1 August 2017

Somalia: Economic Update - Mobilizing Domestic Revenue to Rebuild Somalia

analysis

Somalia's economy is projected to grow at a steady nominal annual rate of 5-7 percent, according to the second Somalia Economic Update (SEU) published by the World Bank. Titled 'Mobilizing Domestic Revenue to Rebuild Somalia', the SEU assesses the prospects for domestic revenue mobilization to support crucial public services and expanding economic opportunity.

"Sustainable and reliable domestic revenue is critical for Somalia's delivery of the National Development Plan - the new government is already working to establish legal and technical capacities for revenue generation", said Hugh Riddell, World Bank Country Representative for Somalia. To support sustainable development spending, and to reduce reliance on external sources of funding "the Federal Government of Somalia and the business community need to work together to find ways to increase domestic revenue without undermining a vibrant private sector -- which has been an engine for Somalia's development in the past two and half decades" he added.

The report shows that Somalia's GDP growth continues to be urban-based, consumption driven, and fueled by remittances and donor support. Over 70 percent of GDP is generated in urban areas. Nominal GDP is estimated to have grown by 5 percent in 2015 and by 6 percent in 2016. Data constraints make it difficult to comprehensively assess the macroeconomic situation in Somalia, especially for the rural sector and for non-marketed output such as water, fodder, and food grown for household consumption.

Growth in 2017 will decelerate to 2.5 percent in real terms, although it is expected to pick up pace in subsequent years. However, Somalia's economy is projected to grow at a steady nominal annual rate of 5-7 percent over the medium-term. "This growth is driven by aggregate demand, fueled by a vibrant private sector, remittances, lower oil prices, and improved security", said John Randa, Senior Economist at the Macroeconomic and Fiscal Global Practice and Lead Author of the SEU. "Reconstruction efforts are likely to continue to underpin growth as the new government consolidates peace and security".

The World Bank's SEU series sets out to provide regular and comprehensive analysis of the Somali economy. Editions include recent economic developments and policy recommendations. This edition of the SEU coincides with Somalia's worst drought in decades, with over half the population - an estimated 6.7 million people - in need of humanitarian assistance. The drought reflects Somalia's continued vulnerability to climate-related shocks, which is resulting in considerable urbanization. Resilience to future shocks requires considerable and longer-term investments in rural and urban livelihoods, services and infrastructure.

Special Focus: Revenue Mobilization

The special focus of the report identifies the priority needs for improving revenue mobilization and provides a timetable for actions and reforms. It includes a historical analysis of tax in Somalia, legal framework, examples of revenue performance from other countries, tax collection constraints and potential policies and measures that could be implemented by Somali authorities.

The World Bank simulation shows that a gradual implementation of tax administration and customs reforms could raise domestic revenue from around 2 percent of GDP in 2015 to more than 13 percent of GDP (US$1.1 billion) in 2022.

Raising revenue is particularly crucial, as it reduces aid dependency, helps finance service delivery, strengthens the contract between the state and its citizens, and fortifies intra-society relationships. The World Bank identifies a series of revenue mobilization actions that can be taken by the Federal Government of Somalia in the short and medium terms. This includes streamlining the tax laws and increasing tax compliance by large companies.

The SEU was prepared in close partnership with Somali stakeholders and aims to contribute to government policy-making and a national conversation on the economy.

Somalia

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