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Somali economy would crumble without remittances

by Sakariye Hussein
Wednesday, July 1, 2015

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For the first time in more than two decades Somalia has a government recognised across the world. This is a sure sign of how much the situation has improved in once the most failed State in the world. There is a lot of progress made on the ground for Somalis to be proud of.

Somalis, both in the Diasporas and at home,  are now heavily involved in the reconstruction of their country and there is a glimmer of hope for lasting peace and prosperity to prevail across the country thanks to the stability and resilience of a nation that had endured years of insecurity, famine and the lack of rule of law.

In the most difficult periods of  the painful Somali civil war, remittances not only helped reduce poverty by enabling people to help their loved ones pay for food, shelter, medicine, education and other basic necessities but it also stimulated the local and regional economies. The evidence of this is that remittance funds,  have and continue to be invested in business, agriculture, construction, promoting development and the creation of jobs.

 For remittance firms that operate in Somalia, it is striking how much the country has changed in recent years. Where once the flow was just one way, from the Diaspora to Somalia, today locals use remittances to buy goods, services and support their family members in the Diaspora too. Another key factor in the improved situation in Somalia today has been the contribution of its dynamic private sector, including the remittance companies, local entrepreneurs and the Diaspora. All these without doubt, have benefitted from the remittance system and processes and they in turn have reinvested in the hope that is present across Somalia today.

Security in Somalia is in a much better state than it was many years ago thanks to a slowly improving governance, security and inward investment. Ironically, it is at this time of real improvement and hope for Somalia, that it is becoming more difficult to send remittances to the country. Remittances from around the world account for up to 40 percent of Somalia’s Gross Domestic Product. This money keeps families from going hungry, sends their children to school and provides seed capital for entrepreneurs to start businesses. It is evident from all this that the Somali economy would crumble without remittances from its Diaspora abroad.

While some banks are establishing bases again in Somalia’s capital Mogadishu, the problem is that the country has not been able to recover from the banking system collapse during the civil war. Before the civil war in 1991, it was possible to just wire money from one’s account in London, Minneapolis or Melbourne straight to a family member's account in Mogadishu. However, today to make this simple transaction Somali Money Transfer Operators (MTOs) need a bank account in the country they are sending the money from, the cash is then wired to Dubai and transferred into Somalia.

During Somalia’s worst periods of lawlessness, there were no obstacles to remitting funds to and from country. Now that most of the country is relatively stable and peaceful and in the hands of an internationally recognised and legitimate government to work with to help regulate this crucial industry, it’s a weak argument to perceive remittances as a threat.

Optimistic steps, but not enough

The steps taken by a number of Western governments over the past year have been largely positive but ultimately not enough to prevent the critical lack of access to banking services that now exists for Somali Money Transfer Operators.

The UK has made some progress with its ‘Safer Corridors’ initiative which aims to build banks’ confidence in Somali Money Transfer Operator by strengthening their accountability and transparency mechanisms. The UK Government, however, needs to move quickly to implement the programme and ensure more active engagement with the banking sector.

In September 2014 the US Treasury Department publicly acknowledged that Money Transfer Operator account closures could be disastrous for US and Somali interests and promised to clarify expectations for banks partnering with MTOs perceived to be a high risk.

In Australia, like in the US, only one bank, Westpac, is currently partnering with MTOs but even this relationship came under threat in August 2014 when the bank announced its intention to close bank accounts of MTOs. Under public pressure, Westpac delayed the closure, but only temporarily. The Australian Government has established a working group with Somali remittance organisations and other advocacy groups, affected communities trying to send cash back to Somalia and the banking sector to find solutions to keep the lifeline open. However, it remains highly uncertain whether remittance services will be able to continue in the long term given this climate of fear of money laundering to fund terrorism and international banks fear of further fines for lack of transparency. 

America, Australia and other countries should follow suit in rolling out the UK’s Safer Corridor initiative which aims to build banks' confidence in Somali MTOs by strengthening their accountability and transparency mechanisms. The UK Government and other international partners in Somalia, to ensure we leave this revolving door of misery for the Somali people and businesses, need to accelerate their support to the Somali financial authorities including the Central Bank, to establish stronger public financial management systems and processes. On the other hand, the Somali Federal Government needs to accelerate the implementation of Vision 2016 in order that the world takes their institutions, including the vital Central Bank, more seriously going forward.

Sakariye Hussein is communications and research assistant at Global Somali Diaspora, GSD
He can be reached through:
[email protected]

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