Somalia’s priority: national integration for economic recovery

After years of overlooking the real needs of the Somali people, it was significant, longed-for change that Somalia’s statebuilding featured in the strategic agenda of the key actors of the International Community (IC), namely the G8 powers [1] in their ministerial meeting held in London on April 11 2013, under the UK Chairmanship. The Ministerial decisions will be ratified by the 39th Summit of G8 heads of government planned for June 17-18 2013 in Lough Erne, UK. This political commitment marks the definitive shift on the part of the IC from the exclusive regional and international security concerns to the broad goal of rebuilding Somalia. To not miss this special opportunity for their common future, Somalis must accelerate their national integration for sustainable economic recovery and development.

The G8 foreign ministers expressed their determination to provide high level political support to the process of Somalia’s re-engagement with the International Financial Institutions (IFI)—the International Monetary Fund (IMF), the World Bank (WB), and the African Development Bank (AfDB)—which are institutions created to promote macroeconomic cooperation, development and stability with sound fiscal, monetary and financial policies at national and international levels. Given the stringent policies and procedures of the IFIs with regard to countries in default like Somalia, the ministers strongly urged the Federal Government of Somalia (FGS) to demonstrate particular political commitment to the public financial management by strengthening transparency and accountability as an essential condition for IFI re-engagement.

Specifically on the issue of national integration, the G8 foreign ministers underscored the importance of a comprehensive political settlement in Somalia, including clarity on relations between central and regional authorities. This calls attention to the flawed and opposing working relationship between center and periphery. Regions must be integrated into the national macroeconomic framework, security and justice system. The UNDP’s operational division of Somalia into South Central, Puntland and Somaliland has to end.

The G8 decisions are consistent with the new international vision and strategy outlined in the New Deal based on the concept of comprehensive approach centered on local ownership. The goal is to end the statelessness, fragmentation and fragility of the countries in conflicts by empowering the local citizens to shape their destiny peacefully, collectively, and democratically.

The G8 actions complement the list of actions either already taken or under finalization by the IC. Those actions include the UN Mini Summit that redefined the role of the IC in Somalia, the US diplomatic recognition of the FGS, the lifting of the arms embargo, the review of AMISOM operation, the new UN Integrated mission for Somalia, the intense engagement of Somali political factions and entities for final political compromise, and the upcoming conferences in London, Brussels and Yokohama.

On May 7, the British Government and the FGS will co-chair the first international conference on Somalia, which will endorse the immediate Somali priorities of rebuilding national institutions for security forces (army, police, and coastguard), justice, public financial management and deepening political cohesion. Ninth century Muslim scholar Imam Ibn Muhammad Al Qutaybah Ad-Dinawaree said on government, 'There can be no government without an army, no army without money, no money without prosperity, and no prosperity without justice and good administration.' The statement mirrors the priorities expected from the London Conference. One potential outcome could be the transformation of the six pillars of President Hassan Sh Mohamud into two years of an IFI-supported transitional program with benchmark tasks and price tag of one billion dollars.

Somalia will be high on the agenda of the 5th Tokyo International Development Conference on Africa (TIDCA) to be held in Yokohama, Japan from 1 to 3 June 2013. UK as the chair of G8 will present the case of Somalia to the conference for mobilizing political and diplomatic support for socio-economic assistance with particular emphasis on the humanitarian dimension. Japan, the African Union, the WB, the UNDP and the UN Office of the Special Advisor on Africa are co-organizers of the conference.

In September, the EU and the FGS will co-chair another conference in Brussels, Belgium. That conference will endorse the medium-term compact between Somalia and the IC as a blueprint for the reconstruction of Somalia.

On April 3 2013 the AfDB Board of Directors approved Somalia Country’s Brief 2013-2015. With this approval, Somalia will be able to benefit from the Fragile States Facility (FSF), the African Water Facility (AWF) and the Special Relief Facility (SRF) administered by the AfDB. Since 2010, Somalia has received about 3.7 million dollars from AfDB.

On April 12, 2013, the IMF recognized the FGS, which paves the way for direct cooperation. WB has had an engagement program with Somalia since the preparation of the Joint Needs Assessment (JNA) in 2007, which produced the Somalia Reconstruction and Development Program (RDP) of a five-year period with a total outlay of 2.2 billion dollars. Somalia owes about 600 million dollars of arrears to the IMF and the WB out of the outstanding debt of US$ 3.656 billion. The US government intends to help Somalia with clearing the arrears.

IFIs play a catalyst role for donors’ financial support, debt relief under Highly Indebted Poor Countries (HIPC) and Multilateral Debt Relief Initiative (MDRI), and foreign investment. Donors’ priority tends to be first political reform, technical assistance and control of domestic financial resources before significant financial aid. Therefore, the process of re-engagement with IFIs and the IC will be arduous and complex and will require dedication, perseverance and professional and political skills. The FGS must be adequately prepared to map problems and policy priorities on commitment and capability for the re-engagement with the IC and IFIs.

THE ROLE OF ECONOMIC RECOVERY IN PEACEBUILDING AND STATEBUILDING

The title of the book by Dr. Ali Isse Abdi, former IMF official, “Somalia: Crisis in Economic and Financial Management: The Root Cause of the State Collapse and the Principal Challenge to National Recovery”, summarizes the main source of the past and present troubles of Somalia.

At the end of 1970s, Somalia endured a severe economic downturn due to high inflation and unemployment caused by widespread macroeconomic mismanagement, political repression, corruption, wars and draughts. Black-market economy, capital flight, tax evasion, the Franco Valuta system (import of commodities without foreign exchange payment through the banking system), currency substitution (dollarization) and public service desertion (brain drain) flourished and changed the structure of the Somali economy.

The Somali currency (the Somali Shilling) began to progressively lose its three functions of unit of account, medium of exchange and store of value. Thus, the ruling regime entered negotiations with the IMF and WB for economic and financial support and adopted successive Structural Adjustment Programs (SAPs).

While Somalia’s use of SAPs was presented as a success story, this success did not last long because selfish politicians and technocrats campaigned for the program’s interruption. The regime refused to implement trade liberation and financial and public enterprise reforms that have been the main source of economic deterioration in Somalia. The Central Bank of Somalia (CBS) was unable to resist the financing of rampant government budget deficit.

The interruption of the IMF/WB program, followed by massive credit creation utilized through cashier checks, precipitated an economic and financial catastrophe that led to the collapse of the Commercial Bank of Somalia. This financial calamity, combined with general discontent, fuelled the uprising that brought down the entire Somali state in 1991. That economic deterioration continues as of today. The lack of credible macroeconomic data on GDP and GNP, debt to GDP ratios, foreign currency reserve, consumer price index, inflation rate, unemployment, money supply, human development indicators, and lack of accountable institutions will be one of the major obstacles to economic recovery. It is not wrong to assume that the economic and social indicators produced by donors after 1991 are not capturing in full the depth of the socio-economic disaster that afflicted Somalia for more than 35 years.

The recent appreciation of the value of the 1,000 note Somali Shilling (So Sh) vis-à-vis the dollar throughout Somalia has thrown the FGS and regional authorities into confusion because both levels of government were not prepared for how to deal with this macroeconomic shock. All necessary informational, political and institutional/administrative conditions for macroeconomic management are yet to be established.

The supply of counterfeit notes fueled the continuous spiral of the Somali exchange rate from So Sh. 15,000 in 2006 to So Sh. 35,000 in 2008 before it came down to So Sh. 19,800 in 2013. Contrary to the economic theory explanations, both the appreciation and depreciation of the Somali exchange rate have had devastating effects on a large segment of the poor population because the consumer goods, services and assets are priced in US dollar.

The formulation and implementation of macroeconomic policies requires effective leadership, trained staff, and aggregate data collection, analysis, monitoring and evaluation. The Ministry of Finance, the CBS, the General Accountant, and the General Auditor share the responsibilities of the macroeconomic financial management functions. The integrity and capability of those institutions under the leadership and oversight of the president, prime minister, and the federal parliament is critical for laying the basic foundation for statebuilding in Somalia.

National integration and close cooperation with the IFIs will expedite the painstaking process of the return to the use of domestic currency as the legal tender for the restoration of financial systems in Somalia. As part of its institutional responsibilities, the CBS must endeavour to first establish its internal functional structure to face the challenges of establishing an efficient and secure national payment system, which is crucial to economic recovery and development. Incidentally, it would be appropriate that the FGS considers the destruction of the “N” Banknote held by De La Rue, a longtime client of the CBS. De La Rue deserves credit for not using corrupt tactics to transfer the currency stock in its warehouses to illegitimate local warlords or entities in order to get back its outstanding debt.

Finally, the efforts of the FGS with regard to macroeconomic management policies cannot be effective unless the country is hierarchically organized. The circular flow of the economy presupposes formation of markets, freedom of movement, reliable national public administration and system of security and justice in all corners of Somalia. The time span needed for Somalia to graduate from its current failed and fragile situation will depend on the determination of the Somali people for unity, cooperation, and a common agenda for the ultimate purpose of national economic prosperity.

ENDNOTES

[1] Canada, France, Germany, Italy, Japan, Russia, United Kingdom, United States, plus the European Union
[2] 2012 London Conference on Somalia served to dissolve the International Contact Group and approve UK Lead role.