by Mohamud M Uluso
Thursday April 5, 2018
Article 99 (d) of the Provisional Constitution of the Federal Government of Somalia (FGS) tasks the Executive Branch to prepare the annual fiscal budget and final accounts. The Legislative Branch reviews and amends the proposed budget before passing the appropriation bill that authorizes collection and spending of public money during the fiscal year that starts from 1st January to 31st December. The fiscal budget is constitutional, political, economic, and financial document that highlights the government’s performance priorities in twelfth months. It is an indicator of state effectiveness.
Unfortunately, the FGS is not adequately fulfilling one important constitutional requirement which is the publication of regular, complete, reliable financial statements during and end of each fiscal year, a reporting that is critical for state accountability and legitimacy. The passive roles of the federal parliament, Central Bank, the General Accountant, and Auditor General on public financial transparency and accountability have perpetuated the persistent of highest corruption perception index in Somalia. FGS’s progress claims should backed with facts and figures. The IMF’s cheer up on budget performance should be taken with grain of salt.
Before delving into 2018 budget analysis, I briefly address the question of taxation for revenue mobilization and state building. Constitutionally, the FGS has the legitimacy to levy taxes on citizens to raise the financial resources needed to deliver essential public goods for economic and social development. However, in levying taxes, the FGS has the obligation to follow well established taxation policy principles, legislative and policy processes, and administrative practices. Few of the well-known tax principles are neutrality, equity and fairness, convenience of payment, simplicity, economic growth and efficiency.
Somali leaders and officials responsible on fiscal policy should be familiar with the fact that the operational partnership strategy in fragile states like Somalia considers taxation the foundation for “effective state, robust economy, and durable peace” on the basis of the principles of “political inclusion, accountability and transparency, political commitment to shared prosperity, effective revenue raising and legitimization of social and economic interests.”
There is strong consensus that increased dialogue on revenue bargaining between State and citizens (taxpayers) is essential to building the culture of voluntary tax compliance which minimizes tax collection costs and tax evasions. It has been argued that “coercive taxation is inimical to consensual governance while revenue bargaining between states and organized citizens provides an opportunity for the creation of consensual and representative government.” Taxpayers have the right to protest against taxes deemed unjust, unfair and harmful to the business viability and growth.
The recent protest of Mogadishu Port users against the payment of 5% sales taxes on imported goods in addition to custom duties and port charges has revealed the many challenges lurking beneath the Somali Statebuilding process based on “fragmented clan federalism,” the financing of the growing size of the federal government associated with endemic corruption, human rights violations, political malfeasances, and poor delivery of public goods. The Government’s argument focused on the needs of additional financial resources to fulfill revenue targets established by the International institutions for debt relief consideration and to pay payroll obligations. The increase of domestic revenue from 2016 to 2018 is 38.5 %
The business community argued that they face high custom duty, port charges, and other exorbitant overcharges. In addition, the sales tax is due on buyers at the time of purchase. The committee of the federal parliament on the economy and finance issued statement backing the business community’s position.
Subsequently, the media engagement of the Ministry of Finance has poisoned the bargaining dialogue between the FGS and business community. The government officials and social media allies craftily portrayed the business community as un-patriots, war profiteers, or anti statebuilding elements. In response the business community questioned the reasons for shouldering the bloating cost of expanding federal government without progress and representation. So far, Mogadishu port users and residents are the taxpayers of the federal government.
Donors and international institutions support programs focused on tax reform that builds voluntary compliance through tax bargain between citizens and government, elimination of tax exemptions, and improvement of public financial management. Indeed, donors invested substantial funds in the strengthening of the public financial management, fiscal discipline, transparency, and accountability of the FGS.
On the analysis of the fiscal budget, the Federal Parliament approved 2018 appropriation bill on balanced fiscal Budget of $ 274.6 million dollars, an overall increase of 5.6% compare to the $ 260.1 million in 2017 revised budget. The domestic revenue is $156.0 million divided into tax revenue of $129.2 million and nontax revenue of $28.9 million, an increase of 13.6% compare to 2017 revised domestic revenue of $ 137.6 million divided into tax revenue $113.6 million and nontax revenue $24.0 million. The source of domestic revenues is from Mogadishu port, Airport, and residents.
The 2018 external budget support is $ 118.6 million compare to $ 122.6 million in 2017, a decrease of 3.2 %. The 2018 bilateral assistance of $ 62.36 million is expected from 3 donors: Turkey $ 20.0 million; Qatar $10.0 million; and Saudi Arabia $ 32.36 million, compare to 2017 bilateral assistance of $38.105 million provided by 2 donors: Turkey $ 28.105 million and Qatar $ 10.0 million. The rest of the external budget support, which is $ 56.24 million, comes through multilateral Assistance. Incidentally, donors reported that $ 1.7 billion has been spent in Somalia in 2017. No Somali institution has confirmed the nature and accuracy of the assistance. The proportion percentages between domestic revenue and external grants in 2018 are 57% and 43% respectively.
About 90.5% of the total expenditure of $ 274.6 million, which is $ 248.6 million, is allocated to current expenditure and about 9.5 %, which is $ 26.0 million, is allocated to capital investment. The administrative classification of expenditure is for Administration institutions $119.6 million; Security and Defense $ 89.8 million; Economic affairs $ 46.2 million; and Social Services affairs $ 19.0 million. The economic classification of the expenditure is: Salaries $130.3 million; Goods and services $94.3 million; capital spending $14.5 million; transfers $ 24.0 million; payment of arrears $ 9.0 million, and Reserves $2.5 million.
Through the Ministries of Finance and of Interior and federal affairs, the 2018 budget allocates $22.13 million to 5 regional states and Benadir Administration: Benadir Regional Administration $10.65 million; Puntland State $ 2.0 Million; Jubbaland $ 1.08 Million; Southwest State $ 2.8 Million; Galmudug $ 2.8 Million; HirShabelle $ 2.8 Million.
The appropriation bill prohibits the government from paying or committing public funds, including funds from donors, unless federal parliament appropriates their use. In budget execution, payments should be made directly to vendors through the Electronic Somali Financial Management Information System (SFMIS). Explicitly, government officials or institutions are barred from collecting money on behalf of vendors and other beneficiaries.
The appropriation bill contains new tax reforms. Payroll tax is due on national and foreigners employees. The monthly payroll income of $ 200 is tax exempt; from $ 201 to $800 is subject to 6%; from $ 801 to $1,500 pays 12%; above $1,501 pays 18%. It is recently reported that the members of parliament whose individual monthly salary is subject to 18 %, have received substantial tax rate cut.
The tax on one ton of fuel and gas is $56.25. The tax on one barrel of fuel $12.5 while one barrel of Diesel is $11.25. The tax charges for telecommunication is 15%. The expected revenue from telecommunication in 2018 is $ 3.5 million, a decrease of $ 2.16 million compare to $5.66 million in 2017. New tax of 5% was imposed on sales, water and electricity consumption and internet and TV services. The estimated revenue from the sales tax is $13 million.
Hotels has been required to collect 5% of the services provided to their customers and deposit the taxes collected in the Treasury Account of the Central Bank . All international travelers going and coming are required to pay $30 dollars per person and the expected revenue increased from $3.85 million in 2017 to 4.88 million in 2018. The 2018 budget eliminated the revenue estimate of $1.6 million tax from the profits of telecommunication corporations included in 2017.
The revenue from custom duty increased from $ 80 million in 2017 to $ 81 million in 2018. Separately the revenue from Qat tax goes up to $16 million in 2018 compare to $ 15 million in 2017. The revenue from port service charge increases from $ 20 million in 2017 to $ 22 million in 2018.
The budget bill lists the order of priority for government payments in case of revenue shortfalls as follows: Food and salaries of the military, bank charges, salaries and allowances for civil servants, payments to parliamentarians and council of ministers, unpaid salaries and allowances from last year, goods and services supplied, and arrears on goods and services supplied last year. The Minister of finance has the authority to verify the legitimacy of the outstanding $ 9.0 million unpaid salaries and allowances in 2017 and to authorize payments. He can also transfer funds from general reserve allocation of $ 2.5 million for emergency uses and inform the federal parliament later.
The major obstacles facing Somalia are the absence of integrated federal government structure, tax administration, and public expenditure management. Recognition of Taxation as the pillar of statebuilding process and as a link between state and citizens for representation, accountability, and stability is critical.
Mohamud M Uluso