Somalia Economic & Financial Reforms: Part 2
How a Somali government investments fund and Securities Regulator can spur private sector led economic growth, increase government revenues and create jobs
According to the IMF, the value of goods imported to Somalia compared to what the country sells (so called current account deficit), is just over $630 million (about 13% of the country’s real Gross Domestic Product “GDP”). It is a figure which is much worse if one were to remove the short-term adjustment impact of remittances and foreign grant inflows. On the other hand, the country’s overall trade balance deficit (the difference between imports and exports) is running at a staggering $4.5 billion a year – over 90% of Somalia’s real GDP. Whilst these numbers should be read with caution, they unmistakably point to the reality of how the country’s export potential is pretty much non-existent.
Such stats raise difficult questions in Somalia’s dollarised economy: how would Somalia pay for itself in the long-term if vast sums of the country’s earnings are spent on imports? How would the country develop if there is no manufacturing sector that turns the country’s natural resources into marketable goods? More importantly, what would be the best way of creating space for private sector investment to increase exports, take advantage of global market opportunities and help create local jobs?
In the pursuit of economic growth and job creation, it is important to separate two points: the things a government can do to unleash private sector investment, including the outcomes from its own funding strategies; and the sort of capital markets investment governance framework that can support a government’s wider investment promotion agenda.
"A SGiF will change the current model of “funding parcels for projects” into one whereby the funding is anchored on core development priorities. The governance structure of the fund will ensure investments achieve intended outcomes by measuring outcomes against clear performance criteria set by the government. The oversight provided by the fund should enable the development of strategies grounded in the country’s core social and development needs, which will help provide material economic and social impact stimulus over the long-term."
The first point alludes to why there is the need to set up a Somali Government Investments Fund (SGiF) - a statutory arms-length fund that is tasked with sourcing public and private funding for the government’s social and economic priorities. The role of this vehicle is not only to centralise the current dysfunctional “funding parcels for projects” model but also create long-term investable assets framework. This will then provide opportunities for the private sector to invest in economic development infrastructure through appropriately designed investment strategies.
The second point is the need for the government to provide necessary environment for economic development, and the removal of barriers to growth - the lack of investment framework to attract private sector capital inflows is a key barrier here. We do of course know that investment in infrastructure, health and education have a far greater long-term impact on Somalia’s economic prospects than anything else. However, harnessing private sector investment into these areas requires clear regulatory strategy, transparent and effective framework that not only safeguards private sector capital inflows but also turns funding into results.
Somali Government Investments Fund
A SGiF will bring two intangible benefits at a stroke: send a strong signal that Somalia is turning a page in in its economic governance, enhancing global market impression amongst national and international investors; and signal that Somalia’s investment environment is conducive to investment inflows, making the Somali government a facilitating and effective partner.
On a broader level, the fund will also enhance partnership with the private sector in the implementation of the government’s economic and social investment priorities. This could include linking the building of hospitals, roads, ports, and schools through public-private partnership framework; the issuance of convertible capital instruments for the investment in core infrastructure, supported through a public backstop; and turning long-term assets inflows into marketable securities that can be used to generate billions of dollars in short and long-term funding. The fund will also create an auditable funding framework that channels funding into government’s economic and social priorities in a way that is transparent and subject to rigorous governance controls.
A SGiF will change the current model of “funding parcels for projects” into one whereby the funding is anchored on core development priorities. The governance structure of the fund will ensure investments achieve intended outcomes by measuring outcomes against clear performance criteria set by the government. The oversight provided by the fund should enable the development of strategies grounded in the country’s core social and development needs, which will help provide material economic and social impact stimulus over the long-term.
A third key objective of SGiF will be the in-housing of the government’s economic holdings across the different sectors of the economy, which is currently a material governance gap. The Somali government is a shareholding partner in different arrangements with many local and foreign companies through opaque structures with very little oversight. This includes resource exploitation and sharing agreements – from running airports to natural / economic resources. There is currently no centralised specialist oversight over these investments and no way of knowing whether the government’s shareholdings / concessions are commercially viable and protect value for Somalia.
The SGiF will provide rigorous oversight over these investments on behalf of the Somali government, ensuring value for money and economic delivery in the national interest. The fund will, where appropriate, also be able to devise and implement strategies for exiting investments that fail value for money or national interest tests. This centralisation of oversight alone could raise many millions of dollars that are currently held either off-balance sheet, or lost through mismanagement and corruption.
A new securities regulator
A significant barrier to private sector investment in Somalia is the lack of capital markets and securities regulator in the country. The creation of a new capital markets regulator would enable companies to finance their businesses through local and international equity and debt issuance – a process that is critical for supporting economic growth and creating jobs.
A securities regulator will set the regulatory rules and standards for raising funding, including disclosure and corporate governance requirements. This will open opportunities for local and international investors to finance viable Somali businesses, which will in turn create growth and jobs for Somalia’s economy. The regulator will also help protect shareholder rights and encourage good governance, acting as a stimulus to further investment inflows. This is what will help unleash domestic funding into businesses, providing additional growth stimulus to Somalia’s financial services market infrastructure.
Realising Somalia’s potential, and help turn the government’s job creation aspiration into reality, will require a sound strategy that clearly sets out a vision for growth that supports national economic development priorities. The biggest barrier is of course the Somali mindset: we must move away from “government by begging bowl” to one that has the confidence to provide a clear blueprint for wealth creation and long-term prosperity for the country. These ideas can help make that happen.
The point here is that it is for the government that must create the conditions for economic success, the failure of which would mean private sector led economic growth would remain to be an illusion.
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The personal views, thoughts and opinions expressed in the text belong sorely to the author, and not necessarily to the author’s employer, organisation or other group or individual.
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