Somalia’s economic growth to contract due to negative COVID-19 impacts

The latest World Bank Somalia Economic Update says COVID-19 has impacted all sectors of the economy leading to declines in revenue for both Federal and state governments.

Somalia’s economic growth is forecast to contract significantly due to the negative impacts of COVID-19 (coronavirus), the locust infestation and extreme flooding. The economy is projected to contract by 1.5 percent in 2020, down from an earlier estimate of 3.2 percent before the pandemic.

The latest World Bank Somalia Economic Update says COVID-19 has impacted all sectors of the economy leading to declines in revenue for both Federal and state governments. The pandemic has limited livestock exports, trade taxes and remittances, with direct impact on poor households, services and core government functions. The authorities have launched a coordinated national response to the crisis. In the short-term, the government prioritized containment of the pandemic’s spread through promoting social distancing, restrictions of large public gatherings, a partial domestic lockdown, and strengthening disease surveillance and health interventions.

Somalia also instituted fiscal measures aimed at increasing the health sector budget to help fight the pandemic at both Federal government and member states, utilizing concessional financing to strengthen the healthcare system already constrained by lack of resources. The authorities expanded the safety net programs to cushion the poor and most vulnerable households. As a result, expenditure pressure is anticipated in 2020 driven by increased intergovernmental grants and social benefits in response to the triple crisis.  

“Together with other development partners, we moved swiftly to alleviate the health, social and economic impact of COVID-19 by helping scale health sector and livelihoods financing, specifically supporting the design and launch a cash transfer program, locally referred to as Baxnaano, that puts money directly in the hands of the most vulnerable households,” said the World Bank Country Manager for Somalia, Kristina Svensson. “Scaling up social protection measures will greatly support the 30 percent of Somalis who face the threat of losing remittances as a source of livelihood.”

The onset of COVID-19 interrupted the nascent rebound in Somalia’s economy that had begun since 2016/17 following a recovery from earlier droughts and narrowed the 2.9 percent GDP growth gains in 2019. However, as the effects of COVID-19 wane over the medium term, the economy is expected to pick up moderately to 2.9 percent in 2021 and reach pre-COVID-19 levels of 3.2 percent by 2022.

To support the medium-term recovery, the report notes there is a need to consider protecting jobs and incomes by providing liquidity and trade financing including emergency loans for nascent small and medium-sized enterprises. Further, revenue mobilization and collection need to be scaled significantly beyond the Benadir region. Similarly, efforts to harmonize taxes across the federal and state governments, remove internal trade barriers, and clearly define revenue sharing need to be intensified along with deepening the fiscal federalism agenda and dialogue. Such measures will increase the fiscal space of both the federal and state governments.

“Continuing support for a vibrant financial system as an engine of economic growth under the Revenue Act and the Customs Reform Roadmap while also shoring up remittance flows is particularly key at this time to help the country implement financial sector reforms and to build back better. said John Randa, World Bank Senior Economist and Lead Author of the report. “This could be achieved by improving core government departments, deepening financial sector supervision, improving the payment system, strengthening the anti-money laundering, and support collateralized lending and mitigate credit risk.”

The special focus section of the report considers options to strengthen security sector reforms in Somalia. It notes that better accountability and effectiveness in the security sector have been ensured by a commitment to public finance reforms. Nonetheless, the security sector will continue to need significant external and domestic resources to implement the ambitious National Security Architecture agreed to by the international community and the government in London in 2017.