditures in 2013 and 51 percent in 2014 (Figure 3.16). The next largest 20 category of expenditure is goods and services, accounting for 47 percent of expenditures in 2013 Millions 15 and 38 percent in 2014. Operating expenditures 10 are concentrated primarily in the security sector (Figure 3.17). Most line ministries have very little 5 funding available for operating expenditures (only 5 percent of education and 14 percent of health 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec spending was dedicated to operating costs in 2014, Revenue Expenditure for example). Source: FGS Ministry of Finance (2015). October 2 0 1 5 | Edition No. 1 21 3. The State of the Economy Figure 3.16: Wages and salaries eat up a significant portion of Federal government’s recurrent budget a. Actual spending, 2013 b. Actual spending, 2014 Contingency Contingency 3% Repayment of 3% arrears Grants 6% Grants 1% 7% Compensation of Compensation employees of employees 44% 51% Goods & Services Goods & Services 47% 38% Source: FGS Ministry of Finance (2015). Figure 3.17: Security and administrative services accounted The highest-spending institution in 2014 was the for the lion’s share of total expenditure in 2014 armed forces, which accounted for 29 percent Contingency FGS expenditure, 2014 Social Services of total spending ($43 million), more than half 3% 3% of it ($21 million) allocated to allowances. The Economic progressive build-up of arrears was particularly Services 7% acute in the armed forces, where arrears at the end of 2013 were $30.4 million (16 percent of the budget). Only $2.2 million of this amount was paid in 2014, and an additional $13.8 million was Security Services Administrative 45% accrued, mostly for wages and salaries. The build- Services 41% up of arrears is not a good signal and adversely affects service delivery. As of the end of 2014, the estimated stock of arrears was $43 million. Source: FGS Ministry of Finance (2015). As in the FGS and Puntland, the security sector in Security remains a top priority for the FGS, Somaliland accounts for the largest share of total which allocates a growing share of its budget expenditure, averaging 46 percent in 2011–13. The to the sector. The budget for the sector amount second-largest spending category, administration to $57.2 million in 2015, 29 percent of the total and general services sector, accounted for about budget. Actual spending on the sector was $67 29 percent in the same period. The two sectors million in 2014 (45 percent of total spending of accounted for more than 70 percent of spending $151 million).151 The armed forces account for the in the Somaliland budget, with the remainder largest share, followed by the police force (Table allocated to the economic and social services 3.3). Given the high level of insecurity in Somalia, sectors. Spending on economic services averaged heavy spending on security may appear justified, 13 percent in 2011–13. Spending on social services, but it crowds out essential spending on social and mainly health and education, accounted for 12 economic services that could address underlying percent of total spending (Figure 3.18). causes and help generate stability. 10 The security sector comprises the Ministry of Defence, the Armed Forces, the Military Court, the Ministry of National Security, the Ministry of National Security, the Police Force, the National Security Force, and the Immigration Department. 22 S o m a l i a Econ o m ic Update • 2015 3. The State of the Economy Table 3.3: Security sector budget of the FGS, 2014 and 2015 (millions of dollars) 2014 2015 Item Budget Outturn Budget Revised Armed Forces 49.7 43.3 58.8 34.5 Police Force 13.9 11.1 14.4 6.8 National Security Force 10.4 8.6 8.9 10.1 Immigration Department 1.7 1.7 1.7 1.7 Ministry of National Security 2.3 1.4 2.5 2.1 Ministry of Defense 0.9 0.7 1.0 1.0 Military Court 0.6 0.6 1.0 1.0 Sector total 79.6 67.4 88.3 57.2 Source: FGS Ministry of Finance (2015). Figure 3.18: By far the largest spending category in 3.4.3 Arrears in the FGS and Puntland are Somaliland is security significant T Expenditure shares, Somaliland 60 he building of arrears in the FGS signals lack 55.2 of expenditure control and undermines cash 50 43.0 budgeting. Arrears at the end of 2013 amounted 40.5 41.0 40 to $30.4 million (16 percent of the budget), which Percent 30.5 32.4 31.6 were carried over into the 2014 budget. The full 30 22.7 extent of arrears is not known, but it can be roughly 20 estimated by taking the difference between the budgeted figure of $91 million for compensation 10 of employees and the actual figure, as wage 0 estimates are usually closer to what should have 2011 2012 2013 2014* been paid. For the stock of outstanding arrears, Security Services Administration & General Social Services Economic Services Source: Data from Somaliland Ministry of Finance. the estimate as of the end of 2014 is $42 million (the stock of arrears at the end of 2013 minus Government expenditures in Puntland are highly net repayment of $1.3 million and new accrual of concentrated in a few agencies, some of which $12.9 million in 2014). appear not to be subject to normal budgetary controls. The top 10 expenditure heads received Salary and allowances drive arrears in Puntland. 88 percent of total government expenditures Salary and allowance arrears as of December 2014 in 2012 and 92 percent in 2013; the top four are estimated at$19.7 million, out of total arrears expenditure heads received 63 percent in 2012 and 69 percent in 2013. General Expenditures (GE) of $24.9 million. A key factor driving the arrears A and B, which are not associated with any specific in Puntland is off-budget activities: off-budget ministry, department, or agency (MDA), accounted revenues are associated with corresponding for 53 percent of total spending in 2013.11 The off-budget expenditures. In 2013 off-budget Puntland president has authority to initiate and expenditures accounted for 22 percent of official approve GE A; the minister of finance has similar budget expenditures and 18.5 percent of total powers over GE B. The security sector is the next- expenditures. Off-budget expenditures are not largest spending category, receiving 18 percent subject to normal budgetary controls and are of the budget (31 percent when security-related generally under the control of the head of the expenditures are included). institution responsible for the spending. Monthly 11 GE A appears to not be bound by budgetary controls. It is a major driver of arrears. October 2 0 1 5 | Edition No. 1 23 3. The State of the Economy budget execution analysis for May–December Figure 3.19: Somalia owes an estimated $5.3 billion to 2013 show that all MDAs are not treated equally: multilateral and bilateral creditors Some MDAs accumulated none or very little salary Distribution of debt by nature of creditor and allowances arrears, while others failed to pay Debt to multilateral creditors US$ 1.5 billion their employees. Non-Paris Club World Bank Creditors, 32% Expenditure management is also weak. Puntland’s 28% chart of accounts does not conform to the Multilateral IMF Government Financial Statistics Manual (GFSM Creditors 24% 28% AfDB, 9% 2001), making it challenging to use as intended. Paris Club Arab Fund There are also gaps in the payment mechanism. In Creditors 12% 43% some cases, authorized officials from some MDAs Arab Monetary Fund 18% withdraw cash from the Puntland State Bank to pay salaries and make payments to vendors for goods and services received. Source: FGS, MoF Debt Management Unit As one of the world’s poorest countries, Somalia 3.5 Debt Arrears and Eligibility for Debt Relief is eligible for the Heavily Indebted Poor Countries (HIPC) (HIPC) Debt Relief Initiative. Arrears to external S omalia accumulated substantial debt in the creditors have blocked access to international Cold War era. Relations with international financial resources to finance reconstruction. creditors were frozen in the late 1980s, when Somalia is working with its development partners financial policies slipped out of control. Because to resolve the debt problem and exploring ways of significant arrears on past debt-servicing to qualify for relief under the HIPC Initiative. After obligations, the lack of a fully functional national reaching the HIPC Completion Point. It would government, and the unstable security situation, be eligible for additional debt relief under the Somalia neither borrowed nor serviced its Multilateral Debt Relief Initiative (MDRI) from the public debt after the 1990s. Decades of conflict World Bank and AfDB debt and Beyond-HIPC Relief significantly reduced Somalia’s ability to pay its from the IMF. To reach the Decision Point, Somalia external debt. would need to reconcile its external debt data with creditor claims and put a debt management system Somalia owes an estimated $5.3 billion to in place. Somalia and its creditors must therefore multilateral and bilateral creditors (Figure 3.19). reconstruct the debt database that was destroyed It owes $1.5 billion (28 percent) to international during 20-plus years of civil war. It must also rebuild financial institutions, mainly the World Bank, the the debt management capacity that was lost IMF, and the Arab Monetary Fund. Of this amount, during the years when there was no functioning $1.2 billion is accumulated arrears (Figure 3.19). government (FGS, MoF, 2015). In addition, the FGS is Somalia also owes $3.8 billion to bilateral creditors expected to develop the poverty reduction strategy accrued during the Cold War era, mainly the United through a participatory process, commit to public States and the Russian Federation; $2.3 billion to financial management reform, build a track record Paris Club members (mainly the United States, the of policy performance monitored by the World Bank United Kingdom, the Russian Federation, France, and IMF, undertake a program of structural and Italy, and Japan); and $1.5 billion to non–Paris Club social reforms endorsed by the World Bank and IMF, countries (including the United Arab Emirates, generate satisfactory economic performance, and Saudi Arabia, and China). be able to make payments to the IMF and World Bank to meet its new obligations. 24 S o m a l i a Econ o m ic Update • 2015 II. Special Focus: Agricultural Sector Risk Assessment Governance October 2 0 1 5 | Edition No. 1 25 4. Governance 4.1 The Public Financial Management (PFM) 4.1.1 The legal and regulatory framework for System PFM is inadequate and is being revamped B uilding a public financial management (PFM) system is a fundamental part of the FGS’s process of reestablishing itself as a functioning T he FGS relies on PFM regulations enacted in 1961, with some amendments made in 1971. These regulations provide guidance for revenue entity after decades of conflict (FGS Ministry collection, annual budgeting, and the budget of Finance 2015). PFM institutions and systems formulation process, as well as some provisions govern how governments collect, allocate, spend, on budget execution, procurement, and banking and account for public money. PFM reform— arrangements. However, the regulations are improving business processes, technology, inadequate to address comprehensively the policy and regulations, organization, and human complex environment in which the FGS now resources—is critical, because without a well- operates. functioning public financial system, a government cannot collect and account for resources effectively, The FGS is committed to improving financial deliver services, and gain the trust and confidence governance and accountability, but it lacks a of the population. sound legal framework. The government has made progress in improving the weak PFM legal The civil war did not destroy Somalia’s federal- and regulatory framework. In 2013 it established level PFM systems. A government-led self- a Financial Governance Committee (FGC), a hybrid assessment of PFM undertaken in 2013 showed government/international oversight mechanism that many basic prewar operating capabilities that has helped coordinate policy dialogue remain in place, although they are neither and increased the accountability of Somalia’s effective nor efficient. It found that systems had concessions and procurement policies and practice. become highly personalized and informal. The self- The FGC aims to increase financial accountability assessment provided a basis for the FGS to develop and build confidence in country systems, support a PFM reform path. These reforms are informed by ongoing efforts to strengthen institutions and experience in other fragile and conflict-affected capacity, and spearhead actions to strengthen contexts. The reform trajectory is incremental, public finance and central bank management. builds on existing systems, and uses a flexible Figure 4.1 illustrates progress so far. learning-by-doing approach to allow constant review and adaptation as new information and Continued effort is required from all stakeholders challenges emerge. to ensure that sound PFM laws are passed and implemented. The draft laws, including the PFM PFM reform takes at least a generation. It took bill, the procurement bill, and the audit bill, have the 20 fastest-moving countries an average of 20 not been enacted in Parliament. The government years to achieve functioning bureaucratic quality needs to disseminate the laws, implement them, and 27 years to bring corruption under reasonable and train staff in their use. Years of de facto PFM control, according to the 2011 World Development practice that diverged from an out-dated legal Report. It is important not to place too many framework means that adherence to laws and demands and expectations on PFM institutions regulations is weak. Reform on this front will need in too short a period, because failure to deliver to be complemented with intensive support to against unrealistic expectations produces a loss of other change management dimensions. confidence and legitimacy (World Bank 2011). 26 S o m a l i a Econ o m ic Update • 2015 4. Governance Figure 4.1: Somalia has adopted new laws, regulations, policies, and procedures governing public financial management LAWS REGULATIONS POLICIES & PROCEDURES • Revenue & Taxation Law • Revenue & Taxation Administration • Aid Management Policy Regulations • Use of Country Systems Policies and • Sector specific regulations i.e. ICT Procedures • Revenue & Tax administration procedures • External assistance procedures manual • Anti-Money Laundering Law • Anti-Money Laundering regulations • Fiscal Federation Policy • Asset Recovery Management • Debt Relief roadmap • Financial Intelligence Unit regulations • Public Financial Management Law • PFM regulations • Financial procedures manual • Procurement Law • Banking Payment System regulations • Procurement procedures • Budget Appropriation Act • Security Sector Expenditure procedures • Government-to-business/civil servants payment procedures • PFM Law • Management Reporting • Budget Appropriation Act • Asset Management Not started In progress Completed/passed Source: Draft FGS Fiscal Governance Strategy 2015. 4.1.2 Budget formulation procedures are in place, Figure 4.2: Fiscal balance is set to be restored in 2015 but implementation is a challenge FGS Budget 250 F inancial regulations established budget formulation procedures, but most of them are not being followed, according to the PFM 200 189 216 199 199 Millions of US dollars 151 150 145 self-assessment. The lack of a standard Chart of 117 117 Accounts complicates budgeting. Participation is 100 very limited, with ministries lacking ownership of their budgets or even awareness of the allocations 50 made to them. 0 -28 -5.8 A credible and predictable budget framework -50 2013 Actual 2014 Budget 2014 Actual 2015 Budget is one of the foundation stones of financial Total Revenue & Grants Total Expendure Overall cash balance Source: FGS Ministry of Finance (Appropriation Act for 2015 Budget). accountability and transparency. The FGS is making progress on this front, in partnership with The FGS has taken a critical step in upgrading the international community. Unlike the 2014 its budget classification (or Chart of Accounts) budget, which had an unfunded shortfall of $27.7 to a multidimensional structure, including million, the revised 2015 budget is balanced (Figure organization, fund source, programs/projects, 4.2), although revenue projections seem ambitious economic classification, and, geographic location. at$199 million compared with previous outturns. The new fund and program segments are being The budget primarily covers recurrent costs, which piloted under World Bank–funded projects. The account for 93 percent of the budget, leaving little organization segment has also been mapped to scope for delivering the tangible and rapid results allow for production of reports by Classification of demanded by the Somali people. Compensation Functions of Government (COFOG) and Peace and of employees accounts for 40 percent of the total State-Building Goals (PSG). The economic segment budget in 2015, down from 51 percent of actual is used to produce IMF-Government Finance expenditure in 2014. The Federal Government Statistics (GFS) reports. collected $145 million in actual revenues in 2014. October 2 0 1 5 | Edition No. 1 27 4. Governance 4.1.3 Budget execution has improved, but it is It is helping design a revised process with added still lacking in many respects controls. The Somalia Financing Facility projects A window is supporting the establishment of a robust Somalia Financial Management Information procurement process within the Ministry of Finance System (SFMIS) is operational. All revenue for the delivery of civil works projects, an important and payment transactions are now processed system for the long-run financing Somalia’s through it and reconciled with the CBS. The SFMIS huge needs. Efforts are underway to ensure that is user-friendly, robust, and secure. It focuses on this valuable experience is mainstreamed into capturing the approved budget, payments, and government operating procedures. revenues; accounting for and posting financial reports; and ensuring budget controls. Budget Significant progress has been made in payroll and financial reports are now posted on the control. Civil service salaries channelled through Ministry of Finance website as part of the the strengthened payroll system accounted for government’s commitment to transparency. about 14 percent of total FGS spending in 2014. Through an incremental approach, other modules Civil servants are now paid only after two-part can be gradually implemented in the SFMIS, with authentication of unique identification numbers emphasis on training and change management. and biometric information. The process still involves manual reconciliation of multiple paysheets and a The foundations of the new payment established single geographic point of pay. Subsequent steps are gradually taking shape. The government is require reconciling multiple payrolls into a single addressing the need for financial controls for list, decentralizing payments, and rolling out a operating expenditures, which are currently made comparable system for the payment of salaries on the basis of cash advances to line ministries, of police and military personnel. Discussions are with ex post controls and little differentiation of underway to deposit salaries directly into civil roles in the payment process. The government has servants’ bank accounts once bank licensing and established a Payment System Reform Task Force to payment systems are strengthened. develop a new system for all line ministries. It will include ex ante controls and strict differentiation 4.1.2 Procurement rules need strengthening of roles in the payment process. Line ministries initiate transactions and submit payment vouchers to the Ministry of Finance for recording and payment. A vendor database is being established P rocurement of goods and services does not follow procurement rules, according to the self-assessment report. The award of contracts is to ensure direct payment to final beneficiaries, not based on open competition. No justifications with strengthened controls using bar-coded are made for the procurement decisions made. payment instructions. The CBS has issued interim Through the FGC, the FGS has made some progress licenses to six commercial banks and nine money updating the procurement regulations, and it is transfer agencies; direct transfers can be made to reviewing contracts. The prime minister and the the vendor accounts in these institutions to reduce minister of finance have begun to act on FGC the risk of cash processing at the CBS. A Treasury recommendations for some contracts. Single Account has been formally established is working now in place through which all revenue The Ministry of Finance has developed a should be paid and all payments made. Procurement Amendment Bill, which has been endorsed by the Council of Ministers and now With the help of international partners, the awaits passage by Parliament. Other documents government is leading the change management that have been prepared to introduce a competitive process for the operating costs payment process. and transparent public procurement system include 28 S o m a l i a Econ o m ic Update • 2015 4. Governance standard bidding documents for supplies and office, legal reform of its role is required to bring works for national and international competitive the law into line with the Constitution. Under bidding, a user guide for the standard bidding the 1972 Law on the Magistrate of Accounts, the documents for the procurement of supplies, auditor general is appointed by and reports to the procurement procedural forms, and a proposed president, weakening the independence and ability organizational structure and job descriptions for of OAG to function as a supreme audit institution. the Public Procurement Authority. The degree of An audit bill has been prepared to establish a more transparency and competition in procurement independent OAG. will be tested after adoption and implementation of these procurement rules and tools in executing Parliament has taken steps to establish its the budget. Capacity building of procurement oversight role. It has repeatedly asserted its department officers in the Ministry of Finance legal role in approving large concession contracts and line ministries is required to ensure effective and sought to renegotiate or cancel a number of implementation of the procurement rules. contracts that have been brought to its attention. Parliamentary committees have summoned The experience of tendering for concessions, ministers for questioning of these contracts. The especially for assets considered national or Parliamentary Finance Committee conducted a strategic, has highlighted the need for a stronger public hearing on the 2012 audit report, and a framework for procurement and concessions. The procedures manual was developed to enable it UN Somalia and Eritrea Monitoring Group (SEMG) to do its oversight role on a consistent basis in highlighted the practice of “secret contracting,” the future. whereby concessions are signed in a nontransparent and ad hoc manner. The absence of a clear Federal financial accountability institutions have legal or regulatory framework for concessions, been under resourced and marginalized for including procedural transparency, has often led decades. They require sustained support to be to agreements with unfavorable terms for the empowered to perform their functions. Very little FGS and Somali citizens. A draft procurement information has been made available for external and concessions act was approved by the Council audit or parliamentary review and scrutiny, of Ministers in April 2014 but is still awaiting and institutions have been starved of resources parliamentary approval. Weak interministerial and subjected to targeted attacks. Under these coordination and extremely limited internal circumstances, significant support must be granted procurement, legal drafting, and negotiation to the OAG and Parliament to fulfil their roles, capacities will make implementation of the act and together with the judiciary. This process is a long creation of its enabling institutions, including the one. The government and development partners proposed Interministerial Concessions Committee, should not be distracted by the proliferation of a formidable challenge. new financial accountability institutions, which will fragment scarce reform capacity. 4.1.3 Oversight institutions are being put in place T he Office of the Auditor General (OAG) has been created. Following the appointment of the new auditor general, in March 2014, the OAG Technical dialogue between the government and development partners on broader issues related to financial accountability have taken place in the made some progress in auditing the 2013 financial context of the PSG5 Working Group on Revenue statements, submitting its report to Parliament and Services. Development partner support to areas in June 2014. While Article 114 of the Provisional including revenue mobilization; intergovernmental Constitution establishes the OAG as an independent fiscal relations; linkages between PFM reform October 2 0 1 5 | Edition No. 1 29 4. Governance and service delivery; and strengthening of left a vacuum of public authority that traditional viable Somali oversight activities(for example, authorities, religious leaders, and rent-seeking external audit and legislative scrutiny) has also networks of de facto authority have filled. been discussed in this forum and agreed to with government and other stakeholders. Although the number and scope of incidents has declined since 2012, predatory behavior by 4.2 Anticorruption and Accountability political actors at the center and in the emerging I state administrations remains a problem. To nternational governance indexes rank Somalia reduce the incidence of predatory behavior, last or near last on corruption and accountability. the Financial Governance Committee (FGC) was In its rankings of more than 200 countries, created to advise and support the FGS on fiduciary the World Bank Governance Indicators place issues. It has achieved some success in bringing Somalia last or near last on control of corruption, fiduciary challenges to light and helping give the government effectiveness, political stability and FGS the tools with which to negotiate better terms absence of violence/terrorism, regulatory quality, with foreign companies. No significant contract rule of law, and voice and accountability. In 2014 restructuring has yet taken place, however. Funds Transparency International ranked Somalia 174th that do make it into the Treasury account at the of 175 countries. The Ibrahim Index of African CBS are still misappropriated, although they are Governance ranks Somalia last, with a mere 8.6 subject to stronger controls than some reports out of 100 points—16.2 points behind the second- acknowledge. Payment requests are subject to last country (Chad). Alternative accountability greater commitment and budget controls, and mechanisms, such as the media or civil society, efforts are being made to ensure the traceability are barely functioning: Reporters without Borders of payments to registered vendors. The roll-out ranks Somalia 176th out of 180 countries in terms of the SFMIS is contributing to promoting better of press freedom. adherence to these controls and more accessible information on payments. The ongoing support Somalia has suffered from severe corruption and of the World Bank to PFM will strengthen these embezzlement of public funds, the absence of any formal accountability mechanisms. accountability mechanisms for public servants or politicians, and the flourishing of networks The passing of the bill establishing the Anti- that profit significantly from their absence. The Corruption Commission in January 2015, the lack of accountability mechanisms undermines President’s commitment on various occasions to the process of stabilization and state formation. the fight against corruption in Somalia, and the The persistence of spoilers at most levels of progressive interpretation of his mandate by the governance erodes confidence that change is afoot Attorney General of Somalia will be important and jeopardizes the emergence of a new cadre steps to trace. Central Bank reform, asset recovery, of honest administrators. Continued predatory strengthened commitment to PFM reform, and behavior by public and private actors in the increased transparency regarding public contracts political, economic, and security arenas has sowed will be important building blocks in creating a more mistrust between the state and civil society and resilient and capable accountability system. 30 S o m a l i a Econ o m ic Update • 2015 II. Special Focus: Agricultural Sector Risk Assessment Outlook October 2 0 1 5 | Edition No. 1 31 5. The Outlook for 2015–17 5.1 The Importance of Security from investing in long-term production-oriented G activities. Any deterioration of the security rowth in Somalia could accelerate in 2015–17 situation, including fallout from the 2016 general if the fragile peace in the South-Central region election, will have an adverse impact on revenue continues, AMISOM troops continue to contain Al by limiting the government’s ability to collect Shabaab, the FGS gains more territorial presence, taxes and reducing growth prospects. If security and the international community continues to declines, macroeconomic projections are unlikely support the FGS. The security situation profoundly to be realized in 2015–17. affects investment, trade, and fiscal and monetary policy. A fundamental precondition for Foreign assistance could decline if political macroeconomic viability in the short to medium dialogue is not maintained. Given Somalia’s term is a durable resolution of political differences. dependence on foreign aid, any disruption in donor support—as a result of frustration with the reform Growth will continue to be consumption driven, process or political bickering, for example—would fueled by remittance inflows and enhanced donor severely curtail budget implementation. Foreign support. Investment demand is projected to pick assistance is channeled both on and off budget. up. As peace is secured and stability maintained, Direct budget support from donors represented 36 a larger share of remittances will be allocated to percent in 2013 and 39 percent in 2014. Off-budget investments, which will drive growth. Livestock will donor financing totaled $137.1 million (73 percent remain the main economic activity. of the 2014 budget). A first test of stability will be the electoral 5.2 Reforms Needed to Spur Growth transition process slated for 2016. If elections are peaceful and credible, consumption, investment, and foreign inflows (remittances, donor flows, and FDI) are likely to increase. Much of the increased H igher growth in the longer run requires increases in exports. If peace and security are restored, stronger consumption and investment investment is projected to be used to purchase will fuel aggregate demand in the short to imported equipment to renovate dilapidated medium term. Over the longer run, exports need infrastructure and housing, leading to strong to increase. Spurring exports requires priority growth in imports. reforms, including establishing a viable, properly supervised and regulated banking sector; reaching The security situation in Somaliland and Puntland a decision point on HPIC to allow access to is adequate for economic activity. In contrast, multilateral concessional financing; and levelling problems in the South-Central region make growth the playing field for the private sector. difficult. The fight to eradicate the militants has slowed economic activity, especially in Mogadishu, Fiscal reforms are needed to make Somalia’s as most government resources go to the security budget credible. The FGS was able to produce a sector. Given the precarious security situation, fully funded draft budget in 2015, but the apparent fundamental economic reforms are unlikely recurrence of arrears underscores the need for to receive the priority they deserve. Security continued attention to macro-fiscal management. challenges also discourage the private sector Revenue projections have tended to be unrealistic, 32 S o m a l i a Econ o m ic Update • 2015 5. The Outlook for 2015–17 leading to expenditure rationing and arrears during automated clearinghouse is established, and bank budget execution. In addition, trade taxes account supervisors are trained. Achieving the high rates of for more than 60 percent of domestic revenue, and growth necessary to significantly reduce poverty a significant portion of the budget is dependent will require increased mobilization of domestic and on unpredictable donor resources. Promising foreign savings to support higher rates of private attempts to elaborate the 2016 budget according sector investment. Reinvigorating the financial to medium-term fiscal planning and economic sector is a critical step toward setting Somalia on fundamentals are welcome. the road to sustained self-sufficiency, creating economic opportunities, and reducing poverty. The The financial sector needs to be formalized financial sector needs to build the correspondent to increase financial stability. Implementation banking relationships necessary for issuing letters of policies and standards that are in line with of credit, and it needs to provide banking services international best practice for bank supervision to the government, Somali investors, and small and regulation would increase the safety, and medium-size enterprises. In implementing the soundness, and integrity of the banking system. new law, the federal government should initially There is an urgent need to formalize the Somali focus on expanding financial services by attracting financial sector to reduce money laundering and sound and credible commercial banks to Somalia terrorism financing risks and help ensure that and expanding nonbank financial institutions to critical remittance corridors remain open. Powers provide small-scale and microcredit, in order to to regulate the financial sector and ensure boost saving mobilization. stability have been given to the CBS through the Central Bank Act. However, legal tools to counter Reliable statistics are critical for policy money laundering and the financing of terrorism formulation, planning, budgeting, and service are still in a draft stage, with both an AML/CFT delivery. They also play a central role in supporting and an anticorruption law in the works. The the implementation of policies. Monitoring and capacity of the CBS to perform its supervisory evaluation in particular supports transparency and role will need to be significantly enhanced. No accountability. Somalia has no formal mechanism significant examination has been performed of for validating the accuracy and reliability of the Somali financial institutions. The CBS and private data generated from official sources, surveys, or actors have engaged in dialogue and a licensing secondary sources. The absence of formal statistical process has been implemented, but lack of systems and continuing conflict in some areas has institutional knowledge, coherent procedures, led to fragmented and incomplete data collection. staff continuity, and limited regulatory clarity Some basic macroeconomic statistics, including are hindering progress. national income and balance of payments data, do not exist. Also lacking are the statistics needed to Operationalizing the 2011 Financial Institutions design and implement social services. A national Act would accelerate growth and potentially create strategy for data development, based on a strong economic opportunities for a wider share of the partnership between data producers and users, is population. High growth in Somalia is predicated needed. Reestablishment of the Somali statistical on implementation of the banking law that was system is an urgent priority, which will require approved in Mogadishu. It is hoped that commercial new institutional structures and generous foreign banking will begin once regulations are in place, an technical and financial assistance. October 2 0 1 5 | Edition No. 1 33 Part Two: Special Focus Intergovernmental Fiscal Relations in Somalia: Challenges and Lessons from International Experience This Special Focus highlights international experience—and theory drawn from that experience—and analyzes what it means for Somalia given the fiscal architecture that is emerging. It comprises five section. Section 6 provides a brief overview of key principles drawn from the analysis that follows. Section 7 overviews progress in forming the federal state of Somalia. It reviews the history of unitary democracy, centralized dictatorship, and state collapse and examines the emergence of a nascent federal system. Section 8 presents a framework for thinking about the design of intergovernmental financing arrangements. It reviews the de facto intergovernmental financing arrangements that are being established as FMSs are forming and examines how they are likely to affect the development of durable intergovernmental fiscal arrangements as the constitution-making process unfolds. The section concludes with observations that it may be more realistic to expect fiscal arrangements to evolve over time, as fiscal conditions change and as trust develops between the stakeholders Section 9 considers the institutional requirements of a well-functioning federal system, particularly in relation to the negotiation and operation of intergovernmental relations. It suggests next steps for collecting information and conducting analysis that will inform a well-considered process of designing the intergovernmental fiscal system. 6. Key Principles Governing Intergovernmental Relations S omalia is at a turning point; creating a workable system of government will be central to its recovery. Since the mid-1990s, a series growth and improved standards of living for the people of Somalia. of peace efforts have made slow but significant The construction of a federal state is complicated progress toward restoring legitimate government. by the preexisting rights of Puntland and by the The Provisional Constitution adopted in 2012 de facto intergovernmental fiscal architecture foreshadowed a final constitutional process that that is emerging as interim state administrations will culminate in 2016. As security across the form. The Provisional Constitution allows country improves, interim state administrations preexisting states (of which Puntland is the only have emerged and are laying the foundations of a practical example) to exercise powers given by new system of government. Optimism is increasing their state constitutions, if they were adopted regarding the possibility of forming a legitimate before the Provisional Constitution. Puntland and functioning, albeit weak, state.12 now performs all the functions of an independent state, including raising revenue from all possible There is now consensus among Somali leaders sources, maintaining an armed security force, that a federal system of government provides the and issuing visas to foreign nationals. It is the best chance of bringing together the fragmented only entity providing state-level services to its state. The idea of a federal system of government citizens. In the absence of any constitutional was first proposed in 2004, when the interim prescription, the interim state administrations are federal charter was adopted. It gained momentum emulating Puntland by assuming full revenue and with the adoption of the Provisional Constitution in expenditure powers. The state-formation process August 2012. The Constitution lays the foundations is thus fundamentally shaping the options for the for the creation of a viable federal system of intergovernmental fiscal architecture of a more government through the FGS. However, much permanent federal Somali state. The risk is that remains to be done to fashion the constitutional over time—the balkanization of states will become framework into a workable multilevel government more entrenched, limiting the role that can be architecture that can support both economic played by the federal government. 12 The constitution-making process has not sought to engage with Somaliland, which asserts its own independence. It is not anticipated that Somaliland will be part of the federal state in the near future. Accordingly, the discussion which follows covers those entities that are considered to be bound by the provisional constitution. 36 S o m a l i a Econ o m ic Update • 2015 6. Key Principles Governing Intergovernmental Relations Box 6.1: What Is a federal system? According to the Forum of Federations (a global network of federalism and devolved governance) federalism is: essentially a system of voluntary self-rule and shared rule. This is implied in the derivation of the word federal, which comes from the Latin foedus, meaning covenant. A covenant signifies a binding partnership among co-equals in which the parties to the covenant retain their individual identity and integrity while creating a new entity that has its own integrity or entity as well. A covenant also signifies a morally binding commitment in which the partners behave toward each other in accord with the spirit of the law rather than merely the letter of the law. A covenant is more than a contract; it commits the parties to an enduring, even perpetual, relationship and to an obligation to achieve the ends of the agreement and to resolve peacefully the conflicts that invariably arise in every relationship. Federalism is thus “both a structure and a process of governance that establishes unity on the basis of consent while preserving diversity by constitutionally uniting separate political communities into a limited, but encompassing, polity.” Source: www.forumfed.org The state formation process is a positive sign, but Fiscal arrangements lie at the heart of the federal it needs to be accompanied by the development project. Somalia’s 2012 Provisional Constitution of robust intergovernmental relations. The state does not specify how functions and resources will be formation process is fragile and fraught.13 Robust distributed between levels of government, except mechanisms for intergovernmental cooperation in relation to four specific areas.14 Assignment of and coordination are vital to sustaining the functions, and the distribution of resources to process. The Provisional Constitution envisages finance them, may be among the most contentious that the constitutional review process defines provisions to be debated as the final constitution intergovernmental relationships, but it is yet to play is agreed. a role in emerging intergovernmental negotiations. The Constitutional Review Commission has been The intergovernmental fiscal system should formed, but it has not been able to operate be based on principles, but they should reflect effectively because of resource and capacity Somalia’s unique social, historical, and political limitations. There has been little discussion of context. Dialogue on these issues is developing the intergovernmental system that defines the in an ad hoc way, usually through serial bipartisan interactions between the FMSs and the federal interactions rather than a plural negotiation government. If the state formation process proceeds among the entities that will make up the federal faster than the development of intergovernmental state. There are no hard and fast rules about what institutional arrangements, it may reinforce the a federal system should look like (see Box 6.1), division of functional responsibilities and revenue so a wide range of options are open to Somalia’s bases along geographic lines rather than across constitutional designers. Sharper focus on key levels of government. decisions is needed, underpinned by more robust 13 The fragility of the current system of government is evidenced by the fact that the Puntland Government has announced the severing of its relationship with the FGS twice since 2012, resulting in a parallel political process to resolve disputes. Similarly, only months after the interim Southwest administration was formed, it set up customs posts between the Benadir region and the new state. The action resulted in a dispute between the Benadir region, the interim Southwest, and the FGS. Early in 2015, the Federal Parliament voted to disapprove the composition of the newly constituted Interim Jubba Administration (IJA). In response, the IJA announced that it would sever its ties with the FGS. The Interim Administration of South West State (ISWA) also took issue with the composition of the IJA regional assembly. Frictions have also arisen between Puntland and the FGS over the formation of the Galmudug Interim Administration. Such examples highlight the need for mechanisms to resolve government to government disputes. 14 Article 54 of the Provincial Constitution grants the Federal Government powers over foreign affairs, national defence, immigration and citizenship, and monetary policy. All other powers are to be negotiated by the Federal Government and FMSs. October 2 0 1 5 | Edition No. 1 37 6. Key Principles Governing Intergovernmental Relations evidence base to inform them. The discussion in The immediate focus should be on nurturing this section aims to support this debate by framing intergovernmental mechanisms through which a basis for understanding the choices and options, fiscal arrangements can be negotiated on an focusing on technical issues rather than the larger ongoing basis. The Constitution should be clear political aspects of forming a federal system. The on the institutional arrangements through which analysis suggests five principles that, in addition fiscal arrangements will evolve, even after it has to those already articulated in the Provisional been finally negotiated. Several provisions of the Constitution, might provide guidance to Somalia’s Provisional Constitution specify a cooperative form leaders. Agreement on these principles, followed of federalism. The Constitution also provides for by a process of unbundling constituent elements an institutional intergovernmental framework, of the fiscal architecture, may provide a more including the Interstate Commission, to become productive starting point than framing the debate operational once the state-formation process in terms of models. is complete. It seems reasonable that fiscal arrangements should be agreed on through Principle 1: The approach should be dynamic, negotiation and discussion rather than by the organic, and grounded in cooperative decision of the Federal Government, but the intergovernmental institutions Intrastate Commission may not necessarily serve C the purpose of intergovernmental negotiation, urrent arrangements will shape what is possible if it cannot bind states’ leaders to the decisions in the short term, but fiscal arrangements it reaches. The process by which these often evolve substantially from their initial design. intergovernmental agreements could be reached is To the extent that newly established states exercise yet to be fully spelled out. the expenditure and revenue powers of existing states, the current decentralized arrangements Principle 2: Intergovernmental financing may become difficult to change, except over arrangements work best as coherent wholes time.15 In Somalia this evolutionary process is made necessary by the uneven and sometimes fragile relations between the center and regions and the history of interclan rivalries. Although D ecisions about the design of one element of the intergovernmental financing architecture limits the options for the design of other elements. some aspects of a constitution can be expressed as The idea that “funding follows function” is one of aspirational goals, fiscal arrangements should be the most basic concepts in intergovernmental realistic and capable of immediate implementation. fiscal design. Having more than one level of If the intergovernmental financing arrangements government means that both functions and to be included in the Constitution are not capable funding must be divided between them, and of immediate implementation, some transitional logic suggests they should match. Resources arrangements should be included in the can be allocated in two ways: by assigning tax Constitution. When de facto fiscal arrangements bases to different levels of government or by are different from the de jure ones for too long, transferring funds from one level of government the risk increases that they may never be fully to another. International best practice, which is implemented. Given the dynamic conditions to assign functions first and then allocate funding in Somalia, a useful approach may be to allow accordingly, may not be practical, since many fiscal arrangements to evolve through successive functions and tax bases are de facto assigned agreements rather than try to strike a grand already. Indeed, arrangements may be dynamic constitutional bargain at the outset. for a period of time in Somalia. Nevertheless, as 15 In this Special Focus, “state” or federal member state (FMS) is used to describe the sub-national units that have formed or are forming. Federal Government of Somalia (FGS) or “federal government” is used to describe the national level of government. “Federal State” or “state of Somalia” is used to describe the whole governance framework for Somalia, including both the federal and state government entities. 38 S o m a l i a Econ o m ic Update • 2015 6. Key Principles Governing Intergovernmental Relations decisions are made about individual components putting pressures on services and potentially (for example, assigning responsibility for raising tensions within or between states regarding particular function, or allocating a tax base), access to services by residents of one region who regard should be paid to how those changes migrate to another. Equal access to services and affect balance within the system as a whole. fairness in the distribution of resources are already enshrined in the Provisional Constitution, but it is Principle 3: Fiscal arrangements should support a not clear how this objective will be achieved. strong and unified economic space A s a small country with low GDP, Somalia can Addressing inequity will require some ill afford to balkanize its economic space. arrangement to share resources among states. If To increase economic efficiency throughout the the revenue-raising capacity of individual states federal territory, goods, money, and people should is uneven, some form of fiscal equalization will be highly mobile. Federal fiscal arrangements be needed. Somalia’s tax room (the fiscal space should be configured to promote a common to collect taxes from different bases) is currently domestic economic space to encourage direct divided across levels of government largely on a investment and an enabling business environment. geographic basis. The FGS controls revenues from the highly urbanized geographic region around States should be discouraged from erecting Mogadishu; other states control revenues that economic barriers to the free flow of goods and can be readily captured within their jurisdictions. commerce within Somalia or complicating the As customs revenue collected at ports is currently investment environment in other ways. A practice the most significant single source of revenue, it to avoid is the levying of taxes on the domestic is likely that some states will be relatively poorly movement of goods across states’ borders (as is endowed with revenue, because the ports within happening in Kenya). Somalia needs to attract the their jurisdiction are small. A system for sharing kind of domestic and international investment resources will need to address this inequality. that will make a sustainable contribution to the Equalization could be achieved either by having economy. Coherent regimes for investment are richer states share their revenues directly with central to creating this enabling environment. states that have less revenue or by having all states Center-state “tax jungles” or tax competition send a larger share of their revenues to the federal among states is to be avoided.16 government, which would then transfer funds to the states that need them most. Principle 4: Equity and inclusion lie at the heart of intergovernmental fiscal arrangements Principle 5: The assignment of functions should R esource competition and unequal access to be efficient and consistent limited resources have often been a cause of conflict in Somalia. If they are well designed, fiscal arrangements can help address inequities I nternational experience suggests a number of principles to guide the assignment of expenditure responsibilities between levels of and engender solidarity. Beyond issues of conflict, government, but some principles are in tension inequitable distribution also has economic with others. On the one hand, services should be consequences. Highly unequal fiscal outcomes as decentralized as possible, to ensure that they might trigger movements of population to are most responsive to local needs. On the other better-endowed states (a right Article 21 of the hand, capacity limitations, economies of scale, Provisional Constitution grants to individuals), and the need to limit administrative duplication 16 In theory, competition between states can be healthy driver of efficiency in more mature federal systems – since states will seek to strike the most attractive balance between levels of taxation and the services that can be provided. However, Somalia’s public sector is still extremely under-developed and it will be some time before tax competition is likely to be healthy rather than harmful to the economy. October 2 0 1 5 | Edition No. 1 39 6. Key Principles Governing Intergovernmental Relations suggest more centralized approaches. The capacity In other countries, the central government almost of different FMSs is currently uneven: Puntland, for always sets customs tariffs, which have international example, has had a functioning administration since trade implications. The administration of a wide 1998, whereas some yet-to-be formed states in range of taxes by multiple separate revenue central Somalia face the challenge (or opportunity) collection entities is particularly inefficient given of building systems from scratch. An important Somalia’s limited human capacity and the small size question for Somalia’s constitutional architects to of the economy. Tax administration is a complex consider is whether all states should exercise the bureaucratic function that requires relatively same expenditure responsibilities immediately or strong capacity to realize the potential of tax bases; whether some asymmetry should be allowed. it can be inefficient to have multiple organizations attempting to develop the same capacity. The The Provisional Constitution prescribes that model of tax administration is a separate issue revenues will be collected and services delivered from how to divide the revenues that have been by the level of government that is able to do so collected. However, considerable trust is usually most effectively. How these principles should be required before one level of government is willing operationalized has not yet been negotiated. In to hand over responsibility for collecting its taxes general, goods and services that are highly mobile to another. Achieving it may be an intermediate are best and most easily taxed at the federal level. rather than an immediate aim. 40 S o m a l i a Econ o m ic Update • 2015 7. From Unitary to Federal Government S omalia’s journey from a unitary state to a 7.1 The Long Road to the Provisional Constitution T nascent federal system of governance has he period from 1960 to 1969 was one of hope, been long and difficult. The term federal did not high expectations, and democratic experiment appear in a Somali constitution until 2004, but in Somalia. On July 1, 1960, the former British in many respects Somalia has been on a journey Protectorate of Somaliland, which had gained to federalism for more than 30 years. In 1995, independence from the United Kingdom five days a report by two respected scholars of Somalia recommended four models of decentralized earlier, came together voluntarily with the former government, including federation, confederation, Italian colony Somaliland to form the Republic and a consociational power-sharing arrangement of Somalia, under a centralized, parliamentary, (Lewis and Mayall, 1995).17 Understanding the and unitary system of government. A democratic complicated journey to today’s provisional system with a directly elected national parliament federal constitution is important if one is to prevailed until 1969. During this period, there were appreciate the influences that will shape the two peaceful transfers of power. emerging state and the decisions Somalia’s constitutional architects will face in designing the fiscal arrangements (Box 7.1). Box 7.1: Constitutional provisions chart the gradual emergence of a federal state 1960 Constitution: Article 1: The Republic Somalia is an independent and fully sovereign State. It is a representative, democratic, and unitary Republic. The Somali people is one and indivisible. 2004 Transitional Federal Charter: Article 1: Establishment of the Transitional Federal Government There shall be a Transitional Federal Government of the Somali Republic based on the sovereign will of the Somali people. Article 11: The Transitional Federal Government of the Somali Republic shall have a decentralized system of administration based on federalism. 2012 Provisional Constitution: Article 1, Section 1 Somalia is a federal, sovereign, and democratic republic founded on inclusive representation of the people and a multiparty system and social justice. 17 A confederation is an association of independent sovereign units that join together for certain purposes. The federal level of government is often nominated by the members of the confederation, rather than directly elected. United Arab Emirates and Bosnia and Herzegovina are examples of confederal systems. Consociational power sharing involves non-territorial power sharing among all the important communities within a state, regardless of where they live. State institutions are designed to accommodate proportional representation of these communities, and veto power for minorities. Executive institutions like the cabinet are designed to ensure representation of all groups. Within this framework, the individual communities are self-government. Belgium and Lebanon are two examples of consociational government. The fourth model proposed by the report was a unitary decentralized democracy. October 2 0 1 5 | Edition No. 1 41 7. From Unitary to Federal Government A bloodless coup put an end to democracy. In to avoid the violence that engulfed the rest of October 1969, following the assassination of the country, first by establishing security forces President Abdirashid Ali Sharmarke, the army and later by focusing on building administrative took power. A period of centralized government structures and a system of self-government. followed, under which the Supreme Revolutionary Meanwhile, armed militias controlled the rest Council, led by General Mohamed Siad Barre, made of the country, with the acquiescence of local all major government decisions. As part of its move populations. The resulting chaos fueled ongoing toward “scientific socialism,” the government mistrust among various clans. nationalized economic production and services. Somalia’s economic fortunes changed after the After a number of unsuccessful efforts, a peace 1977–78 war with Ethiopia, when the Soviet Union agreement was finally achieved in Djibouti in withdrew its support. The ideological stance of the 2000. The conference led to the formation of a leadership softened and patrimonial tendencies civilian Transitional National Government, which appeared to take hold, resulting in increased excluded participation of leaders of armed groups. opposition from armed groups. During its four years in existence, the Transitional National Government controlled little beyond Armed resistance to the regime culminated in the Mogadishu, with the blessing of the militia groups effective collapse of the state in 1991. The period that controlled that part of the city. Armed groups just before the fall of the regime was marked by that controlled most of southern Somalia rejected increased armed clan-based opposition to the the legitimacy of the new government. This period government and the reduction of effective state also saw the rise of the Islamic Courts Union (ICU), control in many parts of the country. Some of the which took control of much of southern Somalia. leaders who engaged in this conflict later emerged Its presence provided the impetus for increased as powerful political actors. In January 1991, international and regional interventions, further General Said Barre fled the country. After the complicating the state-building process. collapse of the regime, various opposition groups fought one another for control of Mogadishu, Some Somalis who remained in the country and resulting within a short period of time in civil others in the diaspora had been advocating for war, and, by 1991, the disintegration of the state. federalism since the mid-1990s. They argued The civil war continued for the next 10 years, that political reconciliation could not be achieved despite efforts and armed interventions from under the hegemony of any one community and international actors, including the United Nations that a predatory, centralized state administration and the United States. was one of the root causes of the civil war. The federal approach found favor with the Soon after the collapse of the state, regions in international community during the decade that North-Western Somalia (which included the followed, as well as with many in the constitutional former British Somaliland) unilaterally declared negotiation process. independence from the rest of the country. Within a short time, the self-declared state of Somaliland Following a protracted reconciliation conference was able to establish and maintain peace and in Kenya, a second government formed in 2004. democracy within its borders and to focus on It incorporated militia leaders in leadership roles building the apparatus of a functioning, if weak, and decided for the first time on a federal system state. In 1998 the regions in the north eastern part of government. While the Federal Transition of the country, Puntland, declared their autonomy, Charter contained an explicit list of the few areas although its leaders have expressed its willingness of responsibility for the federal level and of the to be part of a unified Somalia. Puntland managed many areas to be left to the states, there was little 42 S o m a l i a Econ o m ic Update • 2015 7. From Unitary to Federal Government space for debate or agreement on what type of the process of rebuilding government in Somalia federal system would be most appropriate. The to begin in earnest. The preliminary design of charter therefore empowered the Transitional governance is reflected in the 2012 Provisional Federal Government and the Federal Transitional Constitution. Section 7.3 below takes up discussion Parliament to complete the process of giving birth of the he state formation process which has to a new federal state through negotiations. It followed in more detail. was expected that by 2008 a federal constitution would have been written that would define the 7.2 Municipal and District Governance G type of federal system Somalis wanted to have, overnance arrangements in Somalia but the Transitional Federal Government made have always incorporated elements of little progress during its first four-year term. During deconcentration and decentralization to regions, most of this period, it operated effectively as a districts, and municipalities. Under the original government in exile outside Mogadishu, as the ICU system of parliamentary government established gained effective control of many areas in the country. after Independence, the central government The ICU established itself as an alternative public appointed governors of administrative regions and authority to the internationally backed Transitional most other regional and local administrators, as well Federal Government in southern Somaliaand was as all public sector employees: Everyone from the viewed by some observers as a worrisome sign janitor of a village school to the minister, including of the increasing role of radical groups in Somali village police officers, elementary school teachers, politics. In 2006 Ethiopia intervened to expel the various groups aligned with the ICU. The ICU was and village elders, was a government employee. A defeated, but it left behind radical elements of the deconcentrated system continued to operate during movement—among them, Al Shabaab, the youth the succeeding period of centralized military rule, wing of the ICU. except that mayors and members of city councils, who had previously been elected for three- In 2008 another transitional government year terms, were appointed along with all other incorporating some of the moderate members officials. A national law allowed municipalities to of the ICU was formed to complete the federal raise revenue from some minor fees and taxes and project. It made little headway, as deteriorating from the sale of some city services to partially fund security conditions have frustrated attempts at some of their basic municipal services, but all other state building for much of the past decade, after Al- taxes and expenditures were handled at the central Shabaab gained control of significant parts of the government level. In 2013 the Federal Parliament country. In 2007 the United Nations established adopted the District and Regional Administration AMISOM, which has helped increase security by Establishment Act. The implementation status of expanding the space within which government the law is unclear, but it is anticipated that it will be forces may provide services. Al-Shabaab forces overtaken by the final constitutional arrangements that had controlled most of southern Somalia (Samuels and Otieno 2014). gradually lost territory. The process of dislodging them has accelerated since 2011, as a result of Some cities, towns, and villages developed intense pressure by AMISOM forces and the Somali their own systems of government and revenue national army. Al-Shabaab has now been removed administrations during the period of state from all major urban centers, depriving it of key collapse. In the absence of an effective regional sources of revenue and safe havens, although it or central government, communities and still retains the capacity to instigate terror attacks authorities appointed by successive government against government and international targets. developed their own independent administrations, The resulting peace, albeit fragile, has allowed disconnected from higher-level governments. October 2 0 1 5 | Edition No. 1 43 7. From Unitary to Federal Government These authorities collect revenues and provide The capacity to deliver services and collect basic municipal services. Revenue is raised largely revenues varies widely across Somalia. In both from taxes on businesses, fees, fines, and charges Puntland and Somaliland, assigning functions collected at border checkpoints. Some major urban to local governments with very little capacity to centers have established revenue administrations deliver them means little in practice to citizens, that independently collect revenue to supplement and many social services are provided by nonstate their share. The government of the region in which actors. The United Nations Joint Program on Local Mogadishu is located receives 15 percent of the Governance and Decentralized Services (known as Mogadishu port revenues collected by the Federal JPLG) is encouraging development of local capacity Government, which it uses to deliver services to deliver services, by funding municipalities (these revenues are not shared with other levels of in Puntland and Somaliland that met eligibility government). Municipal governments in Somalia criteria, including elected councils. may be more effective and accountable than higher levels of government, as they are elsewhere in the 7.3 Formation of the Federal State A world (Menkhaus 2014). Provisional Federal Constitution was adopted on August 1, 2012, with significant technical A rudimentary system of fiscal decentralization and financial support from the international to the local level is in place in Puntland and community and following consultations with Somaliland, which have had functioning numerous stakeholders. The Constitution is governments for many years. Governments give provisional because it is incomplete and leaves back some of the revenues collected by districts and many key issues to be resolved, through a process municipalities in Puntland and Somaliland, which laid out in the document. It seems highly likely also retain whatever local revenues they collect. As that the arrangement of government adopted in a result, some municipalities, especially ones located the final constitution will be a federal one. The near ports, are richer than others and provide independence being exercised by interim state better services to their citizens. In Somaliland the administrations suggests that a unitary system of Regions and Districts (Self-Management) Law (Law governance would be difficult to implement in the No: 23/2002), as extensively amended in 2007, short term. It should be noted, however, that some defines the services that municipalities deliver and commentators still believe federalism may be the revenue sources they are allowed to collect.18 It inappropriate, or infeasible, in Somalia. They fear delegates the delivery of health services, education that in the absence of a strong central state, clan (elementary and middle school), security, animal rivalry may undermine state legitimacy.19 health, water, electricity, and the environment to the local level and allows municipal governments Many decisions will determine what kind of to collect a wide variety of taxes, including property federal state is adopted as part of a more taxes, fines, sales tax, and license and permit fees. permanent constitution (See Box 7.2 for an Puntland’s equivalent law, the Local Government Act explanation of how the terminology is used in the No. 7, was partly modelled on the Somaliland law. It following discussion). The concept of federalism defines the roles and responsibilities of lower-level embraces a wide variety of models. At one end governments in delivering services, identifies the of the spectrum are centralized federations, in revenues they are allowed to raise, and provides for which the federal government is responsible for a revenue-sharing mechanism. The law also gives the formulating policy and subnational governments minister of local government and rural development are responsible for implementing it. At the other the power to oversee municipal affairs. end, in more decentralized federations, states 18 This law, which consists of 105 articles, defines in detail how regions and municipalities should govern themselves. It also spells out the roles and responsibilities assigned to lower-level governments and the role of the Somaliland Government (Ministry of Interior) in overseeing the administration of these governments. Because of capacity limitations, implementation of the law is lagging, and the ability of municipalities to discharge their responsibilities is limited. 19 See Elmi (2015) for a discussion of various arguments for and against federalism. 44 S o m a l i a Econ o m ic Update • 2015 7. From Unitary to Federal Government are more powerful, and federal government and operate a durable federalism in Somalia are powers are limited to a few defined functions. yet to be created. Under a decentralized model, the powers of the federal government are often circumscribed, and 7.4 The State of State Formation T states exercise all residual powers. Figure 7.1 he Provisional Constitution prescribes a depicts one way of viewing these options, along process for the formation of Federal Member a continuum from a highly unitary centralized States (FMS). Before 1990 Somalia’s government state to ungoverned anarchy. Over the past 54 included a deconcentrated administration years, governance in Somalia has swung between consisting of 18 regions (including the capital region these two extremes. The work of defining where of Benadir). The Provisional Constitution recognizes Somalia’s federal state will come to rest along this these regions as the basis of forming an FMS but continuum is yet to begin in earnest; a great deal of requires two or more regions to voluntarily agree to work remains to be done. form one. Once agreement has been reached, the Boundaries and Federation Commission is expected Box 7.2: A note on terminology to determine the boundaries of the new state, after FGS (Federal Government of Somalia) refers to the which Parliament declares the state’s formation. federal (national) level of government only. FMS (Federal Member States) refers to the subnational entities under the provisional constitution and for the time being refers Although the state formation process is well to the interim state administrations that have been underway, it is not necessarily following the established. The Federal State of Somalia refers to all steps envisaged in the Constitution. As a result, governments covered by the Provisional Constitution some stakeholders have challenged the legitimacy (the FGS, the FMS, and any third-tier governments). of the process. A contributing factor is that the Boundaries and Federation Commission was Article 50 of the Provisional Constitution lays out established only very recently. It is expected that seven principles that will form the foundation of a more formal process of ratifying state formation Somalia’s federal system. These principles envision will begin soon. Deciding on a process of bringing cooperative federalism, equity in access to services the informal formation of state administrations and resources, and efficiency in revenue collection into line with the constitutional prescriptions is and service delivery (see Annex A for detail of all likely to have its own challenges. A recent report seven principles in Article 50 of the Constitution). by Conflict Dynamics evaluates several possible The institutions and mechanisms required to build options (Samuels and Otieno 2014). Figure 7.1: Somalia has experienced a full range of government systems since Independence 1969-1991 Pre-1969 2004 - present 1998 - present 1991-2000 Military Unitary Federal system Confederate system Anarchy rule democracy (excluding Somaliland) (Somaliland functions as an independent state) More Centralized More Decentralized Source: Oates Continuum of Government Systems, adapted from Dafflon 2014. October 2 0 1 5 | Edition No. 1 45 7. From Unitary to Federal Government Puntland, the only state that existed when the created in August 2013, as a result of agreement Provisional Constitution was adopted, has a between the FGS and delegations from Jubba.22 special status.20 It has been self-governing under In November 2014, the Interim South West its own constitution since 1998 and is considered Administration was created, through a process a de facto FMS. Puntland includes two and half supported by the FGS. The process of creating of the pre-1990 regions (Bari, Nugaal, and half of legislative assemblies and functioning regional Mudug, although these boundaries are not agreed governments is currently underway. In July 2015 to by all). It also claims two additional regions, Sool the process of creating the Interim Galmudug and Sanaag, and part of Togdheer.21 An informal Administration was completed. The state formation process of forming states has been adopted, to process has now moved to the final state, which ensure that conflicts over state boundaries and is expected to cover Hiiraan and Middle Shebelle. the composition of the interim administration are Once this process is completed, every citizen in minimized. Not all the newly formed FMSs have Somalia will live in an FMS, in the Benadir region followed this process (Table 7.1). (the capital region), or in Somaliland, which remains a self-declared independent state.23 Three new interim states have been created since Serious discussion of how the FGS and the FMSs 2013, and a fourth is expected to form by the end will work together is just beginning. of 2015. The Interim Jubba Administration was Table 7.1: State of state formation State/entity Regions Comments Somaliland Awdal, North West, On May 18, 1991, the people of northern Somalia (former British Sool, Sanag, and part Somaliland) unilaterally declared independence from Somalia, calling their of Togdheer (Cayn). state Somaliland. Somaliland has enjoyed peace for much of the period Puntland and the since its creation. It has established the apparatus of an independent state, new aspiring FMS of holding both parliamentary and presidential elections that have been Khatumo also claim considered fair and transparent. Creating an internationally recognized Sool, Sanag, and independent country has been the central objective of all Somaliland parts of Togdheer governments since 1991. It is not anticipated that Somaliland will be part (Ayn). of the process of finalizing the Constitution of Somalia. Puntland Bari, Nugal, and half Puntland declared itself an autonomous region within Somalia in 1998. It of Mudug (North has since set up a functioning administration and held three presidential Mudug). Puntland elections, in which power was peacefully transferred. also claims Sool, Sanag, and parts Puntland considers itself part of Somalia and is willing to be part of the of Togdheer (Ayn), federation.It is a de facto FMS, as it preceded the Provisional Constitution regions that are and signed it. Although it meets the requirement of becoming an FMS also claimed by as prescribed by the Provisional Constitution, the formal process of Somaliland as well as recognition through the Federalism Commission is yet to occur. Given the the new aspiring FMS absence of a functioning central government for many years, Puntland’s of Khatumo. government assumed all the functions and powers of an independent state. The FGS delivers no services in and collects no revenue from this region, including customs tariffs from the Bosaso port. Puntland is still issuing visas to international visitors. The borders of Puntland State are not yet clear and may have to await the determination of the newly formed Boundaries and Federation Commission and the Federal Parliament. In addition to the long standing dispute between Somaliland and Puntland in the north, new border tensions have emerged following the constitution of the newly formed Interim Galmudug Administration. 20 Article 142 of the Constitution on Existing Federal Member States in Somalia includes a provision that “(1) Until such time that all the Federal Member States of Somalia are established and the adopted Federal Member State Constitutions are harmonized with the Somali Federal Constitution, the Federal Member States existing prior to the provisional adoption of this Provisional Constitution by a National Constituent Assembly shall retain and exercise powers endowed by their own State Constitution.” In theory, the provisions of the Constitution on preexisting states also apply to Somaliland, but in practice this is not relevant since Somaliland does not consider itself part of the federal state system. 21 Somaliland also claims Sool, Sanaag, and Ayn (part of Togdheer). 22 Following the agreement, the process of forming a viable state has been ongoing; the final step of constituting a parliament was completed in May 2015, although a reconciliation process to bring along unhappy clans still needs to continue. 23 Somaliland is not part of the state-formation process, as it does not consider itself part of Somalia. However, separate tentative discussions of the status of Somaliland and its future as a separate state or part of Somalia are underway. 46 S o m a l i a Econ o m ic Update • 2015 7. From Unitary to Federal Government State/entity Regions Comments Interim Jubba Gedo, Lower Jubba, On August 28, 2013, the FGS and representatives of the de facto Administration and Middle Jubba administration of Kismayo (the capital city of this region) signed an agreement to create an Interim Jubba Administration (Jubbaland) for two years. The new administration has established government structures and inaugurated a regional assembly on May 7 2015. On May 19, 2015, 40 members of Parliament tabled a motion in the Federal Parliament opposing the inauguration of the IJA Regional Assembly. Their actions prompted protests in several towns in Lower Jubba. The process of completing the formation of this potential FMS is under way. Interim Bay, Bakool, and After protracted negotiations supported and at times mediated by the FGS, South West Lower Shabelle on November 8, 2014 representative of these regions agreed to form a Administration new interim FMS. A state formation conference was due to be held in June, but was postponed because of disagreement on contentious clauses in the provisional state constitution that had been adopted in 2014.A conference in Baidoa to select assembly members was meant to begin in late May 2015, but at October the formation of the Interim South West Parliament was still pending. Interim South Mudug and An agreement was signed in July 2014 to begin the process of forming an Galmudug Galgaduud interim administration for central Somalia.On April 16, 2015, the conference Administration to form an interim Central State opened in Adaado, in the presence of the president of Somalia.The process of forming an interim administration for this state wascompleted in July 2015, with the adoption of a new state constitution (following a consultation process and revisions by a Technical Committee), selection of members of Parliament, and the election of a president and a vice president. The newly elected president indicated his willingness to discuss concerns expressed by Puntland relating to the borders of the new FMS. Hiiran and Hiiraan and Middle A reconciliation conference was held at Beledweyne, at which a peace Middle Shebelle Shabelle agreement was reached on May 6, 2015, following intense fighting between clans in the region. The reconciliation conference was extended in mid-June to accommodate grievances by some groups. A state consisting of Hiiraan and Middle Shebelle is expected to be formed before the end of 2015. Benadir Region Capital city The Provisional Constitution directs that the status of the capital city be determined by the constitutional review process and a special law enacted by the two houses of Somalia’s Federal Parliament. Discussion is also underway regarding whether the Benadir region, regardless of its status as the capital city, should be treated as a region like any of the 18 other pre-1991 regions. If this view prevails, the region could potentially join neighboring regions to form part of a new FMS. This argument considers the location of the capital city as separate from the fate of the Benadir region. For now, the FGS appoints the governor and all senior officials of this region as well as all district commissioners. This arrangement many change once the legal status of the city is determined. Note: Information is current as ofmid-October 2015. October 2 0 1 5 | Edition No. 1 47 7. From Unitary to Federal Government A number of important steps in the process of also confront the challenge of accommodating forming the FGS cannot be completed until all minority interests within FMSs that may be FMSs have been formed. All FMSs need to be in dominated by members of one community. Most place before constitutional negotiations can begin, FMSs are likely to include communities with a because they are the counterparts to the FGS in history of rivalry. Development of inclusive forms the constitutional negotiations as representatives of governance within each state will be as crucial of the wishes and aspiration of the people they for lasting peace as the development of the represent. The Upper Chamber of Parliament relationship among levels of government. (Senate) cannot be established until the states have formed, as this chamber is expected to As FMSs are forming, they are establishing represent the interests of the states. The Senate interim systems of revenue generation and plays a central role in amending and ratifying service provision, even though the design of the Provisional Constitution. States are also these arrangements is intended to be part of the needed to form several constitutionally required constitutional negotiations. In Puntland’s case, commissions, membership of which is constituted these arrangements have been in place since by state-appointed representatives. One of these 1998. On the one hand, deferring negotiation of commissions is the Interstate Commission, which the federal state until the states have formed is has a mandate to promote cooperative federalism fair, as it prevents states that form earliest from by coordinating activities and resolving disputes exerting unfair influence over the design process. between the FGS and the FMSs. On the other hand, the longer the state-formation process takes, the more entrenched systems of de Nascent and sometimes difficult relations facto intergovernmental fiscal relations are likely between new entities will make the federal project to become. The next section examines the facto challenging. Many years without an effective and arrangements that are emerging and how they are legitimate state have undermined trust in the likely to influence the options available to Somali concept of central government. However, the constitutional architects. creation of a well-functioning federal system will 48 S o m a l i a Econ o m ic Update • 2015 8. Designing Intergovernmental Financing Arrangements for Somalia A ll intergovernmental financing systems incorporate two basic components: the distribution of spending responsibilities and the In fragile and conflict-affected states, the design of intergovernmental fiscal relations rarely, if ever, follows a linear path. A recent study of tax and transfer system that finances them.24 intergovernmental fiscal relations in post conflict These components rest on a foundation of states summarizes insights from international institutional arrangements (the political and power experience (Frank, Elin, and Vaillan court 2014). It relationships inherent in the design of government suggests there are several decision-making areas structures). They are implemented through in which different intergovernmental stakeholders budgeting and accounting arrangements and will likely continue to struggle for ownership. the functional and managerial capacity of public On the expenditure side, they mainly concern servants at all levels of government. human resources and public investment. On the revenue side, they relate to taxes, transfers, In an ideal world, these components would be and natural resources. Any of these areas can designed in sequence, so that “funding can follow be a starting point from which to build and function.” Figure 8.1 depicts the sequence of strengthen intergovernmental relations. While designing these components. Of course, the real decisions on revenue might precede assignment world rarely presents the opportunity to design of responsibilities, over time the aim should these arrangements sequentially, but the ideal be to bring these different areas of decision sequencing helps reinforce an important principle making into line. Fiscal conflict is a feature of any that the distribution of spending responsibilities multilevel government system; the mechanisms (also referred to as “expenditure assignments”) and for intergovernmental fiscal coordination need the design of the tax and transfer system are two to be robust enough to prevent new conflicts halves of a system that must function as efficiently from emerging. It is also likely that the interests, as possible in order to deliver services effectively. incentives, and power of stakeholders will change These components need to be designed, or over time. Fiscal arrangements are more likely to retrofitted, to operate as a single system. evolve in line with these changes if designed with flexibility. Robust intergovernmental negotiation Figure 8.1: Intergovernmental fiscal architecture mechanisms are therefore critical. should be designed sequentially Institutional Unpacking these components into their 1 structures Functions and constitutent elements can help focus stakeholders 2 spending on options and their implications. At the responsibilities 3 Tax and transfer systems same time, Somalia’s intergovernmental fiscal arrangements will build on what is already in a. Assignment of revenue sources place. This section examines the choices involved in designing the distribution of functions and b. Financial transfers spending responsibilities and the design of the tax and transfer system. It then explores how a 4 Budgeting, accounting and accounting systems de facto architecture of functional and revenue 5 Functional and managerial capacity and authority assignments is emerging as FMSs form. Although Source: Adapted from Dafflon, 2014 these arrangements are not part of a formal bargain 24 The terms intergovernmental fiscal relations, intergovernmental financing arrangements, and fiscal architecture are used interchangeably in the following discussion. October 2 0 1 5 | Edition No. 1 49 8. Designing intergovernmental financing arrangements for Somalia among stakeholders, they very likely affect what it a function according to its component parts, is possible to negotiate, given that any change covering, for example, the setting of policy; the from the status quo will involve winners and imposition of regulations or standards in the losers. The scope for accommodating different sector; the actual production of the service (staff, interests is then explored through a case study operational funding); the provision of capital of functional assignment and revenue sharing in infrastructure; and monitoring and evaluation. the oil and gas sector, an area of special interest Even before the Constitution is finalized, it may to Somali stakeholders. This section concludes be useful to establish technical sector committees with a discussion of two considerations that to begin unbundling functions (see Box 8.1 for are likely to shape the choices open to Somali suggested terms of reference). stakeholders as they turn to the detailed design of their new system. Box 8.1: A technical committee could help unbundle shared functions using the following terms of reference 8.1 Functions and Spending Responsibilities: 1. Analyze how functions are currently being The Theory performed. F ederal constitutions typically specify the 2. Explore how those arrangements might change under a more efficient and effective set of delivery distribution of law-making power among levels arrangements. of government. In countries where subnational 3. Identify areas where ongoing coordination between autonomy is highly valued (such as Australia and levels of government will be needed and what the United States), the powers of the center are processes and procedures should be put in place to specified and residual powers lie with the states. ensure it happens. In other systems (such as Canada), the powers 4. Identify the budgetary implications of different models of function assignment. of the states are specified and residual powers 5. Isolate any contentious areas that should be referred lie with the federal government. A third model to the political level for debate and decision. (which Kenya and South Africa have adopted)is to list the powers of each level, including areas in which both levels can make laws. An important There is no one correct assignment of functions, question is whether the central government will but some functions are almost always assigned have the power to spend money in areas where to the national level. They include defense, it does not have constitutional authority to make foreign affairs, and management of the economy, laws. Provisions of this kind, known as “spending which Somalia’s Provisional Constitution assigns power,” provide a legal anchor for spending to the federal level (see Annex A). A small in areas not constitutionally delegated to the number of functions (such as garbage collection) federal government. are almost always local. In between lies a wide range of variation, with both states and federal Beyond law-making power, different levels governments playing some role in most functions. of government must reach agreement on the It is increasingly common for responsibilities to assignment of spending responsibilities—who be shared across all levels of government. Table does what—usually at a much finer level of 8.1 shows the assignments for three federal detail. “Unbundling” can be a useful way to countries (Brazil, Mexico, and Canada) and two reach agreement on the assignment of spending constitutionally decentralized unitary states (Kenya responsibilities. It involves disaggregating and South Africa). 50 S o m a l i a Econ o m ic Update • 2015 8. Designing intergovernmental financing arrangements for Somalia Table 8.1: Assignment of Responsibilities in Five Countries South Responsibility Brazil Mexico Canada Africa Kenya Defense, foreign affairs, trade F F F F F Post and telecommunications F F F F Monetary policy, currency, banking, fiscal policy F F F F F Water resource management and airports F, S, L F, S, L F,S,L F F Pensions and social security payments F F F, S F, S F Immigration F F F, S F F Environment — — F, S, L F, S F, S Land use planning, licensing of building construction, F, S, L F, S S, L F, S, L S residential occupancy permits, local markets Primary education L F, S S, L F, S F, S Secondary education S F, S S, L F, S F Health, dispensaries, local hospitals F, S, L F, S S, L F, S S Community fire protection — — S L S Water supply and distribution F, S, L S, L — L S Interstate roads F, S F, S — F F Local roads S, L FS, L — S, L S Source: Adapted from Bergman, Ebel, and Frank 2013. Information on Kenya and South Africa comes from their constitutions. Note: F = federal, S = state, L = local/municipal. — = Not available. a. Kenya has only two levels of government. The “subsidiarity principle” informs decisions Other considerations suggest that functions should about which level of government should be carried out at the central level. They include perform what function. It holds that the lowest externalities (a situation in which the activities of level of government that is capable of performing one state affect citizens in another), economies of a function should carry it out. Subsidiarity helps scale, efficiency, and weak subnational capacity. increase responsiveness and accountability Table 8.2 shows a theoretical assignment of to local citizens and enables government to responsibilities for education. The functions it better reflect local preferences. Article 50 of the identifies can be assigned in many different ways; Provisional Constitution recognizes this principle what works best differs across countries. The point (see Annex A). of this example is to show how unbundling works, not to suggest what components should be vested in a specific level of government. October 2 0 1 5 | Edition No. 1 51 8. Designing intergovernmental financing arrangements for Somalia Table 8.2: Unbundling the education function: Theoretical assignment of responsibilities across levels of Government Area Selection of function “components” National State/local Policy making Universal access Retention of women and girls Hours of schooling Design of school buildings Religious education Use of vernacular in early grades Standard setting Curriculum and qualifications Accounting standards for schools Regulation Teacher accreditation School governance arrangements Service delivery Payment of teachers Administration of school operating grants Supervision and inspection Support and training for facility committees Execution of capital projects Procurement Purchase of school books Capital investment (classrooms) Monitoring Setting of performance standards Accountability for use of funds Education information systems Source: World Bank staff analysis. 8.2 Functions and Spending Responsibilities: between levels of government, it could be less Current Practice in Somalia specific about functional responsibilities. Law- D making powers do not always coincide with e facto expenditure assignments in Somalia are characterized by concurrency—that is, service delivery responsibilities, but a particular both levels of government perform the same government passing laws on an issue is usually functions but in relation to different regions. In a good indication that it controls policy on the some respects these expenditure responsibilities area as well. are aspirational rather than real, as limited fiscal capacity means that most government entities Actual practice does not yet reflect that the exercise only some of their potential spending Constitution reserves four functions to the federal responsibilities. government (foreign affairs, national defense, citizenship and immigration, and monetary In many countries, the assignment of functions is policy).The government of Puntland still issues dynamic. Functions often shift between levels of visas to foreigners travelling from abroad, however, government depending on the changing balance even if they hold a visa issued by the FGS. between demands for autonomy and responsiveness and the desire of central government for Two aspects of functional assignment—efficiency nationally consistent policy or in response to and duplication—merit consideration in the concerns about state government capacity to constitutional design process. Somalia is a small deliver. While the Constitution will need to country with very low GDP. It cannot afford to specify how law-making powers are distributed assign functions in a way that involves duplication 52 S o m a l i a Econ o m ic Update • 2015 8. Designing intergovernmental financing arrangements for Somalia of effort by multiple governments. Somalia’s Some federal constitutions empower both levels emerging FMSs are at very different stages of of government to tax the same bases (concurrent development. Administrations that are just taxing power). Others assign tax bases to different forming in areas previously not under government levels. A third, less common, option is to assign tax control will be in a very different position to deliver bases according to the type of taxpayer (Ethiopia services than Puntland, which has a longer history uses this system).25 The policy decisions that follow of administration than the federal government. depend on which option is selected. If both levels Some form of asymmetry—where some states have of government share taxing powers, decisions more functions than others—may be appropriate must be made about what proportion of the at first. In Kenya the transitional 2010 Constitution available tax room each level will collect. If taxing provided for functions to be assigned only once powers are divided, the main questions are about counties developed the capacity to manage them. which tax bases should be given to which level However, the distribution of revenue bases may of government. Some economic and efficiency determine whether an asymmetric arrangement considerations inform allocation of taxing powers is feasible. Unless the FGS controls significant among levels of government. But it is also revenues and can provide transfers to states that important to ensure that subcentral governments have more functions, an asymmetric distribution of have control over a substantial portion of their functions will not be feasible. revenues, to promote accountability to citizens/ taxpayers and discourage wasteful spending. And It makes sense to concentrate first on the unless the central government has substantial functions that cost the most. In this respect, the revenue powers, there will be limited capacity to function that deserves the greatest attention is equalize differences across regions through central the security sector. Almost 30 percent of total to state transfers. expenditure in Somalia goes to the security sector, a larger share than in any other fragile state other Who administers taxes is a separate question than Afghanistan. Assignment of security sector from who controls revenues. Tax administration expenditures should therefore form a starting options include (a) having national agencies point for considering how to assign tax bases, collect some or all taxes on behalf of subnational in order to ensure that the level of government governments (as Canada, Germany, and Uganda which is responsible for security expenditures do), an approach that is particularly useful where has the fiscal capacity to meet them. Conversely, two levels of government share a specific tax it is unlikely that any of the existing tax bases can base;26 (b) having separate tax administrations be reallocated to another level of government (which may be inefficient, costly, and often not without transferring some or all of this important workable where local capacity is low); and (c) cost responsibility. having subnational governments collect some national taxes collected for the center. Different 8.3 Assignment of Revenues: The Theory approaches could conceivably be adopted for W hen designing a tax and transfer system, the first question to consider is how tax bases should be assigned to each level of government. different FMSs. All revenue assignment decisions involve trade-offs (Figure 8.2). 25 Ethiopia divides taxes based on the nature of the taxpayer. Because the private sector is relatively small, much of its tax revenues come from taxing public servants and publicly owned enterprises. Federal public servants and companies pay tax to the federal government, while taxes on state employees and companies go to state governments. 26 The federal government of Canada collects personal income tax on behalf of all provinces and territories except Quebec and corporate income tax on behalf of all provinces and territories except Quebec and Alberta. October 2 0 1 5 | Edition No. 1 53 8. Designing intergovernmental financing arrangements for Somalia Figure 8.2: Assignment of revenue powers to different levels federalism, this division is to be determined through of government involves trade-offs negotiations. The Provincial Constitution also Sub-national fiscal autonomy More tax efficiency invests the Federal Parliament with responsibility Responsiveness to citizens More scope for re-distribution for establishing national treasury laws that, among between regions other things, “determine legitimate revenue collection and expenditure disbursement relating More taxes at More taxes at to institutions at all levels within the Federal local level center Republic of Somalia.” (Relevant articles of the Provisional Constitution are in Annex A). More inter-regional inequality Sub-national fiscal dependence on center The tax bases in use are divided across levels of Less scope for redistribution Less responsive to at the center citizens government on a geographic basis, with the FGS Less tax efficiency collecting taxes from the Mogadishu region (and Source: World Bank staff sharing a proportion with the Benadir capital region) and Puntland and Somaliland collecting 8.4 Assignment of Revenues: Current Practice taxes within their geographic boundaries (Table in Somalia 8.3). The newer states are still developing their T he Provisional Constitution does not assign revenue bases to different levels of government. Article 50(f) stipulates that revenue- revenue raising capacity, but it seems likely that they will follow the same pattern. Some taxes are not yet being collected by any level of government, raising responsibilities should be given to the level and some tax bases are with municipal governments of government that can exercise that responsibility (Table 8.3). most effectively. In the spirit of cooperative Table 8.3: Distribution of tax bases in Somalia27 Federal Government of Type of tax Somalia (Mogadishu) Somaliland Puntland Customs duty Sales tax Telecoms charges Corporate income tax Turnover tax Personal income tax (public sector) Personal income tax (private sector) Land/property taxes Stamp duty Vehicle taxes Business taxes Departure/ visa fees Airport/harbor fees and charges Administrative fees Note: For Somaliland and Puntland, lower levels of government are included. 27 The table sets out a presumed allocation based on the types of taxes currently being raised, or planned to be raised. In practice no level of government is fully exercising these tax bases presently. 54 S o m a l i a Econ o m ic Update • 2015 8. Designing intergovernmental financing arrangements for Somalia Both the FGS and the FMSs are heavily dependent Inequity in the distribution of resources across on taxes on trade levied at ports. In 2013, 68 regions is a primary cause of conflict; addressing percent of Puntland’s revenues came from customs inequity is a central concern of intergovernmental and related taxes, 90 percent of which were fiscal relations. There are two broad models export and import taxes.28 Eighty-three percent through which equity can be improved. Under of its revenue was generated in the region of Bari, the first model, the federal government is where the port city of Bosaso is located. In the assigned sufficient tax bases so that it has excess FGS, customs duties and related international taxes revenue, which it uses to subsidize states with generated from the Mogadishu port and airport lower fiscal capacity using intergovernmental generated 78 percent of total revenue in 2013. transfers. Under the second approach, states with more resources share them with less well- The heavy reliance on taxes levied at a border off states. This approach, which is less common point is not unusual for a tax system that is at than the first, is described as a “fraternal” an early stage of development, as these taxes system, because transfers are horizontal (among readily lend themselves to collection at physical states) rather than from the top down (although checkpoints. Other taxes, such as income tax, the central government still plays a strong role in require more sophisticated systems and much administering transfers). Box 8.2 describes some greater voluntary cooperation by taxpayers. examples of fraternal transfer systems. Neither level of government in Somalia has been successful in exploiting other core taxes, such as Design of a classic top-down transfer mechanism personal or corporate income tax. The FGS, for involves two sets of decisions. The first is how example, collects personal income tax only from much revenue should be shared between levels public servants. Personal income tax generates less of government. Sharing between among levels of than 4 percent of total income tax in Puntland (see government can take the form of a percentage of Annex B). In the first ever budget of Interim Jubba all or most national revenues (Kenya, Nigeria, the Administration, which covers the six months from Philippines) or the allocation of specific types of June to December 2014, port revenues account for revenue (Australia, Indonesia, India). Some systems 76 percent of domestic revenues and 48 percent of combine both approaches. In more centralized total revenues. countries, the central parliament may determine how intergovernmental transfers are made on an 8.5 Transfers: The Theory ad hoc way basis, sometimes with the advice of an T independent body. The second decision is how to he second dimension of designing a tax and share revenues among states, regions, or provinces. transfer system is addressing fiscal imbalances This step addresses the problem of horizontal fiscal between among levels of government and imbalance. One approach is to share revenues on subnational units. Depending on how tax revenues a derivation basis, which means that revenues go are assigned, one or another level of government back to the region or state that generated them. will have more (or less) resources than needed A derivation approach is often used for sharing a to meet its assigned spending responsibilities. proportion of natural resource revenues with the In both developing and developed countries, tax producing region. Derivation-based sharing does revenues are generally skewed toward the central not address horizontal fiscal imbalance, however— government, giving rise to vertical fiscal imbalance in fact, it often makes the problem worse. States (the central government has more revenues with more robust tax bases receive more revenue than it needs). In most countries, revenues are than states with weak revenue bases. A second inequitably distributed across regions (horizontal approach is to distribute grants or revenue shares fiscal imbalance). 28 Total revenues do not include off-budget revenues and surcharges that are not appropriated. October 2 0 1 5 | Edition No. 1 55 8. Designing intergovernmental financing arrangements for Somalia Box 8.2: Chile and Germany have fraternal intergovernmental transfer systems In fraternal intergovernmental transfer systems, better-off subnational governments share resources with governments that are less well-off. Fraternal systems are supposed to promote national unity, because citizens whose governments receive transfers can see that citizens from other regions have given something up to help them. They can be difficult to enforce, however, and in the situations described below the inter-regional transfers are enforced through strong discipline from central government. Chile’s Municipal Common Fund Municipalities are the third level of decentralized government in Chile. Because of the tax bases assigned to them, they have more fiscal autonomy than provinces. There is a wide disparity between rich and poor municipalities. Three- quarters of municipalities rely on transfers for more than 80 percent of their revenue. To reduce disparities, the government created a system in which municipalities contribute 60 percent of their property taxes (65 percent in the four richest municipalities) and 50 percent of their vehicle taxes (most of which come from the wealthier municipalities) to the Fondo Común Municipal (Municipal Common Fund). The four wealthiest municipalities also contribute a proportion of the commercial taxes they raise. The proceeds of the fund are distributed according to a formula that is based on equal shares, poverty, tax-exempt land in the municipal area, and per capita revenues from other sources. Germany’s Solidarity Pacts Following the reunification of East and West Germany, the six newly incorporated states in eastern Germany had significantly lower revenue-raising capacity than western Germany. Because Germany’s constitution mandates the sharing of taxes, there was limited capacity to address this inequality through top-down fiscal transfers. Instead, the presidents of the states (lander) and the federal government agreed on a “solidarity pact.” The first pact was negotiated in 1995; the second came into force in 2005. Both pacts provide for states with the greatest fiscal capacity to share some of their revenue from tax sharing with the poorer states. The states contribute to the equalization pool on a graduated scale, with states most above the national average contributing the most. The federal government also contributes to the fiscal equalization pool and provides support to the economies of poorer states in a variety of ways. Source: Boadway and Shah 2007; OECD 2008. on an equalization basis. The objective of this Figure 8.3: Allocation across sub-national units can help solve inequity between them, or make it worse method is to give all subnational governments an equivalent fiscal capacity to deliver a similar Revenue sharing Direct grants level of public services. A third approach is to allocate grants on a variety of other bases. Under Selected revenue OR Percentage of streams Unconditional Conditional most revenues this approach grants can reflect sector-specific collected nationally needs, be determined by Parliament, reflect How should unconditional and performance, match an amount contributed by How should shared revenues be distributed conditional transfers be distributed? a subnational government, or be based on other methods not clearly related to either equalization Distribute on Distribute on Distribute on derivation basis equalization basis ad hoc basis or derivation (Figure 8.3). = more horizontal imbalance Solving horizontal fiscal imbalance Source: World Bank staff 30 Since natural resources are often located in remove regions, derivation-based sharing of natural resource revenues may have immediate appeal as a way of compensating for the economic disadvantage otherwise experienced by that region. International experience, for example in Indonesia (Papua and West Papua) and Papua New Guinea (Southern Highlands) is that these regions end up with far more discretionary resources than the rest of the country, but much less capacity to spend it effectively. 56 S o m a l i a Econ o m ic Update • 2015 8. Designing intergovernmental financing arrangements for Somalia 8.6 Addressing Interregional Inequity Through revenue is almost always a national-level tax. The Transfers: Scope to Apply theory to Practice simultaneous dependence on customs revenue in Somalia by both federal and state governments in Somalia D not only skews resource availability between ependence on port revenues means that in the regions, it also restricts the capacity of the federal near term, the emerging fiscal architecture of government to equalize these imbalances through Somalia is likely to be highly inequitable, because transfers to poorer states. not all states have significant ports. Puntland has the port of Bosaso, and Jubbaland captures Under current fiscal arrangements, the FGS revenue from the port of Kismayo. FGS revenues has no capacity to finance transfers to states come mainly from the Mogadishu port; 15 percent with lower revenue capacity, because its own of these revenues is shared with Benadir, the revenues are insufficient. The FGS cannot meet capital region.30 In contrast, the newly established the basic operations of government and salaries Interim South West Administration and Interim Galmudug Administration, along with the as yet of employees from its current revenues. In 2013 undetermined state in Hiiraan and Shebelle, lack it spent $106 million on civil service wages and access to an established port. government operations, well in excess of its own- source revenues. Without international grants, the Even once other tax bases are more effectively government would not have been able to cover mobilized, the revenue-raising capacity of states is these basic expenditures. likely to differ widely. Interregional fiscal inequity resulting from uneven endowments of economic In the short term, the most likely way for the FGS geography is a feature of many countries. Few have to fund transfers would be for the states to hand had much success in overcoming these natural over some of the revenue bases they control to limitations through interregional economic the center, which would then redistribute them. convergence. Urbanization is another factor that Increasing FGS revenue by reducing revenue is likely to influence revenue potential. In addition leakage, better mobilizing the bases, and using to the capital city region of Benadir, Puntland more effective tax instruments (such as ad valorem is already quite urbanized, whereas Jubbaland customs duties) will take time, and such measures and South West State remain mainly rural (Table are unlikely to yield the kind of revenue increases 8.4). For this reason, addressing interregional that are needed to fund an intergovernmental inequity through a system of horizontal fiscal transfer system. Another option would be for FGS equalization will be a key objectives for the to be assigned emerging new revenue bases. For intergovernmental financing system in Somalia, example, the telecoms sector is generally regulated as it is in most countries. by the centre in many federations including the highly devolved federal system of the United Arab The most obvious solution to interregional Emirates. However, it will be challenging for the inequity—transfers from the federal government states to cede revenue bases to the FGS unless to the poorer states—would require more they can also hand off some expenditures. The only tax bases to be assigned to the federal level. state for which there is a reasonable time series of In most federal systems, tax bases are divided data is Puntland.32 As of December 2014, it had between levels of government either by virtue accumulated $24.9 million in arrears, more than of the Constitution or by agreement.31 Customs 60 percent of its annual revenue in 2013. 30 Residents of other states, who pay higher prices for the goods they consume, bear part of the burden of these taxes. 31 In some countries, two levels of government share larger tax bases, such as income tax or VAT, but this mechanism involves complex negotiations to ensure that the overall level of tax is appropriate and does not discourage economic activity. 32 The first budget of the Interim Jubba Administration, which covered the last six months of 2014, did not include revenue from the port of Kismayo. October 2 0 1 5 | Edition No. 1 57 8. Designing intergovernmental financing arrangements for Somalia Table 8.4: Population and economic base of Somalia’s Regions Regions Population estimates Economic Base Somaliland Estimated population is Trade and livestock are the two dominant sectors of 2.6–3.5 million. About 50– the economy. Fisheries and agriculture make smaller 60 percent live in urban contributions. Hargeisa is a government town with a large areas, 25–35 percent number of public servants. Berbera, the second largest are nomadic, 10–15 live port in Somalia, is the business and trade center. Trade with in settled rural areas, Ethiopia and Djibouti is an important economic driver and and less than 3 percent source of revenue. are internally displaced persons (IDPs). Puntland Estimated population is The traditional economic bases of Puntland are livestock and 1.6–2.3 million. About fisheries (primarily for exports). Some commercial agriculture, 50 percent live in urban mostly rain-fed farming, exists, but it is very minor. During areas, 30–40 percent are the civil war years, trade through the port of Bosaso and the nomadic, 10 percent live inland town of Galkayo, including with southern Somalia and in settled rural areas, and the Somali region of Ethiopia, flourished. 5 percent are IDPs. (These population estimates do not reflect the border disputes in the north and south of Puntland.) Jubbaland Estimated population is Livestock is the most important sector of Gedo, which also (Interim Jubba about 1.3–1.4 million. has some agriculture. Agricultural areas are under the control Administration) About 35 percent live in of Al-Shabaab. Gedo has boundaries with both Ethiopia and Regions: Gedo, settled rural areas, 30 Kenya and is an important trade transit point between Kenya Lower Jubba, and percent are nomadic, 25 and Somalia. Middle Jubba percent live in urban areas, and about 10 percent are In Lower Jubba crop production along the banks of the Jubba IDPs. River is the main driver of economy. Al-Shabaab controls some of agricultural areas of this region, which limits the potential of commercial farming. The two major rivers in Somalia meet in Middle Jubba and join the sea in Lower Jubba. The Jubba river traverses all three regions of Jubbaland. Livestock plays an important role in the economies of all three regions that constitute Jubbaland. Fisheries was an important sector in the past. Both the Middle and Lower Jubba have long coasts. Kismayo, the capital of the Lower Jubbaregion, has a large international port. Charcoal trade, which is currently banned, has been a source of revenue for various groups, including Al-Shabaab, that at one time or another controlled the region. South West Estimated population is Bay depends mainly on subsistence rain-fed farming and State(Interim about 2.3–2.4 million. livestock. Bakool’s economy depends largely on livestock. South West About 60 percent live in Historically, Lower Shebelle was part of the breadbasket Administration):Bay, settled rural areas, 20 belt of Somalia and a major contributor of export crops. Bakool, and Lower percent are nomadic, 15 Crop production declined significantly because large Shebelle percent live inurban areas, export-oriented firms and irrigation systems are no longer and 10 percent are IDPs. operational, however, as a result of prolonged conflict have displaced farming communities who were generally unarmed. Crop production and some fisheries now drive the economy. 58 S o m a l i a Econ o m ic Update • 2015 8. Designing intergovernmental financing arrangements for Somalia Regions Population estimates Economic Base Interim Galmudug Estimated population The economy is based largely on livestock. Potential exists for Administratio): is just under 1 million. artisan fisheries potential in both regions, Galgaduud and at Galgaduud and Almost 40 percentlive in least half of Mudug, together constitute Galmudug State but half of Mudug , urban areas, about a third without a good port the contribution by the fisheries sector IWhether Mudug are nomadic,15 percent in the economy is limited. region as a whole are IDPs, and about 10 or and only half percent live in settled rural Lower Shebelle borders Mogadishu, the seat of the federal will form part of areas. (These population government and the commercial capital of the country, where Galmudug is yet to estimates do not include 13% of Somalia’s population lives. This gives the region easy be settled. the areas that are disputed access to a large market. with Puntland.) Undetermined Estimated population is Crop production is the most important driver of the economy. (Hiiraan, Middle about 1 million. About 35 The Shebelle River (one of two major rivers in Somalia) cuts Shebelle) percent live in settled rural across both regions. Middle Shebelle has access to the sea areas, almost 35 percent while Hiiraan is land locked. are nomadic, just under 20 percent live in urban areas, Middle Shebelle also borders Mogadishu. and 10 percent are IDPs. Benadir Region: Estimated population is Mogadishu is the commercial and service capital of Somalia Capital city 1.4 -1.6 million, more and the country’s largest port. The largest businesses and than two-thirds of whom traders are based in the capital. Despite insecurity, Mogadishu live in urban areas. A little has retained its dominance. Mogadishu used to be industrial more than 20 percent are base of Somalia, but almost all industrial infrastructure has IDPs. About one-third of been destroyed. Somalia’s IDP population lives in Mogadishu. Source: Data from UNFPA 2014. Note: Population figures should be treated with caution, as doubts have been expressed about the validity of aggregate numbers given the implied annual growth rate. A number of recent political decisions may result in Agreements about the transfer of functions the handover of expenditures to the FGS without should be meaningful, and followed through the accompanying handover of revenues. The FGS by implementation. Questions of affordability is already under severe fiscal stress, with estimated should be central in these negotiations, to ensure arrears in excess of $45 million and a structural the deals are fiscally feasible. It does not serve budget deficit, according to IMF estimates.33 much purpose for the federal government to Despite this situation, on May 12, 2015, Somalia’s agree to assume responsibility for functions if president launched the Commission on Regional it cannot afford to pay for them in the long run. Militia Integration, whose terms of reference A number of intergovernmental agreements indicate that it “shall ask the Ministry of Defense about the sharing of functions and funding have for any fund and need based on the laid down been agreed but not implemented. Reaching plan and the allocated budget.” The roles and agreements but not honoring them if they are responsibilities of the Ministry of Finance need to not implementable will do more harm than good. be clarified. Decisions regarding the integration Following through on agreements is crucial in the of the militia are already being made at a political current context, since the development of trust level.34 For these agreements to be meaningful between intergovernmental stakeholders will be and to hold, affordability questions need to be fundamental to successful evolution of the fiscal discussed in relation to revenue assignments. arrangements. 33 The stock of arrears has grown significantly since 1 January 2015 when it was estimated by the IMF. 34 One example is the agreement in May 2015 at the Garowe Leadership Forum to accommodate 3,000 additional forces from Puntland into the Somali National Army (RBC Radio 2015). October 2 0 1 5 | Edition No. 1 59 8. Designing intergovernmental financing arrangements for Somalia In the absence of support from fiscal transfers, Internationally, there are many different variations emerging states may erect domestic trade in the ways in which ownership, control, and barriers as a way of capturing revenue as goods revenue entitlement are configured—but very cross their borders. Domestic trade taxes (called few examples of joint management by two levels octroi in Ethiopia and India) are an attractive tax of government. Among developing countries that base for subnational governments, because they produce oil, there are no examples of subnational are relatively easy to levy at checkpoints. These control and management. Although joint taxes have two important drawbacks, however. management is not out of the question, it raises One is that they are prone to leakage, because considerations that need careful thought, including payments are often collected in cash. An equally the risks and inefficiencies associated with important concern is that they erect domestic politicized or complicated multilevel negotiation barriers to trade. Somalia cannot afford to create and approval processes. Issues of revenue sharing disincentives to economic activity. However, unless could be separated from questions of control a solution can be found—most likely in the form and management. Management of the resource of equalizing transfers—it seems inevitable that does not necessarily carry an entitlement to the fiscally challenged emerging states will seek to revenues accruing from it. exploit whatever tax bases they can. Neighboring South Sudan experienced a similar problem of Revenue arrangements for oil, gas, and other managing the emergence of informal subnational natural resources are a subset of the broader taxation through checkpoints and taxes on goods. design of the tax and transfer system. Decisions Its experience may prove useful for Somalia. concern how much to allocate to producing regions and how much to allow the central government If a top-down transfer system is not fiscally to manage on behalf of the country as a whole. feasible in the short term, fraternal (state-to- Oil and gas revenues in Somalia are likely to be at state) transfers may be an option.35 If states least 10–15 years away, but a decision on revenue are not willing to give up revenue bases, at least sharing should be made before commercial initially, a system in which better-off states transfer discoveries are made, to minimize the risk of some of their resources to states with less access violent conflict over disputed resources. The level to revenue may make sense (see Box 8.2). The of government that manages the resource need success of such a system depends on strong trust not capture all the revenues. and goodwill among the emerging FMSs. Several factors should be considered in 8.7 Case Study of Oil and Gas determining the allocation of revenues. They M include the significance of the revenues for the anagement of oil and gas raises an important economy and for government revenue, the volatile and immediate question of functional and nonrenewable nature of natural resource assignment and revenue that puts the framework revenues and the impact of those characteristics set out above in a practical context. Currently, on subnational governments’ fiscal management, multiple levels of government in Somalia claim the and the potential to create significant interregional right to regulate oil and gas concessions, creating inequity if revenues are unevenly distributed. an environment of confusion. Lack of agreement Oil revenues often come from regions that are over who is in control heightens the risk that oil and poorly developed; derivation-based transfers can gas revenues may stimulate interregional conflict significantly change the fiscal balance. In Nigeria, and reduce the potential revenues extractable for example, the region with the highest per capita from these resources. transfers receives more than 10 times the per capita 35 Another option, not discussed here, is a donor-funded, government-implemented transfer scheme. 60 S o m a l i a Econ o m ic Update • 2015 8. Designing intergovernmental financing arrangements for Somalia revenues of the poorest region. For this reason, countries rests on conditions—well-developed arrangements for sharing resource revenues industrial economies, robust government revenues, should be considered as part of the overall design a high level of social trust, well-developed capacity, of revenue-sharing arrangements. sophisticated data collection systems—that are not in place in Somalia. The early experience A further question is whether producing states of developed federations may still be useful, should reap a net fiscal benefit if some revenues however, as examples of how countries faced with are shared with producing states. Revenue from similar situations managed to achieve agreement oil and gas can be captured in different forms, on fiscal issues, especially in the context of including royalties, payments from state-owned conflict. Federalism has been a common choice for oil companies, license and land use fees, export countries that emerged from interregional conflict taxes, and special corporate income taxes. If over the past 200 years. Developing countries that the formula for allocating equalization transfers decolonized in the past 60 years do not necessarily reduces the amount a particular government offer better models, because many of them started receives based on its revenues from other sources, with highly centralized systems inherited from then any revenues from oil and gas will be “netted the colonial period. Their story is more about the off,” so that the net fiscal benefit may be zero. Oil, center relinquishing power and resources to the gas, and mining revenues are treated this way in a periphery. Where federal or quasi-federal systems number of countries, including Australia, Canada, have emerged, they have been more about holding and Indonesia. together than coming together. There may be as much to learn from bad experiences as good ones, 8.8 Conclusion: Choices and Options but Somalia’s circumstances are very different T he emerging de facto fiscal architecture is likely from those of most other countries. The two to be important in shaping what is possible in international examples described have features the design of the new system. Providing access to that may resonate with Somali stakeholders. similar levels to services across the country will be possible only if there is pooling of some significant It may not be possible to achieve more than revenue sources—either by putting revenues in an interim solution. Intergovernmental fiscal the hands of the federal government or by striking arrangements should remain flexible, in order to an intergovernmental bargain among the states manage fiscal conflicts as circumstances and the to share revenues. Where a country starts from interests of different stakeholders change over exerts a powerful influence over what options are time (Frank, Elin, and Vaillan court 2014). The feasible or realistic in the short term. The fiscal most feasible approach may be a sequence of arrangements embedded in the Final Constitution incremental steps phased in over a specified time should be designed so that it is clear how the period, potentially with a sunset clause that expires current de facto architecture will change to make after a fixed period. The Australian Constitution, way for the new constitutional arrangements. If adopted in 1901, provided fiscal arrangements only the changes from current to new arrangements are for the first 10 years, for example. Australia’s fiscal substantial, a phased approach may be needed. landscape 100 years ago bears many similarities to that of Somalia today: Its six states operated These constraints are important to keep in mind as fiscally independent entities, dependence on when considering how best to draw on experience customs duties was high, and fiscal capacity varied in other countries. Some of the models adopted by widely across regions, with the average tax to GDP developed countries are unlikely to be practical in ratio only about 6 percent. Two central problems Somalia. The fiscal architecture of mature federal made finding common ground particularly October 2 0 1 5 | Edition No. 1 61 8. Designing intergovernmental financing arrangements for Somalia difficult during the constitutional negotiations. with at least 75 percent returned to the states. First, transferring customs duty to the federal The distribution provisions covered only the first government would have left the states without 10 years of federation, after which arrangements enough revenue to function. Second, the transfer evolved substantially and in ways not envisaged of customs duties would have affected different by the constitutional architects as the result of states in different ways. In the end, the Australian ongoing intergovernmental negotiation (see Box Constitution provided for the transfer of customs 8.3). Today Australia is one of the most fiscally and excise powers to the federal government, centralized federal countries. Box 8.3: Australia’s fiscal architecture has evolved The formation of the federal Commonwealth of Australia in 1901 brought together six previously self-governing colonies, each with its own fiscal arrangements. The Constitution, negotiated over a decade leading up to federation, was fundamentally a bargain struck by the six constituent units. Retaining state autonomy was an important goal of the negotiations. Accordingly, the powers of the federal government were limited, and states were given residual powers. The most important revenue sources for the colonies at federation were customs and excise duties. The six colonies had operated as independent economic units, taxing the movement of one another’s goods across their borders. As in Somalia, each state levied customs duty at different rates, taxing the taxed movement of goods across state borders. One aim of federation was to form an economic union. State perspectives on economic union varied considerably, however, with some states promoting free trade and others wanting to protect their local industries. Two colonies had begun diversifying their revenue base by imposing land and income taxes; other, less developed states were unable to do so, because their populations were itinerant. Underdeveloped states were consequently more reliant on customs revenue. Because the fiscal circumstances of the states varied greatly, the fiscal provisions of the Constitution proved very difficult to negotiate. The final constitutional settlement gave the federal government exclusive control over the most important tax base but subject to revenue sharing with states. Customs and excise duties were transferred to the Commonwealth government as exclusively federal taxes, with a uniform tariff to be imposed within two years. The federal government was also given four key spending responsibilities: defense, foreign affairs, pensions, and post and telecommunications. It proved very difficult to accommodate the very different fiscal circumstances of each state, because tariff harmonization affected each of them differently. In the end, it was agreed that Western Australia could continue to levy duties on goods from other states on a diminishing basis for a period of five years, as the redistribution effected by the uniform tariff took effect. The question of how to distribute the surplus customs revenue back to the states proved the most difficult to negotiate. In the end, the Constitution included a temporary solution, known as the Braddon clause. For a period of 10 years, the Commonwealth was permitted to use one-quarter of customs revenue for its own expenditure needs. Surplus revenues from customs duty would be returned to the states. Until uniform tariffs were imposed, each state’s “share” of customs duties was calculated based on how much revenue had been raised in that state; for a period of five years following the imposition of uniform duties, duties accrued to the state in which the goods were consumed. For the purpose of calculating the surplus, Commonwealth expenditures were charged against states on a per capita basis. It was envisaged that return of the surplus on a derivation basis would give way to a system of federal transfers to the states, which the Commonwealth Parliament would legislate once the Braddon clause expired. Australia’s fiscal architecture changed radically after federation, in ways that the constitutional architects had not envisaged. What was essentially a derivation-based system in which states received the surplus generated in that state, gradually gave way to a system of intergovernmental transfers based on need. The federal government, which had started at federation with only customs and excise revenue, gradually assumed other tax bases. A federal income tax was introduced to finance participation in World War I. Later the federal government made access to intergovernmental transfers conditional on states not imposing state income taxes, effectively crowding states out of this tax base. Over the first 100 years of federation, Australia went from having a highly decentralized tax and transfer system to having one of the most fiscally centralized federal systems in the world. Source: Hancock and Smith 2001; Spahn and Shah 1995. 62 S o m a l i a Econ o m ic Update • 2015 8. Designing intergovernmental financing arrangements for Somalia Experience suggests that flexibility will be key, occurred only gradually, first with harmonization of so that fiscal arrangements can evolve as trust customs duty rates, then with the establishment of builds. Bosnia and Herzegovina had a rocky a common tax administration, and later with the entry into nationhood following its civil conflict. introduction of a national VAT distributed based Immediately after the Dayton Accords in 1995, on a formula (Box 8.4). It is likely that Somalia’s which ended the civil war, the country became intergovernmental financing arrangements will an independent nation, but the level of trust build on what is already in place, in a series of among the constituent entities was low. In many incremental stages rather than through a grand respects the country was a confederation. Virtually design. Identifying the first step may be the most no revenue-raising powers were vested in the that is possible in the short term. central government at the start. Fiscal integration Box 8.4: Bosnia and Herzegovina gradually achieved fiscal integration through tax reform Following the comprehensive peace agreement initiated at Dayton Ohio in 1995, Bosnia and Herzegovina was established as a single sovereign state made up of two entities: the Serb Republic, including about 60 municipalities, and the Federation of Bosnia and Herzegovina. The new country had two subnational tiers, consisting of 10 cantons and about 80 municipalities. The design of the fiscal architecture drew on the fiscal legacy of Yugoslavia, in which most revenues were raised and retained by the republics, which then made bottom-up transfers to fund the federal government. This arrangement created considerable budgetary vulnerability at the federal government level, because its functioning was dependent on transfers from the better-off republics. The accord reached in Dayton gave the sovereign state of Bosnia and Herzegovina limited responsibilities—for foreign affairs, trade, and immigration; customs policy; monetary policy; and regulation of communications, transport, and law enforcement (but not defense). All powers not allocated to the federal government, including the right to raise an army, were reserved to the entities. The federal government was provided with no independent tax sources. For more than 10 years, its activities were financed entirely from transfers from the entities. The Federation of Bosnia and Herzegovina provided two-thirds of the federal budget, and the Serb Republic provided one-third. Indirect taxes accounted for about 70 percent of all revenues in both entities; they were owned by the entity where they were raised, with shares to canton and municipal level in the case of sales tax. Cantons and municipalities were heavily dependent on sales tax revenue, which accounted for 70 percent of cantonal revenue in the federation and 50 percent of municipal revenue in the republic. Distribution on the basis of origin generated substantial interregional inequity. With support from international actors, the two entities reached agreement on the harmonization of indirect taxes. A harmonized customs law was adopted in 1998, followed by harmonized excise taxes in 2000 and sales tax in 2001. Integration of tax administration proved more difficult, partly because of a policy in the federation to share all sales tax revenues with the canton level. Agreement on the introduction of a VAT was finally reached in the mid-2000s and implemented on 1 January 2006. It was agreed to establish a state-level Indirect Tax Authority and pool all taxes in a single account. The single account provided state government for the first time with a revenue source to supports it functions. It was first applied to fund the state budget and service Bosnia and Herzegovina’s debt, with the balance shared between the entities. Because of the difficulty in attributing VAT revenue to a particularly location, a new basis for distributing the balance had to be found. The parties agreed to share VAT revenue on the basis of a formula that guaranteed the respective shares of entity, cantons, and municipalities within the federation and of the entity and the municipalities within the Serb Republic. To ensure support for the changes, municipalities were given at least as much revenue as they had received from the sales tax, with the new formula phased in over six years. The introduction of VAT not only succeeded in introducing a single national tax administration system and giving the national government a revenue stream to support its functions, it also increased interregional equity. Disparities in per capital income at the cantonal level fell from 4: 1 to 2: 1, and municipal-level differences fell from 200: 1 to 35: 1. Source: Fox and Wallich, 1997; Fox , 2003; Fox, 2007; Levitas, 2007; Wallich and Zhang, 2013. October 2 0 1 5 | Edition No. 1 63 9. Institutions and Processes D esigning institutions and processes through which the fiscal architecture of a government can evolve may be just as important as designing Much of the evolving intergovernmental architecture in federal countries is determined through intergovernmental agreements that are the architecture itself. This section examines renewed and amended periodically. The two (or the mechanisms through which evolution can three) levels of government usually meet to discuss be managed in an orderly way that minimizes issues. Meetings take place at both the political and the risk of conflict escalating. Four categories of technical levels. At the highest level are heads-of- institutions are potentially important for managing government meetings, at which the most politically the ongoing negotiation of resource and revenue significant agreements are negotiated and ratified. sharing and spending responsibilities. The most Standing committees of finance ministers and important of these in Somalia’s current context is ministers of various sectoral ministries meet more the institutions that are needed to take the next frequently, often to reach preliminary agreement step of negotiating a workable, even if interim, fiscal before referring contentious issues to heads of bargain for the federal state. Box 9.1 describes the government. Meetings at the political level are other three types of institutions that have proved supported by more frequent and more detailed useful in other countries. meetings at the technical level, where the day- Box 9.1: Three types of institutions can support dynamic and responsive intergovernmental fiscal relations Finance Commissions A number of countries have formal (often constitutional) finance commissions that provide advice on revenue- sharing arrangements. In some cases they advise on the overall division of resources among levels of government; in other cases their mandate is confined to advising on sharing among levels of government. They help take the heat from political debates about resource sharing, particularly if they provide a technically expert and credible evidence base to inform these decisions. Three key policy choices must be made in designing these commissions: (a) whether membership is technical (as in Australia, India, and South Africa) or political (as in Nigeria and Pakistan); (b) whether the body sits on a permanent basis (as in Australia, Kenya, and South Africa) or periodically (as in India); and (c) whether the commission’s mandate is limited to horizontal sharing between states (as in Australia and Nigeria) or extends to sharing between levels as well (as in Kenya and South Africa). Upper Houses of Parliament Upper houses can function as forums for intergovernmental relations. Their impact depends on how they are constituted. In South Africa, the Council of Provinces is made up of the premiers of the provinces, who provide a direct voice for state governments in the national Parliament. In Australia and Kenya, senators are elected by the voters of the state. Because they are elected separately from the state government, rather than being chosen by them, they do not necessarily represent the interests of the state government; sometimes they are actively in competition with it. They do however represent the interests of voters in their state. Composition of the upper house will depend on whether it is intended to represent state governments or the citizens who reside in states. If these houses have intergovernmental relations functions, they usually have limited mandates, related to vetoing legislation affecting states; they may have no powers with respect to the budget or exclusively federal concerns. Somalia’s Provisional Constitution provides for an upper house with 54 directly elected members representing the FMSs and an equal numbers of senators based on the 18 regions that existed before 1991 (Article 72). Dispute Resolution Bodies Dispute-resolution institutions include constitutional courts and other mechanisms. The court is almost always the final arbiter of constitutional disputes, including disputesrelating to financial provisions, although its jurisdiction is sometimes limited. In South Africa, parties are required to exhaust other options before resorting to courts. In Papua New Guinea, interpretation of certain constitutional provisions is non-justiciable (meaning they cannot be challenged in court) or justiciable only at the instigation of one or other government, not private individuals. Somalia’s Provisional Constitution establishes a constitutional court consisting of five judges, nominated by the Judicial Services Commission and approved by the lower house of Parliament (Article 109B). 64 S o m a l i a Econ o m ic Update • 2015 9. Institutions and Processes to-day work of intergovernmental coordination foundation for that process. An intergovernmental is done. The Provisional Constitution provides for committee of ministers, including ministers of regular meetings across levels of government, finance, constitution, and federalism, could including meetings on issues that affect water, be formed to distill the issues that will need agriculture, health, and education (see Article 52 negotiating. It would work most effectively if in Annex A). The same article envisages that FMSs backed up by a committee of technical officials. may enter into cooperative agreements with other Part of distilling the issues would involve creating federal states or the federal government. a common platform of information to inform joint decision making by both levels. The technical The Provisional Constitution envisions creating committee of officials could play an important role an interstate commission once all FMSs are fully in information gathering and joint analysis. It could formed. It will consist of members appointed analyze the economic base and revenue potential by the prime minister and the FMSs. The federal of different regions, map the revenue sources of parliament will determine its powers. The potential FMSs, and develop a simulation model to commission has a role to play in facilitating explore the fiscal implications of different options intergovernmental coordination and cooperation for the design of the tax and transfer system. between the FSG and the FMSs and resolving administrative, political, and jurisdictional Regular and purposeful meetings help build disputes. It thus has the potential to fulfill more trust, particularly if they are focused on resolving than one of the institutional functions outlined practical problems rather than debating above. Whether its membership is appropriate to competing political perspectives. Although it may negotiate intergovernmental fiscal arrangements be too early to reach final agreement on issues, on behalf of states and the FSG remains to be it is never too early to begin forming a common seen. It may be that a dispute-resolution role basis for understanding the issues. Even before (which should be at arm’s length from the parties the Constitution is finalized, it may be useful to a dispute) may not be consistent with an to establish technical sectoral committees to intergovernmental negotiation role, which should begin unbundling functions. The function of such more properly rest with elected representatives committees would be to(a)assess how functions are of the FMSs, most obviously the ministers for currently being performed, (b) explore how those finance and constitutional affairs at each level.The arrangements might change under a more efficient overlapping roles of the Constitutional Court and and effective set of service delivery arrangements, the interstate commission also need to be clarified. (c) identify the budgetary implications of different models of function assignment, and (d) isolate any The formal processes of negotiating the contentious areas that should be referred to the Constitution cannot begin until all FMSs are political level for debate and decision. formed, but a great deal could be done to lay a solid October 2 0 1 5 | Edition No. 1 65 REFERENCES • Bergman, E., Ebel, R., and Jonas F (2013). “Assignment of Responsibilities in Federal Countries: Lessons for India’s Local Government.” Paper presented to the Decentralization and Subnational Finance Thematic Group, World Bank, Washington, DC, March 22. • Boadway, R., and Anwar S., (2007). “Intergovernmental Fiscal Transfers: Principles and Practice.” World Bank. Public Sector Governance and Accountability Series. Washington, DC. • Cirasino, M., and J. Pesme. 2015. World Bank Migration Brief. April, Washington, DC. • Dafflon, B. 2014. “The Political Economy of Decentralization: Fiscal Federalism in Practice.” Paper presented to the Horn of Africa Economic and Social Policy Institute (HESPI) and Intergovernmental Authority on Development (IGAD) conference on Federalism in Somalia, Addis Ababa, October 23–25. • FAO (Food and Agriculture Organization), 2015. http://www.fao.org/news/story/en/item/283777/ icode/. • Federal Government of Somalia Ministry of Finance. 2015 (forthcoming). Draft Strategy for Financial Governance. Mogadishu, Somalia. • Federal Government of Somalia Ministry of Finance. 2015. Somalia’s Debt Data Reconstruction, Progress and Outlook. Mogadishu, Somalia. • Fox, W. 2003. “Destination Based Indirect Taxation: The Case of Bosnia and Herzegovina.” European Journal of Law and Economics 16: 5–22. • Fox, W., 2007. “Fiscal Decentralization in Post-Conflict Countries.” Fiscal Reform and Economic Governance Project, U.S. Agency for International Development (USAID), Washington, DC. • Fox, W., and C. Wallich. 1997. “Fiscal Federalism in Bosnia Herzegovina: The Dayton Challenge.” Policy Research Working Paper 1714, World Bank, Washington DC. • Frank, J., Elin, B. and Vaillancourt, F (2014). “Intergovernmental Fiscal Relations in Fragile and Conflict Situations”. World Bank, forthcoming. (Report number P.149708), Washington, DC. • Hancock, J., and J. Smith. 2001. Financing the Federation. South Australian Centre for Economic Studies, Adelaide. • Levitas, T. 2007. “A Tale of Two Entities: How Finance Reform Builds Democracy in Bosnia and Herzegovina.” DAIdeas Democracy Briefs 1, February. http://dai.com/sites/default/files/pubs/daideas/ DG_Brief--Bosnia_and_Herz--Issue_1.pdf. • Lewis, L., and J. Mayall. 1995. A Study of Decentralised Political Structures for Somalia: A Menu of Options. Report by consultants from the London School of Economics and Political Science commissioned by the European Union, EC Somalia Unit, and United Nations Development Office for Somalia, London. • Menkhaus, K. 2014. “If Mayors Ruled Somalia: Beyond the State-Building Impasse.” Policy Note 2, Nordic Africa Institute, Uppsala, Sweden. http://nai.diva-portal.org/smash/get/diva2:714676/FULLTEXT01. pdf. • MIT Economic Complexity Observatory. https://atlas.media.mit.edu/en/. • Puntland Ministry of Planning and International Cooperation (MoPIC). (2011). Puntland GDP Estimate, Macroeconomic Unit, MoPIC and UNDP, September, Garowe. • Puntland Ministry of Planning and International Cooperation. 2013. Puntland Second Five-Year Development Plan 2014–2018: Development for All. Garowe October 2 0 1 5 | Edition No. 1 67 References • OECD (Organisation for Economic Co-operation and Development). 2008. Territorial Reviews: Chile. Paris. • RBC Radio. 2015. “Somalia: Somalia Leaders Agree on Crucial Matters after Face-Off in Garowe.” May 2. http://www.raxanreeb.com/2015/05/somalia-somali-leaders-agree-on-crucial-matters-after-face- off-in-garowe/. • Samuels, Kirsti, S. and Otieno, C. (2014). “Options for the Process of Federal Member State Formation and for Interaction between Federal members States and the Somali Federal Government.” Discussion Note. Conflict Dynamics International. Mimeo. • Spahn, P., and A. Shah. 1995. “Intergovernmental Fiscal Relations in Australia.” In Macroeconomic Management and Fiscal Decentralization, ed. J. Roy. Washington, DC: World Bank Institute. • UNDP Somalia (United Nations Development Programme Somalia). 2012. Somalia Human Development Report. Nairobi. • UNFPA (United Nations Population Fund). 2014. Population Estimation Survey 2014. Somalia Country Office, Nairobi. • UNICEF Somalia and Ministry of Planning and International Cooperation, 2014. Northeast Zone Multiple • Indicator Cluster Survey 2011, Final Report. Nairobi, Kenya: UNICEF, Somalia and Ministry of Planning and International Cooperation • USAID (U.S. Agency for International Development). 2014. Somalia Economic Growth Strategic Assessment. Washington, DC. • Wallich, C., and Zhang Qianqian. 2013. “Bosnia and Herzegovina: Subsidiarity and Solidarity in a Three- Nation State.” Paper to accompany panel remarks by Christine Wallich, session on Decentralization in Conflict-Affected States, World Bank, Washington DC, May 1. • World Bank. 2006. Somalia: From Resilience towards Recovery and Development. A Country Economic Memorandum for Somalia. January, Washington, DC. • World Bank. 2011. 2011 World Development Report: Conflict, Security, and Development. Washington, DC: World Bank. • ———. 2013. Somaliland Household and Enterprise Survey. Washington, DC. http://catalog.ihsn.org/ index.php/catalog/4771. • ———. 2015a. Somaliland Poverty Profile and Overview of Living Conditions. Washington, DC. • ———. 2015b. Somaliland Public Expenditure Report. Macro Fiscal and Economic Management Unit, Nairobi. • World Development Indicators. Database. World Bank, Washington, DC. http://data.worldbank.org/ data-catalog/world-development-indicators. 68 S o m a l i a Econ o m ic Update • 2015 ANNEXES Annexes Annex A: Excerpts of relevant articles from the provisional constitution Article 21: Freedom of Movement and Residence (1) Every person lawfully residing within the territory of the Federal Republic of Somalia has the right to freedom of movement, freedom to choose their residence, and freedom to leave the country. (2) Every citizen has the right to enter and to remain in the country, and has the right to a passport. Article 48: The Structure of Government (2) No single region can stand alone. Until such time as a region merges with another region(s) to form a new Federal Member State, a region shall be directly administered by the Federal Government for a maximum period of two years. Article 49: The Number and Boundaries of the Federal Member States and Districts (1) The number and boundaries of the Federal Member States shall be determined by the House of the People of the Federal Parliament. (2) The House of the People of the Federal Parliament, before determining the number and boundaries of the Federal Member States, shall nominate a national commission which shall study the issue, and submit a report of its findings with recommendations to the House of the People of the Federal Parliament. (3) The nomination of the commission referred to in Clause two shall be preceded by the enactment of a law by the House of the People of the Federal Parliament, which shall define: (a) The responsibilities and powers of the commission. (b) The parameters and conditions it shall use for the establishment of the Federal Member States. (c) The number of the commissioners, requirements of membership, nomination methods, office tenure, and their remuneration. (4) The number and the boundaries of the districts in a Federal Member State shall be determined by a law enacted by the parliament of the Federal Member State, which must be approved by the House of the People of the Federal Parliament. (5) Federal Member State boundaries shall be based on the boundaries of the administrative regions as they existed before 1991. (6) Based on a voluntary decision, two or more regions may merge to form a Federal Member State. Article 50: Federalism Principles of the Federal Republic of Somalia The various levels of government, in all interactions between themselves and in the exercise of their legislative functions and other powers, shall observe the principles of federalism, which are: (a) Every level of government shall enjoy the confidence and support of the people. (b) Power is given to the level of government where it is likely to be most effectively exercised. (c) The existence and sustainability of a relationship of mutual cooperation and support between the governments of the Federal Member States, and between the governments of the Federal Member States and the Federal Government, in the spirit of national unity. (d) Every part of the Federal Republic of Somalia shall enjoy similar levels of services and a similar level of support from government. (e) Fair distribution of resources. (f) The responsibility for the raising of revenue shall be given to the level of government where it is likely to be most effective exercised. (g) The resolution of disputes through dialogue and reconciliation. 70 S o m a l i a Econ o m ic Update • 2015 Annexes Article 51: Collaborative Relationships Between the Various Levels of Government in the Federal Republic of Somalia (1) Every government shall strive for a cooperative relationship with other governments, whether at the same level or at another level of government. (2) Every government shall respect and protect the limits of its powers and the powers of other governments, and shall: (a) Have effective brotherly relationships with other levels of government in order to promote the unity of the citizenry. (b) Inform governments of other levels of policies and activities it implements within its boundaries which may have an impact on the areas of other levels. (c) Have policies that facilitate the planning and implementation of joint development projects. (3) In order to ensure the existence and development of cooperative federal relations, an annual conference of Executive heads of the Federal Government and the Federal Member State governments shall regularly be convened, so as to discuss and agree on: (a) Strengthening national unity. (b) Security and peace of the country. (c) National socioeconomic development, and common market policies of the country. (d) Promotion of the wealth of the people. (e) Information sharing. (4) All levels of government must comply with the national Constitution, without any government assuming more powers than the Constitution allocates. (5) A law passed by the Federal Parliament shall regulate: (a) The establishment of institutions and guidelines that shall facilitate interaction between the various levels of government. (b) The establishment of guidelines that will facilitate the resolution of disputes between the various levels of government without resorting to court. Article 52: Cooperative Relationships Between the Various Federal Member State Governments (1) The Federal Government and Federal Member State governments shall ensure that meetings between the Presidents of the Federal Member States and high ranking officials be held regularly to discuss issues that affect their territories, including: (a) Water sources. (b) Agriculture. (c) Animal husbandry. (d) Pasture and forestry. (e) The prevention of erosion and the protection of the environment. (f) Health. (g) Education. (h) Relations and dialogue amongst traditional leaders, and the protection and development of traditional law (i) Relations among religious scholars and (j) Youth. October 2 0 1 5 | Edition No. 1 71 Annexes (2) Federal Member States may enter cooperative agreements amongst themselves or with the Federal Government, which may not be legally binding or contradict the national constitution and the constitutions of the Federal Member States. Article 72: The Number of Members of the Upper House of the Federal Parliament The members of the Upper House of the Federal Parliament shall be elected through a direct, secret and free ballot by the people of the Federal Member States, and their number shall be no more than 54 members based on the eighteen (18) regions that existed in Somalia before 1991, and on the following: (a) The number of Federal Member States of the Federal Republic of Somalia. (b) That all Federal Member States should have an equal number of representatives in the Upper House of the Federal Parliament. (c) That the members of the Upper House of the Federal Parliament should be representative of all communities of the Federal Republic of Somalia. Article 109B: The Formation of the Constitutional Court (1) This Constitution establishes the Constitutional Court which is composed of five Judges including the Chief Judge and the Deputy Chief Judge. (2) The Judicial Service Commission shall nominate as judge of the Constitutional Court only persons of high integrity, with appropriate qualifications in law and Sharia, and who is highly competent in Constitutional matters. (3) The Judicial Service Commission shall propose to the House of the People the person they want to be appointed as a Constitutional judge. (4) If the House of the People of the Federal Parliament approves the name proposed in accordance with Clause 3 of this Article, the President of the Federal Republic shall appoint that Person as a judge of the Constitutional Court. (5) From amongst their members, the Constitutional Court judges shall appoint the Chief Judge and Deputy Chief Judge. Article 125: The National Treasury (1) A law enacted by the Federal Parliament shall establish a national treasury. That law shall also determine legitimate revenue collection and expenditure disbursement relating to institutions at all levels within the Federal Republic of Somalia. That law shall be based on an accountability system that has been tested worldwide and is known to have standards related to financial reserve and expenditure that can equally be implemented in every part of the Federal Republic of Somalia Article 142: Existing Federal Member States in Somalia (1) Until such time that all the Federal Member States of Somalia are established and the adopted Federal Member State Constitutions are harmonized with the Somali Federal Constitution, the Federal Member States existing before the provisional adoption of this Provisional Constitution by a National Constituent Assembly shall retain and exercise powers endowed by their own State Constitution. (2) Existing Federal Member States must be consulted in the decision-making process regarding the federal system, and security arrangements. 72 S o m a l i a Econ o m ic Update • 2015 Annexes Annex B: Revenues of the FGS and the Puntland federal member state, 2013 Revenues Percent of Entity/source of revenue (US Dollars) domestic revenue Federal Government of Somalia Domestic revenues and external assistance 117,440,899 Total domestic revenues 7,5769,408 100.00 Tax revenue 65,051,205 85.85 Tax on income, profit, and capital gains 688,887 0.91 Of which: Wages and salaries (public sector payees) 688,887 0.91 Excise tax 0 0.00 Sales tax 0 0.00 Turnover tax on services (presumptive tax) 1,627,000 2.15 Telecommunications tax 1,627,000 2.15 Stamp sales and duty 4,006,907 5.29 Taxes on international trade and transactions 58,728,410 77.51 Of which: Customs tax on imports 57,985,308 76.53 Custom taxes on export goods 743,102 0.98 Non-Tax Revenue 10,718,203 14.14 Revenue from government services and assets 4,108,203 5.42 Of which: Administrative charges 325,653 0.43 Airport and harbor fees 1,021,335 1.35 Visa and passports fee 2,761,215 3.64 Domestic loans and grants 6,610,000 8.72 Foreign grants 41,671,492 Bilateral 41,671,492 Multilateral 0 Puntland Government Domestic revenues and external assistance 38,351,800 Total domestic revenues 38,351,800 100.00 Tax revenue 32,374,450 84.40 Tax on income, profit, and capital gains 1,299,213 3.39 Of which: Wages and salaries (public sector payees) 849,924 2.22 Wages and salaries (private sector payees) 449,289 1.17 Excise tax Sales tax 1,863,495 4.86 Turnover tax on services (presumptive tax) 0.00 Telecommunications tax 0.00 Stamp sales and duty 1,633,635 4.26 Taxes on international trade and transactions 25,653,118 66.89 October 2 0 1 5 | Edition No. 1 73 Annexes Revenues Percent of Entity/source of revenue (US Dollars) domestic revenue Of which: Customs tax on imports 23,140,837 60.34 Custom taxes on export goods 314,070 0.82 Non-Tax Revenue 5,977,350 15.59 Revenue from government services and assets 2,906,640 7.53 Of which: Administrative charges 1,018,858 2.7 Airport and harbor fees (Landing permits) 346,343 0.01 Visa and passports fee Revenue from government assets 938,936 2.4 Domestic loans and grants Transfers, debts and contributions 3,070,710 8.01 Foreign grants 0 0.00 Bilateral 0 0.00 Multilateral 0 0.00 74 S o m a l i a Econ o m ic Update • 2015 Transition amid Risks with a Special Focus on Intergovernmental Fiscal Relations The Somali economy has remained resilient, driven by the private sector despite two decades of conflict. The private sector helped the economy mitigate the devastating consequences of war and drought. Somali entrepreneurs adapted well and even flourished in a stateless conflict-ridden economy. There has been significant private sector investment growth in trade, money transfer services, transport and telecommunications, funded by remittances from the diaspora. The IMF and the World Bank estimate Somalia’s GDP at around US$5.7 billion in current dollar terms in 2014. This puts Somalia’s GDP per capita at US$435 making it the 5th poorest country in the world. The Federal Government of Somalia is faced with a daunting task of creating a peaceful and secure environment, building strong institutions of governance, and delivering key public services to a weary population after decades of war. These challenges can only be overcome if the FGS takes a leading role to sustain economic reconstruction by creating a stable macroeconomic environment that would underpin rapid economic growth, job creation, and poverty reduction. This can only happen when the Federal government has the resources from both the public and donors. The special focus of this Update examines intergovernmental fiscal relations in Somalia and highlights the challenges and lessons drawn from theory and international experience to provide an analysis of what this means for Somalia given the de facto architecture of fiscal arrangements that is currently emerging. One of the recommendation from this work is that Somalia’s new fiscal arrangements should be designed to work as a coherent system, preserving a strong common economic space across the country, and provide scope to address inequities between regions. As political bargains are struck, regard should be given to the balance between functional responsibilities, and the availability of revenue to fund them. Another recommendation is that Somali stakeholders should be prepared to develop a sustainable fiscal bargain incrementally, renegotiating as fiscal circumstances and the interests of states and federal government change over time. It may not be possible to find a permanent fiscal bargain immediately. The focus now should be developing robust intergovernmental institutions to facilitate ongoing negotiation, and on negotiating a way forward rather than a final fiscal arrangement. World Bank Group SOMALIA ECONOMIC UPDATE Delta Center Menengai Road, Upper Hill Join the conversation: P. O. Box 30577 – 00100 Facebook and Twitter Nairobi, Kenya @WorldBankSomalia Telephone: +254 20 2936000 Website: www.worldbank.org/somalia Send questions and comments: #SomaliaEconomicUpdate Macroeconomics and Fiscal Management Global Practice Cover photos credits by Valter Venturelli (https://www.flickr.com/photos/valter_venturelli) Odd Magne Ruud, Ministry of Foreign Affairs, Oslo