IMF staff welcome the authorities’ continued commitments to policy and reform implementation despite daunting challenges.
Stronger efforts are recommended to improve fiscal discipline, raise domestic revenue, and avoid new domestic arrears in order to keep the Staff-Monitored program on track.
The Central Bank of Somalia is encouraged to keep up the momentum of reform implementation in order to ensure credible currency reform.
An International Monetary Fund (IMF) team led by Mohamad H. Elhage visited Nairobi from September 18–22 for a staff visit to discuss recent developments, progress under the Staff-Monitored Program (SMP), and the economic outlook with the Somali authorities.
At the end of the visit, Mr. Elhage issued the following statement:
“Somalia is marking important milestones on reform and policy implementation, particularly under the SMP. Since 2015, it has concluded two Article IV consultations with the Fund and in May 2016, the authorities entered a 12-month SMP with the Fund to help economic reconstruction efforts and establish a track record of policy and reform implementation.
“Given the broadly satisfactory performance under the SMP, in June 2017, IMF management completed the first SMP with Somalia and, at the request of the Federal Government of Somalia (FGS), approved a new SMP covering the period May 2017–April 2018.
“This second SMP comes at an important juncture for Somalia. Despite recent advances on reform and policy implementation, development challenges for Somalia are daunting. Somalia’s economic and social infrastructure are still significantly underdeveloped, institutions are weak, poverty remains widespread, and the drought has compounded the situation. The security situation remains fragile and is aggravated by high youth unemployment.
The government’s fiscal position is weak, partly because of serious shortfalls in fiscal management, a poor tax collection system, and a heavy external debt burden, with no capacity to repay. The central bank and the financial sector are nascent, and widespread counterfeiting has diminished confidence in the national currency. Consistent reform implementation under this SMP and subsequent ones will help strengthen institutions and economic policies, paving the way for eventual future debt relief.
“The drought has taken a toll on economic activity in 2017, particularly in remote areas, but sustained international support is helping ease the humanitarian crisis.
This development is offsetting steady recovery in the service sector, including in the telecommunication and transportation sectors. As a result, growth and inflation for 2017 are projected to remain at 2.4 and 2.9 percent, respectively. During the first half of this year, the fiscal position weakened. Lower-than-expected domestic revenue and expenditure pressures resulted in a fiscal deficit in June.
“The IMF team recommends the following critical measures to improve fiscal discipline and fiscal performance and ensure credible currency reform in order to keep the SMP on track:
Fiscal framework. To improve budget execution, it is important that: (1) any expenditure increase be fully covered by realistic revenue projections or confirmed grants; (2) the authorities swiftly implement all revenue measures outlined in the budget and additional fiscal measures recently identified to keep the program on track; and (3) the FGS remain current on its payment obligations.
Domestic revenue. Implement speedily revenue measures outlined in the budget, particularly the sales tax on telecommunications and hotels.
Domestic arrears. Staff noted that since the first SMP, domestic arrears have been accumulated numerous times. Stronger political commitment is required to avoid new domestic arrears accumulation. In this context, staff welcomes the authorities’ initiative to work with the IMF to implement an Arrears Management Plan.
Currency reform. IMF staff welcome the progress made by the Central Bank of Somalia on reform implementation under the roadmap for currency reform. The authorities and the mission agreed on a number of follow up measures that need to be implemented to fully complete the remaining benchmarks for credible currency reform.
“During the visit, the team met with the Central Bank Governor Mr. Bashir Issa Ali; the Permanent Secretary at the Minister of Planning, Investment and Economic Development Mr. Abdi Dirshe; Finance Minister Mr. Abdirahman Beileh; and other officials. The team also met with representatives of bilateral and multilateral donors. The team would like to thank the Somali authorities for their cooperation and the open, productive discussions.”