IMF Executive Board Concludes 2016 Article IV Consultation with Somalia and Somalia Completes the First Review under the Staff�Monitored Program

On February 3, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1] with Somalia.

Over the past five years, Somalia has marked important milestones in rebuilding its economy and normalizing relations with international financial institutions. In 2012, Somalia emerged from nearly two decades of civil war. However, the post-war social and economic conditions remain difficult, poverty is widespread, and more than half of the working-age population is unemployed. The Federal Government of Somalia (FGS), elected and recognized by the international community in 2012, continues to face weak institutional capacity, fragile security, and complex clan politics which complicate economic reconstruction. With donors' support, progress is being made in the FGS's efforts to improve security, capacity development, and state building.

The IMF resumed its relationship with Somalia in 2013 and has since been heavily involved in the provision of policy advice and technical assistance. The IMF Executive Board concluded the 2015 Article IV Consultation with Somalia in July 2015, the country's first in more than a quarter-century. And the IMF Managing Director approved a Staff-Monitored Program (SMP) in 2016, covering the period May 2016 through April 2017. The SMP aims to help Somalia's economic reconstruction efforts and focuses on reforms to strengthen macroeconomic policy management, economic governance, and institutional capacity. Given Somalia's weak administrative capacity, technical assistance is an integral part of the program.

Despite a very difficult political environment, the FGS continues to make significant efforts toward restoring its key economic and financial institutions. The government approved a public financial management (PFM) law, initiated electronic payments of civil service and police wages, submitted the 2015 financial statements of the FGS to the auditor general, approved the 2016�20 PFM reform action plan, and adopted a draft National Development Plan (NDP). In connection with the authorities' currency reform plan, the Central Bank of Somalia (CBS) was recently reconstituted and has since fully staffed its cash management department, prepared a draft anti-counterfeit strategy, and adopted a detailed roadmap for currency reform. In addition, an external audit of the CBS's 2014 financial statement was completed.

The Somali economy is expected to continue to be sustained by donors#39; grants, remittances, and foreign direct investment, mostly by the Somali diaspora. Economic activity is projected to decelerate in 2016�17. Growth is projected to be 3.4 percent and 2.5 percent in 2016 and 2017, respectively. The deceleration in growth mainly reflects the impact of the drought on the agriculture sector, which will be partially offset by activities in the construction, telecommunications, and service sectors. Meanwhile, inflation is estimated to be 1.5 percent in 2016 and projected to pick up to 2.7 percent in 2017. The annual trade deficit during 2014�15 was about 55.5 percent of GDP and was largely financed by remittances and grants. For the same period, the current account registered an annual deficit of 8.6 percent of GDP and was covered mostly by foreign direct investment, mainly by Somali diaspora.

The fiscal position was strained in 2016. Budgetary grants and tax revenue fell short, reflecting delayed disbursements and weak tax collection performance. Meanwhile, expenditure on goods and services continued to increase, in part due to the election and security spending.

Going forward, the FGS will continue to implement measures to improve the fiscal framework, raise tax revenue, and implement structural reforms. The authorities plan to revise their National Development Plan, allowing it to become the FGS's key development policy tool.

Executive Board Assessment[2]

Executive Directors agreed with the thrust of the staff appraisal. They commended the authorities for the significant progress made in rebuilding the economy and restoring key economic and financial institutions in a difficult political and security environment. Directors emphasized that strong policy implementation is necessary to address the challenges ahead, boost economic activity, and improve livelihoods. Continued support by the donor community would also be vital in this regard.

Directors noted that budget execution remains difficult because of weak tax collection, poor public financial management, and delays in grant disbursements. They stressed that greater fiscal discipline and stronger budget execution would improve fiscal performance. Directors welcomed the authorities' continued efforts to improve public financial management and contingent measures to deal with domestic arrears and limit delayed payments.

Directors underscored that steady improvement in tax collection would help mitigate the impact from volatility of grants and meet security and social spending needs. To broaden the tax base, they encouraged the authorities to swiftly adopt the Appropriation Bill to endorse the tax code.

Directors supported the authorities' currency reform strategy. They noted that this reform would limit counterfeiting, restore credibility of the national currency, and allow the central bank to conduct monetary policy. Directors concurred that sound and successful implementation of the currency reform hinges on careful preparation and planning. They advised the authorities to follow through on the currency reform roadmap as agreed with the staff.

Directors welcomed the plan to overhaul the financial sector and improve the operations of the central bank, as well as commercial bank accounting and reporting standards. They stressed that jump starting financial intermediation is critical to enhancing Somalia's economic growth. Directors welcomed the progress in advancing financial sector reform, including efforts to bring banks into compliance with prudential norms, and combating the financing of terrorism (AML/CFT). They stressed that aligning the AML/CFT law with international standards and ensuring an effective risk-based implementation would safeguard the flow of remittances into Somalia.

Directors welcomed the authorities' plan to continue to improve the national development plan (NDP). They emphasized that the NDP should give priority to social safety net and pressing humanitarian conditions.

Directors agreed that a steadfast effort to rebuild Somalia's key institutions and governance remains critical. They were encouraged by the increasing focus of the Financial Governance Committee (FGC) on institution building, governance, and reorganization of the Ministry of Finance and the central bank. Noting the significant shortcomings in economic data provision, they called for swift adoption of the long-delayed statistical law.

Directors urged continued strong policy implementation under the Staff-Monitored Program (SMP) and subsequent SMPs. This would help establish a durable economic track record as a basis for future program engagement with the Fund and eventual debt relief.

It is expected that the next Article IV Consultation with Somalia be held on the standard 12-month consultation cycle.

[1]Under Article IV of the IMF#39;s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country#39;s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country#39;s authorities. An explanation of any qualifiers used in summing up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.

Source: International Monetary Fund (IMF).

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