Report No. 5584-SO Somalia: Towards Economic Recovery and Growth August20,1985 Eastern and Southern Africa Regional Office FOR OFFICIAL USE ONLY Documentof the World Bank Thisdocument hasa restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents maynot otherwise be disclosed without W^!orld Bankauthorization. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
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Report No. 5584-SO
Somalia: Towards EconomicRecovery and Growth
August 20, 1985Eastern and Southern Africa Regional Office
FOR OFFICIAL USE ONLY
Document of the World Bank
This document has a restricted distribution and may be used by recipientsonly in the performance of their official duties. Its contents may not otherwisebe disclosed without W^!orld Bank authorization.
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CURRENCY EQUIVALENTS
Currency Unit = Somali Shilling (So.Sh.) = 100 cents
U.S. $1.00 (Official Rate)Up to June 30, 1981 = So.Sh. 6.295July 1, 1981-June 30, 1982 - A dual exchange rate w±th
= So.Sh. 6.295 (for essential imports)= So.Sh. 12.590 (for all other foreign
Exchange Rate Used for Calculations:Throughout the text we have used the annual average exchange rate.These are,
Up to 1980 - SI = 6.295 So.Sh.1981 - $1 = 9.4425 So.Sh.1982 - $1 = 13.9085 So.Sh.1983 - $1 = 15.814 So.Sh.
ABBPEVIATIONS
ADC - Agricultural Development CorporationCPI - (Mogadishu) Consumer Price IndexCSD - Central Statistical DepartmentDAC - Development Assistance CommitteeDB - Development BudgetDOD - Debt Outstanding and DisbursedECA - UN Economic Commission for AfricaENC - The National Agency for TradeENEE - National Electric Energy AuthorityFYDP - Five-Year Development Plan (1974-78)IMCPI - Inter-Ministerial Committee for Public InvestmentMFA - Ministry of Foreign AffairsMNP - Ministry of National PlanningOFfO - Ministry of FinanceMTRP - Medium-Term Recovery ProgramNBB - National Banana BoardONAT - Farm Machinery and Agricultural Services CorporationPIP - Public Investment ProgramTYDP - Three-Year Development Plan (1979-1981)UNHCR - United Nations High Commission for Refugees
GOVERNMENT OF SOMALIA
FISCAL YEAR
January 1 - December 31
FOR OMCIAL USE ONLY
This report is based largely on the findings of an economicmission which visited Somalia during May-June 1984. The mission comprisedMessrs. Rajendra Sharma (Mission Chief), Harry Walters (agriculture), KeithMarsden (industry), Kapil Kapoor (statistics), and Michael Stevens(consultant, planning and budgetting). Swadesh Bose is the principalcoordinating author of this report.
The draft report was discussed vith the Somali Government byMessrs. Dunn, Bose and Sharma in Jute 1985.
71& document ha a resticed disibuton and may be used by ecipients only in the perfonnmnce oftier ofial dutie. Its contnts may not otrwinse be dwBsed witbout World Bank auorization_
SOMALIA: TOWARDS ECONOMIC RECOVERY AND GROWTH
Table of Contents
Page No
Country Data i-iiiPreface ivSummary and Conclusions v-xviii
Chapter I - Introduction and Background 1
Structural Characteristics 1Education and Skills 2Institutional Background 3Demographic Situation 4
Chapter II - Recent Economic Performance 6
Production Grovth in Recent Years 6Domestic Savings and Investment 8Fiscal and Monetary Developments 10Balance of Payments 16External Debt 20Recent Stabilization and Recovery Programs 23
Chapter III - Selected Issues in Nacro-Economic Management 26
Economic Planning, Budgetting, and InvestmentProgramming 26
External Debt Management 36Aid Coordination 39
Chapter IV - Augmenting Commodity Production - Constraintsand Possibilities 43
Constraints to Agricultural Growth 43Issues and Recommendations 50Constraints to Industrial Growth 54Main Issues and Recommendations 56Improving Energy Management and Efficiency 61Long-term Measures to Enhance Energy Supplies 62
Chapter V - Medium-Term Prospects 64
Balance of Payments Prospects 65Government Budget Projections and Outlookfor the Public Investment Program 69
ANNEX TO CHAPTER V 72
STATISTICAL ANNEX 75
MAPS
SOMALIA CDUN1I DATA
Economic lidicators
GNP Per Caplta - lUS266 (1982) 1
Aal Rate of Growth of CDPGros National Product in 1982 1/ at Cnstat Factor cost (2)
(Fiscal Year.)
uss N. Z 1977-0 1981 1982
(OP at Muket Prices 1339.1 100.0 -3.0 4.4 8.5Investnt 267.5 20.0PRource alace -292.6 21.9Export of Goods and NRS 152.4 11.4Import of Goods and NFS 484.2 36.2
O,tstmbig ad Iaauzse 164.5Undisbnumi 71.1Chltatig I=. Unshu,ari 235.6
1/ ThzWi a3lishusl odts fti EKa Bmpes comtrim, totollg U5$1 iu11iful, u*dch ae nvt2 to be disblued any firth.
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PREFACE
The previous World Bank economic report on Somalia a/ was basedon the findings of a mission which visited the country in April-May 1982.The report was issued in May 1983 and served as a document for discussionat the first Consultative Group (CG) meeting on Somalia held in Paris inOctober 1983.
The present report, intended to serve as a document for the nextCG meeting scheduled for November 1985, is largely based on the findings ofa mission which visited Somalia in May-June 1984. Since then Somalia'seconomic situation changed rapidly. The Government adopted a bold adjust-ment program for 1985 under an IMF Stand-by and a special CG meeting washeld in January 1985 to arrange the financing of Somalia's balance ofpayments gap for 1985. The report also covers these developments.
Keeping in view Somalia's long-term development, this reportreviews implementation by the Government of policy reforms for thecountry's medium-term recovery program as agreed at the 1983 CG meeting,and analyses the main problems and prospects for recovery and growth of theSomali economy during the remainder of the 1980s. It focusses on the majorfactors behind Somalia's renewed economic and financial crisis in 1984,and, in particular, on policy measures and institutional reforms needed tosustain economic recovery in the short term and move from recovery togrowth over the medium term, viz: (a) improving macro-economic and demandmanagement through better planning, investment programming, and financialcontrol; and (b) augmenting commodity production through effectiveincentives and better allocation and use of resources.
Chapters 1 and 2 provide an introduction and a review of recenteconomic developments, respectively. Chapter 3 discusses selected issuesin improving macro-economic management in three broad areas: planning,investment programming and budgetting; aid coordination; and debtmanagement. How to improve the management of the public investment programand financial planning and control is a central concern of that chapter.Chapter 4 reviews the main constraints to developments in agriculture andindustry, and discusses a number of measures aimed at generating a supplyresponse in these sectors by making the best use of existing capacities inagriculture and industry, expanding production through low costinvestments, and creating the climate and the incentive framework tomobilize the initiative and resources of the private sector. Chapter 5then briefly considers Somalia's medium-term prospects.
a/ World Bank (Report No. 4081a-SO), Somalia: Policy Measures forRehabilitation and Growth, (May 1983).
SUMMARY AND CONCLUSIONS
1. During the 1970s, Somalia's real GDP fluctuated considerably, but itwas no larger in 1980 than in 1972, while population increased by anestimated 2.6 percent per vear. This output stagnation was notcommensurate with the level of gross domestic investment, averaging about18 percent of GDP during 1975-S0, financed by a large net inflow of foreignaid which also supporzed part of Somali consumption (Table 2.2). In theface of this output stagnation, a great surge in domestic expenditure,following a major conflict with Ethiopia in 1977-78, plunged Somalia into aserious economic and financial crisis. During the three-year period1978-80, real GDP declined by 3 percent annually, the overall budgetdeficit averaged 17 percent of GDP and the deficit on the current accountof the balance of payments averaged 18 percent of GDP. External debtincreased sharply, and by 1980 debt service arrears accumulated to $28million, and annual inflation was 5 percent (Chapter II, Tables 2.1, 2.4,2.5, 2.6).
Somalia's Crisis and Efforts for Recovery
2. Somalia has been in a critical economic situation for a number ofvsars. As the crisis deepened, and following severance of relations withthe USSR, the Government made a major shift in policy beginning mid-1981,and embarked on a major stabilization program to curtail demand expansionand to provide incentives to the productive sectors (supported by IMFStand-by Arrangements). These measures -- comprising exchange rateadjustments, fiscal and monetary restraint, increased interest rates andsubstantial increases in agricultural producer prices -- contributed tosome improvement in Somalia's economic and financial situation. Real GDProse by 6.4 percent per year during 1981 and 1982; led by the agriculturalsector which, aided by liberal pricing policies and unusually goodrainfall, grew by about 14 percent per year. The overall budget deficitdecreased from about 17 percent of GDP in 1978-80 to less than 10 percentin 1981-83; the domestic inflation rate fell from 59 percent in 1980 to 23percent in 1982 (Tables 2.4 and 2.5). In 1983 real GDP growth slowed downto 4 percent as drought conditions adversely affected agriculturalproduction; inflation accelerated to 36 percent. Notwithstanding theseimprovements, some of the basic factors underlying Somalia's financialcrisis persisted: the trade gap and the external current account deficitremained very high while the reduction in government borrowing from thebanking system was primarily attributable to large increases in net capitalinflows (Tables 2.3 and 2.6).
3. Against this background, in 1983 the Government prepared a medium-term recovery program comprising a public investment program (PIP) for1984-86 and a program of phased policy measures for improving economicmanagement and establishing an incentive framework for encouraging privatesector development. At the first Consultative Group (CG) meeting in
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October 1983, the Government revised the PIP and postponed some newprojects pending further studies. The core PIP was focussed on highpriority ongoing projects, and donors pledged support for it and theassociated policy measures.
4. A financial crisis re-emerged in 1984 due to the slackening ofstabilization efforts by the Covernment (para. 2.08), the ban on cattleimports from Somalia imposed by Saudi Arabia in mid-1983, the impact of the1983 drought on domestic production, and the Government's decision not toimplement additional policy measures -- including devaluation, liberaliza-tion of trade and price controls, and financial restraint. Thus, in 1984government expenditure jumped to 36 percent of GDP (from 26 percent in 1981and 1982) and the overall budget deficit increased sharply to 23 percent ofGDP (from 12 percent in 1981 and 1982); public sector borrowing from thebanking system doubled in one year; inflation reached a record 92 percent;and the external position deteriorated. Imports were equivalent to seventimes exports, debt service arrears increased to reach about US$218million, and debt outstanding stood at an estimated US$1.4 billion atend-1984 (Tables 2.4, 2.5, 2.6, 2.7).
5. Faced with a rapidly deteriorating economic and financial situation,the Government adopted a major adjustment program for 1985 under a new IMFStand-by Arrangement. This program is designed to reduce domestic andexternal financial imbalances and to stimulate economic activity throughmeasures to control demand and improve resource allocation. The coreadjustment elements comprise a major devaluation (from So.Sh. 26 - $1 toSo.Sh. 36 = $1, effective January 1, 1985), the establishment of a freeforeign exchange market for most non-Governmental transactions, the virtualelimination of export and import restrictions, the dismantling of mostprice controls, and fiscal and monetary measures to constrain demandgrowth. The program also stipulates an adjustment of the interest ratestructure, an acceleration of the reform of public enterprises, and areform of the banking system.
6. The 1985 program constitutes a bold and ambitious undertakingdirected towards fostering a more market-oriented economy. At a specialConsultative Group meeting in January 1985, donors commended Somalia foradopting this program and pledged quick-disbursing assistance to financeSomalia's balance of payments gap for 1985.
Major Constraints to Economic Recovery
7. Somalia's economic crisis is not over. The fundamental issuesfacing the country - the huge resource gap emanating from a level ofconsumption exceeding domestic production, high import dependencecontrasted to stagnating exports (reflecting a limitation of productionstructure reinforced by inadequate policies), and low productivity ofinvestments arising from deficiencies in financial discipline, public
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expenditure management and resource allocation - persist and cannot beresolved in one year. A sustainable balance of payments and resumption ofgrowth will require not only expenditure reduction, but a combinatiun ofpolicies to restrain consumption, to raise savings, to improve theefficiency of resource use, and to concentrate investment in priority areassuch as rehabilitation and better utilization of existing capacities,relatively quick increases in production of livestock, bananas and otherexports, and viable import-substitution in food and industrial products.Adjustment measures dealing with macro-economic and demand management, anda wide range of reforms to augment domestic production in agriculture andindustry need to be pursued by the Government over a protracted periodduring which it will require the financial support of donors to alloworderly progress in economic and financial recovery.
8. Low productivity rather than low levels of investment seems to havecontributed importantly to Somalia's aggregate output stagnation. In mostyears, gross domestic fixed investment exceeded 15 percent of GDP, much ofit (over 70 percent) in the public sector. Development programs wereprepared with little regard to the priorities for investment, and fewserious attempts were made to appraise the economic and financial viabilityof projects and to rank them on the basis of returns to investment. Donorswere in part responsible for this state of affairs because they did notalways adhere to sound project criteria when initiating and financingprojects. Too many projects were started at once without completing otherson time, owing partly to limited implementation capacity. The capacitythus created has not been fully utilized, often due to inadequatemaintenance or input supply. Beginning with the three-year (1984-86) PIP,through the annual PIPs for 1984 and 1985, some progress has been madetowards realistic planning.
9. In addition to the more immediate problems of economic recovery,Somalia has the fundamental, longer-term problem of sustaining a rapidlyincreasing population on rather limited agricultural land and waterresources. Somalia's population growth rate is 2.8 percent per year. Boththe fertility and mortality rates are high. At this rate, Somalia'spopulation would double to nearly 11 million in 25 years. The rapid growthof population is impeding efforts to raise living standards by divertinginvestment funds required for agricultural development and economic growthto consumption and social infrastructure for a larger population. Toabsorb productively a population double its present size at an improvedstandard of living within the next 25 years will be extremely difficult.Since the existing rangeland has been strained and its carrying capacitycannot accommodate the expected increase in the nomadic population over thenext 15-20 years, a central issue involves the absorption of additionalnomadic population in settled agricultural and non-agricultural activities.
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Towards Economic Recovery and Growth
10. Given the continuing economic and financial crisis, the Governmentneeds to undertake further action and reforms for sustaining the recoveryprogram that it launched in 1983 for achieving the twin objectives ofrestraining demand and raising domestic production, and thus laying thebasis for future growth.
11. The Government's medium-term recovery program (MTRP), entitled'Development Strategy and Public Investment Program 1984-86", presented tothe Consultative Group meeting in October 1983, envisaged the publicinvestment program (PIP) as the centerpiece of national developmentplanning and as a major instrument of allocation of investment resources.This was an important development. However, many of the intendedsupporting policy, procedural and institutional measures still need to betranslated into action.
- The program called for the adaptation of monetary, fiscal andforeign exchange policies for improving macro-economic managemer.consistent with the stabilization effort. The lapse inimplementing the program during 1984 was costly, and theGovernment is aware of the importance of continuing this effort.
- The envisaged further improvements in economic planning,financial discipline, investment programming and budgetting, aswell as external debt management and aid coordination, need to beachieved.
- The program stressed the importance of the reform of publicenterprises. Some progress is underway, and some criticaldecisions still need to be taken.
- In regard to envisaged measures to limit the growth in publicemployment, the Government's decision to abandon the policy ofguaranteed employment to school leavers is a major step forward.
- In agriculture, the envisaged liberalization of pricing andmarketing has been largely accomplished, and led to a largeincrease in area under cultivation and grain output. Studies onthe mechanism for price stabilization and improved inputdistribution are underway.
- The program recognized the importance of formulating andintroducing an incentive framework including pricing policy,investment laws, etc. to encourage the private sector. The tasksinvolved are large and demanding, but need to be done with thehelp of technical assistance.
Further Action for Economic Recovery
12. The unfinished agenda of actions proposed in the Government's 1983MTRP needs to be implemented and progress to full liberalization in the
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areas of trade, prices and exchange rate policies needs to be sustained.These policies also need to be reinforced by additional measures tostrengthen macro-economic management and to further improve the policyenvironment for investment and output growth in the productive sectors.
Macro-Economic Management
13. Improve PIP Management. Given the urgency of the medium-termrecovery program and the staff time required for preparing the PIP and therelated financial framework, the formulation of a new Five-Year Plan willput tremendous pressure on the Ministry of National Planning. The mainfocus of planning efforts should be the annual roll-over of the three-yearPIP. Somalia's limited planning talents and available technical assistanceshould be utilized to improve the PIP, its underlying economic analysis,the macro-economic and financial framework and the related policies. Thisis desirable both from the point of view of sustaining the ConsultativeGroup process and Somalia's own programming and budgetting requirements.In the next PIP (1986-88) there should be much more use of economic andfinancial rates of return in project selection. The PIP's overall sizeshould be at a level consistent with potentially available domestic andexternal resources and Somalia's implementation capacity, as indicated byrecent experience and also taking into acccunt any improvement inimplementation capacity.
14. The PIP should be regarded as the sole authority for projectcommitments and expenditure, and the determinant of the developmentbudget. The list of projects and their expenditure for the first year ofthe PIP should form the basis of the development budget of the Ministry ofFinance. The development budget (which now covers only the local revenuecontribution to development projects) should be expanded into a fullcapital budget including both externally and domestically financedexpenditure. A start has been made in this regard while preparing the 1985budget.
15. Recurrent Expenditure Implications of Projects. The connectionbetween the recurrent budget and the development budget needs to bestrengthened, and the technical quality of the future PIPs raised in theareas of programming and the analysis of recurrent costs. The PIP shouldshow the recurrent costs arising from investment projects (which is notdone at present) and indicate how the additional recurrent costs will befinanced. If the 1984-86 PIP is fully implemented, the annual recurringexpenditure required to operate the completed projects in the late 1980scould amount to another 60 percent of the Government's present totalrecurrent expenditure, and 3 times the recurrent budget currently allocatedto the social and economic ministries (Table 3.1). Unless it can bedemonstrated that there are good reasons to expect that such additionalfuture recurrent costs can be fully financed from both foreign and domesticsources, the PIP needs to be reduced accordingly. It hardly makes sense tomake new investment if completed projects cannot be operated for lack ofrecurrent outlays. In order to improve the situation, the allocation ofthe recurrent budget, which virtually starves the economic and social
services, needs to be corrected aL the cost of general public services.Also, there is need for greater flexibility in the form in which aid isprovided, with somewhat more emphasis on balance of payments support. Tomobilize and effectively utilize non-project aid, the Somali Governmentwould be expected to continue liberalization, improve macro-economicmanagement and proceed with public sector reforms. The reprogramming ofproject aid for financing Somalia's immediate balance of payments gapagreed at the special Consultative Group meeting in January 1985 provides agood example of the required direction of change in aid modality.
16. Prepare Medium Term Financial Framework. In the present difficulteconomic situation of Somalia, the Ministry of Finance and the Mlnistry ofPlanning need to coope~rate closelv to prepare a financing plan for publicexpenditure taking .nto account such strategic issues as:
(a) pay, ronditions and size of the public service;(b) poli-ies toward the public enterprise sector and the likely
mag',itude of their call on public funds;(c) allocation of recurrent expenditure among ministries in favor
of economic services; and(d) s,ze and composition of the 1986-88 PIP consistent with
zapacity for implementation, operation and recurrent outlay.
17. Such a financial plan/framework would be developed on the one handfrom projections of Government tax revetues, retained earnings of publicenterprises, and anticipated aid flows and on the other hand from estimatesof debt service payments, and ordinary and development budget expendi-tures, and targetted increases in international reserves. It would haveto be grounded in the present, with limits to domestic credit expansionconsistent with the IMF program. Such a resource framework should beprojected forward 'or five years, and updated annually. The Governmentshould exercise utmost caution in launching new projects unless thefinancing plan indicates that recurring costs can be financed.
18. Monitoring and Evaluation. For effective management of the PIP, theGovernment needs to strengthen the monitoring of projects, in a mannerappropriate to Somali conditions. Since the PIP contains fewer than 100core projects, it should be possible for the Go-;-ernment to monitor eachproject individually. A six-monthly reporting should be established toprovide financial information on development budget expenditure andphysical information on implementation so that emerging issues andbottlenecks can be identified and resolved. Thle Government should,therefore, strengthen the Inter-Ministerial Committee for Public Investmentfor expenditure monitoring and inter-ministerial cooperation.
19. Expenditure Control and Financial Discipline. One third of thecurrent budget is kept as a reserve item with the Ministry of Finance, andis not covered by the budget formulation process. There appears to be nosystematic mechanism for the setting of expenditure guidelines, nor aneffective fiscal reporting system in budget execution. Also, inadequacies
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of financial discipline and expenditure control remain a serious problem.It is important to improve this state of affairs, to make budgetting moretransparent and to ensure that monies provided for specific purposes arespent on them and that expenditure ceilings are maintained. Financialregulations need to be circulated and enforced strictly.
20. Improve Debt Monitoring and aaM gement. Given Somalia's large debtservice obligations (over $100 million per year or 80 percent of exportearnings) and sizeable payment arrears ($218 million), it is very isportantfor the Government to consider how to cope with the situation. TheGovernment declared its intent to repay in full arrears and obligations tothe multilateral agencies. In March 1985 it had recourse to the Paris Cluband obtained gross debt relief of $41 million for 1985. Debt relief hasbeen obtained or is being sought from non-Paris Club members, e.g. theIslamic Bank, Saudi Fund and Kuwait Fund, while debts owed to specialbilateral creditors have been frozen indefinitely. Also, with help fromIMF and Samuel Montague and Co., the Government is improving debt data.Mbre needs to be done: (a) Steps should be taken to improve the monitoringand management of external debt. The foreign debt unit (FDU) should bestrengthened to ensure timely reporting and payment of de't service. (b)The Government should prepare an action plan for seeking further debtrelief and debt rescheduling. The services of the IMF advisor to FDUshould be utilized to develop a realistic plan. (c) The Government shouldrefrain from contracting short-term commercial credits or non-concessionalloans. Continued technical assistance in debt management would be highlydesirable.
21. Improve Aid Coordination and Effectiveness. Aid being the mainsource of development finance in Somalia, effective use of aid is crucialfor successful development. The purpose of aid coordination should be tomake aid effective. Whichever ministry has the formal responsibility forit, aid coordination should be improved and integrated into the planningprocess.
22. About 20 percent of all foreign aid to Somalia is in the form oftechnical assistance. In terms of its impact on Somali institutionaldevelopment and on the transfer of skills to Somalis, the result of thismassive technical assistance effort has been disappointing. BothGovernment and donors are responsible for this. Because of theGovernment's aid dependence and weaknesses of its planning process and thecivil service, identification and design of technical assistance reflecteddonor priorities and preferences, with emphasis on short-run projectimplementation objectives rather than long-term institutional developmentgoals. Lack of coordination among donors made matters worse. Improvingoverall effectiveness of technical assistance will require: identificationof technical assistance needs with the active involvement of theGovernment; coordination of technical assistance among donors, and by theGovernment through a single ministry at the national level; continued
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efforts for transfer of know-how to counterparts; and an objectiveevaluation of results. However, to make TA effective and well-coordinated,it is also necessary to address civil service issues (para. 3.53).Measures need to be taken for a realistic recasting of public sector wagesand salaries, for introducing increments within scales and a system ofgrading and promotion to restore public morale, and a sense of careerdevelopment for individual officers.
23. Coordination among donors is intrinsic to the Consultative Groupprocess whose focal point is the medium term recovery program. However,there is an awareness that despite large aid flows, results have beenrather poor. There is a growing awareness that the present high levels ofaid flows cannot be sustained without better results. Individually, donorshave not adhered to project criteria to which collectively they have lentsupport. The CG process could and should be strengthened in the followingways, some of which are already beginning to happen: (i) as discussedearlier on, the PIP itself needs technical Improvement; (ii) there needs tobe greater discipline among the donors insofar as they should considerfinancing only high priority projects included in core PIP; (iii) thelinkage between satisfactory macro-economic policies and aid flows andmodalities needs to be continually stressed; and (iv) strong support mustbe given to administrative reform, in terms of both donor willingness toassist restructuring of the public service and its reduction in size, andto make technical assistance and capital aid conditional on institutionalreform.
24. Improve Balance of Payments. The Government should steadfastlymaintain a realistic exchange rate (as determined by a liberalized tradeand exchange regime) to encourage exports and efficient importsubstitution, attract remittances, dampen uneconomic use of imports (i.e.tractors, other capital goods, petroleum, etc.) and help in improvingallocation of scarce foreign exchange resources. Improvement of investmentopportunities is likely to increase remittances, while rapid expansion ofdomestic production is essential for increased exports.
Measures to Increase Commodity Prodeution and Exports
25. On the production side, there are inherent problems of output growthin a fragile agricultural environment subject to frequent severe droughts.It is often beyond the powers of the Government to prevent a temporarystagnation or decline in production. However, the stagnation in cropoutput in the face of rapid growth of population during the seventies, as aresult of which Somalia became dependent on food imports and food aid foraround 40 percent of the total grain supply (Table 4.1), can be attributedin part - but only in part - to physical constraints. Somalia's yieldsof food grains are among the lowest in Africa. It has been demonstratedthat in Somalia also, under improved practices requiring improvement ininput use, extension and support services, yields can be doubled for maizeand sorghum in rainfed areas, and for maize, cotton and sesame, trebled in
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areas under controlled irrigation. However, despite improvement in priceincentives since 1981, inadequacies in input distribution, adaptiveresearch, extension and support services constrain improvement in cropyields. While rainfed agriculture dominates the area under crops, andexpanding the rainfed area and raising yields on it are probably the leastcost means of increasing cereals production, irrigation plays an essentialand important role. All export crops (bananas, fruits) and industrialcrops (cotton, sugarcane) are grown in irrigated areas. Despite the recentincreases in grain production following liberalization of pricing andmarketing, banana production (the major export crop) is way below the peaklevels of the early 1970s; cotton production has changed little over adecade; and sugarcane production has at best regained the level of theearly 1970s. In areas under controlled irrigation, irrigation efficiencyis only 20 percent in the system as a whole. The rehabilitation ofexisting schemes in this area is critical.
26. The livestock sector, on which much of the economy rests, hasstagnated since the early 1970s; annual exports fluctuated around 200,000livestock units, except during 1980-82, when it averaged 250,000 livestockunits (para. 4.14). This stagnation may reflect the inadequacies of policymeasures for, and the constraints on, improving livestock offtake andmarketing. Other constraints are deficiencies in policies (e.g. the pastovervalued exchange rate) and efforts toward the diversification ofSomalia's live animal export market. The Saudi ban on Somali cattle isonly a recent adverse element in an already poorly performing sector, whichdoes not augur well for its possibilities as a future source of growth. Itis very doubtful that the rangeland could accommodate herd increases on thescale required to sustain the nomadic population currently increasing at2.2 percent per year. Given the lack of industrial and urban developmentin Somalia, agriculture (mainly crop production, and to some extentfishing) will need to play a major role in absorbing the surplus nomadicpopulation, and be an increasingly important source of production growthand exports. However, livestock will remain the country's principal exportfor the foreseeable future.
27. Apart from market and resource limitations, expansion of industrialproduction is constrained by poor public enterprise performance, whichaccounts for over 80 percent of the gross output and value added inindustry. Capacity utilization continues to be low (Table 4.6). Thisserious underutilization is reportedly for reasons of lack of spare partsand raw materials, frequent breakdown of machinery, as well as problems ofmarketing and management. With a few exceptions, public sectormanufacturing is largely based on the processing of agricultural, livestockand fisheries products, for both consumer-oriented import substitution andexports. However, omany enterprises continue to depend heavily on importsof raw materials, contrary to the originally envisaged objectives of localproduction of these raw materials. Scarcity of managerial and technicalskills is also a supply side constraint. The progressive erosion in publicsector salaries over the past few years has weakened the morale of publicsector employees. Most enterprises undergo losses and contribute little
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even to cover depreciation, let alone finance expansion or modernization.The public industrial sector absorbs about 95 percent of gross domesticinvestment in industry. In general, the very high share (89% in 1985) ofpublic investment in total investment may crowd out the private sector. Aclear and specific policy framework for encouraging private sectordevelopment needs to be established. In future, the content of the PIPshould be more carefully examined to see if some parts of it can betransferred to the private sector.
28. Increase Agricultural Output and Exports. In agriculture, theGovernment should adopt and sustain policies and measures designed toexploit the possibilities of relatively quick production growth in therainfed and irrigated crops and livestock sub-sectors. In crop production,this requires continued emphasis in the PIP on rehabilitation of irrigationfacilities, improvement of water use and management in the controlledirrigation areas, and rehabilitation and intensification of rainfed areaspresently under cultivation through better land preparation, improved inputsupplies, adaptive research, extension and support services as well asbetter infrastructure. Given the current state of knowledge ofalternatives, the present balance between investment in rainfed andirrigated crop production appears fairly reasonable, but given the muchlarger size of rainfed areas, the need for rapid increases in cropproduction for both import substitution and exports, and the potential faryield improvement, somewhat more emphasis could be given to rainfed areas.In the livestock subsector, in order to increase the off-take rate ofanimals, and increase exports, public investment should be focussed onimproving animal health services and marketing infrastructure and support,including animal maintenance and holding areas in the interior and near theports. By and large, the allocation of resources for these measures shouldgive precedence to investments for the longer-term development of thissubsector.
29. The Government should move further along the path of economicliberalization, and pursue an agricultural pricing policy recognizing thatthe Somali market must be linked to the international market so thatcompetitive prices prevail in Somalia for crops and livestock. Maintenanceof a realistic exchange rate is critical to provide an appropriateincentive structure for stimulating agricultural output growth for bothexport and efficient import substitution. This is particularly needed tostrengthen the competitiveness of the livestock sector and help todiversify livestock export markets. Also, major efforts need to be made byway of irrigation rehabilitation, input supplies and maintenance of priceincentives to restore banana production and exports at least to the earlierlevels. Emphasis should be given to expand fish production and exports, aswell as to identify and stimulate other exports. Rapid export expansionand import substitution is essential for Somalia's medium-term recovery andlong-term development. In order to avoid the ill effects of extreme
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instability of staple food crop prices, arising from wide fluctuation inproduction, the Government should restructure and redefine the role of ADCand ENC, and develop a mechanism for the stabilization of prices within acertain range to ensure incentive prices to growers and reasonable pricesto consumers.
30. To enhance the capacity of farmers to respond to improvedincentives, the Government should take measures to ease the presentshortage of imported agricultural inputs and to improve extension andsupport services. With the objective of ensuring a timely and adequatesupply of inputs, the Government should encourage the private sector andredefine the respective roles of the private and public sectors in inputdistribution and support services. Large-scale public sector projectsshould be abandoned or scaled down to facilitate development of effectivesupport services in the private sector insofar as the potentiality exists.It is important to ensure, however, that prices of imports reflect truecosts of foreign exchange. This will help eliminate windfall profits, andcorrect the present bias in the input mix in favor of heavy machinery, andencourage the use of other esssential inputs.
31. Finally, a serious effort is needed to recover the costs ofgovernment investment and services. The present taxation on land isnegligible; there is no water charge on irrigated land. Both forcontributing towards attainment of some balance in the recurrent budget andfor equity reasons, the Government should adopt measurea to recover (e.g.by water charge, land development tax) part of the costs of its investmentsand services in agriculture. But fees charged should be proportionate tothe actual service provided.
32. Reform Public Enterprises. The relative size of the public sectorindustrial plant capacity implies that better performance of publicenterprises would be the major source of industrial output growth. Inunderstanding with IMF and with IBRD support, the Government intends toaccelerate public enterprise reforms. Some progress has been made inregard to developing criteria f^r selecting enterprises to be retained inthe public sector, and those to be privatized or liquidated. A mainobjective of reforms should be to turn public enterprises into efficiententities. It is important to recognize that to pursue uneconmic activities(even in energy) for socio-political objectives would be against theinterest of economic recovery and industrial development. A two-prongedapproach may be adopted to deal with unprofitable public enterprises: (a)give clear objectives and greater autonomy with accountability tomanagement to try to make them viable and reward management according toperformance; and (b) encourage private investors to take over selectedenterprises through purchase or lease.
33. Promote the Private Sector. Further changes in policies andincentives are necessary to create a favorable environment for efficient
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industrial development and encourage the private investment, both foreignand domestic. In addition to sustaining the recent liberalization oftrade, price and exrhange rate policies, there is need for modification ofthe Labor Code to provide, inter alia, performance-related wage incentives,improvement of local training programs for raising technical and managerialskills, and modification of the foreign investment law to provide for moreattractive tax exemptions, repatriation opportunities and simplification oflicensing. Stronger incentives and a climate of confidence about thefuture are also necessary for attracting domestic private investment inindustry as opposed to trade. This is beginning to happen. However, withknown resources, Somalia cannot expect to attract massive foreign privateinvestment or to experience a major investment boom led by Somalientrepreneurs.
Energy Management
34. Given the large oil import bill and the considerable cost and leadtime involved in developing domestic energy resources, more efficientenergy demand management is of primdry importance over the short- tomediun-term for both making the energy sector more viable and augmentingagricultural and industrial production. The Government recognizes this,but has not yet adopted appropriate policies. Excepting some increases inprices of gasoline and gas oil in September 1984, prices of petroleumproducts and electricity tariffs have been left unchanged since 1982.
35. Energy prices need to reflect more closely their economic costs.This implies that prices of petroleum products cover their c.i.f. importand domestic marketing costs, as measured at a realistic exchange rate.Electricity tariffs should be based on long-term marginal costs of systemrehabilitation and expansion which should be determined through a study onelectricity system expansion. Prior to completion of such a study, tariffsshould at least cover ENEE's financial costs, including debt service, andallow the generation of some financial surplus necessary for expansion; begraduated in line with levels of operating costs in different systems; andarrears due from public and private sectors should be expeditiouslyrecovered. Stumpage fees on fuelvood and charcoal need to be raised tolevels at which they cover the long-run cost of reforestation. Forestryresource management needs to be strengthened, including through woodfueldevelopment plans, to meet requirements for the future.
Medium-Term Prospects and Aid Requirements
36. Due to the serious gaps and deficiencies in statistics as well asSomalia's vulnerability to exogenous shocks (e.g. drought), anyquantitative projection of Somalia's economic prospects over the mediumterm is a particularly difficult task. Despite these limitations, thisreport (Chapter V) presents a set of projections which outlines areasonable indicative and normative scenario for GDP, the balance ofpayments, and government operations over the next five years, assuming
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sustained and full implementation of policies and measures envisaged in the1985 Adjustment Program, as well as policy and institutional reformssuggested in this report. Agricultural value added may be expected toincrease annually by about 3.4-3.5 percent, and overall GDP by 3.6percent. With a liberalized trade and exchange regime, livestock marketswould be diversified and export volume of livestock, bananas, and otheritems is expected to recover rapidly from the extremely low level of 1984,then grow at a moderate rate. However, because of the weak price prospectsfor Somalia's traditional exports, and lack of viable exportdiversification in the medium-term, total merchandise export earnings arenot expected to go much beyond $190 million in 1990, from a level about$110 million in 1982. Despite the considerable increases expected fromworkers remittances, and some progress of import substitution in food,Somalia will face a very difficult balance of payment situation for anumber of years; current account deficit is likely to remain as large innominal terms (around $400 m) as at present but somewhat smaller in realterms; and given the large debt service obligation, high levels of debtrelief and aid, and reductions in less essential imports will be needed, tomaintain other imports including intermediate and capital goods at a levelnecessary to support the growth of GDP through better utilization ofexisting capacities and, for rehabilitation, and some expansion ofcapacities. To finance Somalia's current account deficit through thisdecade, assistance will be required in various forms: additionalcommitments of grants and MLT ranging from about $330 million in 1986 to$360 million in 1990 are required so that MLT disbursements increase from$120 million in 1985 to $135 million in 1990, and disbursements of officialtransfers increase from $300 million in 1985, to about $350 million in1990. This implies no increase in real terms in the total aid inflow.Finally, large debt relief (averaging $50 m) and debt restructuring need tobe provided every year throughout the decade to sustain Somalia's effortsfor economic and financial recovery.
37. In the absence of strong and effective measures to raise revenue,recover costs and seriouqly curtail expenditure on general administration,the recurrent budget deficit is unlikely to change to a surplus. Thecurrent budget should provide for increased recurrent costs, civil servicesalary increases along with staff reduction, and debt service owed in thecoming years, while fiscal efforts need to be made to raise revenue.Therefore, government development expenditure (PIP) would continue to beentirely dependent on external assistance. The high levels of aid neededto correct the imbalance in the external account would provide enough fundsto keep investment expenditure at a moderate level without recourse to thedomestic banking system. Given efficient allocation and use of funds, thisis quite consistent with the projected 3.6 percent growth of GDP,especially in light of the Government's policy to encourage the privatesector.
38. In sum, while it is unrealistic to envisage a rapidly shrinkingcurrent account deficit in the balance of payments in the near future,
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Somalia can be expected to make progress towards economic recovery,provided adjustments are made through vigorous export production andefficient import substitution; aid flows (mostly of grants) and debt reliefare provided to ease the balance of payments and finance critical importsfor boosting production; and emphasis is given to fully utilizing existingcapacities, completing quick-yielding or nearly completed projects, and tobreaking infrastructural bottlenecks. Through coordinated donor supportthrough the Consultative Group process, it should be possible to mobilizeresources to finance the prospective gap, if the Somali authoritiesmaintain and strengthen the mutually agreed policy and institutionalreforms necessary for successful economic recovery. However, progresstowards economic development over the longer term, with sustainedimprovements in the living standards of the population, will also requirestrong government intervention from now on to bring about a significantreduction of the present high rate of growth (2.8 percent per year) ofpopulation.
CHAPTER I - INTRODUCTION AND BACKGROUND
1.01 Somalia is a fairly large but sparsely populated country in thenorth-eastern corner of Africa. Its population of about 5.3 million(excluding refugees)I/ is unevenly distributed over a land area of about64 million hectares. Somalia's varied topography, including a hot and aridcoastal plain, rugged mountains and plateaus and lowlands of varyingrainfall and fertility, presents a harsh and fragile environment foragriculture. The rainfall is not only low (less than 600 -m in most placesand less than 200 mm in one-third of the country), but also irregular, sothat the risk of drought is ever present. About 13 percent of the land isconsidered arable. But due to the limited physical and socialinfrastructure, and with water being the limiting constraint, hardlyone-tenth of this potentially arable land is in fact cultivated. Thecultivated area is very small relative to the country's largely nomadicpopulation. Some of the potentially cultivable land is likely to beinferior to that now under cultivation and may already be used for themigratory livestock system.
Structural Characteristics
1.02 Aproximately 50 percent of the population are nomads andsemi-nomads who depend on livestock for their livelihood, and areconcentrated mainly in central and northern regions, where up to 80 percentof the population are nomads. Roughly another 25 percent of the populationare settled farmers most of whom are found in the southern riverine regionsof middle and lower Juba, and middle and lower Shebelle, and in the higherrainfall Bay region. The farming population constitutes a majority in mostparts of these regions. The remaining 25 percent of the population or anestimated one million people are engaged in various non-agriculturaloccupations and live mostly in urban areas. The urban population islargely concentrated in the towns located on the southeastern coast:Hogadishu, the capital, has a population of about 400,000. The towns ofHargeisa and Burao in the northwest, account for another 200,000 people.
1.03 Over 55 percent of GDP originates in the agricultural sector, 12percent in industry (including 7 percent manufacturing) and about 33percent in services. Livestock production accounts for about 40 percent ofGDP and provides over 80 percent of export earnings. Crop productiongenerates about 10 percent of GDP and the same share of export receipts.Rainfed crop production is based primarily upon sorghum. Crop productionunder controlled irrigation in relatively small areas is centered oubananas (an important export crop), sugarcane, rice and maize.Notwithstanding Somalia's 3000 km coastline, one of the longest in Africa,fishing generates only 2 percent of exports and about 2 percent of bqth GDPand employment.
1/ The refugee population, which reached about 1.2 million in 1980-81, isnow probably about half a million, or about 10 percent of the nationalpopulation. The official figure for refugees in camps is 700,000.
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1.04 Somalia is among the poorest countries in the world. It Isclassified by the United Nations as a least developed country. Per capitaincome for 1982 is estimated at $265. Other indicators of Somalia'slow level of socio-economic development are: an average life expectancy atbirth estimated at 46 years with a crude death rate of 20 per thousand, aninfant mortality rate of 150 per thousand births, and 25 percent ofchildren dying within their first five years of life. These levels ofmortality are among the highest in Sub-Saharan Africa as a whole. Maternalmortality is estimated at 1100 per 100,000 live births compared with 82 inEgypt. Impure water supplies, lack of waste disposal, poor food hygieneand lack of access to health care all contribute to the high mortalityrate. Modern health care is entirely confined to urban areas, whiletraditional medicine remains the main source of health care in ruralareas. The population per physician is 16,000, or about the same as theaverage for low-income countries.
1.05 The evidence on nutritional status is very fragmentary. Itseems that protein-calorie malnutrition is less of a problem than would beexpected in a country with Somalia's level of per capita GDP, mainlybecause of a livestock-dominated economy where meat and milk are relativelymore available, particularly to the nomads. However, malnutrition isserious for particular groups and at certain times. A good proportion ofthe population seem to depend on purchases for a part of their food supply,which is not abundant at all times. Nutritional vulnerability is,therefore, closely linked to purchasing power as well as to capacity towit-hastand drought. Women of child-bearing age and children of age 1-5 areespecially vulnerable among cultivators and poorer groups in urban areas.The Government estimates that 19 percent of children suffer from moderateand 7 percent from severe malnutrition. These levels are slightly higherthan those in Lesotho and Cameroon.
Education and Skills
1.06 After the new Government took power in 1969, the countryproceeded with several reforms and campaigns to expand literacy andeducation. In 1972 the Roman script was chosen for the Somali language,which had existed only in oral form, enabling educational expansion andadministrative unification. Between 1973 and 1975 massive nationwidecampaigns were undertaken to teach literacy in the new script. Because ofconsiderable progress made during the 1970s, the current adult literacyrate is officially estimated at about 50 percent; the primary schoolenrollment ratio is currently 30 percent. The development objectives foreducation, inter alia, are to: continue the process of expansion ofeducational opportunities through compulsory universal and free primaryeducation; diversify post-primary education, paying attention to expansionof technical and vocational education to cope with the critical demand formiddle-level manpower; expand adult educational program; strengthen theteaching and popularization of the Arabic language; and expand facilitiesfor education and research.
1.07 The education sector faces at least two major problems which inturn hamper Somalia's development. First, it is evident that the education
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system is not geared to meet the needs of the economy. There is a criticalshortage of skilled labor and of personnel with technical and managerialskills. At the same time, there is an apparent oversupply of schoolleavers at every level of education, reflecting an Imbalance between theoutput of the formal education system and the intake of the economy.Second, language fragmentation within the education and training sector andthe lack of a coherent, long-term language policy place great strain onhumaru, financial, and material resources. While Koranic education usesArabic, primary and general secondary schooling use Somali. Mostvocational and technical education is in English, while the majority of thefaculties of the National University use Italian as the medium ofInstruction. This situation results in loss of time and high costs becauseof the periodic need for students to retool in a different language priorto moving to successive levels of education or training. Instructionalquality also suffers from lack of language fluency. There is a mismatchbetween language of instruction and further work or study, and limitedavailability of means of teaching the various languages.
Institutional Background
1.08 Since the revolution in 1969, Somalia has experienced majorchanges in its institutional and policy framework for economicdevelopment. In pursuit of its goal of establishing socialism, in the1970s the Government greatly extended public sector ownership of andcontrol over the economy. Nationalization of foreign enterprines after therevolution led to total public sector control of banking, insurance,wholesale trade and agricultural marketing. In medium- and large-scalemanufacturing, the public sector accounted for 88 percent of value addedand 56 percent of employment. The public sector also accounted for themajor share in transportation and tourism in a system where pervasivedirect economic controls replaced the market mechanism. Only livestock andmost of crop production as well as various types of small-scale activitiesremained in the private sector.
1.09 The extension of public sector ownership and control over theeconomy went well beyond the Government's resources and managerialcapacity, tended to erode incentives to effort and productivy in both thepublic and private sectors, and contributed to the stagnation in commodityproduction during the 1970s (see below Chapter II)2/. In the face ofstagnating production, steep increases in domestic expenditure following amajor border conflict with Ethiopia in 1977 led to the convergence of aserious economic and financial crisis which Somalia has been experiencing,with varying degrees of severity since 1978.
1.10 As the crisis became increasingly severe, in early 1981 theGovernment recognized the need for corrective measures and made a majorshift in policy. It decided to move away from state control and ownershiptowards a more market-oriented economy, and embarked on a majorstabilization program under two consecutive IMF stand-by arrangements to
2/ Also, World Bank (Report No. 4081a-SO), Somalia: Policy Measures forRehabilitation and Growth, May 1983.
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curtail demand expansion and to provide incentives to the productionsectors. This was followed in 1983 by the preparation of a medium-termrecovery program with focus on improving economic management, reform ofpublic enterprises and policies to encourage private sector initiatives andinvestment. The recovery program and associated policies were providedco-ordinated donor support at the Consultative Group meeting in October1983.
1.11 The policy and institutional reforms made since 1981 generatedsome recovery in the economy. However, because of the ban on Somali cattleimports in Saudi Arabia - Somalia's major market - the drought of 1983,and the relaxation in demand management by the Government, the economyexperienced a renewed financial crisis in 1984.
Demographic Situation
1.12 In addition to the more immediate problems of economic recovery,Somalia has the fundamental, longer-term problem of sustaining a rapidlyincreasing population on rather limited agricultural land and waterresources. Resulting from high levels of fertility and mortality (crudebirth rate of 50 and crude death rate of 20), Somalia's population has acurrent rate of natural increase of 3 percent. Adjusting for emigration tothe Gulf, the national population growth rate is 2.8 percent per year. Atthis rate, Somalia's population would double to nearly 11 million in 25years. A decline in fertility which is likely to occur spontaneously inthe course of socio-economic development will not make any significantimpact on the population during this period. The rapid growth ofpopulation is impeding efforts to raise living standards by divertinginvestment funds required for agricultural development and economic growthto consumption and social infrastructure for a larger population. Theannual capital costs of developing Somalia's natural and other resources ata rate faster than population growth to absorb productively a populationdouble its present size at improved standard of living within the next 25years, will be very large. Since the existing rangeland has been strainedand its carrying capacity cannot accommodate the expected increase in thenomadic population over the next 15-20 years, a central issue involves theabsorption of additional nomadic population in settledagricultural andnon-agricultural activities.
1.13 A reduction in the rate of population growth would reduce thesecosts and make room for more improvements in living standards of thepopulation. Indeed, for sustained improvement in living standards over thelong term, accelerated fertility decline appears necessary. Thisemphasizes the need for a government population policy and program to bringabout this decline. Strong government intervention from now on cansignificantly reduce the rate of population growth.
1.14 While some key government officials recognize that rapidpopulation growth can impede economic development, in general officialsappear to believe that settlement of excess nomadic population will be madepossible by development of irrigated agricultural land. This view poses amajor issue for development policy. Somalia has substantial potential forirrigation, mainly in the Juba Valley. But large financial costs and
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manpower requirements especially for its rapid development need to be takeninto account. And as noted earlier, expansion of rainfed cultivated areaalso requires considerable investment in physical and socialinfrastructure. Also, as the report will demonstrate (in Chapter III),even if these investment costs can be financed, recurrent expendituresarising from such mmssive investments will be extremely difficult tofinance.
1.15 The Government has not yet adopted a national population policy,and family planning is not promoted as a measure to reduce the rate ofpopulation growth. A major constraint in formulating and implementingpopulation policy and programs is that Somalia has only recently emergedfrom a pronatalist approach and many officials below the top levels are notaware of the population issues. Implementation of family planning programsrequires deep and sustained support at all levels - the political levelas well as from service to management, within the Government. A secondcoustraint is the lack of knowledge and support of family planning amongthe population, most of whom are culturally and traditionally orientedtowards large families. A third constraint is the extremely low coverageof the population with basic health services and a shortfall of trainedstaff which makes it difficult to use the system of rural health centers asthe delivery vehicle for family planning services. Given these problemsand constraints, as well as the consequences of rapid population grovth,the most critical population issue is whether sufficient government andpublic support can be generated to implement an effective populationprogram.31
3/ For detailed discussion of the population issue, see World Bank (ReportNo. 5468-SO), Somalia: Population, Health and Nutrition Sector ReviewC1985).
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CHAPTER II - RECENT ECONOMIC PERFORMANCE
2.01 This chapter briefly describes the major developments in theSomali economy since 19721/, and focuses on the performance since 1981when the Government began to implement major economic policy reforms forthe recovery of the economy from the serious financial crisis that began inthe aftermath of the 1977-78 conflict in the Horn of Africa which resultedin severance of Somalia's relations with USSR. After tracing theimplementation of initial stabilization and recovery programs during1981-83 and the remarkable response of the economy, particularlyagriculture, the chapter shows how, in 1984, the economic and financialcrisis re-emerged with a sharp decline in exports, a large budgetarydeficit, steeply rising domestic inflation, and large accumulation ofpayments arrears, until the Government successfully negotiated the 1985Stand-by Arrangement with the Fund, signalling a renewed commitmant tosustain policy reforms towards fostering a more market-oriented economy.
Production Growth in Recent Years
2.02 Data concerning Somalia's national accounts, until recentlycollected largely through ad hoc limited surveys, are still very weak.Attempts to measure real growth of GDP are liable to significant margins oferror. Available data indicate that during the 1970s Somalia's real GDPfluctuated considerably but the 198' real GDP was no larger than that in1972, while population rose at an estimated annual rate of 2.6 percent(Table 2.1). The economy recovered from the effects of the drought of1973-74 by about 1977 but suffered a decline in production during theperiod 1978-80. This period also witnessed sharp increases in demand,particularly expenditures by the Government. Induced by the Ogadenconflict, government expenditure (at 1977 prices) in 1978 jumped 50 percentover the previous year's level. As noted in the last Bank economic reporton Somalia, 2 / this massive demand explosion in the face of immediatedecline and prolonged stagnation in production led to a serious financialcrisis manifested in large budgetary and balance of payments deficits, andhigh inflation.
2.03 As the crisis deepened, the Government, beginning mid-1981, madea major shift in policy toward liberalization and embarked on a stabiliza-tion program, supported by successive IMF Stand-by credits, to curtaildemand expansion and to provide incentives to commodity producing sectors.Measures included a substantial devaluation, de facto liberalization ofagricultural prices, and substantial reduction in government borrowing fromthe domestic banking system. Since 1981, the economy witnessed the begin-nings of moderate increases in production, quite distinct from the earlier
1/ 1972 is taken as the benchmark year mainly because Somali GDP estimatesare available only from 1972 onwards. No official national accountsdata for 1983 are yet available.
2/ World Bank (Report No. 4081a-SO), Somalia: Policy Measures forRehabilitation and Growth (May 1983).
stagnation. During 1981 and 1982, real GDP rose by an impressive 6.4percent; aided by unusually good rainfall, the growth of agriculturalproduction was even more impressive. This turnaround of the economy isnotable in all the productive sectors except manufacturing, which remainedlargely under Government control. The Government services sector sharplycontracted (see Table 2.1, and Chart I), following the tight control ofGovernment expenditures, thus reversing policies which in the past led todemand expansion.
TABLE 2.1: ANNUAL AVERAGE GROWfl OF GDP BY SECTOR(At Constant 1977 Prices)
Sources: Statistical Annex, Table 2.2. Also 1972 data have been taken from NguyenThi Nguyen, Technical Adviser on National Accounts, U.N. Statistical GEfice,New York, lNational Accouat Aggregates of Somalia-, August 1983. 1972-74data have not been included in the Statistical Annex since data were notavailable in the level of disaggregation desired and were subject toconsiderable discrepancy.
Note: The Government of Somalia recently prepared draft estimates of GDP growth since1970; these draft estimates were not reviewed by the Bank mission.
CHART ISOMALIA: ANNUAL AVERAGE GDP GROWTH BY SECTORS
-16- 2 I~~SETXCEPSWC
_= I I I I I
1N1072-75 to7rJ77 19n I_
2.04 Cowparable GDP data are not available for 1983 and 1984.PreLsiaryand rough estimates suggest that economic growth slowed down to
about 4 percenut in 1983 and 2-3 percent in 1984. Partly because of thedrought, crop production in 1983 was lower than the 1982 bumper crop, butstill higher than that of 1980. The Government view 1984 as a good cropyear. But the economy vas hurt by the steep declinue in livestock off-takeand export due to the Saudi ban on Somali cattle import (see Chapter IV).In manufacturing, vhich accounts for about 7 percent of GDP, 1983 and 1984swg virtually continued stagnation in production, due in large part owingto low and decJlliniR capacity utilization in public sector industrialenterprises.
Domestic Savings and Investment
2.05 Data available from 1975 onvards (Table 2.2 and Chart II) showthat excepting the period before 1978, the level of consumption (bothpublic and private) exceeded GDP during most years. Only in 1981 and 1982- the years of stabilization efforts by the Gorernment through tighteningof fiscal and monetary policy - were domestic savings positive (at anestisated 4 percent of GDP). But perfo-rmance deteriorated again asdomestic savings in 1983 and 1984 beczm zero or negative. However,Sonalla's gross domestic investment has been maintained at around 20percent of GDP during most of these years through a large net inflov offoreign aid, bilch financed part of Somali consumption as well. This aidflow is reflected in the large resource balance (i.e., the net import ofgoods and norr-factor services), which reacbed 24 percent of GDP in 1984(see Table 2.2). Again, only in the two years (1981-82) did imports andresource balance as ratios of GDP drop to some extent. Thus, these twoyears vltnessed a marked improvement in the main indicators of theeconomy. Consumption, imports and the resource balance increasedsubstantially in 1983 and 1984, while the ratio of exports to GDP declined.
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TABLE 2.2: SOMALIA - EXPENDITURE ON GDP(As a Z of GDP at Current Market Prices)
I/ The difference between investment and gross fixed capital formationequals changes in stocks.
2/ Preliminary estimates by MNP (see Annual Development Plan, 1985)3/ Net imports of goods and non-factor services.
Source: Statistical Annex, Table 2.3.
CHART IISOIALIA: GROSS DOMESTIC EXPENDITURE. 1975-84CAS A PItMAGE Cl MP AT CO.MT PREZ POt AVRAUW
,I . _SS DGEST EXPSIT1MtEo E
E
T
S,. I II
aA
1075Y-77 1074-S ilOS-U low 1064
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2.06 Against these fairly high levels of investment, the sluggishnessof GDP growth noted earlier Is indicative of the very low productivity ofinvestment. In other words, it seems clear that low productivity ratherthan low levels of investment have contributed importantly to Somalia'spast output stagnation. There are several reasons for this. The greatbulk of the gross domestic investment has been in the public sector3/, butdevelopment programs were prepared with little attention to determiningpriorities for investment, and few serious attempts were made to analyzeand appraise the economic and financial viability of development projectsand to rank them on the basis of economic or financial returns toinvestment. These deficiencies led to some uneconomic projects. Donorswere in part responsible because they did not always adhere to soundproject criteria when initiating and financing projects. Also, due to lackof proper coordination of aid and investment programming, too many projectswere started at once without completing others on time, owing partly tolimited implementation capacity. The Government's evaluation of pastdevelopment programs4/ notes long delays in project completion andobserves that only 10 out of 88 planned projects in agriculture and only 4out of 33 in industry sector were completed during 1979-81; and during1974-78, 6 out of 73 agricultural projects and 17 out of 54 industrialprojects were completed. Moreover, capacities thus created have beenutilized at a very low level due to inadequate maintenance and resultantbreakdown, and inadequate recurrent cost provisions and input supplies.
2.07 As will be discussed below, in regard to raising theproductivity of investment through public investment management, progresshas begun to be made with the three-year public investment program(1984-86) and the annual PIPs for 1984 and 1985, although more needs to bedone. But progress in regard to demand management and domestic resourcemobilization has been much less consistent.
Fiscal and Monetary Developments
2.08 As explained in a previous Bank economic report on Somalia 5 /,owing to the incomplete coverage and very deficient accounting whichcharacterize Somalia's public accounts, it is not possible to obtain anaccurate or comprehensive picture of the country's overall fiscalsituation. 6 / Nonetheless, Table 2.3 provides data on the main elements of
3/ The public sector accounted for 78 percent of the estimated grossdomestic fixed investment in 1983, and 82 percent in 1984 (see AnnualDevelopment Plan, 1985).
4/ Somalia, State Planning Commission/Ministry of Planning, Performance ofFive-Year Development Programme (1974-1978), Mogadishu, August 1979;Evaluation of the Three-Year Development Program, 1979-81, Hogadishu,August 1982.
51 World Bank (Report No. 4081a-SO), Somalia: Policy Measures forRehabilitation and Growth (May 1983).
6/ Some efforts have been made by the authorities to computerizegovernment accounts with the assistance of an IMF advisor.
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Central Government operations for the period 1975-1983. It may readily beseen from the table (and also Chart III) that compared to the largebudgetary deficit in 1978-80, the Government's current budgetary deficitshoved some improvement in 1981 and 1982. Government borrowing from thebanking system sharply declined in those years, despite a larger overalldeficit. This improvement was largely attributable to restraint onGovernment expenditure under the stabilization program, and substantiallylarger foreign financing of the budget through both grants and medium- tolong-term loans. The budgetary deficit increased somewhat in 1983, butforeign financing also increased, allowing the Government's borrowing fromthe domestic banking system to be considerably reduced. However, Table 2.3indicates that the Government's budgetary position rapidly deteriorated in1984; both the current and overall budgetary deficit increased sharply.Revenue expectations were not realized as exports pluimetted and domesticproduction slowed down, but the Government was not prepared to reducecorrespondingly its expenditures on general administration, includingdefense and publiL wages. Hence, despite much larger availability offoreign financing in 1984, the Government resorted to massive borrowingfrom the banking system, which resulted in a runaway inflation, furtherappreciation of the real effective exchange rate, and aggravation of thefragile balance of payments position.
1/ Residual Item, Ineiding otbhr foreign-financed capital expenditure, other extra-buigetaryependiture, and net lending to publc enterprises.
2/ FIgurs Incdes 1800 llUin So.Sh. for changes in domatic curmency fumda kept for payment ofexternaL debt service arrears.
Note: Data do not correspond with data ln Annex Table 5.1 since data here have been taken from thefl, whie the dae in the anuar from the istry of Finance, Salia.
Souce: DU, vrlous 'scent Ikonc Developent' reports; and Annex Tbl.e 5.1.
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CHART IIISOMALIA: GOVERNMENT FINANCIAL OPERATIONS, 1975-84
CAS A ENr OF ;s PEXOD AVERAhES)
--- TOAL EXPE9DITUtE
-- DEVELOPMET EXPENITUETOTAL REVE4JE
49-
1075-77 1078-OS 1081 -a lQow 106114F3ICAL YEAR
TABLE 2.4: SELECTED INDICATORS OF GOVERNMENT BUDGETARY POSITION, 1975-1983
1/ Residual item. Includes other foreign-financed capital expenditures,other extra-budgetary expenditure, and net lending to publicenterprises.
Source: Statistical Annex, Tables 2.1, 5.3; IMF "Recent EconomicDevelopment- reports.
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2.09. Table 2.4 presents selected indicators of the Governmentbudgetary position for the period 1978-1983 and brings out severalimportant issues:
First, total expenditure peaked at 36 percent of GDP and theoverall deficit at 23 percent of GDP in 1984 as Government stabilizationefforts slackened.
Second, while the share of general administration, includingdefense, has been rising, the share of social and economic services intotal ordinary expenditures declined steeply, frow over 40 percent in themid-1970s to less than 20 percent in the 1980's.
Third, revenues declined steeply in 1984, mostly as a result ofthe low level of trade and economic activity.
2.10 In recent years Somalia's tax revenue (derived mostly fromindirect taxes on domestic sales imports and exports) failed to grow withGDP. The -atio of tax revenue to GDP peaked at 16.6 percent in 1979 butdeclined in later years. In other words, the buoyancy of tax revenue withrespect to GDP has declined to less than one. This points to theimportance of making the tax system more income elastic through simple taxreforms (e.g. universal ad valorem taxes) and improvements in taxcollection.
2.11 Monetary developments over the last few years distinctly reflectthe significant improvement during 1981-83 in the budgetary situation, andits rapid deterioration in 1984. During 1981-83 total net credit rose byonly 16 percent while that to the Government and the parastatals declinedsignificantly (see Table 2.5). This development made possible increasedavailabilities of credit to the private sector, which was crowded out inthe late 1970s. The restraint on overall credit expansion moderated theincrease of money supply (M2) in 1982 and in 1983. However, in 1984 themoney supply increased sharply (59 percent), and the expansion of publicsector borrowing was much faster than the expansion of credit to theprivate sector.
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TABLE 2.5: NDNEY AND CREDIT, 1979-1983(Millions of So. Sh., End of Period)
Ratio of H2 to GDP Z 25.9 35.5 33.9 28.1 27.5 22.8 35.5Percentage lnrrease ofM2/year 32.4 37.5 20.2 30.8 15.7 7.5 58.5
Percentage increase inMogadishu Consumer PriceIndex from previous year 10.0 23.8 59.4 44.4 22.6 36.4 92.0
1/ Includes valuation adjustments for 1981.2/ 12 includes money supply (currency and demand deposits) and time deposits.
Sources: Statistical Annex, Table 6.1, and IW.
2.12 With the moderation in money supply expansion, domesticinflation dropped to 23 percent in 1982. However, as the droughtconditions adversely affected food production, domestic inflation in 1983rose to 36 percent. Rather than consolidate these gains in the fightagainst inflation through sustained policy reform, in 1984 the Governmentdid not continue the earlier financial restraint. Also domestic productiongrowth slowed down. In the event domestic inflation rose to 92 percent in1984.
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Balance of Payments
2.13 Official Customs statistics on foreign trade are available onlyup to 1981, but there is no recording of a large proportion of migrantworkers' remittances coming through unofficial channels. Moreover,official capital inflows (particularly grants) are only partiallyrecorded. The limited analysis presented below is therefore based on datafrom the Central Bank of Somalia and the IMF.
2.14 Recent developments in the balance of payments, summarized inChart IV and Table 2.6, show that Somalia's merchandise imports were nearlyfour times the value of merchandise exports during 1980-82. The currentaccount deficit on external transactions during 1980-82 averaged as high as19 percent of GDP and imports averaged nearly one-third of GDP. Somalia'sbalance of payments situation further worsened as exports declined sharplvin 1983 and 1984; and private transfers (workers' remittances) alsounderwent a sharp decline in 1982 and 1983, following discontinuation in1981 of the franco valuta system that allowed individuals to importessential goods directly with their own foreign exchange. The counterpartof such imports represents private transfers which rose considerably in1984 due to the re-opening of the franco valuta FySLe_- With foreignexchange underpriced, imports tended to remain high. Thm high importdependence made the economy very vulnerable to a.ny econ._tc shocks. Thishigh import dependence and persistently large curreat accoant deficitsuggest a long-standing structural imbalance in external trade. Somaliafaces increasingly serious difficulties in financing such a huge deficitdespite large inflows of concessionary foreign aid.
r-,s(Offial ReAserv - - 10.7 3.7 4.4 1.9(in im&s of cash impworts)MIT debt outstuxi 597 714 972 1,078 1,149 1,400Debt serice atio 2/ 2 8 14 12 17 XDArrars in debt service 8 28 60 oJa 30 95
1 Import data for 1979-8 anx 1984 ilEAd FrEo Vahta irts.
2/ haed an actual payments itich are muh iAr dun obligations. Total obligations (e,uie-luliug arrears) vmud raise the ratio to around 50 percent it 1982 ax 1983.
Note: Data in this table do not correspond to data in Statistical Am= Table 3.1 due todMffernue In Source.
Souce: eea tary Rzl.
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2.15 The immediate cause of the recent crisis in exports was theembargo on Somali livestock (particularly cattle) imports imposed by SaudiArabia since mid-1983.7 / Livestock accounted for 80 percent of exportearnings and 90 percent livetock exports were shipped to Saudi Arabia. Theloss of the Saudi cattle market has been a heavy blow to Somalia'sexports. The number of cattle exported dropjped to 44,000 in 1983 frou157,000 In 1982; the number of total l'vest.ock units exported also declinedsharply. Llvestock export earnings plum-jetted to about $32 million in 1984from $106 million in 1982. The artificially high value of the SomaliShilling in the official market hindered possibilities of diversifyingexport markets for Somali cattle. Alth.ougi: the volume of banana productionnearly doubled during 1980-83 (from 60 thousand tor.nes in 1980 to 79thousand tonnes in 1982 and 110 thousand tonnes in 1983), export receiptsfrom bananas did not show any improvement during the period; in fact exportearnings declined in 1983, although world prices were higher than in1982.8/
2.16 With a 40 percent decline in export receipts and continued highlevels of imports (of food9 ', other consumer good3, fuel and other inputs,as well as capital goods) plus some interest payments, the estimatedcurrent account deficit for 1984 became slightly larger than in 1983.Notwithstanding enlarged public transfers (including increased Saudigrants), Somalia'sexternal payments arears have accumulated. It is obviousthat such large external deficits are unsustainable, even with past levelsof generous aid inflows and that appropriate policy reform for orderlyadjustment should continue to be implemented vigorously and immediately.
7/ After the discovery of rinderpest, Saudi Arabia imposed a ban on cattleimports from Africa, in May 1983. A temporary ban on Somali goat andsheep imports imposed by Saudi Arabia in late 1983 was, however, liftedin February 1984. But the cattle ban remains, although the Somaliauthorities obtained reports from the UN FAO and the ..aternationalOrganization of Epizootics (IOE) that certified there had been noproven cases of rinderpest in Somalia.
8/ According to the Central Bank of Somalia (Annual Report, 1983), thedecline in recorded export earnings is explained by underinvoicing andthe use of the export revenues by the company (Somalfruit) outside thebanking syscem for importing its required inputs and for meeting otherneeds.
9! Dasa compiled by the World Food Programme (WFP) show that foodgrainimports during 1980-83 averaged 210,000 tons per year (37 percent oftotal domestic availability), compared to less than 100,000 tons before1974.
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2.17 In addition to the narrow export base and the adverse externalenvironment created by the Saudi ban, inadequacies in management ofmacroeconomic policies must share responsibility for the recent balance cfpayments crisis. Imports continued to be underpriced in the domesticmarket through the over-valued Shilling and a variety of price controls.The Government failed to adjust the exchange rate of the Shilling inresponse to the divergence between the rates of domestic inflation andinflation in countries in the SDR basket; as a result, both the nominal andreal effective exchange rate began to appreciate. With the steep rise indomestic inflation in the first half of 1984, an even wider divergenceemerged between the nominal and real effective exchange rates (seeChart V), which encouraged imports and discouraged efforts for expansion ofexports and promotion of import-substitution.
SOMAUA
INDEX OF REAL EFFECTIVE EXCHANGE RATE, JAN. 1978-APFUL 1965
2W1
160_
Aa. affoce .zcF ino140
1X20 _-_ _
100
2D .
O . ~ . - A I- - - - - - - - - I
4 0 - - - -- -01...... __
sS____~~~~~M in 99 =3i
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External Debt
2.18 Somalia's external debt burden has grown rapidly in recentyears. The total e-ternal public debt, outstanding and disbursed (DOD),which stood at less than $300 million at the beginning of 1977, doubled to$600 million by the beginning of 1980, and nearly quadrupled by the end of1983 vhen it was estimated at $1,149 million (excluding SDR 103.13 millionfor IMF Standby Arrangement). At the end of 1984 it was estimated at $1.4billion. At this level, DOD represented more than twelve times the valueof exports in 1983 and was equivalent to over 90 percent of GDP in thatyear. Loan commitments during 1975-83 did not follow any consistentpattern. New commitments increased rapidly from $90 million in 1975 to$263 million in 1977. Thereafter, in 1978 and 1979, new commitmentsdeclined to an annual average of $90 million, rising in 1980 and 1981 to anannual average of $215 million, declining once again in 1982 and 1983 to anannual average of $90 million. Disbursements also rose from 390 million in1975 to $186 million in 1981 and fell to about $100 million in 1983 (Table2.7).
TABLE 2.7: AVERAGE TERMS OF NEW CONMITMENTS1975 and 1979-1983 aJ
Commit- Disburse- Interest Grace GrantEnd ment ment DOD Rate Maturity Period ElementYear (US $ Million) z (Years) (Years) Z
a/ The above figures do not include IMF purchases of SDR 103.13 millionunder two standy-by credits; if these are included the total DOD at end1983 would be about $1,200 million.
Sources: Statistical Annex, Table 4.2, and World Bank Debt ReportingSystem.
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2.19 A breakdown of debt outstanding by creditor groups (Table 2.8)reveals that 16 percent of total external public debt at end 1983 was ovedto OPEC institutions and 26 percent to Arab OPEC countries. The share ofcentrally-planned economies in the total debt amounted to 18 percent.Other multilateral institutions accounted for 14 percent and DAC countriesfor 11 percent. The remainder C14 percent) comprised suppliers' credit andcredit oved to private financial institutions. It is noteworthy that about30 percent of total debt outstanding (and about 39 percent of tDW Standbycredits are included) is owed to multilateral institutions (including OPECmultilateral institutions) whose Charter does not allow any rescheduling.Data on debt outstanding as at end 1983 show that out of total debt serviceobligations (including IMF repurchases and charges), those to themultilateral institutions range from 34.5 percent in 1985 to 58.1 percentin 1987. Debt service obligations to these institutions during 1985-87would, on average, amount to $70 million per year, or nearly 60 percent ofthe average annual export receipts for the period.
2.20 The manufacturing sector accounted for 24 percent of the totalDOD in 1983, and transportation, communication and utilities for another 23percent. Loans for commodity assistance and balance of payments supportrepresented 14 percent of DOD. Agriculture and fishing accounted for only8 percent of total outstanding debt.
2.21 During most of the 1970s Somalia was able to mobilize externalloans on highly concessional terms. Since 1980, hovever, the structure andterms of borrowing have hardened (Table 2.7) as Somalia started to raiseloans on non-concessional terms. These included a supplier's credit of$135 million at 8 percent annual interest and 6 years maturity, a $60million loan from private financial institutions at 7.8 percent interestand 11.5 years maturity, with very little grace periods, and short-termbalance of payments' support from Arab and other internationalorganizations (including the Arab Monetary Fund and tHY). As a result thecountry's debt service obligations increased from about $5 million in 1979to over $60 million in 1983. The situation is grave and the prospects areworrisome. Somalia had also already accumulated as $218 million, in debtservice payments arrears at end 1984 (see Annex Table 4.4). And debtservice obligations (without relief) for 1985 (and beyond) are estimated tobe nearly US$120 m:llion or over 100 percent of the year's prospectiveexport receipts.l0/
10/ The situation has been somewhat modified, following the March 1985Paris Club Meeting. For details see para 3.40.
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TABLE 2.8: BREAKDOWN OF EXTERNAL DEBT, DISBURSED AND OUTSTANDINGBY CREDITOR GROUPS
(As of Dec. 31, 1983)
Debt Service ObligationsAnnual Average 1985-87
US Dollars Percentage $ Million Percentage
Total I/ 1,149.1 100.0 123.0 100.0
Official Creditors:
(OPEC)-Bilateral 307.3 26.7o/v Saudi Arabia 130.3 11.3
Uhited Arab Emirates 101.9 8.9
(OPEC)-Multilateral 180.0 15.7 31.1 25.3olv Arab Fund for Eco. Dev. 78.2 6.8
Arab Monetary Fund 43.2 3.8
(CPEs)-Bilateral) 209.3 18.2a/V USSR 103.5 9.0
China 96.6 8.4
(DAC)-Bilateral 124.4 10.8o/W Italy 18.7 1.6
France 15.1 1.3USA 87.7 7.7
(Other)-Multilateral 165.3 14.4 16.6 2/ 13.5o/v IDA 124.1 10.8
IrF Trust Fund 11.2 1.0
Private Creditors:
Suppliers Credits 103.3 9.0
Financial Institutions 59.5 5.2
1/ Excluding IMF Standby credits totalling SDR 103.13 million, which isequivalent to nearly 300 percent of Somalia's quota (SDR 34.5 million).
2/ If IKF Standby repurchases are included, average annual obligations will be$50.1 million.
Source: Statistical Annex, Tables 4.1 and 4.6
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2.22 Despite the weaknesses in Somalia's debt monitoring, it is clearthat the current and prospective debt service obligations are too large forthe country to pay in full in the medium term. In addition, the INFStandby credits will require repurchases in the near-term. Hence, theGovernment has no option but to seek from creditors restructuring ofexisting debt service obligations (inciuding payment arrears) and debtrelief, in order to bring the rescheduled obligations within the country'scapacity to pay. The issues concerning improvement of external debtmonitoring and managmeent are discussed in the next Chapter.
Recent Stabilization and Recovery Programs
2.23 Somalia's uneven economic performance since 1981 largelyreflects the inadequacies of domestic economic management and in theGovernment's adjustment efforts. Faced with a serious economic &ndfinancial crisis, the Government, in mid-1981, embarked on a majorstabilization program to curtail demand expansion and to provide incentivesto the productive sectors, with measures to adjust substantially theexchange rate, impose fiscal and monetary restraint, increase nominalinterest rates and to increase producer prices. These policy measures ledto a higher growth of real GDP and a lower rate of inflation during1981-83, as noted earlier. Notwithstanding the progress made in effectingfiscal and monetary restraint, the Government's recurrent budget stillremained in deficit and budgetary outlays for economic and social servicesdeclined in real terms. Some of the basic factors underlying Somalia'sfinancial crisis persisted: the trade gap and the external current accountdeficit remained very high while the reduction in government borrowing fromthe banking system was primarily attributable to large increases in capitalinflows. A beginning was made in regard to improvement in financialdiscipline and resource allocation, but the process was hampered in 1984 bya continuing appreciation of the real effective exchange rate, extensiveprice controls, and the inadequacies of Government expenditure control,while exports plummetted.
2.24 Against the background of a rapidly deteriorating economic andfinancial situation during 1984, the Government adopted a major adjustmentprogram for 1985 under a new IMF Stand-by Arrangement. This program, inthe formulation of which Bank staff have been closely involved with Fundstaff, is designed to reduce inflation and the balance of payments deficitand stimulate economic activity through measures to control demand andimprove resource allocation. The core of the adjustment program comprisesa major devaluation (from So.Sh. 26 - $1 to So.Sh. 36 - $1, effectiveJanuary 1, 1985), the establishment of a free foreign exchange market formost non-government transactions, the virtual elimination of export andimport restrictions, the de jure dismantling of all price controls, andfiscal and monetary measures to constrain demand through increasing revenueand limiting Government expenditure, and reducinr the rate of monetaryexpansion. The program also envisages an adjustment of the interest ratestructure with a view to ensuring positive real interest rates at end1985. The program also includes an acceleration of the reform of publicenterprises, and reform of the banking system based on recommendations of astudy to be completed in 1985.
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2.25 Practically all controls with respect to trade and currentpayments have been removed. Licensing requirements for virtually allimport and export transactions have been abolished. The exceptions arecertain commodities which, for reasons of public policy, are eitherprohibited or subject to prior approval. Furthermore,, traders will bepermitted to export and import goods previously controlled exclusively bythe State. Under this adjustment program, the franco valuta system hasbeen abolished and replaced by the newly established free foreign exchangemarket. Exporters are required to surrender only 35 percent of theirexport proceeds at the official rate and are allowed to use the remainderin the free market for import of goods and services. The program requiresthe Government to introduce a freely floating system for the determinationof the exchange rate for private sector transactions (excluding thesurrender requirement for exports). Remittances of Somali workers abroadare also to be transacted through the free market. The official and themarket exchange rates are proposed to be unified by January 1986.
2.26 In regard to financial policy, the Government aims at increasingrevenue, restraining monetary expansion, and limiting Government's domesticborrowing and expenditure while reallocating resources to the agreed publicInvestment program (PIP) for 1985. The Government's investmentexpenditures will be kept at a level consistent with available concessionalfinancing. The composition of the 1985 PIP is fully funded and is broadlyconsistent with the 1984-86 PIP endorsed by the Consultative Group meetingIn 1983.
2.27 The Government's adjustment and reform program for 1985constitutes a bold and ambitious undertaking towards fostering a moremarket-oriented economy for recovery and growth. If fully implemented, theprogram involving full liberalization of prices, trade and exchange rateregimes is expected to go far towards improving resource allocation,stimulating domestic production and improving the balance of payments. Ata special Consultative Group meeting in Janaary 1985, donors commended thisprogram and pledged quick-disbursing assistance to finance Somalia'sbalance of payments gap for 1985.
2.28 Somalia's economic crisis is not over. The fundamental issuesfacing the Government - the huge resource gap emanating from a level ofconsumption exceeding domestic production, high import dependence againststagnating exports reflecting a limitation of production structure combinedwith inadequate policies, and low productivity of investments arising fromdeficiencies in financial discipline, public investment management andresource allocation - persist and cannot be solved in one year. Asustainable balance of payments and resumption of growth will require notonly expenditure reduction, but a combination of policies to restrainconsutmption, to raise savings, to focus investment in priority areas forincreased production and exports, and to improve efficiency of resourceuse. Adjustment measures dealing with macroeconomic management and demanduanagement, and a wide range of reforms on the production side of theeconomy need to be pursued by the Government over a protracted perioddcring which it will require the financial support of the donors to alloworderly progress in economic and financial recovery.
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2.29 These measures are needed for sustaining the medium-termrecovery program (MTRP) entitled "Development Strategy and PublicInvestment Program, 1984-86", that the Government launched in 1983 forachieving the twin objectives of improving macroeconomic managment andraising domestic production. The introduction of the PIP as a majorinstrument of allocation of resources is an impressive achievement, butmany of the supporting policy procedural and institutional measuresenvisaged by the program remain to be translated into action.
2.30 The program called for the adoption of monetary, fiscal andexchange rate policiec for improving macroeconomic management consistentwith the stabilization effort. The lapse in this regard in 1984 wascostly, and the Government is aware of the need for continuing this effort.
- The envisaged further improvements in economic planning,financial discipline, investment programing and budgetting as well as inexternal debt management and aid coordination, need to be achieved. Theseissues will be discussed in Chapter III.
- In regard to envisaged measures to limit the growth in publicemployment, the Government' s decision to abandon the policy of guaranteedemployment to school leavers is a major step forward. However, measuresregarding the structure of public sector salaries and civil service reformneed to be taken.
- The program stressed the importance of the reform of publicenterprises. Some progress is underway, but some critical decisions stillneed to be taken.
- In agriculture, the envisaged liberalization of crop pricesand marketing has been largely accomplished. Studies on the mechanism forprice stabilization and improved import distribution are underway.
- The program recognized the importance of formulating andintroducing an incentive framework to encourage the private sector. Thetask is demar-ding but needs to be done with the help of technicalassistance. The issues and required measures on the production side willbe discussed in Chapter IV.
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CHAPTER III - SELECTED ISSUES IN MACRO-ECONOMIC MANAGEMENT
3.01 As noted in the previous chapter, deficiencies inmacro-economic management bear partial responsibility for Somalia'sfinancial crisis. Expected results from previous price and exchange ratepolicy reforms could not be sustained partly because of weaknesses infinancial discipline in the public sector. In order to strengthenmacro-economic management, the commendable progress recently made towardsliberalization in the areas of trade, price and exchange rate policies,need to be sustained and enhanced. Also, actions need to be taken tofurther improve economic planning, budgetting, investment progra ming, andfinancial discipline as well as external debt management and aidcoordination. This chapter addresses these latter issues and provides somesuggestions for improvement. Some of the suggested improvements can bebrought about in the near term while others will take a longer time.
I. Economic Planning, Budgetting, and Investment Programming
3.02 Somalia's planning system alternated between three and fiveyear plans augmented by annual plans. The current Five-Year Plan coveringthe period 1982-86 exceeded implementation capacity and lackedmacro-economic perspective, was deficient in financial realism in regard tolikely availability of (domestic and foreign) resources, and its influenceover Somali policy making has been weak. Fortunately for the long-termdevelopment of Somalia, the Government is showing awareness that economicmanagement in the areas of planning, budgetting and investment programingneeds to be improved and it has begun taking steps to imporve thesituation. Within the Five-Year Plan (1982-86) period, the Governmentprepared a three-year (1984-86) public investment program (PIP) in 1983 forpresentation to the first Consultative Group meeting.
3.03 The PIP contained a three-year (1984-86) core program (of highpriority projects) of $970 million and a supplementary program of $315million. The PIP is an impressive achievement and has provided the basisof the CG discussions. The Government and donors, through the ConsultativeGroup, are beginning to support investment programming by concentrating theparticipants' attention on PIP projects and progress with policy reform.
3.04 The 1984-86 PIP accepted in principle to include only thoseprojects w'esch meet such criteria as: (i) completion of viable ongoingprojects with a substantial sunk cost; (ii) projects aimed atrehabilitation and better utilization of existing capacity; (iii) projectsaimed at augmenting production (particularly in livestock, bananas andocner export crops) relatively quickly and at viable import substltution,particularly in food grains and industrial products; and (iv) infra-structure projects aimed at breaking bottlenecks to commodity production.But these criteria were not strictly applied in selecting projects.
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3.05 The 1984-86 PIP submitted to the first CG meeting includedseveral projects of long gestation for which the degree of priority was notclear and which did not appear to have been subjected to adequate economicand financial analysis. During the meeting the Government reviewed the PIPand in light of Bank recommendations and the deliberations of the CG itpostponed some new projects pending results of further studies andappraisal, and made some efforts to include only projects of first priorityin the revised PIP. The revised core PIP of $875 million (for 1984-86) wascommended as a good start towards more rigorous investment planning andprogramming by the CG participants, including the World Bank. Nonetheless,this "endorsement' was largely a holding operation to see that obvious'white elephant' projects were excluded from the PIP and that essentiallythe ongoing projects, particularly with a lot of sunk capital, wereimplemented.
3.06 The public investment program for 1984 and that for 1985 (justrecently prepared) essentially derived from the Three-Year (1984-86) coreprogram have made some improvement. However, several weaknesses remain.Some projects included in the program have not undergone rigorous economicand financial analysis to pass the test of acceptable rate of return.Donors also bear some responsibility for these deviations. Also, theprogram has not adequately emphasized the need for a shift in investmentallocation in favor of the private sector - a rising share (over 85percent in 1985) of the estimated domestic investment has gone into thePIP.
Towards Realistic Planning
3.07 For further improvement in planning and public investment/expenditure programming in Somalia, serious and immediate attention needsto be paid to several important aspects of planning (discussed in thefollowing paragraphs): (i) focus on the rollover PIP; (ii) recurring costimplications of projects; (iii) medium-term financial framework;(iv) monitoring and evaluation; and (v) expenditure control and financialdiscipline.
Focus On Rollover Public Investment Program
3.08 Given the urgency of the medium-term recovery program, therelated PIP and financial framework, and the considerable staff tinerequired for these, the formulation of a new Five-Year Plan will puttremendous pressure on the Ministry of National Planning. The main focusof planning efforts based on clear Ideas about future sources of growth,should be the next three-year (1986-88) PIP; its annual rollover should bethe determinant of the development budget. This is desirable both from thepoint of view of sustaining the Consutative Group process and Somalia's ownprogramming and budgetting requirements.
3.09 The Annual Plan for 1985, prepared by the Ministry of NationalPlanning, based on the list of projects and their expenditure for thesecond year of the 1984-86 PIP, describes the policies to be applied and
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provides a macro-economic framework for the year. It was also preparedabout the same time as the budget but it did not fully determine thedevelopment budget. The latter is still a partial budget, covering onlythe local revenue contribution to (and not the total resources used in)development projects. Financing of the local costs of dsvelopment projectsis done by counterpart funds generated by substantial amounts of (largelybilateral) commodity aid. The development budget is open ended, in thesense that provided finance is assured or in sight, a project may beincluded in the budget. It is highly desirable to expand the developmentbudget into a full public sector development budget covering both domesticand externally-financed expenditure, though this may take more than oneyear to achieve because of the weakness of the Government accounts. Alsothe lack of involvement of planning staff in the development budget createsa big vacuum. To remedy this, the planning and budgetting processes shouldbe brought closer by making the annual rollover of the PIP coincide withthe budget cycle and the preparation of the development budget. In thepreparation of the public investment program for 1985, there was someimprovement in the process of investment programming; sectoral committeescarefully reviewed each and every project for inclusion in the program, andthere were intensive discussions on the size, composition and financing ofthe program among the Ministries of National Planning and Finance, and thesectoral ministries.
3.10 The PIP should be seen as an opportunity to update theprogramming of expenditure on development projects. The first version ofthe PIP effectively had incomplete programming. Projects intended forimplementation were listed according to their target rate of implementationand the figures summed. This resulted in a projection of an unreal-istically high rate of expenditures, causing adverse donor comment. TheGovernment has not yet completed a review of its actual 1984 capitalexpenditure, but preliminary data suggest that it would be less thantwo-thirds of the planned PIP. Future versions of the PIP shouldincorporate the latest estimate of actual project expenditure, in order toarrive at a realistic planned expenditure and to avoid protracted delays inproject execution.
Recurrent Budget, and Recurrent Expenditure Implications of Projects
3.11 As noted in Chapter II, in the period from 1977 to 1984, therewas a remarkable shift in the distribution of recurrent expenditureresulting in impoverishment of economic and social ministries in relationto general administration and defense. Less than 20 percent of recurrentexpenditure is spent on economic and social services in Somalia, comparedto 40 percent in all low-income African countries as a whole in 1981. Thisneeds to be changed if the budget is to support economic development.
3.12 The link between the recurrent budget and the developmentbudget is very tenuous at present. There is no system for quantifying therecurrent expenditure arising from development projects. Underfunding ofrecurrent costs undercuts the potential perLirmance of investment projects,as Somalia's experience amply shows. Future PIP should show the recurrent
_ 29 -
costs arising from investment projects and indicate how the additionalrecurrent costs will be financed.
3.13 In a properly functioning budgetting system of a developingcountry, provided that the mix of projects does not include an excess ofhigh 'r' coefficientl/ expenditure and that the size of the developmentbudget is moderate, growth of the economy and the development of the taxsystem should be sufficient to accommodate the operating and maintenancecosts of projects. For Somalia the situation is quite different:
(1) Olly moderate growth of GDP can be expected. The elasticity oftax revenue with respect to GDP is low. While some improvementsin the tax system should be possible in this regard, there is nolarge reserve of tax capacity waiting to be tapped under thepresent circumstances. The ratio of tax to GDP is already highfor Somalia's lev-1 of income. Also, excessively high taxes willaffect incentives to private investment. Hence, the focus has tobe on expenditure rationalization. There is, however,considerable scope for improved cost recovery in agriculture andother sectors (c.f. Chapter 4 Para. 4.34).
(2) The PIP is extremely large relative to the recurrent budget. Forexample, the 1985 PIP of So.Sh. 7.1 billion (excluding unfundedprojects shown in the Annual Plan) is about the same size as therecurrent budget of So.Sh. 7.7 billion if plan implementationtargets are met.
(3) Unless the capital budget is deliberately composed of low 'r'coefficient projects (e.g. tarred roads and cost recoveryschemes) only a double digit growth mineral economy could main-tain a development budget running at nearly 100% of the recurrentbudget.
(4) Average 'r' coefficients are not low in Somalia, and approxi-mately 70 percent of PIP projects have recurrent expenditurerequirements.2/
3.14 Table 3.1 gives the results of an exercise to estimate the orderof magnitude of recurrent costs likely to arise if the 1984-86 PIP isimplemented in the way that the Government intends. The methodology isvery simple. In the absence of information on the recurrent costs of
1/ The ratio of annual recurrent expenditure from the budget required forproper utilization of the capacity/facility created upon projectcompletion to the total investment cost of the project.
2/ Out of a total of 155 projects of all categories in the L984-86 PIP,from the project descriptions 109 were judged by us likely to haverecurrent cost requirement, 31 in theory should be self-sufficient, 14were TA projects and one reportedly had a commitment by the donor tofund recurrent costs.
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Somali projects, 'r' coefficients derived from work elsewhere in Africa areapplied sector by sector to the PIP estimated capital expenditure for theperiod 1984-86. The resulting 'recurrent cost arising' is then comparedwith the existing level of recurrent budget allocations.
3.15 The calculations in the table reveal the heavy pressure that willfall on the recurrent budget if the PIP Is implemented as planned. Inconstant prices, an additional 3.5 billion shillings (Table 3.1, Column 4)will have to be found in 1987 if PIP projects are to be maintained andoperated. This implies a 62.5 percent increase in total recurrent budgetexpenditures of So.Sh. 5.6 billion in 1984, equivalent to an annualrecurrent expenditures growth of 17.5 percent in real terms.
3.16 The distributional impact of the PIP on the recurrent budget isdrAmatic. Since less than 20 percent of the recurrent budget is at presentallocated to economic and social services, the PIP-induced increase inthese areas, if projects are to be operated on their completion, isenormous. In 1984 the recurrent budget allocation to the ministriesresponsible for implementing the PIP appears to be no more than 1.2 billionshillings. This will have to rise to 4.7 billion shillings in 1987 if thePIP is implemented as planned, an increase of 283 percent, equivalent to anannual growth of 55 percent in real terms in the recurrent allocations toeconomic and service ministries (Table 3.1). In current shillings, theincrease will be more than double what is indicated in the table. Similarincreases will also be required in 1988 and beyond.
3.17 These calculations, it should be remembered, take account of onlyPIP pressures on the recurrent budget. Allowance must also be made forpolicy as opposed to project related Increases in expenditures. Thefinancial implications of public service reform need also to be borne inmind. The recurrent cost requirements estimated in Table 3.1 shouldtherefore be regarded as a minimum measure of the pressures on therecurrent budget.
3.18 It is important, therefore, for the Somali authorities toestablish a system for estimating the recurrent cost arising of projects,and their impact on the recurrent budget, and incorporate this analysisinto the programming of the PIP. Recurrent costs need to be evaluated on acommon basis for all projects when they are designed. The results shouldstrongly influence the choice of projects for inclusion in the PIP. Sinceno donor is going to commit itself to the long-term financing of recurringcosts of its projects, much less those of other donors, the PIP needs to bescaled down until it reaches a level which results in operating costc thatcan be afforded from domestic revenue. The problem is that on the presentoutlook there is no room for any PIP-induced recurrent cost requirements,suggesting that the PIP be considerably wound down if unmaintained andunoperated projects are to be avoided. In practice, such issues willbecome clearer when revenues, recurrent budget reallocation and publicservice reform are examibed in a medium-term framework. The argument thatthe PIP itself will promote higher government revenues is not sufficientlyestablished to justify a maximum size PIP, even if donor financing ofinvestment permitted it.
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Table 3.1 - Recurrunt Cost Impilcations of 1964-86 PIP
Sector Tot l PIP Asswmd _ r F Recurrent Coat Recurrent Oost Recurrent RequiredExn. 184-86 CoefficIents Arlsing 187 Arlsing '87 Provlsion '84 Recurrent Cost(S MIlIIon) (S MIIIon) (So.Sh. MIIIIon (So.Sh. MIlIIon) AllocatIon
a/ PIP expenditure '84-'86 is taken from Table 4.1 of Development Strategyand Public Investment Programme 1984-86 (Revised December 1983).Sector totals sum to $945.1 million, not $969 million as the Tablesuggests. It includes both funded and to be funded projects. The PIP-planned expenditure total is taken at face value, no slippage isassumed.
b/ 'R' coefficients are drawn from three sources: (i) Peter Heller: 'TheUnder Financing of Recurrent Development Costs," Finance & Development,March 1979; (ii) Club de Sahel, and where these are not available(iii) mission estimates. In sectors where projects should beinherently viable in financial terms (manufacturing) or where cost-recovering tariffs should be applied (water, telecommunications andposts), the assumption is made that this will be so. The 'r'coefficient of .01 applied in these cases reflects solely theadditional costs incurred by the responsible ministry supervising theexpanded and, hopefully, cosL-covering activities of its subsidiaries.
c/ The table assumes the recurrent cost arising impacts fully in the yearfollowing the PIP period 1984-86. In practice, the build-up from PIPprojects will be slower, due to implementation slippage, the fact thaton existing programming some projects are not due to be completed untilafter 1986, and that for others it will take several years after thecapital phase is over for full scale operations to be achieved. On theother hand, recurrent cost pressure from pre-PIP project spending mayimpact after 1984, and PIP slippage will be partly offset by costescalation on projects that are implemented between 1984 and 1986.
d/ Exchange rate used is the official rate prevailing in January 1985,which overvalues the currency considerably. Replacing the officialrate with an equilibrium rate would magnify the recurrent pressure, butproject costs presumably would also have to be recast to reflect thelocal and foreign currency components of expenditure. This informationis not readily at hand. Nevertheleless, if adjustment were made for amore realistic exchange rate, it would show the figures in the Table tobe conservative estimates of the recurrent costs arising from the PIP.
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3.19 In view of present outlook for domestic revenue and in light ofenormous recurrent expenditures arising, the outcome might be a request formore commodity aid fitted into the Government's financial plan for therecovery period. However, the financial plan has to be convincing to windonor support. There is a need for greater flexibility in the form inwhich aid is provided, with much more emphasis on balance of paymentssupport as an interim measure to facilitate the adjustment process.However, insofar as this support is forthcoming and leads to increasedgeneration of counterpart funds, the country's planners must be careful notto regard such funds as a substitute for domestic revenues, or even as along-term supplement. To mobilize and effectively utilize non-project aid,the Government would be expected to continue liberalization, improvemacro-economic management, restrain expenditure on new projects, improvecost recovery, and proceed with public sector reforms. The reprogrammingof project aid for financing Somalia's immediate balance of payments gapagreed at the special Consultative Group meeting in January 1985, providesa good example of the required direction of change in aid modality.However, foreign aid alone will not solve the problem of recurrentexpenditure unless the Government makes major efforts to raise revenue,recover costs, and reduce expenditure on general administration.
Medium-Term Financial Framework
3.20 The economic situation of Somalia is so severe that it is noteasy to see how revenues to cover budget expenditures vill be forthcomingin the medium-term. Thus, the pressure for monetary financing of thebudget will increase but will need to be resisted.
3.21 Against this difficult background, a financing plan for publicexpenditure (investment plus recurrent) should be carefully constructed.Strategic decisions affecting public expenditures include:
(i) pay, conditions and size of tLhe public service.
(ii) policies toward the public enterprise sector and thelikely magnitude of their call on public funds both duringand after rationalization of the sector is completed.
(iii) allocation of recurrent expenditure among ministries infavor of economic services.
(iv) size and composition of the PIP consistent with capacityfor implementation and operation.
(v) availability and use of counterpart funds generated bynon-project aid.
Each of these issues is complex enough, but they cannot be takenseparately. They are central to determining the size of the publicexpenditure program over the period of the 1986-88 PIP. There is arequirement, consequently, for a financing plan which, with greater rigorand disaggregation, over a period can be transformed into a medium termfinancial framework (MTiFF) in which the effects of alternative policyrespoases can be measured and judgments reached.
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3.22 Such a financial framework would be developed on the one handfrom projections of Government tax revenue, retained earnings of publicenterprises, and anticipated aid flows, and on the other hand fromestimates of debt service payments, and ordinary and development budgetexpenditure requirements. It would have to be grounded in the present,with limits to domestic credit expanslon consistent with the IMF program.Thereafter, expenditure would be largely constrained by the forecast levelof domestic revenues and assumptions on the likely flow of commodity aid.Such a resource framework should be projected forward for five years andupdated at least annually. The Ministry of Finance will almost certainlyneed technical assistance to establish the framework and to test thefinancial Implications of different fiscal strategies.
Monitoring and Evaluation
3.23 Successful programming depends critically on a well-functioningmonitoring system, yielding current information on the implementation ofprojects and the expected outturn at the end of the year. For effectivemanagement of the PIP, the Government needs to strengthen the monitoring ofprojects, in a manner appropriate to Somali conditions. The PIP containsfewer than 100 core projects, by no means too great a number for theGovernment to individually follow and take stock of. What is required is alist of projects by ministry, which is currently provided by the AnnualPlan. A routine of six monthly reporting then needs to be establishedproviding two categories of information: (i) financial information ondevelopment budget expenditure, to pe mit drawdowns to be made and overrunsand emerging global issues identifiec; and (ii) physical ir'ormation onimplementation, to reveal where delays are occurring, to convey what ishappening in the field, and to break bottlenecks. This type of informationis the raw material for program management and for the effectivesupervision of implementation performance by line ministries and theMinistry of Planning.
3.24 The configuration of projects varies between sectors and betweendonors whose design and operational preferences vary. Most largeprojects(which tend to be financed by several donors) are run by projectmanagement units (PMUs) headed by Somali nationals, with expatriatesproviding technical and accounting support. They are thus in a goodposition to supply the Ministries of National Planning and Financeinformation on total project cinsmitment and expenditure.
3.25 Since 1983 the Government has been making a determined effort todevelop such a simple system for monitoring development expenditure. AnInter-Ministerial Committee for Public Investment (IMCPI) was formed withthe Director General of the Ministry of Finance as chairman and includingrepresentatives of the Central Bank, and central Ministries of Planning,Industry and Commerce to: (i) monitor the implementation of the PIP; (ii)submit PIP financial implementationi reports to the Ministry of Finance; and(iii) maintain a profile of major projects. Major project units arerequired to submit to IMCPI regular information reports and updated costestimates. The resulting improvements are aleady reflected in the 1985Annual Plan. However, more needs to be done. The IMCPI's cumbersome forms(circulated to project managers) need to be greatly simplified and theresponsibility for their collection and analysis established.
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3.26 The IMCPI has the potential of being further developed as anumbrella organization facilitating cooperation between the Ministries ofFinance and National Planning on financial and macro-economic aggregatesfor the PIP rollover, and lending weight to the Planning Ministry'sattempts to enforce plan execution.
Expenditure Control and Financial Discipline
3.27 Serious weaknesses exist in the budgetary process. The coverageof the budget is reduced by the absence of development expenditure financedby foreign aid. The effective coverage is further reduced by the inclusionof more than one third of the total budgetary provision in a singlecontingency or reserve item under the Ministry of Finance. This item doesnot appear to be covered by the same rigor as is applied to the rest of thebudget. Another weakness is the absence of policy guidelines based upon anassessment of the macroeconomic situation. In budget execution, there isno effective fiscal reporting system which is required for management andinformation purposes. The accounting system is outdated and deficient andthere is no comprehensive manual of procedures covering all aspects ofaccounting. These issues were reviewed by an IMF mission and should beaddressed on the basis of that mission's reco.mendations.3/
3.28 Although the Finance Ministry's call circular containsexpenditure ceilings (conditioned by expected revenue receipts) withinwhich spending units must frame their recurrent submissions, there appearsto be no systematic mechanism for the setting of expenditure guidelines,either in real or nominal terms. Given the continued financial crisis ofrecent years, expenditure control is an area that should be addressedseriously.
3.29 Inadequacy of financial discipline and expenditure controlcontinues to be a serious problem. As they find the voted amountsinsufficient, ministries spend on what they perceive to be their mosturgent needs, which may not coincide with what the money was voted for. Inthe case of development expenditure, there is no uniformity in accountingand control procedures (largely determined by the donor); as a result, noaccurate information on development expenditure is available. Thesituation is further worsened by the absence of aid data, especially forprojects financed by foreign grants. It ic important to improve this stateof affairs, and to ensure that monies provided for specific purposes arespent on thea and that expenditure ceilings are maintained. For therestoration of expenditure control the authorities should create a climatewhich encourages financial rectitude, by example as well as sanction.Financial regulations and other relevant handbooks need to be reprinted andcirculated, and financial management should be stressed in trainingcourses. Though the scope for improvement is great, progress is likely tobe slow since the task is far from easy.
3/ For details see IMF (Fiscal Affairs Department), 'Somalia: A Review ofBudgetary and Accounting Procedures-, August 29, 1984.
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Summary of Recommendations
3.30 The Somali authorities should try to further improve the nextthree-year (1986-88) Public Investment Program as a comprehensive documentembracing all development expenditure programs of the Government. Alongwith the criteria used in the 1984-86 PIP, there should be more use ofeconomic and financial rates of return in the selection of projects. TheMinistry of National Planning and the Ministry of Finance need to cooperateclosely to prepare a comprehensive financing plan of the PIP, showing notonly the expected external resources (along with debt service obligations)but also how the Government's revenue and expenditure would evolve duringthis period. The financing plan should, over a period, be developed into amedium-term financial framework.
3.31 Recurrent costs of projects should be calculated, and theirimplications for the overall government finances and current budgetaryallocations should be examined. In addition to project financing and theimplementation capacity of the public sector, recurrent costs of projectsshould be taken into account in determining the size of the PIP (also inselecting projects). It is necessary to accept the principle that newprojects should not be launched unless the financing plan/medium-termfinancial framework indicates that recurrent costs can be financed. The1986-88 PIP should make a beginning in this regard, and consider whetheradditional aid requirements should take the form of project aid or balanceof payments support. To justify a large PIP, the Government will need toreduce expenditure on general administration and defense, raise allocationsto social and economic services, restrain consumption, raise savings andimprove cost recovery. Monitoring of project implementation should befurther improved. The IMCPI should be developed into a machinery formonitoring the PIP and fostering close cooperation between the Ministriesof Planning and Finance in all aspects of planning, budgetting andmonitoring. Financial discipline and expenditure control need to beimproved; for this to happen, there is need for stricter enforcement offinancial accountability, and more transparent budgetting. The sbare ofrecurrent budgetary expenditure to economic and social services needs to beraised.
3.32 The present development budget (for only domestically financedexpenditure) should be expanded into a full development budget showing bothdomestic and externally-financed expenditure. Since it will take severalyears before the accounting system is in a position to account for allfunds, an interim system should be adopted whereby the development budgetshows, project-by-project, all sources of finance. Technical assistanceprovided by donors needs to be more effective in helping the Somaliauthorities in bringing about the suggested improvements in publicexpenditure program management.
II. External Debt Management
3.33 In Somalia, the Ministry of Finance is legally responsible forsigning all external loans, approving their terms and conditions andkeeping all data relating to external debt. However, the leadresponsibility to negotiate the loans until recently rested with theMinistry of National Planning; since May 1984 it rests with the Ministry ofForeign Affairs.
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3.34 Despite the establishment in the Finance Ministry of a foreigndebt unit (FDU) in 1979 with assistance from the World Bank, Somalia's debtmanagement is still very weak. This is due to a number of reasons.
3.35 Somalia is among the few countries which do not submit to theWorld Bank the completed forms without regular help from the Bank. Debtfiles maintained by Somalia do not, in most cases, carry the World Bankdebt reporting system (DRS) numbers by which they could be identified. Theamount outstanding for each individual loan is not posted on a ledger in away that it can be converted to one currency and aggregated for all loans.Moreover, contrary to the requirements of Somali law, loan agreements areoften signed by other ministers and not by the Minister of Finance; anddebt data are sometimes kept in other public entities. Consequently FDUfaces problems in routinely receiving loan agreements, and cannot compileaccurate information on the status of aggregate external debt. FDU alsofinds it difficult to access information on disbursements made for eachproject. The application for disbursement is made by the concerned sectorministry which requests the creditor to effect disbursement. The Ministryof Finance is not notified of the disbursements made and discovers themonly when its Treasury Department starts to receive invoices from creditorsfor debt repayments.
3.36 In these circumstances, FDU has serious constraints in obtaininginformation on the country's debt service obligations. Moreover, thesystem of effecting repayments is also deficient. When notifying theCentral Bank of a payment order the Ministry of Finance does not specifyrequisite data on the breakdown between principal and interest, and oftenfails to mention details of the relevant loan. Some creditors are partlyresponsible for this as they do not specify details in the invoice to theMinistry of Finance. However, work by an IMF-sponsored advisor and bySamuel Montague and Co. in recent months has started to establish morereliably Somalia's outstanding debt payment arrears, and debt serviceobligations.
3.37 The main issues in future external debt management concern: (i)improvement of institutional framework and procedures; (ii) strategy forexternal borrowing; and (ill) how to restructure existing debt serviceobligations (including payment arrears) and to seek debt relief.
Institutional Framework and Procedures
3.!8 In order to improve debt monitoring and management, it isnecessary to strengthen FDU by elevating the status of its head andproviding him with additional staff. In this context, the provision of aresident advisor from the IMF to advise FDU is very welcome. This wouldhelp towards better recording and collection of debt data, improved designto access information, and better use of information to establish debtservice obligations. Secondly, the sole legal authority of the Minister ofFinance for signature of all loan agreements needs to be enforced. Toensure this, officials of the Ministry of Finance should participate inloan negotiations at an early stage, although the Ministry of ForeignAffairs should formally lead loan negotiations with the advice of the
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Mnistry of National Planning. No other ministry, Government agency, orpublic enterprise should be allowed directly to enter into negotiationswith donors or other creditors. Finally, the Government should introducemeasures to develop a system under which ministries and public enterprises,with projects financed by external loans, inform FDT of their request fordrawdown from external loans, and require that the creditors keep FDUinformed of the disbursements made.
Strategy for External Borrowing
3.39 In view of the heavy debt service obligations in the next severalyears, and the large accumulation of arrears, the Government shouldformulate a new strategy for external borrowing, the main elements of whichshould include the following. First, as a matter of principle, theGovernment should not borrow for projects outside the PIP worked out by theGovernment and the international donor community. Second, the terms andconditions of the loans, and guarantees, if any, should be carefullyreviewed before agreement to ensure that their debt liabilities are notinconsistent with the country's repayment capacity. Third, theGovernment's recourse to nou-concessionary loans should be strictly forbalance of payments assistance to support stabilization programs to reducethe financial imbalance and limited to the International Monetary Fund andthe Arab Monetary Fund. Finally, the Government should attempt to mobilizea maximum proportion of assistance through grants.
Plan for Debt Restructuring and Debt Relief
3.40 The Government should formulate a strategy to seek arestructuring of its debt service through debt rescheduling; such debtrescheduling should be planned and implemented periodically in the future.The Government's recent recourse to the Paris Club to seek a formalrescheduling of the debt payments arrears to 1984 and payments due in 1985is a welcome move.4/ Also, the Government needs to prepare a plan forapproaching the major non-Paris Club creditors individually or through someother forum to restructure debt service, including payments arrears. Theservices of the IMF advisor to FDU should be utilized to develop arealistic plan.
4/ The Paris Club meeting from March 4-6 rescheduled arrears through 1984,and debt service for 1985. This involved medium- and long-term arrearsamounting to $109 million and $13 million on guaranteed short-termcommercial arrears. The gross amount of debt relief from the Clubmembers for service in 1985 amounted to $41 million. Deductingmoratorium interest falling due in 1985, net debt relief amounted to$27 million.
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III - Aid Coordination
3.41 By virtue of many factors Somalia receives a large volume ofinternational assistance, one of the highest per capita aid flows inAfrica. Net disbursements of aid to Somalia has been estimated at over 30percent of GDP during 1980-1982. The broad issues concern coordination ofcapital aid and technical assistance by the Government, and coordinationwith donors.
The Government's Apparatus for Coordinating Aid
3.42 Until recently, formal responsibility for aid coordination wasvested in the Ministry of National Planning, which had the EconomicCooperation Department for the purpose. On May 1, 1984, the Governmentdecided on the immediate transfer of the Economic Cooperation Department tothe Ministry of Foreign Affairs (MFA).
3.43 MFA has been taking overall charge of Somalia's relations withdonor countries and institutions; and overall responsibility for aidcoordination, both grants and loans, capital aid and technical assistancewill be with NFA. The role of the Ministry of Planning in this regard willbe to prepare plans, and to advise on the priority of projects contemplatedfor a particular donor's program.
3.44 Initial donor reaction to the new arrangements was dismay. Therewas great apprehension that the decision would result in an inevitabledeterioration in aid coordination by the Government of Somalia, and seriousdamage to the Consultative Group process.
3.45 Alongside planning, programming, project appraisal andmonitoring, aid coordination is an important element in the management ofa development program. Successfully combining them is difficult enough ina single ministry. Separating them makes the task much more prone to delayand breakdown.
3.46 Aid being the main source of external finance in Somalia, aidcoordination, whichever ministry has the formal responsibility for it,should be integrated into the planning process. There must also be closelinks with the Ministry of Finance to facilitate budgetting, cash flowmanagement and debt management. If MFA is prepared to accept the formalleadership of loan negotiations taking care of the foreign policy aspectsand leave the substantive technical issues of aid coordination to MNP andMOF, there is lit.le reason for donor relationships in Somalia to beimpaired by the move. It is understood from the Government that MFA dealslargely with grants and technical assistance, and coordinates with MNP andMOF on these and other aspects of foreign aid.
Technical Asa4 stance
3.47 It has been estimated that over 20 percent of all foreign aid inSomalia is in the form of technical assistance. Figures published by theDevelopment Assistance Committee of the OECD show that the disbursement of
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technical assistance grants increased from US$16 million in 1976 to overUS$100 million in 1983. In 1981 the country was reckoned to be therecipient of about 1,000 professional man years of direct technicalassistance, and an additional 600 man years within capital projects.5/
3.48 Technical Assistance for planning, sector analysis and projectpreparation provided by donors has not, however, done much to overcomeSomalia's institutional weaknesses, which have constrained the absorptivecapacity even for grant aid. In terms of its impact on Somaliinstitutional development and on the transfer of knowledge and skills toSomalis, the results of this massive technical assistance effort can onlybe characterized as disappointing. Externally funded technical assistanceprojects tend to continue for long periods and to leave few visible resultswben discontinued.
3.49 The reasons for this situation are complex, with responsibilitylylng with both Government and donors. They relate fundamentally to theway technical assistance is programmed, designed and implemented. Theweakness of the Government's planning process and the country's dependencer- external assistance has led to a system of project identificationwithout full involvement of the Government. Since technical assistanceusually formed part of an investment package, the Government found itdifficult to say 'no' to what it considered of doubtful benefit. Given theunderstandable preoccupation of donors with the proper design andImplementation of donor- funded investment projects, it is not surprisingthat both the selection and design of technical assistance projects hasfocussed primarily on short-term project implementation objectives ratherthan long-term institutional development goals. The result has been aplethora of special project units and other organizations, outside thenormal government structure, supported by external donors providing largesalary supplements and other prerequisites for the Somali staff and witheasy access both to foreign exchange and local currency resources.. Itshould come as no surprise that these units have tended to beself-perpetuating and that the permanent government structure has, ifanything, been weakened.
3.50 Even in cases where the objective of technical assistance hasbeen the development of permanent government structures, this objective hasoften been defeated by defects in the delivery system for technicalassistance and weakness at the receiving end. The lack of a well-functioning civil service, exacerbated by the erosion of salaries, andprevalence of donor financed salary supplements to Somali staff in mostprojects, including technical assistance projects, has led to misallocationof staff resources including rapid turnover of local staff, low staffmorale, absenteeism and low productivity. Many Somali nationals tended toleave their regular jobs and move between project posts in search of higherpay based on no stipulated criteria of experience or qualifications. Poor
5/ The main sources of technical assistance in descending order were atthat time: Italy (university teachers), UNDP, West Germany, Egypt(secondary school teachers) USA, EC, UK, France and the Netherlands.
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project design, selection, and administrative procedures and other problemshave occasionally resulted in poorly qualified expatriate experts. Oftenselection of experts was not appropriate. The traditional adviser/counterpart modality has poorly served the objective of transferring skillsto Somalis, and innovative approaches are clearly needed. Lack ofcoordination among donors seems to have resulted in occasional competitionfor scarce local resources, conflicting advice and in many cases, failureto provide mutually supporting assistance. Finally, the capability ofgovernment entities to manage technical assistance components and projectshave been extremely weak, and their activities were inadequatelycoordinated. Although the Ministry of National Planning acted as aclearing house, there was little effective coordination of technicalassistance by the Government.
3.51 Given the urgency for improvement, future technical assistanceshould produce tangible results in the short term through alleviating themost serious operational shortcomings at the sector level as well as at thelevel of macro-economic management. Over a period, it should contributeeffectively to the development of Somali institutions, in particular tostrengthening of the planning, programming, and monitoring process at thesector level and of project preparation, economic analysis andimplementation at the operating agencies.
3.52 Improving overall effectiveness of technical assistance willrequire: identification of technical assistance needs with the activeinvolvement of the Government; coordination of technical assistance amongdonors, and by the Government through a single ministry at the nationallevel; continued efforts for transfer of know-how to counterparts; and anobjective evaluation of results.
3.53 Principles similar to those for capital aid apply to technicalassistance coordination. TA coordination is best achieved by keeping it asclose as possible to where the public service is managed, and planning andproject coordination occurs. A special problem arises in Somalia becausemanagement and planning for the public service are weak. For TA coordina-tion to be placed on a firm basis, it is necessary to address publicservice issues. Indeed, successful civil service reform - with arealistic recasting of salaries, the introduction of increments withinscales and a system of grading and promotion to restore public servicemorale and a sense of career development for individual officers - iscrucial to effectiveness of technica.&. assistance in Somalia. This reformprocess is now likely to begin with the recent USAID sponsored study of thecivil service, which investigated the condition of the public service andrecommended how it might be better managed. The forthcoming report of theUNDP/World Bank Technical Cooperation assessment mission is expected tomake more specific recommendations for better coordination andeffectiveness of technical assistance.
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Consultative Group Process and Coordination Among Donors
3.54 Coordination among donors is intrinsic to the Consultative Groupprocess whose focal point is the Medium Term Recovery Program. However,there is an awareness that despite large aid flows, results have beenpoor. Notwithstanding elaborate donor efforts to arrange improvedprocurement procedures resources intended for projects have gone astray.There is a growing awareness that the present high level of aid flowscannot be sustained without better results. Also, there is a sense thatthe donors themselves are in part responsible for the unsatisfactory stateof affairs. Individually, donors have not adhered to project criteria towhich collectively they have lent support.
3.55 The question, therefore, is how best to nurture the CG process,so that it continues to be supported by both the Government of Somalia andthe donor community. The process could and should be strengthened in thefollowing says, some of which are already beginning to happen: (i) asdiscussed earlier on, the PIP itself needs technical improvement in theareas of programming, assessment of implementation capacity, the analysisof recurrent costs, and more use of economic analysis in project selection;(ii) there needs to be greater discipline among the donors that theyentertain for financing only high priority projects included in core PIP;(iii) the linkage between satisfactory macro-economic policies and aidflows and modalities needs to be continually stressed; and (iv) strongsupport must be given to administrative reform, in terms of both donorwillingness to assist restructuring of the public service and its reductionin size, and to make technical assistance and capital aid conditional oninstitutional reform.
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CHAPTER IV - AUGMENTING COMNODITY PRODUCTIONCONSTRAINTS AND POSSIBILITIES
4.01 This chapter indicates the major factors which seem to constraingrowth of production in agriculture and industry sectors as well as thebroad areas of potential growth through relaxation of these constraints.In addition to the difficult physical environment and external factors,there are policy related constraints to output growth. In agriculture,while farmer incentives have been improved considerably, the state ofsupplies of inputs, extension and support services, and water use andmanagement remains poor; so are the health services and marketinginfrastructure for livestock. In industry, the Government intends to takecritical decisions in the reform and restructuring of public enterprises inorder to improve their efficiency, and is aware of the need for a policyframework conducive to attracting and encouraging the private sector.Also, improvement in energy efficiency and management through appropriatepricing and other measures is an important requisite for supportingproduction growth in the economy.
Constraints to Agricultural Growth
4.02 The stagnation in crop output in the face of rapid growth ofpopulation during the seventies, as a result of which Somalia becamedependent on food imports and food aid for around 40 percent of thetotal grain supply (Table 4.1), can be attributed in part - but only inpart - to physical constraints to crop production in a fragileenvironment.
Table 4.1: SOMALIA - DOMESTIC PRODUCTION AND INPORTSAS PERCENT OF TOTAL GRAIN AVAILABILITY (1979-83)
Imports as Percent ofCalendar Domestic Marketed Grain SupplyYear Production Import
.....(000 tons)..... Commercial Concessional Total
Sources: Agricultural Incentives and Grain Marketing, Somalia, January1984. Production data for 1983 from Annex Table 7.1.
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4.03 Considerable obscurity surrounds the level and changes in cropproduction in Somalia from 1970 through 1983.1/ Taken at face valueavailable figures (Table 4.2) indicate increases in production of all majorgrain crops during 1981-83 after a decade of stagnation. Three-yearaverages are used to eliminate the effect of annual fluctuations. Droughtreduced the 1983 production below the levels of the previous two years (SeeAnnex Table 7.1). Despite these recent improvements, banana production,the major export crop, is still below levels reported in the earlyseventies, and sugarcane production bas at best regained the level of1970-72. Cotton production is little changed after a decade and a half,and this is Largely true also for groundnuts and beans and to a lesserextent sesame. The dramatic improvements have been in sorghum and also inmaize.
Table 4.2: SOMALIA - AVERAGE ANNUAL CROP PRODUCTION, 1979-1983
4.04 Somalia's principal foodgrains -- sorghum and maize -- areproduced mostly on rainfed and some flood irrigated land. In additionthere are 50,000 hectares of controlled irrigated land in the South - ofwhich about 30,000 hectares are used for maize and rice, and the rest forsugarcane, bananas, cotton and fruits and vegetables. The source of recentgrowth of grain output has been a rapid expansion mainly in thenon-irrigated cultivated area (Table 4.3). Between 1978 and 1982 thereported area increased by over 200,000 mostly under maize, sorghum and
I/ Recent statistical sampling efforts within the Ministry of NationalPlanning have greatly improved the reporting system for the years 1982and 1983, but it is unclear how these figures relate to those reportedfor earlier years.
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sesame. Much of this expansion may be explained by favorable weather in1981 and 1982: witness the more than 100,000 ha decline (largelyconcentrated on maize) in 1983 when weather was adverse. Along with goodweather, another important factor was at work. Incentives to producersbegan to improve by 1981 as the Government devalued the Somali Shilling,eliminated the practice of parastatal monopsony of domestic crop purchases,and, as a result, raised producer prices of major agricultural cropsobtained by farmers.
Table 4.3: SOMALIA - CHANGES IN ESTIMATED AREA OF MAIN CROPS 1977-83
Total MainYear Sorghum 4aize Banana Sesame Field Crops
4.05 The observed relationship between acreage expansion and outputgrowth, albeit over a short period, indicates that factors constrainingactual cultivated area also constrain the growth of crop production. Inaddition to unstable rainfall there is one long-standing constraint tobringing increasingly larger rainfed cultivable area under actual cropproduction, namely the lack of infrastructure.2 / Of the country's about 8:aillion hectares of cultivable land, less than 1 million ha3/ is actuallycultivated. An essential but also unanswered question is the degree towhich the remaining 7 million ha of "potentially cultivable' land can beeffectively utilized and through what means - rainfed production orirrigation - and costs. The 1981 Bank Agriculture Sector Review indicatedthat expansion of irrigated farming would require investments of the orderof US$7,500 (in 1979 prices) per hectare compared to about $300 per hectarefor opening up new land in the rainfed areas. Available data do not permitus to calculate and compare rates of returns on investment in expandingland and in opening up new rainfed land.
2/ World Bank Report No. 2881a-SO, Somalia: Agricultural Sector Review,June 1981.
31 50,000 ha controlled irrigation, 110,000 ha flood irrigation, and therest rainfed.
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4.06 The reported yields of food grains - 0.3 - 0.4 tons/ha formaize and sorghum in rainfed areas and 0.8 tons/ha for maize (as of 1981)in irrigated areas - are among the lowest in Africa. One ton or more perhectare is quite common in many countries including Kenya, Uganda andEthiopia. Even in the Sahel group (Chad, Mali, Gambia, Niger, Mauritania,Senegal) cereal yield is over 0.5 tons/ha. Low yields indicate that thevery limited use of yield-increasing inputs is another constraint to outputgrowth. It has been demonstrated that in Somalia also under 'bestpractice' requiring improvement in input use, extension and supportservices, yields can be doubled for maize and sorghum in rainfed areas, andfor maize, cotton and sesame, trebled in areas under controlledirrigation.4/Introduction of improved seed (Somtex maize), better inputuse and extension in about 30 percent of irrigated area under maize havealready resulted in a 50 percent increase in the average irrigated maizeyield to about 1.2 tons per hectare.
4.07 Water Resources and Irrigation. While rainfed agriculturedominates the area under crops, and expanding the rainfed area and raisingyields on it are probably the least cost means of increasing cerealsproduction, irrigation plays an essential and important role. All exportcrops (bananas, fruits) and industrial crops (cotton, sugarcane) are grownin irrigated areas. Usable surface water comes from the country's tworivers - Shebelle and Juba - both originating in Ethiopia. Presently38,700 ha (over 80 percent of area under controlled irrigation) are in theShebelle region. But irrigation efficiency is only 20 percent in thesystem as a whole, reflecting frequent shortages. Periods of low flow arealso associated with higher water salinity levels, adversely affectingcrops. Many farmers with irrigated land along the Shebelle still rely onthe onset of rains 'efore planting.
4.08 The rehabilitation of existing schemes in this area iscritical. Moreover, many of the so-called irrigated areas have never beenfully developed - levelled and provided with secondary and tertiary canals- so that yields in these areas are no better, and can at times be lowerthan, those in adjoining rainfed areas.
4.09 The most immediate prospects for rapid production benefits andearly, higher returns appears to lie in the rehabilitation of the Shebelleasrea. The better utilization of existing irrigation infrastructure inlower Shebelle will allow increased production of bananas, vegetables,sugar and other high value cash crops, much of which can be exported. Tothe extent that irrigated area is used for foodgrain production, improvingthe efficiency of water use in this area (to achieve higher maize yields)will substantially add to the national food supply.
4.10 However, for the future development of the country, one has tolook to the much greater potential of the Juba Valley. In this regard, theproposed Bardhere Dam project is central to the Government's plans.
4/ See World Bank, Report No. 2881a-SO, Somalia: Agricultural SectorReview, June 1981.
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This issue was discussed at the 1983 Consultative Group meeting andagreement was reached on a program of studies to be completed to determinethe appropriate sequencing of the large investments involved. The resultsof many of these studies are not yet available, but when they are,decisions should be made about this long-debated proposal.
4.11 Livestock Production. Although the livestock sector is theprincipal economic base of Somalia at present, providing occupation forover half the population as pastoral nomads, its future is criticallydependent on the remaining potential of the rangeland. The livestockpopulation is not known with certainty. A major issue in Somalia is thecarrying capacity of the forage supply. Many argue that it isdeteriorating through over-grazing. However, it is widely recognized thatlittle, if any, rangeland reserves remain and the prospects forsubstantially increasing the availability of feed resources on the rangesare limited and the costs are uncertain. It is also generally agreed thatmarketing and animal health services are likely to be more important inraising offtake.
Sources: 1975 Official Census; other years estimates of Ministry ofPlanning.
4.12 The impact of animal diseases on mortality and morbidity amonglivestock has not been adequately evaluated. The Government has carriedout a number of programs to limit or eradicate diseases, but seriousdeficiencies in the animal health system persist and reduce the offtakerate of animals.
4.13 In the absence of accurate data, estimates of livestock offtakealso vary widely. The most recent offtake estimates are: cattle 11percent; camels 2.3 percent and sheep and goats 18.6 percent. Increasedofftake would be possible through reduced mortality following improveddisease control.
4.14 The traditional marketing system is well developed, but marketinfrastructure and facilities provided by the Government are poor. Herdsare sent by hoof or truck to export points (mainly Berbera in the north andMogadishu and Kismayu in the south) or larger urban markets for slaughter.The holding grounds are often poorly maintained and the services theyprovide are often quite limited.
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4.15 Live animal exports have been essentially stagnant since theearly 1970s, with the exception of cattle in 1981-82 (see Table 4.4). Thisstagnation may reflect the country's having reached the limit of its animalfeed supply, but is more likely a reflection of constraints on improvinglivestock offtake and marketing, and deficiencies in policies (e.g. pastovervalued exchange rate) and efforts toward the diversification ofSomalia's live animal export market.
*Total Livestock Unit; 1 camel - 1.1 LU; 1 head of cattle - 0.8 LU;and 1 goat or sheep - 0.1 LU.
Sources: Livestock Development Agency; and National Range Agency,Department of Livestock Marketing Facilities.
4.16 Domestic livestock consumption is less well documented thanexports. Hides and skins production (passing through official channels)over the past decade shows a declining trend or stagnation in all but camelhides.5/
4.17 Despite these caveats concerning the data, the livestocksector, on which much of the economy rests, has shown little if any growthover the past decade. The Saudi ban is only a recent adverse element in analready weakly performing sector, which does not augur well for itspossibilities as a future source of growth.
5/ Recorded output in 1982 and 1983 of less than 2 million sheep and goatskins in substantially below earlier years, except for 1976. This isalso true of cattle hides, which were generally between 80 and 130thousand annually, but are now about 50,000.
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4.18 Economic Policy Environment. During the 1970s, marketing ofcrops was controlled by parastatal agencies which paid low prices togrowers relative to world prices and domestic costs of production. TheAgricultural Development Corporation (ADC), which had a virtual monopsonyof domestic food crops, purchased at prices which constantly declined inreal terms with inflation (Table 4.5). This ADC monopsony of purchases atdisincentive prices was a major factor explaining sluggish productiongrowth in basic cereals through 1980. Large government imports of cerealsat an overvalued exchange rate and marketed through the National TradingAgency (ENC) at low prices, enabled ADC to dominate the market and prices.
Table 4.5 SOMALIA - NONAL4L AND ILAZIION-ADUSTED PRICES OF RED SORGHUMSelected Years, 1973 - 1983
Source: Agricultural Incentives and Grain Marketing In Soalia, January 1984 and nissionrecalculations for 1983.
4.19 A major movement toward liberalization which commenced in 1981contributed to improved crop production. The Government eliminated the ADCand ENC monopsony of domestic purchases and imports of agriculturalproducts, and allowed farmers to sell their produce in the free market.ADC's purchases and ENC's grain imports dropped sharply. These changestoward liberalization also reflect the serious shortage of official foreignexchange and government budget resources. But, despite considerableprogress in liberalization of prices, data on Mogadishu retail food pricessince mid-1984 suggest that the pricing issue has not been fully resolved.After rapid increases since late 1983, rice, flour and pasta pricesdeclined sharply (maize and sorghum prices less rapidly) after July 1984indicating strongly that concessional food imports were used to push downdomestic cereal prices.
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4.20 On the other hand, inadequacies of extension and supportservices, and an almost complete lack of adaptive research, persist andhinder agricultural development. For the near term, the shortage of fuelhas immobilized both public and private vehicles; crops are not collectedor moved on time; pumps are not opereated for irrigation or agriculturalprocessing (sugar mills). However, the overvalued shilling and theresultant underpricing of imports created an excessively strong demand forimported inputs (both machinery and fuel) which would not be justified at arealistic exchange rate.
Issues and Recommendations
4.21 The lessons of the stagnation of the 1970s, the dramaticallyimproved crop production and livestock exports during 1981-82 and thepresent agricultural difficulties suggest that the possibilities ofagricultural growth in Somalia in the near and longer term will depend onhow the following issues (discussed further below) are resolved:6!
- Recognition of the intrinsic, weather-induced instability ofagr'cultural production, which requires appropriate pricestabilization mechanisms along with further liberalization, andintegration with the world market;
- Arriving at a balance in the exploitation of productionpossibilities in the rainfed and irrigated crops, and livestocksectors, and strengthening of adaptive research;
- Arriving at a productive and equitable balance with respect touse of inputs (machinery and other imports), and betweengovernment and private sector activities, in the areas ofmarketing and distribution;
- The development of appropriate cost recovery policies.
4.22 Economic Liberalization and Stabilizing Mechanism forAgricultural Prices. The elimination of government price controls and theelimination of parastratal monopoly/monopsony control over food marketingare positive steps to Improve farmer incentives. However, unlessfluctuations in production can be offset smoothly by effective buffer stockpolicies and imports, extreme price instability is the predictableconsequence: witness the experience since late 1983. This in turn wouldgenerate strong pressure for reverting to price fixing and for using foodaid to depress prices, as may have been happening since mid-1984.
4.23 The joint Somali Government-World Bank study of AgriculturalIncentives and Grain Marketing has proposed to combine and restructure ADCand ENC and create a new National Grains Agency to serve mainly as abalancing mechanism to support private sector grain marketing to
6/ A new Agricultural Sector Study is underway with a number of joltSomali-World Bank task forces to shed more light on an appropriatedevelopment strategy in agriculture.
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oversee the import and stocking of grain and to intervene in the market asand vhen needed to ensure an incentive price structure for farmers andreasonable prices to consumers. This recommendation is being revieved bythe joint Government-IBRD task force established to review the agriculturalsector.
4.24 Managing an effective price stabilization mechanism for cereals- buying when producer prices are low and selling when they are high,managing effective and least cost buffer stocks and importing as needed tosupport such a system - has not proven to be an easy task even in moredeveloped countries. Neither ADC nor ENC is staffed with peopleexperienced in these matters and neither institution has had the mandate todo so. For moving towards establishing such a system Somalia needs tocarry out: (i) an assessment of the capacity, resources, staffing,operations and management of ADC and ENC; and (ii) an evaluation of thedata base, information, and analytical capabilities needed to operate aprice stabilization system.7/
4.25 In the livestock sector, there is a considerable degree ofstability provided by the capacity of livestock herders to vary theirrelease or retention of animals on the range. There is hardly any remedyto the instability caused by drought. That apart, a more effectivestabilizing mechanism for livestock would be an efficient and flexibleexport marketing pclicy and institutional support geared to a number ofdifferent markets.
4.26 For both expansion of livestock exports and efficientimport-substitution in grains, the Government should maintain a realisticexchange rate so that internationally competitive prices prevail inSomalia. To ensure that this will happen, full adoption and continuedoperation of the new exchange rate system and early unification of theexchange rate is essential.
4.27 Balanced Exploitation of Resources. Although the livestocksubsector dominates the agricultural sector, the long-term limitationsplaced on expanded livestock production through limitations on the rangefeed supply, justify emphasis on crop production. It is very doubtful thatthe rangeland could accowmodate herd increases on the scale required tosustain the nomadic population currently increasing at 2.2 percent peryear. Indeed the 1981 Bank Agricultural Sector Review recommended that thenumber of people and animals on the range should be stabilized for theforeseeable future. How to absorb productively the additional nomadicpopulation (of up to 1 million within the next 15 years) in agriculturaland urban non-agricultural sectors is a central issue in Somalia'slong-term development. If the entire additional nomadic population were tobe absorbed in the urban areas, urban population would more than double inthe next 15 years and exceed 40 percent of the total population. Given the
7/ More specific recommendations on agricultural price stabilizationmeasures will be provided by the forthcoming Agricultural Sector Study.
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lack of industrial and urban development in Somalia, such a rapid urbangrowth is difficult to envisage, partly because of the heavy demand forskills, and public expenditure on infrastructure that it would make.Agriculture will need to play a major role in absorbing the surplus nomadicpopulation. Therefore, public resources going to crop production (aboutthree times those for livestock) cannot be considered excessive despite thestill relatively small crop sector in terms of employment and GDP.However, livestock will remain the country's principal export for theforeseeable future. For exploiting livestock possibilities emphasis shouldbe given to disease analysis and control, animal health services, andmarketing support, including maintenance of holding areas for animals inthe interior and at or near port facilities. These measures can beexpected in the nearer term, to increase livestock off-take for export. Byand large, allocation of resources for these measures should precedesignificant investments for longer-term development of this subsector.
4.28 Within the crop subsector, the critical issue of balance isbetween irrigation and rainfed production and, within irrigation, betweenrehabilitation and new projects. The long-term development of agriculture-will require both expansion of rainfed areas and development of irrigationfacilities. Hovever, because of Somalia's serious financial crisis andresource constraint and the urgent need for growth of production andexports, immediate priority should be given by the Government and donors tothose activities which can increase production relatively quickly and atlov investment cost. This should broadly include rehabilitation ofirrigation facilities and improvement of water management in the controlledirrigated areas (largely around the Shebelle as noted earlier), andinvestment in rainfed areas especially for rehabilitation andintensification of areas presently under cultivation through better landpreparation, improved input supplies, support services, as well as someimprovement in physical and institutional infrastructure including adaptiveresearch. At the present state of knowledge of alternatives, the balancebetween investment in rainfed and irrigation (a ratio of about 40:60)appears fairly reasonable,because or the relatively large size of the BayRegion, Extension and Training, and Northwest projects financed by IDA.The Northwest Project and the Semi-Mechanized Rainfed Pilot Project areshowing promise of developing dryland production technique. In both casesthe key to success has been a moisture conservation technique, for whichthe prospects of rapid and widespread replication should be the subject ofquick and intensive review. The Extension Project has been refocussed intothe irrigated areas for which at least some new and improved technologiesexist. Given the size of the rainfed areas, the need for cereals, and theimpact that relatively modest yield increase would have, more attentionneeds to be given to projects which could derive higher benefits and reducecosts.
4.29 Agricultural Input Supplies, and Mechanization. Along withproviding improved incentives to farmers, there is need to ensure adequateinput supplies and provision of support services. While a full and carefulevaluation of the recently completed Agricultural Inputs and Services Study(COWI-Consult, December 1983 and May 1984) has only recently been started,
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it illustrates a number of important issues related to input supply andsupport services. Most of these issues can be put in two categories:(i) whether the input mix (the weight of tractors and machinery) isappropriate to Somali conditions; (2) how will inputs be distributed:through government (public sector) or private means.
4.30 The study's projection of immediate 1985 input demand of about$60 million, with a medium-term demand for the period 1984-88 of roughly$190 million is excessive. At the present official exchange rate, thisprojected input demand for 1985 would equal 80 percent of the 1985investment budget and about 6.5 times the ordinary budget for theagricultural sector. Nearly 85 percent of the projected demand is fortractors, and land development equipment and implements while the share offertilizers and seeds is very small.8! This seems inappropriate inSomalia's situation. A realistic estimate would be no more than one halfof the projected amount, for reasons noted below.
4.31 Mechanization has already gone a long way in Somalia, despite thefact that most farmers are smallholders. Relatively few animal tractiontechniques are used; experimentation and promotion of animal traction havenot been vigorously pursued. Results emerging from the Semi-MechanizedFarming Pilot Project and the Northwest Regional Development project alsosuggest that a mix of mechanized land clearing, soil bunding, plowing andfallow maintenance, combined with hand weeding, crop maintenance andharvesting may be viable technologies consistent with Somali conditions andfactor proportions. This indicates, notwithstanding the over-emphasis ontractors in the Inpurs and Services Study, the need for some additionaltractors and especially spare parts imports, as is being provided throughthe proposed Agricultural Inputs program being financed by the Governmentsof the United States, Federal Republic of Germany, Italy, as well as IDA.Consistent use of the free market exchange rate for such transactions, asenvisaged under the 1985 adjustment program, would quicky moderate themagnitude of such demand.
4.32 The Inputs and Services Study is highly critical of the operationof public sector institutions (ONAT, AFMET and MLFR) in the distribution ofagricultural inputs, and proposes major restructuring and privatization inall these areas. These proposals need to be studied carefully and actionshould be taken to improve input distribution by raia!ng public sectorefficiency and encouraging private operators. This is already being donewith the Agricultural Inputs Credit and the agricultural sector study.
8/ The total number of tractors to be imported during 1984-88 would be2,943 (along with a wide variety of implements) as against an estimatedstock of tractors for 1983 at 785 (235 in the government sect c and 550in the private sector). Fertilizer use would rise from less than10,000 (mainly used on bananas) now to 43,400 tons in five years.
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4.33 Cost Recovery and Equity Questions. At present public investmentin the agricultural sector as elsewhere is supported by externalresources. The tight ordinary budget situation will become tighter as therecurrent cost implications of new and planned projects become evident (seeChapter III). In the first place, government revenues need to be increasedsubstantially from agriculture and other sectors so that gradually balanceis restored in the ordinary budget. In the second place, with nearly 90percent of domestic investment planned in the public sector for 1985(compared to 78 percent in 1983), major, large-scale public sector projectsmay need to be scaled down in the 1986-88 PIP in favor of more effectivesupport activities to facilitate private development. In the third place,agricultural credit needs in the private sector should be supplied throughthe banking system, and not crowded out through rapid public sector creditexpansion, as in the past (see Chapter II).
4.34 In addition to these measures, a serious effort is needed torecover the costs of government investments and services. The presenttaxation on land - SoSh. 5 for rainfed and SoSh. 10 for irrigable land -
is very low, particularly in areas of major government investment. Alsothere is no water charge on irrigated land. Veterinary and livestocksupport services should a'so gradually recover part of their costs.Granting land at no cost, in a situation where land is a highly valuableasset, should be stopped. Long-term free land leases are also similar togrants, and should be based on repayments consistent with the value of theland, except possibly in cases where social objectives are being pursued,such as relief or settlement programs to alleviate poverty.
Constraints to Industrial Growth
4.35 Somalia's very small domestic market and relatively poor resourceendowment are major constraints to industrial development. Scarcity ofmanagerial and technical skills and experience in both public and privatesectors has also been a major supply-side constraint on industrialdevelopment, accentuated by migration to the Gulf States. Based largely ona concentrated demand for some consumer goods, many of the obviousopportunities for viable import substitution had been taken by someindustrial investment in the 1970s.
4.36 As noted in Chapter II, recent developments in the industrialsector have been disappointing. Real output per capita has been virtuallystagnant for the past five years. The public sector accounts for about80 percent of gross output or value added in industry and absorbs about 95percent of gross domestic investment in industry. Available data on publicsector enterprises indicate that their poor performance must bear a majorresponsibility for the &tagnation in manufacturing value added. Most ofthem incur losses and fail to cover even depreciation costs. Capacityutilization in public sector industrial enterprises was very low (Table4.6). It fell further, and in some cases sharply, in 1983. This seriousunderutilization is reportedly for reasons of lack of spare parts and rawmaterials, frequent breakdown of machinery, as well as problems ofmarketing and management. With a few exceptions, public sectormanufacturing is largely based on the processing of agricultural, livestock
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and fisheries products, for both consumer-oriented import substitution andexports. However, many enterprises continue to depend heavily on importsfor raw materials (e.g. the Somaltex and the Cigarette and Match Factoryfor cotton and tobacco inputs), contrary to the originally envisagedobjectives of local production of these raw materials. The cigarette andmatch factory (the only profitable public manufacturing enterprise duelargely to a monopoly of cigarette imports) lost over 70 percent of itsproduction hours due to machinery breakdowns and shortages of spare parts.The Jowhar sugar mill was closed during most of 1983 for rehabilitation andrepairs. The edible oil mill was mostly idle due to inadequate supplies ofraw materials, which also severely handicapped the meat processing andaluminum utensils factories. On the other hand, the textile factorysuffered from large accumulation of stocks of raw material, and finishedproducts which exceeded annual sales. Several private firms - making soap,detergents, soft drinks, leather, footwear, filing cabinets, safes, metalfurniture, foam rubber, mattresses and plastic products - visited by themission indicated that, although they were operating at higher levels ofcapacity than the public sector, they were experiencing serious constraintsto expansion of production - particularly a scarcity of imported 'nputs.
Table 4.6: SOMALIA - Capacity Utilization in a Sample of PublicEnterprises (Actual Utilization as I of Capacity)
1977 1978 1982 1983
Name of Enterprise
Somaltex Textiles 65 75 51 33(Balad)
SNAI Sugar Mills 30 7(Jowhar)
Milk Plant 53 46 14 6(Mogadishu)
Meat Factory 37 - 3 2(Kismayo)
Edible Oil Mill 2 1(Mogadishu)
Cigarette and Match Factory 57 33(Mogadishu)
Aluminium Utensils 45 21(Mogadishu)
Foundary and Mechanical 60 22Workshop (Mogadishu)
Sources: Central Bank of Somalia, Annual Report and Statement of Accounts,1978; and information provided by the Ministry of Industry.
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Maln Issues and Recommendations
4.37 Within the limitations of market and natural resources, thereseems to be some entrepreneurial talents which could be channelled intoindustry, given the right incentives. Somalia has a long history ofsuccessful international trading. Somali entrepreneurs have shownconsiderable ingenuity in mobilizing the savings of Somali workers abroad.
4.38 Several policy changes (see below) have been initiated by theGovernsent which should help to create a more favorable environment forefficient industrial development and attract private investors, bothforeign and domestic, into manufacturing. Steps are also being taken totackle the problems of the public sector more vigorously. These policychanges are reviewed below and suggestions made for further improvment.
4.39 Foreign Exchange: Scarcity of foreign exchange for spare partsand liported materials has probably been an important factor responsiblefor underutilization of industrial capacity. Somalia's entire cotton cropis absorbed by the State-owned textile company; yet 60 percent of cottonrequirements had to be imported in 1983. Successive measures have beenintroduced to relieve this pressure. Liberalization of crop pricesImproved growers' incentives. Sixty-five percent of export earningsallowed to be retained by exporters for use in the free market sinceJanuary 1985 will provide incentives for export and efficient import-substitution. But still greater Incentives would be desirable in future.The unification of the foreign exchange market by end-1985 and free andfull convertibility of the proceeds of exports which are almost entirelynon-manufactured, would yield additional foreign exchange in the market,and can be purchased by industrial enterprises as well. These measureswould help the potentially viable enterprises.
4.40 Pricing and Marketing: In the past, prices of inputs offered bystate marketing agencies tended to discourage production of some basiclndustrial raw naterials and price controls over industrial productssqueezed operating margins of manufacturing enterprises. The eliminationof price controls in 1985, and greater competition in the domestic marketshould increase the flexibility of the production/marketing system. Itshould also provide more reliable market indicators of the relativeefficiency of existing enterprises and the comparative advantages ofdifferent lines of production. This presumes that public sectorenterprises will be given discretion to set their own prices and choosetheir own supliers and distributors, as well as greater autonomy in otherareas of uanagement (see below).
4.41 Labor and Management: A strict application of the Labor Code hascontributed to the unprofitability of some enterprises resulting partlyfrom an excessive public sector industrial labor force and high wagesbill. The new Labor Law of 1984 would give greater authority to managersto release surplus labor from their enterprises. This is an importantfirst step.
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4.42 Greater flexibility in setting wages and introducing performance-related incentives would also be desirable. The wages structure In publicenterprises should take into account the scarcity of particular skills, andprovide sufficient incentive for higher productivity. The same remarksapply to greater efforts to raise technical and managerial skills andperformance through training programs at the Department of Training at theMinistry of Social Affairs, and the Somali Institute for DevelopmentAdministration (SIDAM).
4.43 Public Enterprise Reform. Due to operating losses, most publicsector manufacturing enterprises have been unable to make any contributionto the government budget through taxes and have been perennially short offunds for both working capital and replacement of fixed assets, thusaccumulating arrears to the Government and relying heavily on bank credit.Since Somalia's savings rate is close to zero and the core publicinvestment program is funded completely from abroad (see Chapter III), thisis a serious 8cate of affairs for efficiency of resource use and industrialdevelopment.
4.44 The Government is aware of the problem. It also realizes that,since the public sector Industrial plant capacity far exceeds that in theprivate sector, better performance of public enterprises would be the mainsource of industrial output growth in the near future. In understandingwith the International Monetary Fund and with IBRD support, the Governmentintends to accelerate public enterprise reform with focus on making theexisting public enterprises viable through Increased capacity utilization,while emphasizing the development of the private sector.9/ Some progresshas already been made in regard to criteria and methodology to be used forassigning public enterprises into three cetegories: those to be retainedin the public sector, those to be wholly or partly privatized, and those tobe liquidated. Also, a new policy statement is under preparation.
4.45 The main objective of reform measures should be to turn thepublic enterprises into efficient entities and not a burden on the budgetor the economy. The Government should develop a comprehensive actionprogram in this regard. Studies undertaken by SIDAK's staff and ILOadviser show that there is room for improvement in several areas of publicenterprise operations and managenent. There being little or no costaccounting, public enterprises have no basis for making pricing decision.In general, accounting is poor and there is no uniform system. Materialsmanagement is poor. Work study is seldom undertaken and work standards arerarely set. Many factories have obsolete items in their inventories.Factory layouts raise labor costs unduly. Eighty percent of maintenancework is on breakdowns and only 20 percent on preventive maintenance. Theseproportions should normally be reversed. An inefficient centralizedbudgeting system and control discourage management of enterprises. As adirect consequence of past policy of mass employment, overstaffing is acommon feature in public enterprises despite their fairly high capital-intensity. Corrective action in all these areas requires, in addition to
9/ Annual Development Plan 1985, December 1984.
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government policy, some impiovement in the availability and motivation ofskilled management and staff. Within the level of protection provided bythe system of tariffs, public manufacturing enterprises should pursueclearly defined objectives of achieving larger output and higher rate ofprofit or surplus. A greater multiplicity of objectives would make itimpossible to monitor and judge performance of these enterprises, orintroduce any financial discipline in their operations.
4.46 For the basic objective of establishment of an independent,competitive, commercially-oriented industrial sector (public and private),free from direct political intervention, It may be necessary to createsufficient incentives and sanctions for managerial improvements. Bettermanagement will be judged by larger output add profitability. Toregenerate motivation and incentives in management and workers, the presentcivil service type salary system in public enterprises should be changed toallow for strong financial incentives for better management, and workers'wages should be related to results. Privatization is one option forinfusing new life into public enterprises and reducing the risks ofpoliticization of managerial decisions. However, the scope in themanufacturing sector seems to be somewhat limited. Nobody in the privatesector wants to buy loss-making enterprises. The Government, for its part,is contemplating liquidation of non-viable enterprises which it considersnon-essential or non-strategic, divestiture of those viable enterpriseswhich it considers non-essential or non-strategic; but is reluctant to sellor liquidate any 'essential or strategic' enterprise whether it is viableor not. To make the reform halt or reduce the heavy drain on the budgetand the financial system, the authorities need to identify very carefullywhat they consider essential or strategic. To pursue uneconomic activities(even in energy) for social or political objectives would be against theinterest of economic recovery and industrial development.
4.47 A two-pronged approach seems to be called for. The firstapproach would aim at turning unprofitable public enterprises around byintroducing stronger management incentives for better performance. Sellingthese enterprises to Government- or party-controlled cooperatives is notenough. The Government should improve the institutional framework withinwhich those public enterprises remaining in the public sector will operate,especially in regard to Government-Enterprise relations in setting theoperational and financial targets; and ensure that public enterprisemanagements have adequate decision-making authority that they require forefficient operations within the Government objectives. Each enterprisemanagement should at the same time be made commercially accountable to theGovernment. Past experience indicates that for achieving results, suchreform with accountability is essential. A number of poor investments,e.g. the Somaltex Factory, continued to absorb considerable public funds inan effort to make them viable, but without commensurate results.10/ Thesecond approach would be privatization through outright sale or iase. Tobe successful, the new investors would need to possess superior management
10/ Abdulkadir H. Deriye, The Role of the Public Sector In DevelopingCountries: Somalia, International Center for Public Enterprises inDeveloping Countries, 1984, pp. 73-74.
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skills and know-how. Stronger incentives and inducements may be necessaryto attract such investors. This point is examined below.
4.48 Incentive Framework for the Private Sector: Regulationsaffecting foreign private investment are laid down in Law No. 7 of January29, 1977 on Foreign Investments. This law, adopted before major changesoccurred in economic policy, needs updating to respond to current thrust ofeconomic policy. Un-er this law, the Ministry of Finance is authorized togrant total or partial exemption from duties and taxes for up to five yearsfor "productive enterprises". Licensing decisions must be conveyed to theinvestor within 60 days of the application. Interest, profit and loanrepayments are annually transferable abroad up to 30 percent of theoriginal capital invested plus reinvested profits in the case of"productive enterprises", and up to 10 percent for "non-productiveenterprises".
4.49 There has been very little foreign industrial investment sincethis law was enacted. This is understandable in view of the overalleconomic situation. However, the incentives and guarantees offered arealso less favorable than Rome other countries (e.g. Mauritius) which havebeen more successful in attracting foreign capital. The authorities areconsidering possible revisions and UNIDO has provided advisory services inthe field. The law could be strengthened in several ways. The distinctionbetween -productive' and "non-productive" investments is not defined and isleft to the interpretation of the Ministry of Finance. Any such dis-tinction is arbitrary and unnecessary. Any economically viable legalactivity which contributes to the output of goods or services in anyeconomic sector should be encouraged.
4.50 Transparency would be improved if the tax exemptions orreductions and eligibility criteria were spelled out more clearly. At themoment, fiscal incentives are granted at the discretion of the Ministry ofFinance. Uncertainty may deter potential investors. The level, number andduration of the concessions seem to be unduly dependent on the bargainingpower and influence of the investor. And arbitrary discrimination betweenone enterprise o one product and another may result in inequity anddistortion of investment flows.
4.51 One solution would be to specify each type and level of incentiveaccording to precise categories of activity or priority areas. Forexample, export industries might be offered more extensive incentives, andfor a longer period of time (say 10 years) than import substitutionprojects, as a means of counterbalancing other biases against exports.However, multiple classification and complex eligibility criteria should beavoided. Simplicity, automaticity, clarity and uniformity are thecharacteristics of most effective investment codes.
4.52 Consideration might also be given to removing the repatriationrestrictions. Given Somalia's large debt service burden, direct foreigninvestment should be particularly welcome. Repatriated profits represent asurplus retained by the foreign investors after they made theircontributions to the national economy by way of capital, know-how, tax
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revenue, employment and foreign exchange saving or earning. Anyrestrictions that act as a deterrent to foreign investment have a real costin terms of contributions foregone. However, in the absence of profitableminerals like oil, Somalia with its limited natural resources, poorinfrastructure and skills, cannot expect to attract massive foreign privateinvestment.
4.53 Turning to the question of domestic private investment,indigenous enterpreneurs are showing some interest in industrial projects,despite the contraints noted earlier. They feel that the Government ismore positive in its attitudes towards the private sector and they welcomethe liberalization meaures already taken. Some 60 applications forindustrial licenses were received by the Ministry of Industry over the pasctwo years. Some were granted but not yet implemented, because of the highrisks and uncertainty associated with the foreign exchange allocationsystem that existed till January 1985. Traders can readily liquidate theirstocks of finished goods in a sellers market. It is much more difficult torecover investment in plant and machinery which has become idle becausecritical inputs or spare parts cannot be obtained. Manufacturing requiresa longer planning horizon. The devaluation of the shilling, andestablishment of a free market alongside the official exchange rate, is awelcome move. Eventual establishment of a completely freely convertibleSomali Shilling in the exchange market would further enhance theirconfidence. Given the scarcity of managerial and technical skills andexperience, one should not expect an investment boom led by Somalia'spotential industrial entrepreneurs. To the extent private investors risktheir own capital under such a free exchange rate regime, project selectioncould be left to the judgement of the entrepreneur and the appraisal of hiscofinanciers (using standard rate of return techniques). Industriallicensing could then become simply a registration procedure, rather than aselection process by which the Government attempted to -pick winners".Adequate equity investment by private entre,reneurs should ensure asustained commitment to the success of a project and lead to fewerfailures.
4.54 Finally, consideration should be given to three measures thatwould help to improve industrial performance and the environment in whichthe sector operates. First, reform of the financial sector, includingliberalization of deposit and lending rates and permission for foreignbanks to establish branches in Somalia, would help to mobilize domesticsavings and foreign capital. Second, the system of protection for import-substitution industries should be reviewed. Under the 1985 IMF Stand-byarrangement, the Government has eliminated quantitative controls (importbans or quotas) and raised the structure of interest rates. In addition,introduction of moderate, relatively uniform rates of duty on finalproducts, combined with maintenance of a realistic exchange rate, would bemore conducive to efficiency. Third, encouragement should be given to theestablishment of an independent Chamber of Commerce or ManufacturersAssociation to represent the views of the private sector, engage In acontinuing dialogue with Government on policy issues and administrativeprocedures and provide collective services to members (training,dissemination of information, data collection, etc.).
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Improving Energy Demand Management and Efficiency
4.55 Costs of petroleum imports in 1984 exceeded 40 percent ofmerchandise exports. Because of the scarcity of readily available energyresources in Somalia, and given the considerable cost and lead timeinvolved in developing domestic resources, more efficient demand managmentis of primary importance over the short- to medium-term for both making theenergy sector more viable and augmenting agricultural and industrialproduction. This is recognized by the Government but appropriate pricingand non-pricing policies have yet to be applied.
4.56 Energy Pricing: Excepting a 25 percent increase in prices ofgasoline and gas oil in September 1984 in the wake of the 47 percentdevaluation of the Shilling, prices of petroleum products and electricitytariffs were left unchanged since 1982 despite accelerating domesticinflation and substantial devaluations. Prices of practically allpetroleum products are below their c.i.f. import costs. At a more adequateparallel exchange rate (e.g. So.Sh. 80/US$ instead of the official rate ofSo.Sh. 361US$), all petroleum products except gasoline and jet fuel sold toforeign airlines are subsidized. Serious distortions in relative priceshave persisted. For social and industrial policy reasons, the officialprices of diesel and kerosene are held at just about 60 percent of theprice of gasoline, and LPG is heavily subsidized to stimulate itsconsumption in place of woodfuels (the price of LPG to the consumer at theofficial exchange rate is about 56 percent of the international price).Distribution margins, especially for LPG, are very low and thus do notprovide an incentive to improve marketing operatinos.
4.57 Electricity tariffs (residential and industrial kwh tariffs atSo.Sh. 2.00 and 2.80, respectively) are too low to fully cover thefinancial costs of electricity supply, let alone the economic costs ofsystem expansion. Tariffs are uniform throughout Somalia irrespective fdifferent cost levels in different systems. ENEE has requested tariffincreases of about 80% on which the Government has yet to act.
4.58 Energy prices need to reflect more closely their economic costs.This implies that prices of petroleum products cover their c.i.f. importand domestic marketing costs, as measured at a realistic exchange rate, andnot the official rate of So.Sh. 36 to $1. At present, the Governmentapplies the official exchange rate to petroleum imports. It would be moreappropriate to subject petroleum to the general market exchange rate whichreflects more accurately the scarcity value of the foreign currency.Prices of currently subsidized products need to be raised to their marketlevels. Also, the price relationships on international markets should begradually astablished for domestic fuel prices as well, which would callfor approximately identical taxation levels.11! Future prices of petroleumproducts should be regularly adjusted in line with the maintenance of a
11/ It sbould be noted that by increasing taxes on diesel and kerosene tothe level prevailing for gasoline, additional revenue of So.Sh.420-470 million at 1984 consumption levels could be generated, whichwould nearly double the actual revenue from fuel taxes.
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realistic exchange rate, which would require appropriate administrativearrangements. Electricity tariffs should be based on long-term marginalcosts of system rehabilitation and expansion which should be determinedthrough a study on electricity system expansion. Prior to completion ofsuch a study, tariffs should at least cover ENEE's financial costsincluding debt service and allow the generation of some financial surplusnecessary for expansion; be graduated in line with levels of operatingcosts in different systems; and arrears due from public and private sectorsshould be expeditiously recovered. With regard to the pricing of woodfuels(a) stumpage fees on fuelwood and charcoal need to be raised to levels atwhich they cover the long-run cost of reforestation and (b) governmentcontrol over the charcoal prices should be removed (unless already done) toencourage production and reforestation.
4.59 Non-price measures: In addition to energy pricing to reflecteconomic costs, non-price measures are also needed to improve energyefficiency and to stimulate conservation. Significant scope for fuelsavings exists in the residential sector through dissemination of improvedstoves, and in the transport and industrial sector, including electricitygeneration through better equipment maintenance, operational improvements,and minor rehabilitation investment. The substitution of cheaper fuels(i.e. diesel for gasoline in transport, and fuel oil for diesel in powergeneration) also could contribute significantly to lowering energy costs.
4.60 The petroleum refinery (45,000 tons per year) has been severelyaffected by operational inadequacies and adverse economics. Because of itssmall size, obsolete design and high operating costs, ex-refinery costs areabout $4 per barrel higher than comparable c.i.f. import costs of petroleumproducts. It would probably be cheaper for Somalia to toll-refine importedcrude in more efficient refineries abroad or to import products directly,provided the agreement with Saudi Arabia permits this. Since the closureof the refinery is not acceptable to the Government, future expenditureson the refinery should be limited to the minimum necessary to improveoperational efficiency. P4ith respect to electricity, high priority shouldbe given to the rehabiltation of existing generation and distributionequipment in the Mogadishu and other systems.
Long-term Measures to Enhance Energy Supplies
4.61 While management of energy demand through price and non-pricemeasures is essential in the near term, augmenting energy supply iscritically important for meeting long-term needs of the economy. Oilexploration by multinationals over the past several years has not resultedin the discovery of any reserves. Naturally, these efforts need to becontinued. The Government has also explored the possibility of naturalgas. However, no gas reserves were established despite the drilling of twowells at Afgoy (near Mogadishu). Therefore, as of now, there are no knowndomestic hydrocarbon resources to replace imported fuel for electric powergeneration and other uses. A major rationale to the Bardhere dam proposal(see para. 4.10) is to provide for hydroelectric power to meet theincreased future demand for electricity, which ls currently generatedthrough imported fuel. These alternatives ed to be carefully studied.
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4.62 In regard to woodfuel, Somalia still has considerable forestreserves, but they are concentrated in relatively remote areas, whileserious deforestation has occurred near population centers. If unchecked,consumption pressures could lead to widespread destruction of accessibleforests. Woodfuels have to be supplied over ever-increasing distances,which has increased the energy requirements to transport them.
4.63 Although the Government has recognized the importance ofpreserving forest reserves, no forestry development strategies and policiesexist, and institutional arrangements are grossly inadequate. The ForestryDepartment has only two trained foresters and extension is undertaken bystaff who have no background in forestry. Its 1984 budget was onlySo.Sh. 5 million, and capital expenditure is entirely foreign-financed.Foreign advisers to the Forestry Department essentially fill staffpositions and provide little training to their local counterparts. Nonatural forest management and only little reforestation are undertaken.External assistance was largely for environmental forestry and training.The establishment of tree nurseries assisted under the World Food Programwas poorly implemented. Only recently has external assistance beencoordinated more systematically through the Cooperation for development inAfrica (CDA) initiated by a number of bilateral donors.
4.64 Forestry resource management to meet voodfuel requirements of themajor consumption centers need to be strengthened by: (a) enhancing themanagerial and technical capacity of the Forestry Department; (b) takinginventories of forest and plantation resources within reasonable distanceof major consumption centers; (c) preparation of a woodfuels developmentplan; (d) research into fast-growing tree species, and evaluation ofleast-cost options to manage existing forest resources and forreforestation; (e) assistance to charcoal producers to increase output andto undertake reforestaton; and (f) selective establishment of periurbanfuelvood plantations for major consumption centers.
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CHAPTER V: MEDIUM-TERM PROSPECTS
5.01 Largely due to the serious gaps and deficiencies in economicdata, including national accounts and balance of payments statistics, anyquantitative projection of Somalia's economic prospects over the mediumterm is a very difficult task. Not only are data on merchandise importsand exports very incomplete and deficient, information on capital flows anddebt service obligations has serious weaknesses.
5.02 However, an informed judgement about the magnitude of foreignexchange availabilities (through export earnings and aid modalities) andtheir uses (various types of imports, and debt service payments) is helpfulfor an appreciation of Somalia's mediumr-term economic prospects. It indi-cates the order of magnitude of the imbalance in the external accountrequiring adjustment if the country is to make progress towards economicand financial recovery. Given the country's serious balance of paymentscrisis and extremely high import-dependence, resulting from past inade-quacies of macro-economic management and neglect of export expansion andefficient import substitution, Somalia will face a very difficult economicsituation for a number of years. This will be so, even if the Governmentsustains and further strengthens the full package of liberalizationpolicies under the 1985 IM program, and vigorously implements the policyand institutional reforms recommended in Chapters III and IV, to increaseexports and import substitution, control Government expenditure, reformpublic enterprises and promote the private sector. Indeed, over the nextfew years the country's trade and current account deficits are likely toremain nearly as large as at present; and given the large debt serviceobligation, high levels of debt relief and aid, and reductions in lessessential imports will be needed to achieve a satisfactory rate of outputgrowth. It has not been possible to develop and run a model quantifyingthe potential effects of the various policies mentioned earlier, and theimpact of unforeseen exogenous shocks which may occur. However, we haveprepared a set of projections which outlines an indicative and normativescenario for GDP, and the balance of payments, over the next five years(through 1990), assuming sustained and full implementation of the policiesand measures envisaged in the 1985 Adjustment Program, as well as thepolicy and institutional reforms suggested in this report.
5.03 Even with substantial donor assistance in appropriate forms, theprocess of adjustment will not be essy and will require sharp restraint onpublic consumption and more efficient use of limited imports. It willgenerate considerable economic, financial and social political strains, asreform measures work their way through. But the donors should appreciate,and be supportive of, Somal'a"s sustained commitment to adjustment. It hasto be noted, however, that in the absence of implementation of appropriatepolicies and reforms, even generous aid flows will not suffice to achieveeconomic recovery and growth.
5.04 Table 5.1 shows the projected rate of growth of real GDP from1985 through 1990. With normal weather, higher levels of aid, and betterallocation and use of resources, the economy could maintain the recent
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recovery in production. Agricultural value added (livestock, crops,fishing) would increase annually by 3.5 percent in 1985 and 1986 and by 3.4percent thereafter. Value added in the small industrial sector wouldincrease by about 7 percent per year. Value added in the services sectorswould grow at a lower rate of about 3.0 percent per year. Overall GDPwould grow at about 3.6 percent per year. This growth rate of GDP is aboutthe same as the average growth rate during 1980 through 1984. The assumedgrowth of GDP is optimistic but feasible. With the population increasingby nearly 3 percent per year, this will imply a very small increase in GDPper capita. It is based on the expectation that during the remainder ofthis decade the Government will vigorously implement the recovery programand its associated policies as indicated earlier, and will be supported byadequate and coordinated donor assistance. Provided that implementation ofpolicy reforms is accelerated, investment efforts are more sharply focussedon high-yielding commodity producing activities, and implementation ofinvestment expenditure is improved, Somalia may expect to achieve a GDPgrowth rate of about 4 percent per year. The Government, however, is ofthe view that overall GDP during the period under review could grow by asmuch as 5 percent per year.
Table 5.1: PROJECTED GDP GROWTH RATES(Z per annum at 1977 Prices)
5.05 Our balance of payments projections are summarized in Table 5.2.The methods used are explained in the Annex to this Chapter. Somalia'sexports will depend mainly on two items - live animals and bananas. Withthe continuing Saudi ban, cattle exports face a market constraint.Somalia's recently-concluded agreement with Egypt on livestock exportswould somewhat relax this constraint. More importantly, maintenance of arealistic exchange rate will make Somali livestock competitive, and help todiversify export markets. Our projections assume a liberalized trade andexchange rate system, and GDP growth as stated above. Hence, the volume oflive animal exports is expected to recover rapidly in the next few yearsfrom the extremely low level of 1984, then grow at a moderate rate of3.5-4.0 per annum. The volume of banana and other exports (hides andskins, fish, etc.) also will depend on maintenance of a realistic exchangerate and the progress in output growth. Export volume is expected toincrease fast in 1985 and 1986 and thereafter at 5 percent per year. Thisis an optimistic expectation and is dependent on Somalia's sustained effortnot only for expanding livestock exports in diversified markets, but alsofor increasing other exports particularly bananas, fish and hides andskins. Total export earnings in current dollars are expected to exceed thelevel of 1983 in 1985, and 1986, and then increase at a moderate rate.However, because of the weak price prospect for live animals and banana
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tovards the end of the decade, total serchandise export earnings are notexpected to go much beyond $190 million in 1990, from a level about $110million in 1982.
5.06 The private transfers, which are esentially remittances ofSonali nationals working abroad, are expected to rise rapidly to about $80milllon in 1985 and then increase relatively slowly to reach over $100million in 1990. This optimism is based on the recent exchange rateadjustment and the assumed future liberalization of the exchange rateregime and promotion of private investment opportunities.
5.07 Projected Uses of Foreign Exchange. The import projections areessentially based on informed judgements on (a) required food imports toensure adequate availability for the population (including refugees),(b) modest requirements of petroleum imports, and (c) mo'derate levels ofother imports including Intermediate and capital goods to support thegrowth of GDP through better utilization of existing capacities and,for rehabilitation, and some expansion of capacities. The overallmagnitudes are also moderated by considerations of availability of aid.Our projections assume that foreign aid per capita would remain at the sameas the level reached in 1985. Disbursements of official developmentassistance (ODA) to Somalia amounted to $100 per capita in 1980, and wouldbe about $85 in 1985, both in 1980 prices. These projections, whichalready have a very delicate balance, do not include the Bardhere damfinancing requirements. If a decision is made to proceed with this largeinvestment proposal, the asssuption will be that the Bardhere dam will haveto be financed by external assistance additional to that projected here.Since aid per capita cannot be expected to increase any more in real termsabove the level reached In 1985 through special efforts, and exports cannotbe expected to increase faster than projected, Somalia's adjustment willhave to be mainly through an adjustment of import dependence. In fact,import restraint and import substitution required for Somalia's successfuladjustment and economic recovery are built Into these projeL-dons, whichare thus 'normative', but in our judgement feasible. As foGdgrainproduction is expected to increase, food imports are projected to decline.Projected oil imports presume some improvement in energy conservation andefficiency following appropriate price adjustments. The greater thesuccess in import substitution in food and other commodities, and thegreater the restraint on consumption, the more can imports be compressedwithout hindering production growth. Improved efficiency in resource use4i also presumed in the projected imports of other goods (including capitaland intermediate goods).
5.08 Trade imbalance would be reduced, but only moderately. From alevel of five times exports in 1985, projected imports would be down tothree-and-a-half times exports by 1990. For a resolution of this basicimbalance, conslstent with economic recovery, Somalia will need a longerperiod of successful export expansion and import substitution. Somalia'splanners should think through the medium- and long-term structuraladjustment requirements, and try to see how best the country can do withthe available resources. Because of the serious limitation of publicinvestment implementation capacity, this projection is probably the highestlevel of imports that the Somali economy can productively absorb over themedium term. But the projected imports (including those of capital andintermediate goods) would suffice to support the envisaged output growth,if used efficiently in the most productive uses.
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5.09 The second major requirement of foreign exchange is for debtservice payments. As noted in Chapters II and IrI, Somalia's debt serwiceobligations have risen rapidly in recenc years, and would amount to about$120 million (roughly 75 principal and 45 interest) or nearly 100 percentof export earnings per year in the immediate future, unless debt relief andrescheduling are arranged with creditors. Altogether, even with some debtrelief recently obtained at the Paris Club, Somalia's foreign exchangerequirements (for merchandise imports, services, and debt service payments)would be nearly $650 million in 1985 rising to about $750 million in 1990.Both the size (90 percent of GDP) and structure of its debt put the countryin an extremely difficult situation - a virtual debt trap. Since nearly40 percent of Somalia's outstanding debt is owed to multilaterals includingIMF, a maximum of 60 percent of the debts can be potentially rescheduled.Debt service to multilaterals (including repurchases from IMF) is alreadybecoming quite large. Also, it should be noted that even if all otherdebts are rescheduled on a very long term in the next few years, along withthe usual capitalization of overdue interest payments, the interest paymentobligations alone on the rescheduled debt will amount to over $50 millionper year from 1991 onwards. Thus, even with good management there is noeasy way out.
5.10 In spite of the optimistic projections of export earnings andprivate transfers, the current account deficit would remain as high as $400million in 1985 and 1990, which, however, implies some reduction in realterms. Even assuming that official transfers under various modalities ofcommodity and project aid would rise from $250 million in 1985, to nearly$350 million in 1990, disbursements of medium-term and long-term loans(NLT) will need to increase from $120 million in 1985 to $135 million in1990. In other words, to finance Somalia's current account deficitconsistent with a moderate growth of GDP through this decade assistancewill be required in various forms: Additional commitments of grants andMLT amounting to about $330 million in 1986 and $360 million in 1990 arerequired so that disbursements in 1986 and beyond can be at about theexpected level in 1985. I/ Finally, large debt relief and debtrestructuring need to be provided every year throughout the decade tosustain Somalia's efforts for economic and financial recovery. But equallyimportant is the need for Somalia's effort for adjustment to economize onimports and to allocate and use them efficiently to support productiongrowth. Past underpricing of foreign exchange and imports needs to bereplaced by a liberalized trade and exchange rate system to reflect truecosts of imports. Moreover, luxury and inessential imports will need to bediscouraged through high Import taxes.
1/ The above computation of required additional aid commitments is basedon the following assumptions:(a) Commodity aid is 70 percent of total disbursements while Project
aid is the remaining 30 percent.(b) Commodity aid disburses over a two-year period - 60 percent in
the first year and 40 percent in the second year.(c) Project aid disb!lrses in the following manner:
Year 1: 20 percent; Year 2: 20 percent; Year 3: 25 percent;Year 4: 25 percent; Year 5: 10 percent.
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Table 5.2: BALANCE OF PAYMENTS PROJECTTONS 1985-90(in current US $ Millions)
1984 1985 1986 1987 1988 1989 1990(Prel u. )Actual
Memo Items:Additional aid comit-ments required for pro-jected disbursements 332 149 174 171 358
Debt service ratio (Z) c/(before rescheduling,and including rMF) 225 121 105 90 30 30 28
a/ Assumes $5 million in Standby credit in 1986 (spill over from the 1985program); but none in later years.
b/ Indicates essentially the order of magnitude of debt relief required, inaddltion to projected aid. The March 1985 Parls Club reschedulingcomprised of $108.8 million of service on medium- and long-term officialdebt and $13.4 million on guaranteed short-term commercial arrears. Inaddition, Islamic Development Bank agreed to reschedule $12.5 million,of vhich terms are not yet known, vhile the Government Is dlscussing thepossibility of rescheduling by other non-Paris Club members.
c/ Does not Include loan comoitments after December 31, 1983; and includesaround $10 million lnterest charges payable to IW each year.
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5.11 It would be unrealistic to envisage a rapidly shrinking currentaccount deficit in the balance of payments, if Somalia is to have resourcesfor carrying forward the ongoing economic recovery program. Since exportsand private transfers are mostly unlikely to exceed our optimisticprojections, and further reduction in imports of intermediate goods arelikely to hurt domestic production of both exports and import-substitutes,only through an appreciable reduction in consumption and/or a drasticretrenchment of invesrment can imports be further reduced than projected.Curtailing consumption is likely to be extremely difficult politically, andwould also have a disincentive effect on production and remittances, whileany large reduction in investment is likely to hurt long-term development.Our projected scenario is for Somalia's balance of payments through 1990 toremain precarious, with an enormous imbalance; it is tenable only ifSomalia can count on large inflows of foreign aid and considerable debtrelief every year. Throughout this period, Somalia will require an averageannual aid disbursements of about $300 million in grants and $130 millionin (mostly concessional) loans; more than one half of these inflows willlikely be needed for commodity aid and balance of payments support. Inaddition, Somalia will need debt relief averaging about $60 million peryear. However, through coordinated donor support through the ConsultativeGroup process it should be possible to mobilize resources to finance theprospective gap, if the Somali authorities maintain and strengthen themutually agreed policy and institutional reforms necessary for successfuleconomic recovery.
Government Budget Prospects and Outlook for the PIP
5.12 The budgetary outlook for the next several years is likely to bevery grim. The very large current budgetary deficit brought about by thesharp fall of revenues combined with a high level of current expenditure in1984 is unlikely to be eliminated in a year or two. The situation callsfor effective measures to raise revenues, curtail expenditure on generaladministration and switch expenditure to more critical areas. TheGovernment is trying to rectify the imbalance. However, the budgetarycrisis is so serious that, even with much stronger measures than taken sofar, the budget will be under considerable pressure in the coming years.
5.13 As against the steep revenue decline in 1984 as proportion ofGDP, there are no immediate signs of a recovery of revenues. There is anurgent reed for a genuine fiscal effort on the part of the Government inorder to increase revenues faster than the growth of GDP and restore theerstwhile ratio (16-17 percent) of revenue to GDP. Such an effort willrequire much improvement in tax collection, cost recovery and change overof duties and sales tax to an ad valorem basis. The revenue outturn willbe contingent upon the measures actually implemented. On the expenditureside, the critical budgetary situation warrants substantial reduction ofexpenditure on general administration and defense, and considerableincrease in favor of economic and social services to provide adequately forrecurrent expenditure required to operate and maintain these services, andrecently (or soon to be) completed projects. Increased allocation forrecurrent outlays is highly important in view of the serious underfunding
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in recent years, as noted in Chapter III. Another important issue concernsthe need for increased budgetary allocation in the coming years for highercivil service salaries along with reduction in employment rolls. Littleattention has been paid in recent years to restore civil service salariesto reasonable levels. In the interest of Somalia's development, theproblem should not be deferred any further. Finally, the Government needsto provide fully in the budget for debt services owed in the coming years.The shilling equivalent of external debt services will indeed be quitelarge.
5.14 In the light of the above, the Government should develop afinancing plan for the medium term to see how these prospective budgetaryexpenditures - based on sound estimation of recurring costs, requiredsalary adjustment combined with staff reduction, and estimates of debtservice obligations - can be met by projected tax and non-tax rd-Nenues,including cost recovery and retained earnings of public enterprises. It isextremely important that the Government opt for vigorous fiscal efforts toput the budget on a strong foundation. Because of the uncertaintiesregarding th. exchange rate, and the combination of various fiscal policyissues involved, no quantitative projection of the budget is projectedhere.
5.15 However, in the absence of very strong and effective fiscalmeasures, it is hard to envisage that the current budget will change fromdeficit to surplus in the near future. Hence, Government's capitalexpenditure (PIP) will continue to be entirely dependent on externalassistance. The high levels of aid (excluding aid for refugee relief)needed to correct the imbalance in the external account (Table 5.2) wouldprovide enough resources to finance the requisite public developmentexpenditure without recourse to the domestic banking system. As discussedin Chapter III, a modest public investment program, given efficientallocation and use of funds, and improvement in funding of recurrent costs,is quite consistent with the projected about 3.6 percent annual growth ofGDP, especially in light of the Government's policy to encourage andpromote the private sector. After the rampant inflation of 1984 and theadoption of the 1985 adjustment program, it is hardly conceivable, nor isit desirable, that a larger PIP could be financed by domestic bankborrowing.
5.16 Provided government expenditure on general administration(including defense) is reduced, funding of recurrent outlays on criticaleconomic services is improved, rehabilitation and better utilization ofexisting capacity is implemented, and liberalization policies aremaintained, our projected scenario indicates that even allowlng an annualpopulation growth at 2.8 percent there would be room for some increases inper capita GDP and consumption. A major burden of adjustment is ongovernment consumption in general administration which needs to be reducedconsiderably in real terms.
5.17 These scenarios indicate the dimensions of the adjustments gearedto economic and financial realities for restoring external and internalbalance in the economy. First and foremost, export production and
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efficient import-substitution need to be augmented on an urgent basisthrough a liberalized trade and exchange regime system and other policy andinstitutional reforms for improving incentives. Secondly, since theseadjustments will take time, aid flows, mostly of grants, will have to beincreased to finance the critical import needs for boosting production.Without such support, the foreign exchange constraint will frustrateSomalia's efforts for rehabilitation and fuller utilization of capacity.Thirdly, increased aid to finance the external imbalance will also generateadditional funds for the budget. In the use of these ftnds, as well asother aid, emphasis should be given to maintenance of existing capacities,and development expenditures should be closely monitored and controlled.Emphasis should be on quick-yielding or nearly completed projects, andthose for exports and food production, and for breaking infra-structuralbottlenecks. To avoid excess liquidity and rapid inflation, expendituremust be kept within available resources. Provided the package of policiesenvisaged in the adjustment program are implementel on a sustained basistowards restoring balance to the external accounts and the budget over thenext several years and provided the international community supportsSomalia with additional aid over the difficult period, Somalia'smedium-term recovery should be possible. However, progress towardseconomic development over the longer term, with sustained improvement inliving standards of the population will also require strong governmentintervention from now on to bring about a significant reduction in the rateof population growth.
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Annex to Chapter V
General Assumptions
The balance of payments projections made in this chapter arebased on assumptions similar to those used by IMF in its recentprojections. It is assumed that appropriate policies will be implementedby the Government with a positive response from both exportables and importsubstitutes. In regard to imports it is assumed that Somalia will make abetter use of scarce foreign exchange than In the past. A flexibleexchange rate will be maintained. Trade and exchange rate system willremain liberalized to ensure that all imports reflect their true costs.World inflation of 4 percent per year is assumed. The import projectionssuffer from serious data deficiencies. There is an urgent need for betteranalytic base to establish end-use demand for critical imports.
Assumption About Export Growth
(a) Live animals:
The number of sheep and goats exportAd will rise by 20 percent in1985, 12 percent in 1986, and 4.0 percent yearly in subsequentyears. By 1990, the export volume will slightly exceed its 1982level of 1.45 million. Cattle exports will rise sharply in 1985 to47,000 or 30 percent of the 1982 level, resulting partly fromexports to Egypt; increase by another 21 percent in 1986, and by1987 the effects of the Saudi ban will be largely eliminatedresulting in export of 107,000 units (70 percent of the 1982 level)thereafter by 3.5 percent every year to reach the 1982 level towardsthe end of the decade.
Ca-mel exports account for less than 5 percent of livestock exportearnings; in 1985 export volume assumed to reach about 50 percent ofthe 1982 level; will increase by another 20 percent in 1986 and thenannually by 3.5 percent.
Live animal exports are converted to livestock units (l.u.):
The actual export unit values per LU (which plummetted to $324 in1984) will rise by about 45 percent in 1985; and then by 2 percenteach year thereafter.
(b) Bananas:
The volume of exports in 1985 are assumed to rise by 25 percent overthat of 1984; another 11 percent increase is assumed for 1986, andthereafter 5 per cent per year. The unit value in current dollarsexpected to rise by 2 percent per year.
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(c) Other Exports:
Earnings from other exports consisting mainly of hides and skins,fish, myrrh, fruits and vegetables, are projected to rise by 21percnet in 1985, 15 percent annually thereafter, implying someIncreases in real terms.
Assumptions about growth of imports
1. Food
(a) Given the dietary habits of the Somali population, especially thepastoralists, about 200 lbs of foodgrains per head per year istaken as norm. This plus consumption of animal products, edibleoil and sugar provided an average calorie intake of 2,300 perperson in 1979/80, according to studies done in the Ministry ofAgriculture. A population of 5.5 million (excluding refugees) isassumed for 1985. Foodgrain consumption is assumed to increase by3 percent per year (due to increases in population and income).In addition about 4,000 tons of foodgrains are assumed to berequired about 500,000 refugees. It is assumed that foodgrainproduction is about 8 percent higher in 1985 over 19R3, 4 percentincrease in 1986, and 3.5 percent annual increases thereafter.Import requirements are determined residually. The average ofWorld Bank price projections for maize and wheat is used as proxyfor foodgrains; a freight of $65 per ton is added.
(b) With increasing production in Juba sugar project, sugar Import Isassumed as virtually nil. Edible oil imports 25,000 tons per yearare assumed per year for local population and refugees. WorldBank projections of soybean oil prices are used; a freight of $100per ton Is added.
(c) Other food such as dried milk and dates are assumed at $15 millionper year.
With increases in domestic production imports would decline.
2. For projecting other imports, we assume increased import-substitution, reduction of inessential imports and more efficient use ofimports. Hence, after a large Increase in 1985, the growth rate in realterms will be as under (except that other imports would increase slowly in1986 following stock replenishment in 1985):
1985-90
Mineral fuels 2 percent per yearNon-food consumption goods,intermediate goods and capital goods 3 percent per year
Because of lack of current data on end-use demand for critical imports, wehave lumped together 'other imports', assuming that government policy willrestrain consumption goods imports, allow faster growth of intermediate
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goods imports while capital goods imports will be determined by high-priority investment projects. Our projections imply Import elasticitiesof about 1.0 with respect to GDP for both intermediate and capital goods,and for mineral fuel an import elasticity of about 0.7.
3. Interest payments and amortization are largely taken from thoseshown in Chapter III. Charges paid to IMF are also included. Debt reliefobtained at the Paris Club in early 1985 is also reflected.
4. Official transfers (food aid, commodity aid and project aid) anddisbursements of MLT for 1985 showing a large increase, are estimates. For1986 and beyond these are assumed to remain constant in real terms (risingby 4 percent in current dollars), implying some decline in per capitaterms. But their composition will change in favor of grants, as grants areassumed to increase and MLT disbursements to decrease !n real terms.
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SOMALIA: STATISTICAL ANNEX
Part I - Social and Demographic Data
1.1 Social Indicators Data Sheet1.2 Select Demographic Indicators1.3 Age and Sex Distribution1.4 Distribution of Civil Servants by Sex and Category1.5 blstribution of Civil Servants by Education1.6 Distribution of Civil Servants by Date of Entry1.7 Distribution of Civil Servants by Grade
Part II - National Accounts Data
2.1 Gross Domestic Product by Sector (Current Factor Cost)2.2 Gross Domestic Product by Sector (Constant Prices)2.3 Expenditure on Gross Domestic Product (Current Prices)2.4 Expenditure on Gross Domestic Product (Constant Prices)
Part III - Trade and Balance of Payments Data
3.1 Balance of Payments3.2 Value of Exports by Major Commodities (Central Bank)3.3 Value of Imports by Major Commodities (Central Bank)3.4 Value of Exports by Major Commodities (Trade Returns)3.5 Value of Imports by Major Commodities (Trade Returns)3.6 Exports by Country of Destination3.7 Imports by Country of Origin3.8 Livestock Exports3.9 Livestock Exports to Saudi Arabia3.10 Destination and Value of Banana Exports3.11 Exports of Hides and Skins3.12 Main Food Imports of ENC
Part IV - External Debt
4.1 Service Payments, Commitments, Disbursements4.2 Average Terms of New Commitments by Type of Creditor4.3 Sectoral Distribution of Debt Outstanding and Disbursed4.4 Average Terms of New Commitments4.5 Arrears at end 1984 and Debt Service 19854.6 Projections of Debt Service Obligations by Creditor 1984-88
Part V - Public Finance
5.1 Financial Operations of the Central Government5.2 Central Government Revenue5.3 Functional Classification of the Central Government5.4 Central Government Wage Bill5.5 Functional Classification of Development Expenditure
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Part VI - Monetary Accounts
6.1 Monetary Survey6.2 Summary Accounts of the Central Bank6.3 Summary Accounts of the National Commercial Bank6.4 Summary Accounts of the Somali Development Bank6.5 Loans and Advances by Economic Activity6.6 Somali Development Bank - Loans by Sector
Part VII - Agricultural Sector
7.1 Production of Agricultural Crops7.2 Banana - Area, Yields and Exports7.3 Productions of Sugar Cane and Sugar7.4 Implied Yields of Main Food Crops7.5 Estimated Planted Area by Region, Crop and Season7.6 Producer Prices Paid by ADC
Part VIII - Industrial Sector
8.1 Number of Establishment and Distribution of Gross Outputand Value Added
8.2 Percentage Distribution of Industrial Establishments8.3 Select Data on Public and Private Sector
Part IX - Prices
9.1 Mogadishu Consumer Price Index, 1974-839.2 Monthly Movement of CPI, 1982-849.3 Retail Prices in Mogadishu, 1982-84
Part X - Education
10.1 Education by Level10.2 Primary and Secondary Schooling10.3 Primary School Enrollment by Grade and Sex10.4 Secondary School Enrollment by Grade and Sex10.5 Selected Educational Indices10.6 National University of Somalia: Graduation Rates
dS?1ME RELATIV POVERTY INCOELEVEL (US5 PER CAPITA)
R . .. 65.0 1 107.7 477.4AL .. .. 50.0 Ij 65.0 186.0
ESTIM POP. 312.0? ASOLUTEPOVERTY INC LEVL (X)
UUBN .. 40.0 1 34.7RURAL .. .. 70.0 56.4
OIOT AVAILABLEPOT APPLICABLE
M OT ES
/a The gF°p averases for each Indicator are populatiow-weighted ariltmtic .man.. Coverage of countries among theindicators depends on availabIlity of data -ad Is not mlforo.
/b Unleas otbervise noted, -Dta for 1960- refer to any year between 1959 and 1961; -ta for 1970 between 1969 end1971; mad data for -lvat ecent Eetiate- between 1980 and 1982.
/c 1977; Id 1976; 1- 1975; If 1962; /p 1978; /b Increae due to literacy cmapign of 1974.
NOTE: DATA FOR IXPRTS AND IMPaRTS BOTH ARE UM2ERRECOROEO.1/ PRELI1I4AURY ESTIMATES.2/ INCLUDES COUNTERPLRST TO FRANCO VALUTA IMPORTS.3/ INCLI0ES COUNTERPARTS TO VALUATION AODJUST*ENTS.SOURCE: DATA PROVIOED 8Y THE CENTRAL SANK OF SOMALIA, IMF; AN STAFF ESTItATE.
q0
TABLE 3.2SOMALIA: VALUE Of EXPORTS BY MAdOR COMMODITIES
BASED ON FOREIGN EXCHANGE RECORD(MILLIONS OF SOMALI SHILLINGS)
NOTE11 : EXPCKT VALUES AS ASSESSEO It CUSTONS W NOt ALWAYS REFLECTCURRENT PRICESs RATHER THEY SERVE AS BENCHMARK VALUES FORPURPOSES OF LEVYING EXPORT TAX AND STATIST. AND SERVICE OUIY.
NOTE 2/: EXPORT VALUES AS ASSESSED BY CUSTOMS OIFFER FROM EXPORT RECEIPTSAS REPORTED OV THE CENTRAL SANK CUE TO DIFFERENCES INCOVERAGE. TIMING. AND VALUATION.
SOURCE:MINISTRY OF PLANNING. CENTRAL STATISTICAL DEPARTMENT,FOREIGN TRAOE RETURNS.
TABLE 3.5SOMALIA:IMPORTS BY CONEOSITIES(MILLIONS oF SOMALI SHILLINGS) Page 1 of 2
NOTE: EXPORT VALUES AS ASSESSED BY CUSTOMS DO NOT ALWAVYS REFLECTCURRENT MARKET PRICES; RATHER THEY SERVE AS SENCIUARK VALUES FORPURPOSES OF LEVYING EXPORT TAX AND STATISTICAL AND SERVICE DUTIES.
SOURCE: MINISTRY OF PLANNING. CENTRAL STATISTICAL DEPARTMENT,FOREIGN TRAOE RETURNS.
* THIS COLUMN SHOWS THE AMOUNT OF ARItHHEFIC IMBALANCE IN THE AMOUNT OUTSTANDING INCLUOING UiNOISBURSf) rROM ONEYEAR TO THE NEXT. THE MOST COMMON CAUSES OF IMBALANCES ARE CHIANGES IN EXCHANGE RATES ANo TRANSFER OF ODFISFROM ONE CATEGORY TO ANOTHER IN THE TABLE.
Table 4. 1 SOMALIA
SERVICE PAYMENFS, C0MMITMENTS, nilSURSEMENIS ANO OUTSTANDING AMOUNTS OF EXIERNAL PURLIC UFnI
PROJECTIONS BASED ON DEBT OUTSTANDING INCLUDING UNOISCURSEn AS OF DFC. 31, 1983DEBT REPAVABLE IN FOREIGN CURRENCY AND GOODS
(IN WHOUSANDS OF U.S. DOLLARS)TYPE OF CREDITOR FINANCIAL INSTITUTIONS
CREDITOR COUNTRY MULTIPLE IENDERSTO AL
YEAR DEBT OUTSTANDING AT T R A N S A C T I O N S O U R I N G P E R I OONtER C14ANGESBStOgNIINO OF PERIOD
* TI4S COLUMN SIOWS ItE AMOUNT or ARIt1SIEFIC IMBALANCE IN T1IE AMOUNT OUTSTANOING INCLUDING UNII5BURSF0 rRflM (NtYEAR TO 1THE NEXT. tHE MOSI COMMON CAUSES OF IMBALANCES ARE CHANGES IN EXCI/ANGE RAlTS ANO TRANSFER OF WDUISFROM ONE CATEGORY TO ANOTIHER IN THE TABLE.
Table 4.1 - SOMALIA
SERVICE PAYMENTS, COMMITMENTS. DISOIIRSEMENTS AND OUTSTANDING AMOUNTS OF EXTFRNAL PUBLIC OCtT
PROJECTIONS BASED ON DEBT OUTSTANDING INCLUDING UNDISBURSED AS Or DEC. 31. 19R3DEBT REPAYABLE IN FOREIGN CURRENCY AND GOODS
(IN tHOUSANDS OF U.S. DOLLARS)TYPE OF CREDITOR FINANCIAL INSTITUTIONS
TOTALYEAR DEBT OUTSTANDING AT T U A N S A C T I 0 N S D U R I N G P F R I 0 D OIHtR CHANGES
B IEGINNING OF PERIOD
D DISBURSED * INCLUOING COMMIT- OISBURSE- S E R V I C E P A V M E N T S CANCEL- AndJsT-: ONLY :UNOISBURSED: MENTS MENTS ........ : -.--- :- - - LATIONS MENI S
IIIIS COLUMN SHOWS TlHE AtMUNT OF ARITIUMETIC IMBALANCE IN THE AMOUNT OUTSTANDING INCLUDING UNO15RnIIRStD FRfnM lNEYEAR TO 1HE NEXT. THE MOST COMMON CAUSES OF IMBALANCES ARE CHANGES IN EXCIIANOE RATES ANO IRANSIFR OF DFRnISFROM ONE CATEGORY TO ANOTHER IN THE TABLE.
Table 4.1- SOMALIASERVICE PAYMENTS. CM4MITMENTS. DIS0 URSEMENTS AND OUISTAN1ING AMOIINfS or EXTFRNAL P1II1 Ic nrFl
PROJECTIONS BASED ON DEBt OUTSTANDING INCLUDING itODISBIIRSED AS OF DEC. 31, 1983DEST REPAYABLE IN FOREIGN CURRENCY AND GOODS
(IN THOUSANDS OF U.S. DOLLARS)TYPE OF CREDITOR NATIONALIZATION
roTALYEAR DEBT OUTSTANDING AT T R A N S A C T I 0 N S D U R I N 0 P E R I 0 0 OIIFR CtHANGFS
BlEGINNING OF PERIOD
DISBURSED INCLUDING COWMIT- DISBURSE- S E R V I C E P A V M E N I S CANCEI AOIUST-ONLY :UNDISBURSED: MENES MENTS ----------- ----------- ---------- LATIONS MENt
' * * * ' * THE FOLLOWING FIGURES ARE,PROJEC ED * * * * * *
* THIS COLUJN SHOWS THE AmOUNT OF ARITHMETIC IMBALANCE IN THE AMOUNT OUTSTANDING INCLUOING UNDISBURSED FROM ONEYEAR TO THE NEXT. THE MOST COMWON CAUSES OF IMALAWNCES ARE CHANGES IN EXCIIANGE RATES AND TRANSFFR OF nfBlSFROM ONE CATEGORY TO ANOTHER IN THE TABLE.
Table 4,1 - SOMALIA
SERVICE PAYMENTS, COMMITMENTS, DISBURSEMENTS AND OUTSTANDING AMOUNTS OF EXTERNAL PU8LIC DFBT
PROJECTIONS BASED ON DEBT OUTSTANDING INCLUOING UNOISBURSED AS OF DEC. 3t, 19R3DEST REPAYABLE IN FOREIGN CURRENCY AND GOOOS
(IN THOUSANDS OF U.S. DOLLARS)TYPE OF CREDITOR MULTILATERAL LOANS
TOTALYEAR DEBT WJTSTANDING AT T R A N S A C T I O N S O U R I N G P E R I OD OTlirR CHANGsFS
: DISBURSED : INCLUDING COMMIT- DISBURSE- : S I R V I C E P A V M E N T S CANCFL- AnJUST-: ONLY :UNLISBURSED: MENTS :IENTS ---------- ------------ : LAVIONS MENI *
* THIS COLUMW SFOWS THE AMOUNT Of ARIIHETIC IMBALANCE IN TllE AMOUNT OUTSTANDING INCLUDING UNDISRIIRSEI) FROM tINrYEAR TO THE NEXT. THE MOST COMMON CAUSES OF IMBALANCES ARE ChIANGES IN EXCIIANGE RATES ANo IRANSFER UF UFRFIFROM ONIE CATEGORY TO ANOTHER IN THE TABLE.
Table 4. 1 - SOMALIA
SERVICE PAVMENTS. COMuITMENTS. DISBURSEMENTS AND OUTSTANDING AMOUNTS Or EXTFRNAL PUBLIC DEBT
PRDJECTIONS BASED ON DEBT OUTSTANDING INCLUDING IINDISBURSED AS OF Drc. 31. 1983DEBT REPAYABLE IN FRIE ION CURRENCY AND GOODS
(IN TH4OUSANDS OF U.S. DOLLARS)TYPE OF CREDITOR MULTILATERAL LOANS
TOT ALYEAR DEB3TOUTSTANDING AT T RA N SA CT ION S O UR INCG P E R IOD OTIIER CHIANGES
* BEGINNING OF PERIOD
*DISB3URSED INCLUDING COMMIT- DISBURSE- S E R V I C E P A Y M E N T S CANCE L- ADIJUIST-ONLY :LRDISBURSEO! MENTS M4ENTS -------------------- LATIONS MFNT
* tllS COLUMN SHOWS THIE AMOUNT OF ARITHMETIC IMBALANCE IN TifE AMOUNT OUTSTANDING. INCLUDING, UNDISRtIRSEIJ PROM ONEYEAR TO THE NEXT. THE MOST COWOON CAUSES OF IMBALANCES ARE CHANGES TN EXCIIANGoE RArFS AND IRANSFER Or DEDISFROM ONE CATEGORY TO ANOTHER IN THE TABLE.
Table 4.1 SOMALIA
SERVICE PAYMENTS. COMMITMENTS. DISBURSEMENTS AND OUTSTANDING AMIIINTS OF EXTERNAI PU8IlIC nFOT
PROJECTIONS BASED ON DEBT OUTSTANDING INCLUDING UNOIS8URSED AS OF OEC. 31. 1983DEBT REPAYABLE IN FOREIGN CURRENCY AND GOODS
(IN THOUSANDS Of U.S. DOLLARS)TvPE OF CREDITOR BILATERAL LOANS
TOTALYEAR DEST OUTSTANDING AT T R A N S A C I 0 N S D U R I N G P E R I O D o:ifER CIlAN(*rS
BEGINNING OF PERIOD : :
* DISBURSED : INCLUWING COMMIT- DISBURSE- S E R V I C E P A Y M F N T S CANcEL - AIIJUST-: ONLY :UNDISSURSED: MENTS : MENTS --------------------------------- LArtIONS MNT
* IUIS COLUMN SHOWS THE AMOuNr OF ARITHMETIC IMBALANCE IN TIIE AMOUNT OUTSTANDING INCLUDING UiNfISBllRSFl FWWUM nNEYEDR TO TIHE NEXT. THE MOST COW"ON CAUSFS OF IMBALANCES ARE CHANGES IN EXCHANGE RATES AND TRANSFER (1xr DritsFROM ONE CATEGORY 10 ANOTHER IN THE TABLE.
Table 4 .1 - SOMALIA
SERVICE PAYMENTS, C0MMITMENTS. OISBURSEMENTS AND OUTSTANDING AMOUNIS OF EXTERNAL PUBLIC DEBT
PROJECTIONS BASED ON OEBT OUTSTANDING INCLUDING UNDISBURSED AS or OFC. 31, 1983DEBT REPAYABLE IN FnREIGN CURRENCY AND 0OO0S
(IN THOUSANDS OF U.S. DOLLARS)TYPE OF CREDITOR BILATERAL LOANS
TOTALYEAR *OEBT OUTSTANDING AT T R A N SA C T I O N S D U R I N G P E R I O D OI4FR CIIANGFS
BEGINNING OF PERIOO
DISBURSED : INCLUING: COMMIT- DISBURSE- :S E R V I C F P A V M F N T S CANCEL- n.jusr-ONLY :UNDISBURSED: MENTS MENTS - LATIONS MEN?
* THIS COLUMN SHOWS THE AMOUNT OF ARITIU41TIC IMBALANCE IN tilE AMOUNT OUTSTANDING INCLUDING UNOISBtURSEu rRom ONEVEAR TO TIfE NFXT. Tiff MOST COMMON CAUSES OF IMBAIANCES ARE CHANGES IN FXCIfANGF RAIES AN) TRANSrtR nr nittBiI Il 11111 " I AltICUR; In l111111A lf I 11t1 lil lAit F
Table 4.1 - SOMAlIA
SERVICE PAYMENTS. COMMITMENTS. DISBURSEMENTS AND OUTSTANDING AMOUNTS or EXIERNAL PURLIC DERI
PROJECTIONS BASED ON DEBT OUITSTANDING INCLUDING UNDISSURStO AS or DEC. 31, t983DEBT REPAYABLE IN roRE IaN cURRENY AND 'loos
(IN fiOUSANDS OF U.S. DOLLARS)TOTAL
YEAR DOEBI OUTSTANDING AT T R A N S A C T I O N S O U R I N G P ER I OaD OThfFR CIIANGES: BEGINNING OF PERIOD
: DISBlRSED : INCLUDIN: COMMIT- DISBURSE- : S E P V I C E P A V M E N I 5 CANC.FI- ADJUI%ONLY ;UNDISBURSED: NENTS : MENTS ------------ - ----- -- LAFIONS MFNI T
* THIS COLI SHOWS 104 A$M0UNT OF ARITHKTIC IMBALANCF IN THE AOMOUN OUTSIANDING INCLUDINn UN)I-S,UR%FD rRnM ONrVEAS TO THE NEXT. 1441 0IST CONION CAUSES Of IMRALANCIES AE CHNAWNS IN EXCIANAE RATES AND IRANSFR or iislisFROM UE CATEGOY OTO ANQT41E IN THE TABLE.
Table 4.1 - SO0MAL i
SERVICE PAYNENvS. COWMITNENIS, DISBURSEMENTS AND OUTSTANDING AMOUNTS OF EXTERNLL PUBLIC DEBT
PROJECTIONS BASED ON DEBT OTJSTANDING INCLIIOING UNDIS6URSED AS OF DEC. 31. 1983DEBt REPAYABLE IN FOREIGN CURRENCY ANO GOOOS
(IN THOUSANDS OF U.S. DOLLARS)TOTAL
YEAR DEBT OUTSIANDING AT T R A N S A C T I 0 N S D U R I N C P E R I 0 n OTIHER C1IANGESBEGINNING OF PERIOD~~.... ....... ..... ......... _, -- - - - - - - - - - - - - - - - - - - - - - - - - - - - - ,. ................... ................. ,..,..... ..... ...
DISBURSED : INCLUDING COMIMIT- : DISBURSE- S E R V I C E P A V N E N T S CANCft : ADJllSIONLY :*tWISBURSED: MENTS MENTS M LATIONS HENI
* 1illS COLUMN SIOWS THE AMOUNT OF ARITHMETIC IMBALANCE IN THE AMOIJNT OUTSFANDING INC.UDING IINOISBURRSFU rfrlN lNtYEAR TO THE NEXT. THE MOST COMMON CAUSES OF IMBALANCES ARE CHANGES IN EXCHANWE RATES ANO TRANSIER or jItInsFROM.ONE CATEGORY TO ANOTHER IN THE TABLE.
- 115 -
Table 4.2: AVERAGE TERMS OF NEW COMIIIIENTS BYTYPE OF CREDITOR 1975 and 19IFTI
* Does not include debt service on debt committed after Dec. 31, 1983.Also arrears are excluded. Does not incorporate reschedulings done atParis Club meeting of March 1985.
Source: World Bank Debt ReportinZ System
TABLE 5.1SOMALIA: FINANCIAL OPERATIONS OF THE CENTRAL GOVERNMENT, 1975-63
1/ hEY OF AMORTIZATION PAYMENTS,2/ OLEVELOPUENT EXPENDITURE FINANCED FROM DOMESTIC SOURCES ONLY.3/ RESIOUAL ITEMS CONSISTING MOSTLY OF THE EXTRA UOGETARY EXPENDITURE BY SOME
MINISTRIES AND NET LENDING TO PUOLIC ENTERPRISES FOR PROGRANS NOT INCLUDEDIN TFE DEVELOPEN1T PROGRMA. IN 1975 AND 1976 THESE EXTRAOROINARV EXPEND.INCLUOtO DROUGHT REHAOILITATION EXPENDITURE FINANCED BY THE PROCEEDES OFSALES OF COwDITY AlO.
4/ RECEIPTS Of FOREIGN LOANS EXCL. ASSISTANCE TO DIRECTLY FINANCED PROJECTSAND EXTRAIUD. GRANTS DEPOSITED INTO THE SPECIAL ACCOUNTS AT THE CENTRALBANK, LESS AMORTIZATION.
SOURCES: MINISTRY OF FINANCE , IMF, & CENTRAL BDAK OF SOMALIA.
TABLE 5.2SOMALIA: CENTRAL GOVERNMENT REVENUE, 1975-83
1/T1IS IS AN ADDITIOHAL INCOME TAX ON THE EARNINGS OF NONGOVERNMENT WORKERS.I/ GROSS P.t.T RECEIPTS LESS THE ORoINARY EXPENDITURE OF THE MINISTRV OF POST
AND TELECOMNICATIONS.3/ THlE TURNOVER TAX' IS, IN FACT, NOT LEVIED ON TURNOVER. IT IS LEVIED AT
RATES-OETERMINED BY THE MINISTER OF FINANCE ON SOME PUWi.IC ENTERPRISESTHAT REPORT NET PROFITS.
4/ THE SHARE Of OEPRECIAT10N IS TREATED AS DOMESTIC CAPITAL TRANSFERS IN THECENTRAL GOVT. BUDoET CLASSIFICATION. THESE TRANSFERS ARE REQUIRED BY LAW.
S/ INCLUDING MINING EXPLORATION, FISHERIES. AND OTHER CONCESSION LICENSES.6/ INCLUDES HARUOU A WAREHOUSE FEES. SCHOOL FEES. AIRPORT TAX. PUBLICATION AND
NOTAIY RECEIPTS, AND REGISTRATION FEES ON SHIPS.T/ INCLUDING CAPITAL TRANSFERS FROM DOMESTIC SOURCES.SOURCES: MINISTRY OF FINANCE. IMF. 6 CENTRAL RANK OF SOMALIA.
YAntE 5.3SOMALIA:FUNCTIONAL CLASSIFICATION OF CENTRAL GOVERNMENT
ORDINARY EXPENDITURE. 1975-83(MILLIONS OF SO"ALI SHILLINGSI
If PRIOQ TO 1962, MItNISTRY OF JUSTICE AND RELIGION INCLUDED CUSTODIALCORPS AND YOUTH CENTRES.
2, IN 1977 'POLICE' WAS TRANSFERRED TO THE 'PRESIOENCY' AND 'INTERIOR' WASCHANGED TO *LOCAL GOVERNENTS AND RURAL OEYELOPMENT.-
3/ DATA ARE ADUSTED TO EXCLUDE AMORTIZATION PAYMENTS; THE REMAINDER CONSISTSMINLY oF PROVISION FOR SU8SIDIES AND CONTINGENCIES.
4/ FROM 197. THE 'STATE PLAENNING COMMISSION,- WHICH HAD BEEN INCLUOED IN THE9PRESIOENCYV ORING 1971-77 WAS PROVIDED A SEPARATE BUOGET.
S/ IN 197? THE MINISTRY Of LABOR AND SPORTS BECAME IWO SEPARATE MINISTRIES.6/ UNTIL 1977 FISHERIES' INCLUDED 'NARINE TRANSPORT ALSO.7/ OPERATING DEFICITS OF THE POSTS AND TELECOMM.; OPERATING SURPLUSES. DEFINED
AS GROSS RECEIPTS LESS ORDINARY EXPENDITURE. ARE SHOWN IN TABLE 5.2 UNDEROPERATING SUMPLUSES Of DEPARTMENTAL ENTERPRISES.
S/ THE MINISTRV OF TOURISM. WHICH WAS ABOLISHED IN 1976. WAS RE-ESTABLISHEDI" 1976.
SOURCE: MINISTRY OF FINANC. IMf, A CENTRAL BANK OF SOMALIA.
I-
TABLE 5.4SOMALIA: CENTRAL GOVERNMENT WAGE BILL If, 1975-84
SOURCE: OATA PROVIDEO BY MINISTRY OF AGRICULTURE AND CENTRAL BANK.
TABLE 7.2SOMALIA: BANANAS-AREA, YIELDS AND EXPORTS, 1973-83
WARNING: DATA HAVE NOT BEEN EDITED........................................................................................................................................................................................ ....
I/ PROOUCING AREA IS LESS THAN TOTALE AREA, AS REPLANTING IS REQUIREDeVERY 3-4. YEARS.
2/ YIELDS EXPRESSED PER HECTARE OF PRODUCING AREA.2/ 00 NOT AGREE WITH BALANCE OF PAVMENTS FIGURES AND TRADE DATA IN
TABLES 3., 3.3. AD 3.5, WHICH ARE BASED ON FOREIGN EXCHANGERECORD, AND FORIGON TRADE RETURNS DATA.
SOURCE: NATIONAL SANANA fIOARO. ANNUAL REPORT; CENTRAL *AW' OF SOMALIA,ANUAL REPORT; AND DATO PROVIDED BY THE SOEALI AUTHORITIES.
TABLE 7.3S0WALIAt PRODUCTlON OF SUGARCAN! AMo SUGAR 1974-93
WARNINO: DATA HAVE NOT BEEN EDITED._-..... _____._..................................,_,.. ........ .................... 0................................
Sources Statistics of Educatlon, 1981/82, Mlnistry of Educatlon.
Table 10.2
SmALIA - Prison aud Iceoadaui Saolia a. 1970/71-17SI/02
hr IntOlImemi teaalwre Iaroll Teachere artoll.ent Teacherayear Sehle Cleeseee o tal Vera. Total FAl Sehoole C s To V school. Classes Tatar Feale Total el ale
bgloe Averae Nle. o1 Pupils Per Teacher Average No. of Teachers For Class Av ereae Ma. of Pupils For Classglem"tar zateradifte SecoBe ry 1e6nter Intermediate SecndZry Sl-entary Interuedtata Setondary
1 WI CalbId 63 t9 25 0.6 l.2 2.2 46 35 34
*. bdter 31 31 16 1.0 1.1 2.9 10 34 46
*. amq 36 33 20 0.6 0.7 2.2 22 23 42
4. fri 20 is 23 0.9 1.2 2.1 to 21 S2
S. ^aa1 40 30 1? 0.7 1.0 2.4 30 31 40
*. llsd 20 16 30 0.9 1.3 1.5 19 21 45
Y. a/ediud 25 22 to 0.9 1.0 2.3 23 23 46
0. NliSre 39 19 30 1.0 1.6 1.5 40 10 45
9. SmInOIs 31 20 16 0.6 1.0 2.9 z3 20 46
10 1 Wso r 20 21 21 1.7 2.1 2.6 47 45 57
11. filNeess 34 23 1I 1.0 1.3 2.1 33 30 40
12. ky 20 20 tS 1.3 1.3 2.4 27 27 40
1). makoel 28 17 13 0.6 1.3 3.0 23 21 39
14. Coda 56 21 14 0.6 1.3 2.6 46 27 1
15. JIoUeuo 27 29 18 1.0 1.0 2.0 27 30 )I
14. J/-28 1 26 It 22 1.0 1.4 1.6 2s 41
uIs0eaol Avers" 35 22 20 1.1 1.5, 2.S 38 12 in
lereot Nintetvy of tidcatles.
Table 10.6
Natlonal University of Soeallat Graduation m atea(by Faculty and Son)
University lntake (197-1980) Unlverslty Graduates (1982) Craduation Rates (Z)Role Femle Total Kale Female Total Kale Fremie Total