What are Somalia’s biggest economic challenges?

You might think Somalia would have had little to celebrate in recent weeks, as a seemingly resurgent Al-Shabaab continues to put up a fight, their backs-to-the-rope tenacity acknowledged even by president Barack Obama during his recent visit to East Africa.

That security threat has also put paid to hopes of the country of nearly 11 million holding a full vote next year, news that would have cast a further pall on celebrations of its 55th birthday, marked early this month.

The country’s internationally-backed government is kept up by a 22-000 strong force from five African Union countries, in addition to local soldiers, but that has not deterred frequent attacks by the Islamists, the latest on Sunday at a hotel housing three diplomatic missions and which killed at least 13 people.

But amid all the action a team from the International Monetary Fund quietly visited the country, on the back of it’s readmission to the lender’s fold in April 2013, and for the first time in over two decades we have a close to independent and reliable general picture of the country’s economy.

The top layer would please many: when adjusted for inflation the Gross Domestic Product grew 3.7% in 2014, or 6.6% when taken at face value, with agriculture and services providing the bulk of this growth. A dip in real GDP to 2.7% is expected this year, but few would begrudge the progress, with even multinationals like Mastercard sniffing about.

An inflation rate of 1.3% would impress most countries anywhere, while a still growing team of local technocrats is starting the sizeable challenge of stabilising its financial sector.

Then there is the not-so-good news. Attracting diaspora professionals is a major headache, and several loopholes for corruption exist. The IMF euphemistically refers to the latter as a lack of “sound fiscal principles and transparent reporting”, while there is little clarity on management of complex federal politics or how to protect hydrocarbons revenues from swamping the system.

The country also lacks a plan on strengthening the credibility of its money transfer firms, while there is very little data to size up anything, what the IMF terms the need to “improve statistical capacity”, with its large informal sector effectively off the radar, especially of the taxman.

And then the outright bad news: budget preparation and implementation is weak at best and the little cash goes to salaries and security. Even those are in arrears, with the 2015 budget having been prepared on a zero cash balance basis.

There is a gaping current account deficit of 11% of its $5.7 billion GDP; its key export markets in the Middle East are volatile, imports are mainly foodstuffs, remittances which at $1.3 billion are a fifth of GDP are threatened,  and donors finance all poverty reduction plans.

Additionally, the country does not qualify for IMF cash and may not do so for a long time: its external debt of $5.3 billion is 93% of its GDP, and it is accumulating even more debt as it seeks to finance budgetary shortfalls, while assets barely touch $60 million.

The economy is predominantly dollarised, the IMF notes, and cash is scarce with the poorest not able to access even the smallest banknotes. Then there is the small matter of counterfeits: 95% of Somali shilling notes are fake.

While the overall tenor of the IMF’s Article IV consultation is couched in encouraging and sympathetic language, it is a long laundry list of things to fix, and it is hard to hide that Somalia’s is essentially an economy on life support.

It is to be expected: as a result of the civil war triggered in 1991 its state institutions were almost reduced to rubble, and are only finding their footing now, but it’s a long path back, even for the famously resilient and enterprising country.

“Considerable donor assistance is required for helping Somalia to meet these daunting challenges”, the IMF staff report says. The assessment is a tough reality check for Somalia’s government and a sobering one for potential investors. Mogadishu would have been forgiven if it had sought to redact it extensively, or even object to its publication as it created breathing room, given it only got back on the programme in 2013.

But it did not, and this is significant. For a long time the IMF’s annual assessment of member state economies, known as Article IV consultations, were largely kept under wraps, with only government officials privy to it. A large part of this was for economic reasons: technocrats feared disseminating too much information would expose them to heavy market penalties—such as damaging runs on their currencies—and a view even the IMF bought into.

Only in 1997 did the Washington-based lender start releasing its Public Information Notices (PINs), which were tightly-worded briefs about the state of member economies put out by its executive board.

Four years later the IMF, following a promising pilot, started making the release of the more detailed—and blunt—Article IV staff reports voluntary, but allowed countries to remove information they deemed sensitive, or turn down their publication altogether.

The terrain has since completely changed; for the last 10 or so years the release of staff reports has been “voluntary but presumed”—meaning countries have to explicitly object to the publication, which is now taken as a norm.

Few countries object to the publication of information notices, while by some counts eight in every 10 now allow the staff reports to go out.

Somalia certainly has less to worry about markets now as it is still figuring out its basic systems, but it would be concerned about raising much-needed funds from spooked donors and investors. But the release actually counts in its favour—authoritative studies have in recent years drawn a link between the publication of staff reports and the transparency of a regime.

According to the researchers, governments that have tended to seek the suppression of the public disembowelling of their finances often have democratic deficits. But if a regime is more transparent at home, it is more capable of giving credible promises to those who would seek to help it, and is thus transparent abroad.

Essentially, the all-innards-out nature of it may all be a bit discomfiting for Somalia, but it can only buy it crucial market and donor goodwill.

This article is published in collaboration with Mail & Guardian Africa. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Lee Mwiti is a contributor at Mail & Guardian Africa.

Image: Girls stand inside their classroom at a primary school in Dobley town. REUTERS/Thomas Mukoya.