Hard Choices: The Impact of Covid-19 on Somalia's Economy
Rescuing Somalia from Covid-19 will be difficult and there are hard choices to be made. Austerity budget and funding re-prioritisations will be a necessary start
Somalia’s economy is dependent on consumer spending. Inflows from remittances form a significant part of the cash flow which consumers use for spending. The government’s main sources of tax are concentrated on transactions from international trade (such as import duties and port levies). As the United States Dollar (USD) is Somalia’s de facto national currency and the Central Bank of Somalia (CBS) does not maintain sufficient liquidity buffers in USD, the country’s economy is materially exposed to market movements in terms of changes in the value of dollar currency as well as any global liquidity stress events.
"So far, the government’s poor response was not so much as policy constraints as of disorganisation and disarray. If we learned anything from this global crisis, it is the importance of good, decisive leadership."
Somalia’s financial markets, which are dominated by the money transfer businesses (or “Hawalas” as they are known) act as the financial system intermediaries through which the majority of the country’s cash inflows and outflows are processed. The complete absence of interbank payment and clearing systems means the majority of the Hawalas rely on cash transportation in bags to move funds around. As a consequence, the global ban on flights and the resulting economic lock downs have combined to create a funding crunch and a perfect storm for Somalia’s economy and financial system.
Price gouging is rife in Somalia and is already happening because of Covid-19. The government has tentatively tried some minor policy interventions (i.e. either abolishing or halving the taxes on few daily necessities – “Qutul Daruuri items”. However, whilst these steps might be attractive in theory, the resulting impact has been wholly negligible.
This is because the government does not have the avenue to deploy any meaningful level of fiscal easements that can make a material difference to people’s livelihoods. As this analysis will demonstrate, rescuing the country from Covid-19 will require difficult choices to be made, including a fundamental reprioritisation of the government fiscal spending priorities budgeted for 2020 from which desperately needed resources could be released.
Given the limited options at the government’s disposal in relation to revenue generation, the 2020 spending plan needs to be assessed through the lens of “core prioritisation” principles and a new budget drawn up. A significant portion of the government’s budgeted expenditure is used for recurrent costs and this needs to change. A reassessment of the 2020 plan is therefore critical in order to prioritise saving lives and livelihoods and set the country on a good path to recovery.
Economic slump is inevitable
In the best case scenario, the government’s revenues are predicted to shrink by $212 million in 2020, representing 91% of the domestic revenue and over 45% of total revenues (which includes donor support). This will have an impact on core spending on security and Covid-19 mitigation plans.
Revenue generation is one element of the equation. If predicted revenues are expected to collapse, an austerity budget would be the only answer in the absence of any other fiscal policy option.
A government can raise revenues either through tax increases or cost reductions. As the tax base in very low in Somalia and the tax burden is disproportionately on small businesses that mainly operate in Mogadishu, further increases in taxes will never be an option at a time when the economy is suffering from the effects of Covid-19, nor would this raise any additional revenue. Spending cuts will therefore be the only option which means the 2020 budget would need to be revised so that it can effectively provide for the health crisis the country is facing and mitigate the worst effects of the expected economic disaster. The government should also be planning for the recovery options both in terms of Covid-19 and the wider economy.
So far, the government’s poor response was not so much as policy constraints as of disorganisation and disarray. If we learned anything from this global crisis, it is the importance of good, decisive leadership.
Leading the people and country to safety
Economic crises always expose a country’s structural and institutional weaknesses. When a country’s leadership is unable to deal with human suffering or is indifferent to a national disaster, it is that inaction more than anything else which will cost many more lives and destroy millions of livelihoods.
It is now the time to act to lead the people and country to safety.
You can download the full presentation here: https://b076fa56-a4c7-407d-8553-53df2c7c2d72.filesusr.com/ugd/d80f13_895ef1719911404da85f071ecea7e2c2.pdf
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