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The global outbreak of the SARS-COV-2 virus and has now reached pandemic levels, with countries around the world attempting to enforce strict screening and social distancing measures to ‘flatten the curve’ in the hopes of not overwhelming healthcare systems. With a contagion rate of over 3 (i.e., 1 infected person is likely to infect 3 others) and a mortality rate of 4%, the virus presents a series risk to the Somali economy and consequently on the Government’s fiscal policy priorities for FY2020. This paper presents a short analysis of the potential impact on the macroeconomy.
- Private consumption expenditure: Our economic growth is largely driven by private consumption expenditure that is mainly financed by remittance inflows from the Somali diaspora. Given that our diaspora predominantly live in economies already experiencing significant contraction in economic activity driven by government containment directives, their own income is highly likely to be negatively affected, resulting in an overall drop in their ability to remit funds home to their families in Somalia. With remittances estimated to account for around 29 percent of GDP in 2018, this could lead to up to a 15 – 25 percent reduction in GDP if remittances fall commensurately with the contraction in western economies.
- Exports: Somalia’s exports income is heavily reliant on livestock sales, and in particular on camel sales to the Middle East. Saudi Arabia has previously instituted livestock import bans on Somali goods, but moreover the recent ban on pilgrims travelling to Mecca and Medina on Hajj poses a serious threat to exports, given that Hajj-period demand accounts for most Somalia’s sales to the Gulf. Furthermore, the inability to guarantee issue phytosanitary certificates across fisheries and livestock sectors, coupled with the increased fear of zoonotic diseases, is likely to lead to further losses of exports. Assuming a blanket ban on Somali live animal exports this could lead to a 15 – 25 percent reduction in GDP.
- Imports: With China accounting for over 17 percent of Somalia’s imports in 2017, disruptions in China’s manufacturing sector are likely to result in fewer goods being shipped to Somalia as larger economies are prioritized by China for its exports. Furthermore, given the ban on flights instituted by the Government, Khat imports from Kenya are also likely to decrease, as evidenced by the desolate Beertakhat market in Mogadishu. Reductions in imports have a favorable impact on GDP; assuming a blanket ban on imports from China and khat imports from Kenya, this could result in a 10 – 20 percent increase in GDP. While GDP may increase it is important to note that Government revenue is likely to fall commensurately with declines in imports, given the country’s reliance on customs duties as a key source of own-source revenue. Moreover, imports pose a serious health risk for the country, as limited capability exists to screen and sanitize imported products and, perhaps more critically, ensure that sailors transporting imported goods are not themselves carriers of the virus.
- Foreign aid flows: The global contraction in global economies is likely to impact the availability of foreign aid funds for Somalia, particularly for countries with explicit ODA targets set against their GDP (e.g., the UK which allocated 0.7% of its GNI to ODA expenditure). While donors have historically come to Somalia in its time of need (during droughts, floods, and more recently during locust swarms), it is highly likely that this assistance will be humanitarian in nature; as humanitarian aid flows have typically bypassed Government systems, this could lead to a reversal in recent trends for increased developmental ODA expenditure being passed through Country Systems. Assuming western economies contract to the same extent as their stock markets are falling, this could translate to a 10 – 15 percent GDP loss of for Somalia.
- Inflation: While a reduction in imports have a favorable impact on GDP and the current account balance, this is likely to in turn impact on inflation as the price of imported goods (manufactures, petroleum, foodstuffs, and construction materials) increase given increased scarcity in Somalia. This inflation will not only have an effect on Somali citizens at large, but will also drive up the costs of Government operations in the short-term, particularly in terms of food rations to the Somali National Army, a key cost driver of Government operations and a critical spending item necessary to underwrite Somalia’s security and stability.
- Employment: The recent revival of private sector firms in major urban cities where al-Shabaab occupation has ended is also at risk. With youth unemployment estimated at around 70 percent, any reduction in private sector firms’ revenue is likely to lead to an increase in layoffs for the few that are employed, creating a serious risk of creating new potential recruits for al-Shabaab and thereby further increasing the security threat posed by the group. Given that private sector firms are predominantly involved in wholesale and retail activities, any slowdown in port efficiency and any reduction in the flow of imports is likely to have a knock-on effect in these firms’ capability to retain their employees, further exacerbating the country’s endemic unemployment problem.
- Human Capital Formation: The closure of schools is likely to have a long-term impact on Somalia’s human capital formation, as recent gains in increasing school attendance are likely to be reversed the longer the ban is in effect. Falls in mean levels of education (and resulting falls in human capital stock) have multiple effects on the economy, particularly through income losses as individuals are unable to engage in more skilled (and more lucrative) forms of employment.
While the data to develop diagnostic models of the impact of the virus is not readily available to the Ministry of Finance, from the analysis above we estimate a potential GDP contraction ranging between 35 – 45 percent, resulting in significant welfare deterioration for Somali citizens at large as well as a concerning fall in domestic revenue mobilization potential.
- Social Cohesion: A concerted effort has been made over the past four years to drive reconciliation both within and between communities, and between Somalia’s layered tiers of government. How does one build social cohesion in a time of social distancing? This issue has no ready solution but must be further explored in order to ensure that stability gains made over the past four years, at both a local level but also in terms of improved intergovernmental fiscal relations, are not reversed.
Briefing Note on the Potential Economic Consequences of the Coronavirus on Somalia | Ministry of Finance
Briefing Note on the Potential Economic Consequences of the Corona virus on Somalia Prepared by the Ministry of Finance Economic Policy and Planning Department | Research & Analysis Unit
The reason we have such a low GDP and why it’s about to shrink by 40% is the fact we haven’t had an actual government since 1969
