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Somalia Economic Outlook
Macroeconomic performance and outlook
The economy grew by an estimated 2.9% in 2019, up from 2.8% in 2018. The rebound is mainly due to recovery in agriculture and strong consumer demand. Inflation peaked at 5.1% in 2018 and declined to an estimated 4.4% in 2019 as food prices adjusted downward. The government budget remained in balance—given the restrictions on new public borrowing under staff monitored programs (SMPs) since 2016 and the need to keep inflation under control.
The current account deficit improved from 9% of GDP in 2018 to 8.3% in 2019 because livestock exports recovered and import growth slowed. In Somalia’s current account, aid and remittances have generally countered the deficits, while foreign direct investment has remained subdued. Limited control over the money supply due to counterfeiting and dollarization of the economy, coupled with low fiscal balances, leaves the monetary and fiscal authorities few instruments to prop up growth in the short run. Despite widespread dollarization, the Somali shilling has remained fairly stable, depreciating by only 5.7% since 2017 to 24,490.85 shillings per dollar in September 2019.
The Somali High Frequency Survey, wave 2, of 2017, indicates that Somalis are among the poorest people in Africa, with a poverty incidence of 69.4% and per capita income of about $400. Poverty among maleheaded households was about 72%, compared with 66% for female-headed households. A better understanding is needed of the country’s poverty dynamics along gender lines. Youth constitute about 70% of the population, with about 67% of them unemployed. Only 30% of children are enrolled in schools—18% in rural areas.
Tailwinds and headwinds
GDP growth is projected at 3.2% in 2020 and 3.5% in 2021. An improving security situation, normalization of relations with international financial institutions, and prospects of debt relief under the Heavily Indebted Poor Countries Initiative (HIPC) in 2020 present opportunities to address economic and social challenges. Somalia has satisfactorily implemented three SMPs since 2016, enhancing state legitimacy and improving macroeconomic management and performance. These programs addressed some structural rigidities and institutional weaknesses.
Together with development partners, Somalia is using targeted interventions to help meet its HIPC debt relief obligations. The support enhances building institutional capacity and providing opportunities for skill development as a catalyst for better public services, including infrastructure. Investments in hard infrastructure such as roads and ports and soft infrastructure such as enhanced skill development, along with increasing formalization of the economy, will boost medium-term growth.
Data are scarce on human development. Low investment, low economic diversification, and low productivity in the informal economy have hamstrung economic dynamism. At the center is the need to formalize economic activity to provide a base on which the government can mobilize tax revenue, strengthen its public service capacity, and invest in infrastructure. In 2018, the ratio of revenue to GDP was 3.8%, rising marginally in 2019 to an estimated 3.9%. Current revenue does not provide fiscal space to spend on productive investments. Given the global economic slowdown, Somalia’s dependence on aid and remittances (about $1.4 billion annually) presents significant risks to growth. These factors, coupled with low skills, low savings, high poverty, insecurity, institutional weaknesses, vulnerability to climate-related shocks, debt distress, and restrictions on borrowing compound the risks.