Sunday July 23, 2017
By Matthew Amlôt
On June 21, the management of the IMF completed the second and final review under the first Staff–Monitored Program (SMP)[1] with Somalia, and the Managing Director of the IMF approved a new SMP covering the period May 2017–April 2018.
Somalia’s 2016 electoral cycle was completed on February 8, with the election of Mr. Mohamed Abdullahi Mohamed as President. The new government has renewed its commitment to continue with strong policies and reforms to rebuild economic institutions, and to lay the foundations for inclusive economic growth and poverty reduction.
The international community and key donors of Somalia have welcomed the new government’s commitment, reaffirming their support to Somalia at a roundtable held last April in Washington, D.C. and at the Somalia Conference in London in May.
Somalia is a fragile state and the country’s post-war economic situation continues to be very difficult, with poverty remaining widespread. The authorities are lacking the resources and capacity, as well as the policy instruments, such as social safety net programmes, to respond to their challenging development needs, including meeting the humanitarian needs resulting from the ongoing drought.
The drought is weakening economic activities and pushing up food prices. The government’s budgetary expenditures in 2017 will be largely consumed by wages and salaries, as well as goods and services. On the revenue side, donor grants are projected to finance about 40 per cent of the 2017 budget. Somalia is still facing a large trade deficit, which will be covered by grants, remittances, and foreign direct investment from the Somali diaspora.
Programme implementation through end-December 2016 and end-March 2017 was broadly satisfactory. In view of this performance and the remedial measures by the authorities to address shortcomings in performance under the first SMP, IMF management agreed to the completion of the second and final review of the programme.
In view of the major challenges Somalia faces, the authorities requested a new 12-month SMP covering the period May 2017–April 2018, which the Managing Director of the IMF has now approved. The new programme will help the authorities maintain macroeconomic stability; rebuild institutions and capacity for macroeconomic management and governance; and to implement the necessary measures to lay the foundation for achieving debt relief in the future under the Heavily Indebted Poor Countries (HIPC) Initiative.
The new SMP is founded on three pillars: fiscal policy and reforms, monetary and financial sector policies and reforms, and governance and capacity development.
- Fiscal policy will focus on improving budget execution and avoiding accumulation of domestic arrears; broadening the tax base; and improving public financial management.
- The monetary and financial sector agenda will include further steps toward currency reform, financial sector development, and establishment of effective regulations for money-transfer businesses. The latter includes improvements to the legal and operational framework in connection with issues related to money laundering and combatting the financing of terrorism, which will help to facilitate the inflows of remittances to support economic activity and poverty reduction.
- Capacity development and reforms to improve governance will be central to the programme. These efforts will be supported strongly by technical assistance from the IMF which will continue to be financed from a donors’ Trust Fund.
- Risks to the programme and the outlook are high, including the fragile security situation, weak institutional capacity, and major refugee and humanitarian crises. However, the authorities’ continued commitment to the programme and sustained and coordinated international support should help mitigate these risks. Improved ownership of the programme by the authorities will also be essential to its success.