Despite significant challenges, including from the continued severe food crisis, Somalia has maintained strong reform momentum and program performance has been satisfactory. A staff-level agreement was reached on the fifth review of Somalia’s Extended Credit Facility (ECF) arrangement; The authorities’ steady progress under the Heavily Indebted Poor Countries (HIPC) process is also important to lay the ground for achieving the Completion Point in late 2023; Continued support from international partners is imperative to support the authorities’ policy efforts.

An International Monetary Fund (IMF) team, led by Laura Jaramillo, conducted discussions with the Somali authorities in Nairobi on March 7-14, 2023 and reached a staff-level agreement on the fifth review under the Extended Credit Facility (ECF) arrangement. This agreement is subject to approval of the IMF’s Executive Board.

At the conclusion of the discussions, Ms. Jaramillo issued the following statement:

“Somalia continues to face acute food insecurity in some areas due to persistent drought. The authorities’ response has focused on identifying the most affected areas, mobilizing external funding, and coordinating with the UN system on delivery of humanitarian assistance. Thanks to donor support, close to 7.3 million people are getting some form of assistance. Nonetheless, half of the population would face acute food insecurity by June 2023 if the April-June rainy season disappoints and financing of humanitarian support is not adequate.

Despite this and the challenging security situation, Somalia continues to make progress under the ECF-supported program and towards the HIPC Completion Point triggers, and the HIPC Completion Point appears achievable by 2023Q4.

Economic activity has been weighed down by the drought and slowing global growth, and risks remain elevated. The GDP growth estimate for 2022 and projections for 2023 were downgraded by ¼ percent to 1.7 percent and 2.8 percent, respectively, due to the prolonged drought and subdued remittance inflows. Average inflation reached 6.8 percent in 2022 due to high food and fuel prices and is expected to decline to 4.2 percent in 2023 as commodity prices recede. Near-term risks are elevated, including a worsening of the food crisis if healthy rains do not resume in 2023 or if commodity prices rise further.

For 2023, the authorities are committed to continue to improve revenue collection and make room for priority spending, while containing discretionary expenditure pressures. They will submit to Parliament a Supplementary Budget for 2023 that presents a balanced fiscal position based on realistic revenues. The Supplementary Budget will accommodate expenditure that is supportive of growth, security, and development—including security sector compensation and provisions and the hiring of new teachers—while other discretionary spending will be scaled back. External budget support remains crucial.

The authorities continue to advance fiscal reforms. On domestic revenue mobilization, key reforms are ongoing on customs modernization, a new income tax law, and increasing revenue collection from large businesses, including the telecom sector. Public financial management has been strengthened, and improvements are ongoing on integrating all employees in the payroll system, fiscal reporting, procurement, and management of non-financial assets. Progress has also been made on the petroleum sector legal framework. The authorities will also take steps to strengthen the strategic and oversight role of the Inter-Ministerial Concessions Committee over government contracts and concessions.

The Central Bank of Somalia (CBS) is advancing institutional governance and financial sector reforms. Progress has been made in improving financial sector infrastructure. The CBS will continue to enhance the regulatory framework and strengthen its capacity in risk-based supervision, including through legislation and preparation of risk-based prudential regulations. Important steps have been taken to address money laundering/financing of terrorism risks, including the recent enactment of the Targeted Financial Sanctions Law, and further efforts will continue to be needed.

The authorities continue the steady progress toward the HIPC Completion Point. Impressive achievements include the recent approval by Parliament of several key pieces of legislation, including the Electricity Act, the Extractive Industries Income Tax Law, the Data Protection Law, the Targeted Financial Sanctions Law, the Digital ID System Law, the Investment and Investor Protection Act, and the Federal Law on Fisheries. The authorities reached debt relief agreements with most Paris Club members and the Kuwait Fund for Arab Economic Development (KFAED) and continue to seek agreements with other bilateral creditors.

Timely financing and capacity development support from development partners is essential for the successful implementation of the authorities’ reform strategy. Contributions from Somalia’s partners to the Somalia Country Fund are critical to ensure smooth delivery of IMF technical assistance to support the goals of the ECF-supported program and the HIPC Initiative.

The mission would like to thank our counterparts for a constructive and fruitful dialogue. Meetings were held with the Minister of Finance, Minister of Planning, the Central Bank Governor, other government officials, and development partners.”