Tanzania: IMF team holds first talks with Somalia in 25 years

Dar es Salaam, Tanzania (PANA) - An International Monetary Fund (IMF) team Thursday concluded discussions on the Article IV Consultation with Somalia, the first such discussions held in over 25 years.

“Even though the political and security situations remain challenging, Somalia has made tremendous progress since resuming relations with the IMF on 12 April 2013,” said IMF team leader Rogerio Zandamela at the end of the discussions, held from 8-18 June 2015 in the Kenyan capital, Nairobi.

In a statement made available to PANA here, Zandamela recalled that since 1991, Somalis have suffered greatly from civil war while the economy deteriorated as the physical infrastructure was destroyed.

In addition to the loss of lives, the war worsened the population’s living conditions, now among the lowest in the world.

“To support economic growth and development, Somalia needs financial help from the international community, as well as technical assistance and capacity building,” the official pointed out, explaining that the Fund has been actively involved in providing technical assistance and policy advice in its key areas of expertise, which laid the groundwork for these discussions.

According to the IMF, economic activity in Somalia is estimated to have expanded by 3.7 percent in 2014, driven by growth in agriculture, construction, and telecommunications.

“For 2015, real growth is projected at 2.7 and inflation should remain subdued at about 4 percent. With modest progress on the security front and an absence of drought, medium-term annual growth should be about 5 percent. Nevertheless, growth will remain inadequate to redress poverty and gender disparities,” Zandamela said.

He noted that the government in Mogadishu was undertaking an ambitious reform programme, but progress toward good governance—with sound and accountable institutions—is important for the restoration of public confidence in government.

“Since Somalia has large potential for revenue from natural resources, effective concession management and a suitable fiscal regime are critical for peace and prosperity,” he said. “The natural resource management strategy should incorporate best practices while facilitating private sector participation and ensuring transparency.”

Somalia also needs consensus regarding fiscal federalism, including responsibilities for service delivery, and revenue collection and sharing.

Zandamela further stated: “While notable progress has been made in strengthening fiscal institutions, significant reform is required to bring public financial management systems closer to international standards.

"Somalia also needs to adopt comprehensive and properly sequenced budget reforms, which will require steps to improve budget preparation and execution, arrears control, treasury management, and accounting and reporting.

“The 2015 federal budget was prepared on a zero cash balance basis with optimistic revenue forecasts and weak commitment control. Deficiencies in revenue mobilization, considerable expenditure pressure, and unfulfilled pledges of donor support have led to extraordinary difficulties in budget execution.

“The funding shortfall has led the federal government to ration cash and incur arrears to the defense forces, civil servants, and suppliers.”

The IMF team noted that an expansion in the number of ministries and government entities has left Somalia with a payroll-centric budget, with the share of wages about 45 percent of spending.

The dependence on foreign grants remains over 40 percent of the budget, exposing it to uncertainties in donor disbursements. International assistance outside the budget is significantly higher than direct budget assistance.

“In light of lower domestic revenue and shortfalls in donor support, IMF staff projects a significant budget deficit in 2015,” read the statement. “Accordingly, Somalia needs to boost revenue and revise the budget to align spending commitments with available resources.”

On going forward, the IMF team suggested that Somalia should adopt policies to address important budget vulnerabilities. Fiscal rules, such as targets for the share of wages and capital, can help ensure fiscal sustainability and a desirable composition of spending.

“The economy is predominantly dollarized and cash is scarce, particularly in lower denominations. Somali banknotes are not readily available, creating problems for the poorest. Public and political pressure is mounting for currency reform,” the IMF team noted.

Nevertheless, the team advised that currency reform should be delayed until necessary conditions are in place. Failed efforts would create significant direct losses, as well as reputational costs, so currency reform should adhere to a well-designed roadmap, including building adequate technical and human capacity.

“Swift action is required so that remittances can be channeled through the international banking system. Elaboration of a financial sector roadmap will be a critical first step to build credibility in licensing and supervision,” Zandamela emphasized.

The IMF mission met with Somalia’s Finance Minister Mohamad Aden Ibrahim, Deputy Planning Minister Abdullahi Sheikh Ali, and Central Bank Governor Bashir Issa Ali, as well as other senior officials. The mission also held a debriefing session with donors.
-0- PANA AR 18June2015

18 june 2015 19:17:56

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