Somalia’s economy has managed to survive collapse, maintaining reasonable levels of output throughout the two-decade-long civil war.

Now, with political recovery and transition slowly underway, the country’s economy faces new hurdles. Investors have arrived in Somalia looking to cash in on the rebuilding process and abundant natural resources in areas such as agriculture and livestock, fisheries, oil and gas.

More innovative fields, such as mobile technology, have also been taking off, although they still only impact a minority of the population (22.5 out of every 100 inhabitants have a mobile phone subscription in Somalia, significantly lower than the developing world average of 84.3).

The second pillar of the president’s Six-Pillar Strategy to stabilise the country is economic recovery. In line with this, Somalia aims to build a transparent, formalised, globally competitive economy that collects tax revenues.

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But it faces a number of challenges as it works towards these goals. Some of these are:  

Certification

Somalia’s government does not have the capacity to participate in certification schemes or to provide authenticity documentation that would enable businesses to sell goods globally. Firms instead have to find unconventional, and often costly, workarounds.

Although sesame seeds are grown in large quantities in Somalia exporting them is a challenge.

“Just before the famine, there was a very good season of sesame, and I remember talking with a businessman who explained he was forced to take the sesame in Somalia and nationalise it in some way in Indonesia to sell it to Germany,” said Luca Alinovi, regional director of the FAO at a recent event on Somalia’s foreign direct investment prospects in Nairobi.

“This is quite an inefficient way to deal with it but the only way if you’re not able to have a proper certificatory regime, a proper Economic Partnership Agreement (EPA) between Somalia and Europe.”

Mr Alinovi notes that similar mechanisms are used when it comes to exporting fishery products. “We need to have much stronger capacity to support the country and the people to have those regulatory frameworks which help the people do business properly.”

Trade difficulties

Somalia is not a member of any regional economic blocs, and it has few formal trade deals with other nations.

The US and the European Union currently have no trade agreements with Somalia, and the country is not a member of the World Trade Organisation, compounding the difficulties local firms face when competing regionally and internationally.

In 2012, Somalia exported goods worth $693 million , according to data from the European Commission’s Directorate-General for Trade. While this represents a significant increase the country still runs a large trade deficit. In 2012, its imports were valued at $1,818 billion.

Somalia’s biggest export market is to the UAE, which takes in more than half its total exports. Just three countries (UAE, Yemen and Oman) account for 82.5 per cent of all exports, predominantly in livestock, out of Somalia.

Regional partners often impose restrictions on Somalia, mainly out of security fears. “Borders sometimes are closed,” said Hassan Noor, CEO of Hanvard Africa, a consultant firm that focuses on East Africa.

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“People fly from Mogadishu direct to Istanbul. They can fly to Dubai. But they can’t fly to the next-door neighbour.” (There are no direct flights between Mogadishu and Ethiopia, although there are to Djibouti, Kampala and Nairobi.)

As a result, businesses have to go to great lengths to trade. “Businesses register in Dubai in order to get access to finance and the like,” said Nick Haslam of advisory firm Adam Smith International. 

Currency reform

Restoring the credibility of Somalia’s currency will also be crucial to economic development. The Central Bank has identified “the introduction of new and unified currency” for Somalia as one of its strategic goals for the next five years.

“There are several versions of the same currency (Shilling) in circulation concurrently, and most of them are fake,” the bank noted in its Strategic Plan 2013-2018.
Since the early 1990s, no bank notes have been printed officially.

“The collapse of the Central Bank and the banking system left a vacuum for monetary and regulatory control and totally shattered the country’s payment system,” noted the report. This led to “currency substitution and the growth of the parallel currency market,” with warlords and militias issuing their own currency.

Officially, Somalia’s shilling trades at around 1,200 to the US dollar, but it is about 15 times that rate on the black market.

In mid-2013, the International Monetary Fund resumed relations with Somalia after 22 years. For now, it will not provide loans to the country, but it pledged to provide technical assistance and highlighted currency reform as a major priority.

The Central Bank is still struggling. Central Bank Governor Yussur Abrar resigned in November after just seven weeks, citing claims of corruption and government interference, and while an interim leader has been appointed, the Bank has yet to find a full-time replacement.

“There’s a lack of capacity, and huge corruption,” said Shirwa Jama, the International Development Law Organisation’s Somalia country representative.  

Managing oil deals and revenue

Nowhere are the problems and potential of the Somali economy better exemplified than in the oil and gas industry. There are massive reserves, and even before the collapse of government, large firms were exploring the possibility of mining oil and gas.

But lack of legislation and political wrangling at regional and national levels impede development in this sector.

“There is currently growing hostility between the Federal Government of Somalia and regional administrations that have signed oil deals independently of the government,” a UN Monitoring group on Somalia and Eritrea noted in a July letter to the Security Council.

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