IMF debt relief creates new business opportunities in Somalia

In summary:

  • Civil war in Somalia has lasted for 30 years leaving the country devastated.
  • The country has risen towards establishing many small- medium enterprises (SMEs).
  • IMF and the World Bank pledge to grant debt relief under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative.

Somalia, a nation rich in history and culture with an ever-resilient population, has found itself entrenched in seemingly perpetual conflicts over the past decades.  

The civil war which has lasted for nearly 30 years has left the country devastated, with poor infrastructure and an essentially non-existent economy.

Nevertheless, according to Trading Economics the Gross National Income (GNI) is estimated to have increased 171% from $182 in 1990 to $312 in 2018, which points towards an annualized growth of around 6%.

The country has, in the last five years managed to rise from its ruins and turned towards establishing a stable federalist government. It has facilitated the creation of most small and medium-sized enterprises (SMEs).

In his keynote address, President of Somalia Farmaajo stated that “his Government intends to reduce poverty by two per cent each year”.

Conducive business environment

Although development is still in its early stages, indications are promising an increasingly efficient and prosperous economy.

Additionally, aided by a growing number of Somali diaspora who is returning to the country to invest in SMEs and provide businesses with necessary funding. This has, created a healthy competition in a multitude of Somali industries.

One such example are the skyrocketing property prices in the capital Mogadishu due to vast gentrification in many districts.

National developments have also been boosted by the International Monetary Fund and the World Bank’s pledge to grant debt relief under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative.

Heavily Indebted Poor Countries (HIPC) Initiative

Somalia Government can swiftly start rebuilding its economy and infrastructure at the early stage of the initiative. According to the International Monetary Fund, the debt relief will be irrevocably reduced from US$5.2 billion by the end of 2018 to US$557 million in net present value (NPV).

Once it reaches the HIPC Completion Point in about three years’ time.

The initiative enables Somalia to re-join the international financial systems enabling the Somali Government to borrow money from financial institutions and invest within its population.

The aim of the Somali Government is to plant the seed of a free market economy, in the hope that the near future will lead it to prosper into one of the strongest emerging economies in East Africa.

Investment Opportunities

Government of Somalia has hinted towards opening of its economy for foreign investment and increased oversight and regulation. One recent example is the licencing of seven state-owned deep-water offshore blocks of oil and gas and the ratification of the Petroleum Law in February 2020.

According to the Oil Review, the licensing agreement coincided with the approval of Somalia’s cabinet to appoint the board members of the Somali Petroleum Authority (SPA).

SPA would become a sovereign authority providing a comprehensive accountability, transparency and enforcement of regulatory principles in the interest of the Somali people.

New policies do not only target well-established industries of Somalia such as petroleum and livestock, but also encourage investment in the domestic market by foreign firms.

Increased competition between foreign entities is anticipated to result in the formation of a domestic industry that is less improvident and short-sighted.

The increased efficiency should enable larger businesses to make better use of economies of scale within the country, reduce cost of production and lower the costs of living in major cities such as Mogadishu.

It should be a pinnacle for foreign companies to establish presence in Somalia before their competitors. Onus is on them to profit from the low tax rates combined with the liberalization of trade by the Somali Government.

Additionally, the creation and funding of independent institutions by the Government to oversee the implementation of such policies and schemes should be of utmost importance in order to reassure investors and attract foreign investments.

Lower Opportunity Cost

The states that are economically viable are able to purchase needed supplies in bulk. Unfortunately, non-developed nations like Somalia have been left behind in the world rankings due to a low and stagnant Purchasing Power Parity (PPP).

Whereas these circumstances might seem to provide gloomy prospects for the country, there are ways to navigate these challenges.

A large informal sector and foreign remittances have helped Somalis to persevere and provided driving force in opening up the economy. While it is true that slow rate of economic growth will most likely result in a slow improvement in standards of living.

As the world’s largest economies continue to outsource their supplies to countries that have lower labor costs, Somalia could see an opportunity for startups, entrepreneurs, and business experts for investment. Labor costs are relatively low. 

The initiative has seen the international communities and observers have applauded the astounding progress Somalia is making in rebuilding its economy

Whilst also benefitting from a lower opportunity cost for numerous resources compared to neighboring countries.

An exceptional example of this is the sector of “frankincense” where Somalia’s reserve accounts for one of the biggest globally. Frankincense has been traded and used in medicine and rituals for up to 5000 years, making it one of the world’s oldest internationally traded commodities.

Improved security, fishing and Tourism Industry

Somalia has the largest coastline in continental Africa and has some of the world’s most pristine seashores. This is a strategic opportunity for the tourism and fishing industries to invest and thrive.

The weather is comparatively warm, similar to popular tourist destinations in the Mediterranean such as Turkey and Greece.

Security has greatly equally improved with the help of other nations including Turkey and Qatar. Northern regions of Somaliland hold some of the oldest and most archaic cave paintings in the world such as “Laas Geel” which predates to 18,000 BC.

Buildings such as the “Mosque of Zeila” pre-ludes to the 7th century and so does the equally important port of Zeila, both of which could draw large numbers of tourists. This demonstrates that tourism, can be levered to provide an influx of funds for regional economies to thrive.

Finally, although there is still ample space to go in order to lift an open-ended embargo opposed by the United Nations in 1992, imports of necessary goods and military armaments needed to maintain and preserve peace, will be less complicated.

The IMF debt relief scheme is an additional lifeline for Somalia.

References

Article

  • Somalia – GNI Per Capita – 1990-2018 Data | 2020 Forecast

[ https://tradingeconomics.com/somalia/gni-per-capita-current-us$-wb-data.html#:~:text=GNI%20per%20capita%20(current%20US,compiled%20from%20officially%20recognized%20sources.]

  • IMF, “Somalia to receive debt relief”, 2020.

[ IMF.org. 2020. International Monetary Fund. [online] Available at: <https://www.imf.org/en/News/Articles/2020/03/25/pr20104-somalia-somalia-to-receive-debt-relief-under-the-enhanced-hipc-initiative>

  • Oli Review Africa, “Exploration”, 2020.

[ 2020, https://www.oilreviewafrica.com/exploration/industry/somalia-appoints-board-members-and-chairman-for-somali-petroleum-authority-spa. Accessed 4 Oct 2020].

  • “Somalia Partnership Forum Stresses Job Creation and Poverty Reduction To Promote Stability”. UN News, 2017.

Literature

  • Hull, Bradley Z. “Frankincense, Myrrh, and Spices: The Oldest Global Supply Chain?” Journal of Macromarketing, vol. 28, no. 3, Sept. 2008, pp. 275–288, doi:10.1177/0276146708320446.
  • Peter Navarro, “The economics of China price” P. 13-27, 2006).

ahmed-m-hassan

Ahmed Hassan is an Economic Analyst with a Degree in Business Management. He has obtained his Degree from the University of St. Mary’s, London and is presently pursuing his Politics and Economics Master’s at King’s College London, in the department of European Studies. He has written several articles that extensively cover Policies, Economics, Business Politics and Foreign Affairs.

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