June 2024 | Edition No. 9 Addressing Climate Change Challenges for Economic Growth @Abdihakim/World Bank Addressing Climate Change Challenges for Economic Growth Federal Republic of Somalia SOMALIA ECONOMIC UPDATE Addressing Climate Change Challenges for Economic Growth June 2024 AFRICA © 2024 The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved This work is a product of the staff of The World Bank. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. 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Cover photos: Abdihakim/World Bank TABLE OF CONTENTS Abbreviations ......................................................................................................................................................................................... i Acknowledgements ................................................................................................................................................................................ ii Foreword................................................................................................................................................................................................. iii Horudhac................................................................................................................................................................................................. iv Executive Summary................................................................................................................................................................................. v Dhokumenti Kooban ............................................................................................................................................................................... xi PART I. SOMALIA MACROECONOMIC SUMMARY ................................................................................................................................. 2 1. The Global and Regional Economy............................................................................................................................................ 2 2. Recent Economic Developments in Somalia.............................................................................................................................. 3 3. Medium-Term Outlook and Risks.............................................................................................................................................. 14 4. Conclusion and Summary Policy Options ................................................................................................................................. 19 PART II. SOMALIA CLIMATE CHANGE AND ADAPTATION POLICY ACTIONS.................................................................................... 22 5. Somalia Climate Change and Adaptation Policy Actions .......................................................................................................... 22 5.1 The Context of Climate Change in Somalia .................................................................................................................... 22 6. Climate Trends and Impacts..................................................................................................................................................... 24 6.1 Climate Overview .......................................................................................................................................................... 24 6.2 Climate Disasters ........................................................................................................................................................... 25 6.3 Chronic Climate Change Stresses on Agricultural Productivity....................................................................................... 26 6.4 Heat Stress and Human Health...................................................................................................................................... 28 7. Social and Economic Impacts.................................................................................................................................................... 30 7.1 Damage and Physical Capital.......................................................................................................................................... 31 7.2 Impacts on Labor and Human Capital............................................................................................................................ 32 7.3 Agricultural Production.................................................................................................................................................. 33 7.4 Large-scale Displacement............................................................................................................................................... 34 7.5 Poverty and Vulnerability............................................................................................................................................... 35 7.6 Climate, Fragility and Conflict ........................................................................................................................................ 38 8. Integrating Climate Considerations into Somalia’s Development.............................................................................................. 39 8.1 Resilience to and Preparedness for Extreme Climate Events......................................................................................... 41 8.2 Build Resilience into Somalia’s Development................................................................................................................. 42 8.3 Accessing Finance for Climate Adaptation Related Activities......................................................................................... 44 References................................................................................................................................................................................................ 45 LIST OF FIGURES Figure 2.1: Somalia annual contribution to total GDP growth (growth rate percentage points)....................................................... 3 Figure 2.2: Agriculture production rebounded in 2023, from the 2020–23 severe drought............................................................. 4 Figure 2.3: Inflationary pressures eased, driven by decline in food prices........................................................................................ 6 Figure 2.4: Overall banks’ performance signals increasing confidence in Somalia’s financial sector................................................ 7 Figure 2.5: Trade activities rebounded in 2023.................................................................................................................................. 7 Figure 2.6: Remittances have remained relatively resilient to recurrent shocks............................................................................... 8 Figure 2.7: FGS revenue mobilization efforts are paying off, even though the base remains low..................................................... 8 Figure 2.8: Increasing FGS wage bill, while sector spending is skewed toward security and administration ................................... 10 Figure 2.9: Revenue performance remains strong, but still too low to cover increasing expenditure needs ................................... 12 Figure 5.1: Country climate vulnerability index versus readiness index score................................................................................... 23 Figure 6.1: Projected mean annual temperature (°C)........................................................................................................................ 24 Figure 6.2: Projected mean annual precipitation (mm)..................................................................................................................... 24 Figure 6.3: Trends in Somalia’s largest daily maximum temperature and precipitation.................................................................... 25 Figure 6.4: Projections of the annual number of days (with max. temperature above 35°C) for different greenhouse gas (GHG) emissions scenarios......................................................................................................................................................... 25 Figure 6.5: Projected annual SPEI Drought Index............................................................................................................................... 26 Figure 7.1: Weather-related disasters in Somalia, 2008–23.............................................................................................................. 34 Figure 7.2: Share of households affected by drought by residency and consumption quintile, 2022............................................... 35 Figure 7.3: Poverty headcount by region and share of population exposed to climate shocks, 2022 .............................................. 35 Figure 7.4: Violence, food insecurity, and internal displacement across Somalia............................................................................. 37 LIST OF TABLES Table 2.1: Government fiscal operations, 2022–2024 (US$ Million)................................................................................................ 9 Table 2.2: Fiscal operations at sub-national governments............................................................................................................... 11 Table 2.3: Somalia: Decomposition of total public debt over the HIPC initiative............................................................................. 13 Table 3.1: Selected economic and poverty indicators (% of GDP unless otherwise indicated)........................................................ 14 Table 7.1: Summary of Somalia’s climate risks with magnitude and trend measures ..................................................................... 31 Table 7.2: Projected impacts of coastal flooding with 25-year return period, excluding damage to crops and livestock................ 32 Table 7.3: Heat impacts on labor productivity, by sector (percentage change) ............................................................................... 33 LIST OF BOXES Box 2.1: Recurrent climatic shocks are intensifying Somalia’s already fragile environment ........................................................ 5 Box 3.1: Somalia’s external debt profile......................................................................................................................................... 16 ABBREVIATIONS AfDB African Development Bank ICPAC IGAD Climate Prediction and Applications Center AMISOM African Union Mission in Somalia IDPs Internally Displaced Persons AML/CFT Anti-money Laundering and Combating the Financing of Terrorism IMF International Monetary Fund AS Al-Shabaab JSS Jubaland State of Somalia ATMIS Africa Union Transition Mission in KYC Know Your Customer Somalia MDAs Ministries, Departments and Agencies CBS Central Bank of Somalia MDB Multilateral Development Bank DMU Debt Management Unit MENA-FATF Middle East and North Africa Financial DRM Disaster Risk Management Action Task Force EAC East Africa Community MMO Mobile Money Operator ECF Extended Credit Facility MTB Money Transfer Bureau EMDEs Emerging Markets and Developing ND-GAIN Notre Dame Global Adaptation Economies Initiative EEZ Economic Exclusion Zone NDC Nationally Determined Contribution EP&R Emergency Preparedness NDP9 National Development Plan for and Response 2020–2024 ESP Energy Service Providers NEOC National Emergency Operations Center FAO Food and Agriculture Organization ODI Overseas Development Institute FDI Foreign Direct Investment PFM Public Financial Management FEWS NET Famine and Early Warning Systems Network PSS Puntland State of Somalia FGS Federal Government of Somalia RVF Rift Valley Fever FMS Federal Member State SATG Somalia Agriculture Technical Group FSNAU Food Security and Nutrition SODMA Somalia Disaster Management Analysis Unit Agency GCF Green Climate Fund SOMCAS Somalia Customs Automated System GDP Gross Domestic Product SPEI Standardized Precipitation Evapotranspiration Index GEF Global Environmental Fund SSA Sub-Saharan Africa GHG Greenhouse Gas SWS South-West State of Somalia GSS Galmudug State of Somalia UHI Urban Heat Island HCT Humanitarian Country Team VCFs Vertical Climate Funds HIPC Heavily Indebted Poor Countries WASH Water, Sanitation, and Hygiene HIPC CP Heavily Indebted Poor Countries Completion Point WBG World Bank Group HSS Hirshabelle State of Somalia WTO World Trade Organization HWG Hydromet Working Group y-o-y Year-on-Year June 2 0 2 4 | Edition No. 9 i ACKNOWLEDGEMENTS The Ninth Edition of the Somalia Economic Update (SEU) was prepared under the overall guidance and supervision of Abha Prasad (Practice Manager, EAEM1), and Philip Schuler (Lead Economist, EAEM1). The team benefited from valuable guidance from Kristina Svensson (Country Manager, AEMSO). Peer reviewers were Diji Chandrasekharan Behr (Lead Environmental Economist, SAEE2), Mahama Samir Bandaogo (Senior Economist, EAWM1) and Victor Steenbergen (Senior Economist, EAEM1). The SEU was prepared by a World Bank team led by Abdoulaye Ouedraogo (Economist, EAM1) and Stella Ilieva (Senior Economist, EAEM1). The core team consisted of Catherine Ngumbau (Consultant, EAEM1), Saadia Refaqat (Senior Economist), and Stephen Ling (Lead Environmental Specialist). The team wishes to thank Aphichoke Kotikula (Senior Poverty Economist), Asta Bareisaite (Senior Private Sector Specialist), Benjamin J. Kushner (Disaster Risk Management Specialist), Nandya T. Yuwono (Senior Urban Specialist), Sameer Goyal (Senior Financial Sector Specialist) and Vera Rosauer (Senior External Affairs Officer) for their valuable inputs. Christine Khasiro Wesakania and Angela Wangari Mwangi provided administrative and logistical support during the preparation of the report. Peter Milne edited the report and Robert Waiharo contributed as Graphic Designer. The report benefited from fruitful comments and information provided by representatives of the Federal Government of Somalia. ii S om a l i a Eco n om i c Update FOREWORD Over the last year, Somalia has continued taking important steps towards a stronger economy and more resilient institutions. In December, Somalia qualified for full and irrevocable debt relief under the Highly Indebted Poor Countries (HIPC), eliminating the debt burden that had plagued the country for over three decades. It also joined the East Africa Community (EAC), the 30-year UN arms embargo was lifted, and Somalia was elected to a non-permanent seat at the UN Security Council in June 2024. These are huge achievements, which should also help boost investor confidence and attract foreign direct investment, encouraging increased broad-based private sector activity and investment. At the same time, the impacts of climate change continue to devastate the country. Somalia slowly started to emerge from the severe 2022 drought, but was hit by devastating floods later in the year and early 2024. Somali households are also frequently exposed to shocks, with over two-thirds of the country’s population reported having experienced at least one shock in 2021–2022 that severely affected their economic situation. Climate-induced displacements, heightened conflicts over scarce natural resources, and increased vulnerability among marginalized groups like rural populations, women and youth exacerbate the country’s fragility. In this context, economic prospects for Somalia are improving although the pace of economic growth remains modest. As such, we see that the economy is rebounding, inflationary pressures have eased, and fiscal performance has improved. The outlook remains positive, with economic growth set to accelerate, albeit at modest pace. Nevertheless, despite Somalia’s steps toward recovery, the outlook poses significant risks, including global economic shocks, climate-related shocks, and security threats. The 9th edition of the World Bank’s Somalia Economic Update (SEU) assesses key economic developments, prospects, and policies in Somalia. The Update is intended for a wide audience including policy makers, business leaders, the community of analysts and professionals engaged in economic debate, and the public. This SEU addresses climate change challenges for economic growth. It highlights the urgent need of the Government of Somalia to support sustained and long-term growth, anchored on macroeconomic stability and broad-based structural reforms, while laying the groundwork for sustainable development and enhanced climate resilience, ensuring a more secure future for its people. Kristina Svensson Country Manager, World Bank Somalia June 2 0 2 4 | Edition No. 9 iii HORUDHAC Over the last year, Somalia has continued taking important steps towards a stronger economy and more resilient institutions. In December, Somalia qualified for full and irrevocable debt relief under the Highly Indebted Poor Countries (HIPC), eliminating the debt burden that had plagued the country for over three decades. It also joined the East Africa Community (EAC), the 30-year UN arms embargo was lifted, and Somalia was elected to a non-permanent seat at the UN Security Council in June 2024. These are huge achievements, which should also help boost investor confidence and attract foreign direct investment, encouraging increased broad-based private sector activity and investment. At the same time, the impacts of climate change continue to devastate the country. Somalia slowly started to emerge from the severe 2022 drought, but was hit by devastating floods later in the year and early 2024. Somali households are also frequently exposed to shocks, with over two-thirds of the country’s population reported having experienced at least one shock in 2021–2022 that severely affected their economic situation. Climate-induced displacements, heightened conflicts over scarce natural resources, and increased vulnerability among marginalized groups like rural populations, women and youth exacerbate the country’s fragility. In this context, economic prospects for Somalia are improving although the pace of economic growth remains modest. As such, we see that the economy is rebounding, inflationary pressures have eased, and fiscal performance has improved. The outlook remains positive, with economic growth set to accelerate, albeit at modest pace. Nevertheless, despite Somalia’s steps toward recovery, the outlook poses significant risks, including global economic shocks, climate-related shocks, and security threats. The 9th edition of the World Bank’s Somalia Economic Update (SEU) assesses key economic developments, prospects, and policies in Somalia. The Update is intended for a wide audience including policy makers, business leaders, the community of analysts and professionals engaged in economic debate, and the public. This SEU addresses climate change challenges for economic growth. It highlights the urgent need of the Government of Somalia to support sustained and long-term growth, anchored on macroeconomic stability and broad-based structural reforms, while laying the groundwork for sustainable development and enhanced climate resilience, ensuring a more secure future for its people. Kristina Svensson Country Manager, World Bank Somalia iv S om a l i a Eco n om i c Update EXECUTIVE SUMMARY Somalia’s economy rebounded in 2023 as the stability, especially in times of low and stable country emerged from the severe 2020–23 drought global commodity prices. The exchange rate and the 2022 global commodity price shocks. (Somali shilling [SSh] to the US dollar) remained Real gross domestic product (GDP) growth is relatively stable, averaging SSh 27,201 to US$1.00 estimated at 3.1 percent in 2023, up from 2.4 in 2023. percent in 2022. Favorable rains starting in April 2023 led to improved agricultural production, The Federal Government of Somalia (FGS) reduced food insecurity, and served to support has continued to maintain broad-based fiscal private consumption. The recovery in exports stability, even though challenges remain. was faster than expected as livestock exports— Fiscal performance improved in 2023, driven by the key driver of export earnings—rebounded sustained domestic revenue mobilization efforts. with improved weather conditions. Nevertheless, As a result, the budget closed with a small surplus, net exports continue to be a drag on growth as the but fiscal challenges remain as domestic revenues economy heavily relies on imports. continue to be too low to cover Private sector credit growth the country’s huge development strengthened construction, real Favorable rains starting needs. While domestic revenues estate, and investment. However, in April 2023 led to increased to 2.8 percent of GDP in remittances, which support improved agricultural 2023, up from 2.5 percent in 2022, consumption, investment, and production, reduced this accounts for 45 percent of the terms of trade, were muted in 2023, food insecurity, and FGS’s total revenues, leaving a large reflecting tighter global economic served to support share of public expenditures to be conditions. private consumption financed by external grants. Donor grants accounted for 55 percent of Inflationary pressures eased, supported by a total revenues in 2023. Furthermore, almost all recovery in the agriculture sector and declining expenditures are recurrent and non-discretionary, global commodity prices. Overall inflation, with wage bill and security costs consuming most however, remained sticky compared with pre- of the total FGS spending. Spending on social 2022 levels, averaging 6.1 percent in 2023 services is financed through external grants. In this compared with 6.8 percent in 2022. Recovery regard, the FGS’s capacity to finance investments in agricultural production helped to ease local that could reduce poverty or increase economic staple food prices, with food inflation averaging growth is limited. just 0.7 percent in 2023, compared with 13.9 percent in 2022. The decline in global commodity Somalia achieved a historic debt relief milestone prices led to lower fuel and energy prices locally, in December 2023, eliminating the debt burden though still high compared with pre-2022 levels, that had plagued the country for over three contributing to the stickier overall inflation. This decades. The country received full and irrevocable is compounded by increasing local house rents, debt relief of US$4.5 billion, almost wiping out all and telecommunication services, mainly from of Somalia’s external debt, which is estimated to telephone and telefax equipment price increases, have fallen to 5.4 percent of GDP in 2023, down and transportation costs. The economy’s de facto from 64 percent in 2018. In the post-Heavily dollarization continues to be a source of price Indebted Poor Countries (HIPC) environment, June 2 0 2 4 | Edition No. 9 v Executive Summary Somalia now has expanded opportunities to with further easing in global commodity prices finance investments in development priorities and and continued social protection measures, will expand basic service delivery. Nevertheless, the cushion household incomes, especially among FGS must continue taking important steps to avoid the vulnerable, supporting private consumption falling back into debt distress. The authorities will growth. Economic reforms and increased public need to continue to strengthen macroeconomic investment with Heavily Indebted Poor Countries institutions, strengthen debt management Completion Point (HIPC CP) dividends will boost capacity, and rely on concessional borrowing to investor confidence and attract foreign direct allow the country to continue domestic reforms investment (FDI), encouraging increased broad- to boost growth and strengthen public finances. based private sector activity and investment. The Government’s commitment to maintain fiscal discipline and increase domestic revenue, Nevertheless, despite Somalia’s steps toward together with structural reform in key areas, will recovery, the outlook poses significant risks, help to safeguard long-term debt sustainability. including global economic shocks, climate-related shocks, and security threats. A The country has also made further slowdown in global growth significant strides toward regional could contribute to inflationary integration. Somalia was admitted Weather volatility is pressures, pushing up commodity into the East Africa Community a perennial source prices once again. Given Somalia’s (EAC) bloc on November 24, 2023, of risk, with extreme dependence on imports, especially and became a full member on climate events such as consumption goods, higher prices March 4, 2024. It is also making droughts and floods, as from trading partners will pass progress toward joining the World experienced recently, through to domestic prices, adding likely to mute ongoing Trade Organization (WTO). These to inflationary pressures and agricultural recovery, efforts are seen as opening up suppressing economic activity. in turn reversing or opportunities to enhance trade Higher oil prices would increase slowing overall growth integration in the region and Somalia’s import bill, weakening its globally. For example, by joining the EAC, Somalia already vulnerable external sector. A slowdown in has gained access to a market of over 300 million the global economy would also likely contribute people, bringing opportunities for economic to a further weakening of remittance inflows expansion, diversification, and job creation. from Somalia’s large diaspora, affecting private consumption and investment. Importantly, Medium-Term Outlook and Risks weather volatility is a perennial source of risk, The recovery in economic growth is projected to with extreme climate events such as droughts continue into the medium term. Real GDP growth and floods, as experienced recently, likely to mute is projected to expand to 3.7 percent in 2024 and ongoing agricultural recovery, in turn reversing or 3.9 percent in 2025. This is due to the continued slowing overall growth. Similarly, insurgency and rebound in household demand, domestic conflict continue to pose risks to economic activity. investment, and government spending. Average Terrorist attacks by Al-Shabaab (AS) continue Gu and Dyer rains in 2024 are projected to lead to threaten the security situation, discouraging to continued recovery of agricultural productivity, potential domestic and foreign investors, and improve household incomes and food security, putting more pressure on the FGS to increase and boost exports in 2024 and 2025. This, coupled government spending on security. vi S om a l i a Eco n om i c Update Executive Summary Somalia Climate Change and Adaptation having experienced at least one shock in 2021 Policy Actions or 2022 that severely affected their economic Somalia has witnessed severe climate disasters situation. Climate-induced displacements, and faces a multitude of climate risks, which heightened conflicts over scarce natural resources, pose a serious threat to its future economic and increased vulnerability among marginalized development, industrialization, trade, and urban groups, especially rural populations, women, and development. Climate has shaped Somalia’s youth, exacerbate the country's fragility. human geography and economy, and climate change and variability are major contributors Somalia needs to get ahead of the impacts of to ongoing fragility. The interplay between acute climate disasters by investing in resilience climate impacts and Somalia's social and political and preparedness rather than ex-post spending fragilities amplifies the risks. The country has on humanitarian aid, which continues to witnessed severe climate disasters, notably the consume the bulk of external assistance. This will longest drought in recent decades, followed by require investments in disaster risk management severe flooding in vulnerable areas. There is some (DRM), social protection, and more resilient overlap in climate risk and poverty rates, with the rural livelihood systems (potentially including poor vulnerable to climate change concentrated in future retreat from some areas where livelihood the Shabelle river basin (floods), the systems are no longer viable). northeast (heat) and, more broadly Furthermore, as Somalia navigates Somalia (three risks). Somalia is rapid urbanization, partly driven highly vulnerable to climate shocks by climate-induced vulnerabilities that hurt growth and hinder poverty Climate resilience in rural areas, climate-proofing will need to be fully development requires a broader reduction efforts. Frequent shocks mainstreamed into set of policy actions and including repeated climate-related Somalia’s development investments. These include resilient events, such as cycles of droughts, floods, and locust infestations, have infrastructure and livable cities interrupted the country’s economic trajectory. through climate-smart urban planning that ensures As a result, growth has been low and volatile, sustainable energy, transport, and water services, exacerbating the high levels of poverty across and includes green spaces and reduces urban heat the country. Acute climate disasters, especially islands. Investments in public health and human prolonged droughts and inland flooding can have capital, such as post-disaster emergency health wide-ranging social and economic consequences provision, disease vector monitoring and control on production and exports, food security, and programs, health and safety regulations for public social vulnerability and cohesion. buildings and workspaces, and public awareness campaigns, are also required. The cycles of extreme events—droughts and floods—are the most obvious and currently Extreme events are unlikely to reduce in the impactful manifestation of climate change foreseeable climate future, but the burden of and climate variability. Impacts are remarkably climate impacts will shift. Climate resilience will widespread, but particularly severe on rural and need to be fully mainstreamed into Somalia’s pastoral households, and are a major driver of development. Demographic and development rural-urban migration. Somali households are trends will expose more urban and infrastructure frequently exposed to shocks, with over two- assets to flood hazards, and shifting climate thirds of the country’s population reportedly conditions will put more chronic stress on June 2 0 2 4 | Edition No. 9 vii Executive Summary livestock and agricultural systems, human health To enhance resilience, it is crucial to address the and productivity, and the water supply. Longer- nexus between climate stressors, social fragility, term resilience to climate change at the whole-of- and conflict. This involves inclusive planning and economy level depends not only on integration of peacebuilding efforts diversification away from inherently with climate adaptation measures, climate-dependent rural production ensuring that the needs of the most sectors, but also on addressing Longer-term resilience vulnerable are met. By focusing on climate risks in growth sectors. To to climate change at the intricate links between climate avoid building vulnerability into the whole-of-economy change, social vulnerabilities Somalia’s development, it will be level depends on and conflict, Somalia can lay necessary to invest in resilient diversification away the groundwork for sustainable infrastructure and services, livable from inherently development and enhanced climate cities (designed with green spaces climate-dependent resilience, ensuring a more secure and efficient cooling solutions, as rural production future for its people. well as flood protection), and in sectors, and addressing human development to counter climate risks in growth climate impacts on health and sectors access to education. viii S om a l i a Eco n om i c Update DHOKUMENTI KOOBAN Somalia’s economy rebounded in 2023 as the stability, especially in times of low and stable country emerged from the severe 2020–23 drought global commodity prices. The exchange rate and the 2022 global commodity price shocks. (Somali shilling [SSh] to the US dollar) remained Real gross domestic product (GDP) growth is relatively stable, averaging SSh 27,201 to US$1.00 estimated at 3.1 percent in 2023, up from 2.4 in 2023. percent in 2022. Favorable rains starting in April 2023 led to improved agricultural production, The Federal Government of Somalia (FGS) reduced food insecurity, and served to support has continued to maintain broad-based fiscal private consumption. The recovery in exports stability, even though challenges remain. was faster than expected as livestock exports— Fiscal performance improved in 2023, driven by the key driver of export earnings—rebounded sustained domestic revenue mobilization efforts. with improved weather conditions. Nevertheless, As a result, the budget closed with a small surplus, net exports continue to be a drag on growth as the but fiscal challenges remain as domestic revenues economy heavily relies on imports. continue to be too low to cover Private sector credit growth the country’s huge development strengthened construction, real Favorable rains starting needs. While domestic revenues estate, and investment. However, in April 2023 led to increased to 2.8 percent of GDP in remittances, which support improved agricultural 2023, up from 2.5 percent in 2022, consumption, investment, and production, reduced this accounts for 45 percent of the terms of trade, were muted in 2023, food insecurity, and FGS’s total revenues, leaving a large reflecting tighter global economic served to support share of public expenditures to be conditions. private consumption financed by external grants. Donor grants accounted for 55 percent of Inflationary pressures eased, supported by a total revenues in 2023. Furthermore, almost all recovery in the agriculture sector and declining expenditures are recurrent and non-discretionary, global commodity prices. Overall inflation, with wage bill and security costs consuming most however, remained sticky compared with pre- of the total FGS spending. Spending on social 2022 levels, averaging 6.1 percent in 2023 services is financed through external grants. In this compared with 6.8 percent in 2022. Recovery regard, the FGS’s capacity to finance investments in agricultural production helped to ease local that could reduce poverty or increase economic staple food prices, with food inflation averaging growth is limited. just 0.7 percent in 2023, compared with 13.9 percent in 2022. The decline in global commodity Somalia achieved a historic debt relief milestone prices led to lower fuel and energy prices locally, in December 2023, eliminating the debt burden though still high compared with pre-2022 levels, that had plagued the country for over three contributing to the stickier overall inflation. This decades. The country received full and irrevocable is compounded by increasing local house rents, debt relief of US$4.5 billion, almost wiping out all and telecommunication services, mainly from of Somalia’s external debt, which is estimated to telephone and telefax equipment price increases, have fallen to 5.4 percent of GDP in 2023, down and transportation costs. The economy’s de facto from 64 percent in 2018. In the post-Heavily dollarization continues to be a source of price Indebted Poor Countries (HIPC) environment, June 2 0 2 4 | Edition No. 9 ix Dhokumenti Kooban Somalia now has expanded opportunities to with further easing in global commodity prices finance investments in development priorities and and continued social protection measures, will expand basic service delivery. Nevertheless, the cushion household incomes, especially among FGS must continue taking important steps to avoid the vulnerable, supporting private consumption falling back into debt distress. The authorities will growth. Economic reforms and increased public need to continue to strengthen macroeconomic investment with Heavily Indebted Poor Countries institutions, strengthen debt management Completion Point (HIPC CP) dividends will boost capacity, and rely on concessional borrowing to investor confidence and attract foreign direct allow the country to continue domestic reforms investment (FDI), encouraging increased broad- to boost growth and strengthen public finances. based private sector activity and investment. The Government’s commitment to maintain fiscal discipline and increase domestic revenue, Nevertheless, despite Somalia’s steps toward together with structural reform in key areas, will recovery, the outlook poses significant risks, help to safeguard long-term debt sustainability. including global economic shocks, climate-related shocks, and security threats. A The country has also made further slowdown in global growth significant strides toward regional could contribute to inflationary integration. Somalia was admitted Weather volatility is pressures, pushing up commodity into the East Africa Community a perennial source prices once again. Given Somalia’s (EAC) bloc on November 24, 2023, of risk, with extreme dependence on imports, especially and became a full member on climate events such as consumption goods, higher prices March 4, 2024. It is also making droughts and floods, as from trading partners will pass progress toward joining the World experienced recently, through to domestic prices, adding likely to mute ongoing Trade Organization (WTO). These to inflationary pressures and agricultural recovery, efforts are seen as opening up suppressing economic activity. in turn reversing or opportunities to enhance trade Higher oil prices would increase slowing overall growth integration in the region and Somalia’s import bill, weakening its globally. For example, by joining the EAC, Somalia already vulnerable external sector. A slowdown in has gained access to a market of over 300 million the global economy would also likely contribute people, bringing opportunities for economic to a further weakening of remittance inflows expansion, diversification, and job creation. from Somalia’s large diaspora, affecting private consumption and investment. Importantly, Medium-Term Outlook and Risks weather volatility is a perennial source of risk, The recovery in economic growth is projected to with extreme climate events such as droughts continue into the medium term. Real GDP growth and floods, as experienced recently, likely to mute is projected to expand to 3.7 percent in 2024 and ongoing agricultural recovery, in turn reversing or 3.9 percent in 2025. This is due to the continued slowing overall growth. Similarly, insurgency and rebound in household demand, domestic conflict continue to pose risks to economic activity. investment, and government spending. Average Terrorist attacks by Al-Shabaab (AS) continue Gu and Dyer rains in 2024 are projected to lead to threaten the security situation, discouraging to continued recovery of agricultural productivity, potential domestic and foreign investors, and improve household incomes and food security, putting more pressure on the FGS to increase and boost exports in 2024 and 2025. This, coupled government spending on security. x S om a l i a Eco n om i c Update Dhokumenti Kooban Somalia Climate Change and Adaptation having experienced at least one shock in 2021 Policy Actions or 2022 that severely affected their economic Somalia has witnessed severe climate disasters situation. Climate-induced displacements, and faces a multitude of climate risks, which heightened conflicts over scarce natural resources, pose a serious threat to its future economic and increased vulnerability among marginalized development, industrialization, trade, and urban groups, especially rural populations, women, and development. Climate has shaped Somalia’s youth, exacerbate the country's fragility. human geography and economy, and climate change and variability are major contributors Somalia needs to get ahead of the impacts of to ongoing fragility. The interplay between acute climate disasters by investing in resilience climate impacts and Somalia's social and political and preparedness rather than ex-post spending fragilities amplifies the risks. The country has on humanitarian aid, which continues to witnessed severe climate disasters, notably the consume the bulk of external assistance. This will longest drought in recent decades, followed by require investments in disaster risk management severe flooding in vulnerable areas. There is some (DRM), social protection, and more resilient overlap in climate risk and poverty rates, with the rural livelihood systems (potentially including poor vulnerable to climate change concentrated in future retreat from some areas where livelihood the Shabelle river basin (floods), the systems are no longer viable). northeast (heat) and, more broadly Furthermore, as Somalia navigates Somalia (three risks). Somalia is rapid urbanization, partly driven highly vulnerable to climate shocks by climate-induced vulnerabilities that hurt growth and hinder poverty Climate resilience in rural areas, climate-proofing will need to be fully development requires a broader reduction efforts. Frequent shocks mainstreamed into set of policy actions and including repeated climate-related Somalia’s development investments. These include resilient events, such as cycles of droughts, floods, and locust infestations, have infrastructure and livable cities interrupted the country’s economic trajectory. through climate-smart urban planning that ensures As a result, growth has been low and volatile, sustainable energy, transport, and water services, exacerbating the high levels of poverty across and includes green spaces and reduces urban heat the country. Acute climate disasters, especially islands. Investments in public health and human prolonged droughts and inland flooding can have capital, such as post-disaster emergency health wide-ranging social and economic consequences provision, disease vector monitoring and control on production and exports, food security, and programs, health and safety regulations for public social vulnerability and cohesion. buildings and workspaces, and public awareness campaigns, are also required. The cycles of extreme events—droughts and floods—are the most obvious and currently Extreme events are unlikely to reduce in the impactful manifestation of climate change foreseeable climate future, but the burden of and climate variability. Impacts are remarkably climate impacts will shift. Climate resilience will widespread, but particularly severe on rural and need to be fully mainstreamed into Somalia’s pastoral households, and are a major driver of development. Demographic and development rural-urban migration. Somali households are trends will expose more urban and infrastructure frequently exposed to shocks, with over two- assets to flood hazards, and shifting climate thirds of the country’s population reportedly conditions will put more chronic stress on June 2 0 2 4 | Edition No. 9 xi Dhokumenti Kooban livestock and agricultural systems, human health To enhance resilience, it is crucial to address the and productivity, and the water supply. Longer- nexus between climate stressors, social fragility, term resilience to climate change at the whole-of- and conflict. This involves inclusive planning and economy level depends not only on integration of peacebuilding efforts diversification away from inherently with climate adaptation measures, climate-dependent rural production ensuring that the needs of the most sectors, but also on addressing Longer-term resilience vulnerable are met. By focusing on climate risks in growth sectors. To to climate change at the intricate links between climate avoid building vulnerability into the whole-of-economy change, social vulnerabilities Somalia’s development, it will be level depends on and conflict, Somalia can lay necessary to invest in resilient diversification away the groundwork for sustainable infrastructure and services, livable from inherently development and enhanced climate cities (designed with green spaces climate-dependent resilience, ensuring a more secure and efficient cooling solutions, as rural production future for its people. well as flood protection), and in sectors, and addressing human development to counter climate risks in growth climate impacts on health and sectors access to education. xii S om a l i a Eco n om i c Update RECENT ECONOMIC DEVELOPMENTS @Abdihakim/World Bank Recent Economic Developments 1. Somalia Macroeconomic Summary 1.1 The Global and Regional Economy Commodity prices are expected to continue their downward trend in 2024. Despite still Tight monetary policies, restrictive financial being above pre-pandemic levels, prices of conditions, and the slowdown of global trade most commodities fell in 2023 due to moderate continued to weaken global growth. Global demand. It is expected that oil prices will remain economic growth slowed to 2.6 percent in 2023 relatively unchanged in 2024 at around US$81/ and is expected to continue this downward bbl, falling by only 2.4 percent from 2023 levels trend in 2024 (to 2.4 percent). Although as the global economy decelerates. In the same monetary tightening in advanced economies is way, food prices fell by 9 percent in 2023 and expected to end as the global headline inflation are expected to fall by a further 1 percent in has reduced, policy rates are expected to 2024 due to abundant supply of major crops. decline only gradually, as core inflation remains The prices of coffee (arabica) and tea (average) more persistent. In an environment of relatively followed a similar trend in 2023, with declines high real interest rates, economic growth in of 19.3 and 10.2 percent, respectively. These the United States in 2024 is expected to reach 1.6 percent, down from 2.5 percent in 2023, events are contributing to a decline of global while slightly increasing in the Euro area to 0.7 inflation, which will continue in 2024–25 but percent in 2024, up from 0.4 percent in 2023 will remain above its pre-pandemic average as energy prices ease. Financial conditions in beyond 2024. the United States became looser during 20231 and, as of 2024Q1, economic growth has been Despite global headwinds and a challenging outperforming expectations, putting pressure domestic context, economic growth in Sub- on global interest rates. High interest rates Saharan Africa (SSA) is expected to rebound in advanced economies have created more in 2024–25. The reduction in inflation and challenging financial conditions in emerging increasing real incomes will boost private markets and developing economies (EMDEs), as consumption across the SSA region, contributing several EMDEs still face liquidity challenges and to a rebound in GDP growth of 3.4 percent elevated borrowing costs. Moderate consumer in 2024 and 3.8 percent in 2025, up from 2.6 sentiment and challenges experienced by the percent in 2023. Nonetheless, around half property sector have been slowing China’s of SSA countries are growing at rates below growth, which is expected to fall to 4.5 percent their pre-pandemic levels. Tight monetary in 2024, down from 5.2 percent in 2023. Despite policies and fiscal consolidation efforts will these headwinds, global trade is nonetheless keep investment and public consumption expected to pick up this year, driven partially subdued in 2024. While inflation remains high, by a recovery of demand for goods, after it is expected to continue its decline as global remaining flat in 2023. Going forward, global supply chains normalize and commodity prices growth is projected to accelerate in 2025 (to fall. More than half of African governments 2.7 percent) as both advanced economies and are facing external liquidity problems or EMDEs recover, interest rates decrease, and unsustainable debt burdens and are actively global financial conditions ease.2 seeking to restructure or reprofile their balance National Financial Conditions Index (NFCI) as of April 17, 2024. Federal Reserve Bank of Chicago. 1 World Bank. 2024. Global Economic Prospects, January 2024. 2 2 S om a l i a Eco n om i c Update Recent Economic Developments sheets. And, even if fiscal balances are expected is projected to grow at a faster pace, by 5.2 to improve in 2024, external borrowing costs percent in 2024 and by 5.7 percent in 2025–26. remain high. The East African Community (EAC) 2. Recent Economic Developments in Somalia Growth is rebounding gradually with improved weather conditions contributing to the continued reversal of the impacts of the prolonged 2020–23 severe drought. Favorable rains in 2023 led to improved agricultural production, reduced food insecurity, and supported private consumption. Exports recovery was faster than that of imports, as exports of livestock rebounded. Private sector credit growth contributed to strengthening construction, real estate, and investment, as growth in remittances remained muted. Inflationary pressures eased in 2023, supported by better agriculture performance and easing of global commodity prices. The Federal Government of Somalia (FGS) ran a small surplus in 2023 but the fiscal situation remains challenging due to low domestic resource mobilization. Public expenditures are dominated by personnel costs, while investments in human capital are largely financed by grants and investments in infrastructure are negligible. The economy rebounded as drought to be a drag on growth as the economy is conditions reversed in 2023, following a heavily reliant on imports. Private sector credit, severe five-season drought which grew by 34 percent in 2023 compared Somalia’s economy rebounded in 2023 as the with the previous year, contributed to growth country emerged from the severe 2020–23 in construction, real estate, and investment. drought and the 2022 global commodity price However, remittances growth slowed in 2023 shocks. Real gross domestic product (GDP) relative to 2022, partly due to the impact of growth is estimated at 3.1 percent in 2023, global inflation on the purchasing power of the up from 2.4 percent in 2022 (Figure 2.1). The diaspora community. agriculture sector experienced a stronger- Figure 2.1: Somalia annual contribution to total GDP than-expected rebound after over two years growth (growth rate percentage points) of drought. The final onset of the rains led to 18 15 improved crop yields and livestock health 12 and contributed to the continued reversal of 9 the impacts of the prolonged severe drought, 6 Percent 3 reducing food insecurity and supporting private 0 consumption. Private consumption remains -3 the key driver of Somalia’s economy (Figure -6 2.1), accounting for roughly 129 percent of -9 -12 GDP in 2023. Also, the recovery in exports was -15 2019 2020 2021 2022 2023 faster than projected, as exports of livestock Gross fixed investment Government consumption Private consumption rebounded quickly with the improving weather Exports, goods and services Imports, goods and services conditions. Nevertheless, net exports continue Source: World Bank, WDI Database. June 2 0 2 4 | Edition No. 9 3 Recent Economic Developments The economy rebounded from its 2018–20 robust recovery. Estimates show that the heavy declining path and the 2022 spikes in global rains and floods in October–November 2023 commodity prices, helped by a stronger-than- destroyed Gu off-season crops and prevented expected rebound of the agriculture sector in maturation of early planted Deyr season crops, 2023. Drought conditions started to reverse in affecting about 83,360 hectares of cropped land April 2023, after the historic five-season severe (FEWS NET, December 2023). drought, with the favorable rains in 2023 driving a recovery in agricultural productivity. The The livestock subsector also recovered quickly, country experienced average to above-average with livestock exports increasing significantly rainfall in the Gu rainfall season (April–June), in 2023. Average Gu rains and the largely with rains being highest in the agricultural and above-average Deyr rains led to a significant pastoral areas located mainly in the southern improvement in pasture and water availability and northern regions of Somalia.3 Similarly, the in the pastoral regions in northern, central, Deyr rainfall season (October–December) in and southern Somalia. This led to improved 2023 was one of the wettest on record.4 The high livestock body weight and continued restocking, precipitation helped boost crop production and as well as increased milk production, supporting supported livestock productivity, contributing households’ food consumption and income to the continued reversal of the effects of the from milk sales. As a result, the recovery in prolonged drought. In this context, cereals exports of live animals picked up quickly, with production and other major crops rebounded in shoats (sheep and goats) and cattle growing 2023, with staple food crops, maize and sorghum, by 43 and 35 percent, respectively, compared being 23 percent higher than the previous year with the previous year (Figure 2.2b). Overall, (Figure 2.2a). Total production of both crops the improved weather conditions helped was, however, 5 percent lower than their increase total crop and animal production five-year averages (2018–22). Nevertheless, which, combined with sustained humanitarian flooding during both rainfall seasons, but more assistance, supported continued food security, severe in the Deyr season, prevented a more and improved household incomes. Figure 2.2: Agriculture production rebounded in 2023, from the 2020–23 severe drought a. Annual crop production b. Live animals exports (100 = 2019) 125 160 Output volume (100 = 2011-13) 100 135 75 110 50 85 25 60 2019 2020 2021 2022 2023 2019 2020 2021 2022 2023 Cowpeas Sesame Maize Sorghum Cattle Shoats Source: World Bank staff estimates using data from FAO Somalia (2024). Note: Livestock export data cover both Berbera and Bossaso ports. 3 FEWS NET. Somalia Food Security Outlook June 2023 to January 2024. 4 FEWS NET. Somalia Food Security Outlook Update December 2023. 4 S om a l i a Eco n om i c Update Recent Economic Developments Box 2.1: Recurrent climatic shocks are intensifying Somalia’s already fragile environment Climate change may increase the frequency of shocks and introduce a multitude of more gradual changes, affecting growth and livelihoods. Somalia faces escalating climatic shocks that are compounded by insecurity and economic instability challenges. Recurrent climate-related stocks, such as cycles of droughts, floods, and locust infestations, have severely disrupted agricultural activities, livelihoods, and depleted water resources. These impacts have led to rising food insecurity, poverty, and internal displacement, exacerbating national instability and economic woes. The country has experienced 14 droughts in the past two decades, devastating the agriculture sector, which employs over 70 percent of the population. Locust infestations and recurrent flooding have further aggravated these challenges. Somalia faces a multitude of climate risks that pose a serious threat to its future economic development, industrialization, trade, and urban development. Somalia is highly vulnerable to climate shocks that hurt growth and hinder poverty reduction efforts. Frequent climate-related stocks, such as cycles of droughts, floods, and locust infestations, have interrupted the country’s economic trajectory. As a result, growth has been low and volatile, exacerbating the high poverty rates across the country. Acute climate disasters, especially prolonged droughts and inland flooding can have wide-ranging social and economic consequences on production and exports, food security, and social vulnerability and cohesion. The interplay between climate impacts and Somalia’s social and political fragilities amplifies the risks. Addressing the immediate risks posed by recurrent climate disasters require investments toward disaster risk management (DRM), such as strengthening emergency response architecture, climate information systems, and integrating DRM into strategic and spatial planning for key sectors, along with adaptive social safety nets and a national disaster risk financing strategy. Other key strategies include enhancing resilience of rural livelihoods and natural resources, and investments in water management systems. Looking ahead, rainfall variation in Somalia is projected to increase, which is expected to lead to more frequent incidences of drought and flooding. As capacity for water resource management is at a nascent stage and institutions for DRM response need to be developed, these extreme weather events are associated with damaging exports of livestock, diminishing the livelihoods of pastoralists, internal displacement, and the deterioration of agricultural value chains, as well as increase flood risk in rapidly expanding cities. Adapting to and mitigating the effects of climate change requires action at multiple levels, from supporting households to cope with shocks and mainstreaming climate-risk analysis in routine investment decisions and sectoral planning, to encouraging long- term growth of less climate-dependent sectors. Part II of this report provides a detailed deep dive into climate change impacts in Somalia. Source: World Bank and FEWS NET, June 2023–January 2024. Improved weather and an easing of global in 2023, compared with 13.9 percent in 2022. commodity prices dampened inflationary The easing of global commodity prices led to pressures lower fuel and energy prices locally, though Inflationary pressures eased in 2023, these remain high compared with pre-2022 supported by better agriculture performance levels, contributing to stickier overall inflation. and declining global commodity prices. Overall This sticky inflation is also a result of increasing inflation, however, remained above trend, house rents, transportation, telecommunication despite declining, averaging 6.1 percent in 2023 services, mainly from telephone and telefax and 6.8 percent in 2022, compared with 4.6 equipment price increases, and clothing (Figure percent in 2021. Favorable rains in 2023 boosted 2.3b). Overall inflation reached 5.9 percent in agricultural production, easing local staple food March 2024 (y-o-y), as food prices declined, prices. Food inflation averaged just 0.7 percent reaching -2 percent during this period. June 2 0 2 4 | Edition No. 9 5 Recent Economic Developments Figure 2.3: Inflationary pressures eased, driven by decline in food prices a. Overall inflation, percentage b. Mogadishu: Contribution to overall inflation, percentage Mogadishu Puntland Somaliland Food & non-alcoholic beverages Housing, water, electricity, gas & other fuels 16 Communication Transport Clothing & footwear 14 10 12 8 10 6 Percent 8 4 6 2 4 0 2 -2 0 -4 May -22 Jul-22 Sep-22 Nov-22 Jan-23 Mar-23 May -23 Jul-23 Sep-23 Nov-23 Jan-24 Jan-21 Mar-21 May -21 Jul-21 Sep-21 Nov-21 Jan-22 Mar-22 J F MAMJ J A S O N D J F MAMJ J A S O N D J F MAMJ J A S O N D J F M 2021 2022 2023 2024 Source: SNBS 2024, Ministry of Planning Puntland, and Ministry of Planning Somaliland. Reforms by the Central Bank of Somalia are address money laundering/financing of strengthening the financial sector terrorism risks. Similarly, the issuance of digital The Central Bank of Somalia (CBS) has identification in September 2023, and the continued to develop its regulatory capacity to development of credit and collateral registries ensure stable financial sector growth. Financial in the coming years, are expected to support intermediation remains nascent, with only less the ability of financial institutions to assess and than 9 percent of the population having a bank mitigate risks and promote financial inclusion account. However, mobile money is utilized among households and firms. by about 97 percent of households, where transactions are in US dollars, as the economy Somalia banks’ domestic assets are rising, is de facto dollarized.5 The CBS is mainly focused signaling increasing confidence in the banking on licensing, supervising, and regulating sector (Figure 2.4a). Commercial banks’ assets financial institutions dominated by money more than tripled compared with pre-COVID-19 transfer bureaus (MTBs), as well as improving levels, reaching US$1.6 billion in 2023 and transparency in financial transactions. The CBS representing 13.9 percent of GDP. Growth in has so far licensed all 14 commercial banks, domestic assets is mainly driven by growth 12 MTBs, and three mobile money operators in deposits. Customer deposits remained the (MMOs) to operate in Somalia. However, the primary commercial banks’ liabilities, mainly current law restricts the CBS to the formal in the form of demand deposits of commercial supervision and regulation of banks, with a entities and individuals. Credit to the private revised Financial Institutional Law currently sector increased by 34 percent (Figure 2.4b) in being approved to expand CBS oversight to the 2023 to reach 4.6 percent of GDP, up from 3.8 entire financial sector. The authorities’ efforts percent in 2022. Investment in partnerships/ in anti-money laundering and combating the joint ventures and trade financing are the financing of terrorism (AML/CFT) are being two main subsectors of private sector credit, supported through the implementation of an which grew by 23 and 20 percent, respectively. AML/CFT Law, with the support of the CBS and However, the largest increases were in real the Financial Reporting Center. In addition, in estate loans, at 77 percent, and construction March 2023, a Targeted Financial Sanctions loans, at 31 percent, while investment in real Law was enacted, which is expected to further estate grew by 11 percent during the period. 5 Somali National Bureau of Statistics, Federal Government of Somalia, 2023. 6 S om a l i a Eco n om i c Update Recent Economic Developments Figure 2.4: Overall banks’ performance signals increasing confidence in Somalia’s financial sector a. Credit to Private Sector and Bank Deposits b. Banking sector domestic assets growth Private sector credit Bank deposits 2022 2023 1,600 61% 1,400 44% 1,200 34% US$ million 1,000 29% 28% 28% 25% 800 11% 600 400 200 -6% -14% 0 Cash on Private Investment in Fixed, CBS & other Oct-22 Oct-23 Apr-22 -22 Apr-23 -23 Feb-22 Feb-23 Sep-22 Sep-23 -22 Dec-22 -23 Dec-23 Jan-22 Jul-22 Jan-23 Jul-23 Nov-22 Nov-23 Jun-22 Aug-22 Jun-23 Aug-23 Hand sector property & Intangible commercial May May Mar Mar credit real estate & other Banks Assets balances Source: Central Bank of Somalia database (2024). A rebound in exports in 2023 supported the Spending on oil and food imports bills declined gradual recovery of the weak external sector in 2023. Improved weather conditions and the International trade rebounded quickly in easing of global commodity prices contained the 2023 from the prolonged drought and high total import bill. As a result, food imports, which commodities prices. Improved climatic had increased by two-thirds in 2022, declined conditions in 2023 gradually boosted export by 7.4 percent (in nominal terms) in 2023, while recovery, with total merchandise exports the oil import bill declined by 10 percent during increasing by 38 percent in 2023 compared this period (Figure 2.5b). Overall, merchandise with 2022. Favorable rainfall supported a rapid imports increased by 11 percent in 2023, mainly recovery in livestock exports, Somalia’s main driven by the import of construction materials, driver of export earnings. Exports of live animals medical products, and electrical products. increased by 48 percent to US$771 million in Nonetheless, Somalia runs a chronically high 2023, representing over 80 percent of the total structural trade deficit, as the economy is merchandise exports (Figure 2.5a), while small heavily import-dependent. The trade deficit only crops and vegetable oil exports also grew by 39 narrowed slightly to 58.8 percent of GDP in 2023, percent during this period, reflecting improved from 61.2 percent in 2022. The current account agricultural production. deficit widened slightly by 1.6 percentage points Figure 2.5: Trade activities rebounded in 2023 a. Total merchandise exports, US$ million b. Total merchandise imports, US$ million Others Other Beverages & tobacco Forest products Medical products Oil Crops & vegetable oil Cars & spare parts Construction Animal skins & products Clothes & footwear Livestock Food - 200 400 600 800 1,000 - 500 1,000 1,500 2,000 2023 2022 2023 2022 Source: Central Bank of Somalia 2023. June 2 0 2 4 | Edition No. 9 7 Recent Economic Developments to 9.6 percent of GDP in 2023. External flows Figure 2.6: Remittances have remained relatively resilient to recurrent shocks mainly grants and remittances, both estimated at 50 percent of GDP in 2023, and FDI estimated 1,000 900 at 5.2 percent, financed the deficits. 800 700 Remittances declined in 2023, reflecting tighter US$ Million 600 global economic conditions. Remittances 500 recorded a 6.5-percent decline in 2023, the first 400 decline in the past five years. The decline was 300 attributed to tight global financial conditions as 200 monetary policies tightened, and high inflation 100 rates experienced in the countries where most 0 Q1 Q2 Q3 Q4 of the Somali diaspora resides (the United 2021 2022 2023 Kingdom, the United States, Sweden, Australia, Source: Central Bank of Somalia (2023). South Africa, the Gulf states, and neighboring Trade taxes and non-tax revenues remain the countries). Remittances support consumption, main sources of domestic revenue (Figure investment, and terms of trade, and help 2.7), accounting for 47 and 32 percent of total to cushion households in times of shocks. domestic resources, respectively, in 2023. Remittance flows also continued to be hindered Trade taxes increased by 33 percent in 2023 by the lack of correspondent bank relationships driven by increased custom duties for building for Somali banks. and household materials, and the importation of khat as supply constraints eased. Non-tax FGS fiscal performance continues to improve revenue increased mainly from overflight driven by sustained domestic revenue mobilization and harbor fees, telecom spectrum fees, and efforts visa and passport fees. Taxes on goods and Supported by tax policy and administration services—the third-largest category—increased measures, FGS revenues improved in 2023 by 17 percent in 2023, mainly driven by sales tax (Table 2.1). As a result, the budget closed with a on imported goods. While modest, income and small fiscal surplus of 0.2 percent of GDP in 2023 corporate taxes also increased markedly by 31 (compared with a deficit of 0.1 percent in 2022). percent, with personal income tax from private Domestic revenues increased to 2.8 percent of and public employees driving performance. GDP in 2023, up from 2.3 percent in 2021 and 2.5 percent in 2022, driven by higher customs Figure 2.7: FGS revenue mobilization efforts are paying off, even though the base remains low collections following the hike of customs Total revenue performance in 2023 duties for luxury goods, implementation of the -11% Grants Somalia Customs Automated System (SOMCAS), -36% as well as better inland revenue collection Non-tax revenue 12% 29% due to improvements in tax administration. -43% Other taxes Nevertheless, overall domestic revenue remains -47% low compared with the country’s development Goods & services 17% 16% needs, making up only around 40 percent of 33% FGS total revenue. As a consequence, most of Trade taxes 25% Somalia’s public expenditures are financed by Income & profits 31% 31% external grants, with donor grants accounting for 55 percent of total revenues in 2023. vs 2022 outturn vs budget Source: FGS Ministry of Finance 2023. 8 S om a l i a Eco n om i c Update Recent Economic Developments Table 2.1: Government fiscal operations, 2022–2024 (US$ Million) 2022 2023 2024 FGS FGS FGS FGS FGS+FMS FGS Budget Actual Budget Actual Actual Budget Revenue and grants 944.9 721.9 917.3 738.1 887.4 1,040.9 Domestic revenue 250.1 262.7 283.3 329.5 461.5 346.2 Tax revenue 173.7 181.7 189.9 224.8 332.1 241.4 Taxes on income, profits, property 15.8 18.7 18.6 24.4 37.5 23.2 Taxes on goods and services 30.8 32.8 33.1 38.3 70.6 46.6 Taxes on international trade 111.3 116.2 123.2 154.1 213.4 164.5 o/w import tax on khat 16.0 13.7 20.0 17.2 .. 19.0 Other taxes 15.9 14.1 14.9 8.0 10.6 7.0 Non-tax revenue 76.4 81.0 93.4 104.7 129.4 104.8 o/w telecoms spectrum fees 13.1 4.1 6.0 8.4 .. 7.8 Grants 694.8 459.2 634.0 408.6 426.0 694.7 Budget support 174.6 145.5 173.6 .. .. 185.0 Project support 520.2 313.7 460.4 .. .. 509.7 Expenditure 919.5 719.5 922.6 720.3 922.8 1,079.3 Compensation of employees 266.0 259.6 296.7 292.2 393.1 360.9 Use of goods and services 232.2 140.7 208.7 138.2 211.4 324.5 Interest and other charges 2.5 0.8 5.8 13.2 13.2 9.8 Transfers (intergovernmental) 132.4 111.2 157.8 126.3 128.9 218.5 Social benefits 247.3 188.9 190.0 130.6 132.0 85.6 Other expenses 5.6 5.1 10.2 5.4 12.6 16.2 Capital 33.5 13.2 53.4 14.4 31.6 63.8 Budget balance 25.4 2.4 -5.32 17.8 -35.4 -38.3 Memo: Nominal GDP (US$ millions) 10,420 10,420 11,680 11,680 11,680 12,807 Source: FGS Ministry of Finance, March 2024. FGS expenditures declined by 0.8 of a on average in the period 2021–23. The wage percentage point to reach 6.2 percent of GDP bill accounted for 41 percent of total spending, in 2023. This was due to lower disbursements equivalent to 2.5 percent of GDP in 2023. to donor projects compared with 2022 and favorable rains contributing to the ongoing Wage bill increases reflect reforms to bring all reversal of the 2020–23 drought effects, resulting government workers onto the formal payroll, in reduced crises response commitments. as well as new recruitment. The security sector Almost all FGS expenditure is recurrent and wage bill now accounts for the largest share non-discretionary (Table 2.1), and dominated of the total wage bill, at 52 percent in 2023, by the wage bill, which increased by 16 percent representing 21 percent of total spending June 2 0 2 4 | Edition No. 9 9 Recent Economic Developments (Figure 2.8a). It surpassed civil service personnel the pre-COVID-19 level and accounted for 17.5 costs in 2020, with the onboarding of the percent of expenditures in 2023. Social benefits security personnel onto the formal government declined to 18 percent of total spending in payroll. It has subsequently continued to 2023, down from 26 percent in 2022, reflecting increase, recording 9 percent average annual lower donor commitments in crisis response, growth in the period 2021–23, mainly due to as drought conditions waned, and commodity the recruitment of new personnel. Total security prices continued to decline. personnel costs account for 80 percent of total security spending, mainly for the armed forces FGS sectoral priorities remain largely and the police. Similarly, the civil service wage unchanged, but a shift toward social and bill increased at the same rate during this economic services is being realized through period, reflecting personnel reclassification increased external grants (Figure 2.8b). Social into more formal head-counted staff and new expenditures, mainly comprising cash transfers recruitments across government agencies. under the Baxnaano social safety program, accounted for 17 percent of total spending Capital spending accounted for only 2 percent in 2023, compared with just 6 percent in the of total FGS spending in 2023 (Table 2.1). pre-COVID-19 level. Total spending is skewed With limited fiscal space, the Government is toward administrative services to manage unable to invest in its key sectors, particularly fiscal operations and security provision. Thus, infrastructure, energy, and agriculture, which administration sector spending increased to would benefit the country’s economic growth 29 percent of total spending in 2023, up from and job creation. Goods and services were the 27 percent in 2022, while security sector second-largest spending category after the spending reached 27 percent of total spending, wage bill, accounting for 19 percent of total up from 23 percent in 2022. Repeated adverse spending in 2023, representing 1.2 percent of climatic shocks and the lingering effects of the GDP. The Government has increased spending pandemic continued to drive increases in social on social benefits and intergovernmental spending to cushion vulnerable households. grants since 2021, as the country battled with Donor investments in public works, water, severe drought and high commodity prices and agriculture accounted for the increased while also recovering from the COVID-19 crisis. expenditures in economic services, which Intergovernmental transfers to sub-national reached 10 percent of total spending in 2023, governments almost tripled compared with up from 7.8 percent in 2022. Figure 2.8: Increasing FGS wage bill, while sector spending is skewed toward security and administration a. FGS wage bill, US$ million b. FGS sector spending, US$ million Security personnel wage bill Civil service wage bill Percentage change 160 from 2023 outturn 183 Economic services, +154 140 170 Social services, +41 57 72 120 218 Transfers incl. projects, +73 198 120 35 126 100 80 111 Defence & security, +33 256 46 192 170 160 80 Admin. services, +20 194 210 252 153 60 2021 2022 2023 2024 2019 2020 2021 2022 2023 Approved Budget Source: FGS Ministry of Finance. 10 S om a l i a Eco n om i c Update Recent Economic Developments Intergovernmental grants continue to support The delivery of public services across the FMSs fiscal operations at the FMS level remains challenging, given that fiscal space Domestic revenue collection increased across remains so limited. FMS spending is virtually all Federal Member States (FMSs) in 2023. all recurrent, mainly the wage bill, and goods Puntland State of Somalia (PSS), which has the and services (Table 2.2), with high reliance largest budget of the five FMSs, saw a marginal on external grants. Capital investments are increase of 1.2 percent in actual collection to minimal, with only Puntland spending a sizable US$85 million compared with the previous share, at 13 percent of total spending in 2023. year, while Jubaland State of Somalia (JSS), the second-largest FMS, saw the highest increase Implementing the 2024 FGS budget will require of 56 percent to US$29.5 million (Table 2.2). renewed efforts to mobilize revenue Trade taxes and taxes on goods and services FGS total expenditure is set to increase are the key drivers of domestic revenue in significantly in 2024, as implementation these two FMSs. While own-source revenues of donor-funded projects is expected to increased across the other FMSs (South-West accelerate. The state budget is expected to State of Somalia [SWS], Galmudug State of exceed US$1 billion (Table 2.1), increasing by Somalia [GSS], and Hirshabelle State of Somalia 50 percent compared with 2023 outturn, and [HSS]) during this period, the revenue base equivalent to 8.4 percent of GDP. The increase remains too low, with grants playing a critical is largely due to higher security spending in role in supporting fiscal operations. response to the withdrawal of the Africa Union Table 2.2: Fiscal operations at sub-national governments PSS JSS SWS GSS HSS 2022 2023 2022 2023 2022 2023 2022 2023 2022 2023 Revenue and grants 111.0 95.9 38.4 47.8 22.9 20.5 24.3 22.8 12.1 15.4 Domestic revenue 84.1 85.1 8.9 29.5 3.4 5.0 7.9 8.4 3.3 4.0 Trade taxes 42.7 43.1 10.1 15.0 0.3 0.5 0.1 0.3 0.2 0.4 Taxes on goods and services 13.1 14.4 4.6 5.9 1.2 1.0 6.5 6.5 1.9 2.8 Taxes on income and profits 7.5 7.0 1.0 1.8 1.8 3.0 0.7 0.8 0.3 0.5 Other taxes 2.4 2.2 - 0.1 - 0.0 - - 0.1 0.3 Other revenue 18.4 18.4 3.2 6.7 0.2 0.4 0.6 0.7 0.8 0.1 Grants 26.9 10.8 19.5 18.3 19.5 15.5 16.3 14.4 8.8 11.4 Expenditure 113.1 98.0 37.5 46.5 22.3 20.7 23.3 22.7 12.1 14.6 Wages and salaries 56.6 47.3 18.1 24.4 12.4 11.7 11.5 11.0 8.5 6.6 Goods and services 31.3 34.2 11.6 16.2 5.5 8.0 8.1 9.5 2.2 5.2 Transfers 1.3 0.5 0.3 - - - 0.1 0.3 Other expenses 2.1 2.1 6.6 4.5 0.3 0.0 0.0 0.1 1.2 1.8 Social benefits 2.0 1.3 0.1 0.1 0.6 - 0.1 - - 0.5 Capital 19.8 12.6 0.8 1.3 3.5 1.0 3.6 1.8 - - Source: FMS Ministries of Finance data. Note: GSS=Galmudug State of Somalia; HSS=Hirshabelle State of Somalia; JSS=Jubaland State of Somalia; PSS=Puntland; SWS=South-West State of Somalia. June 2 0 2 4 | Edition No. 9 11 Recent Economic Developments Transition Mission in Somalia (ATMIS), while in overflight fees (from the upgraded airspace new teachers hired during 2023 are expected to classification); visa, passport, and airport fees; push up spending on the wage bill, and goods and telecom spectrum fees, mainly from phone and services, compared with 2023. Most of this number fees—a new tariff from 2024 onwards. additional spending is expected to be financed by external grants, keeping the overall deficit The FGS’s continued strong domestic revenue low at 0.3 percent of GDP. Donor grants, mostly efforts are paying off project financing, dominate the total revenue Domestic revenue collection remained strong in envelope, estimated at US$695 million, or 5.4 2024Q1, driven by robust performance across percent of GDP. Domestic revenue is also set all revenue streams. Actual collection increased to improve, but at a more modest rate than by 41 percent in 2024Q1 (y-o-y), compared with external grants. Fiscal risks are associated with the same period in 2023 (Figure 2.9a), mostly lower-than-expected disbursements on donor due to higher customs duties on luxury goods. funds, especially for security, and weaker Trade taxes and non-tax revenue—the main domestic revenue mobilization. drivers of domestic revenue—increased by 27 and 33 percent, respectively, during this period. The FGS aims to sustain its domestic revenue Taxes on goods and services almost doubled, mobilization efforts. Domestic revenue is while income and corporate taxes more than estimated at 2.7 percent of GDP in 2024, doubled, recording the highest growth of all increasing by 5.1 percent to US$346 million. the revenue streams. Similarly, disbursement Revenue collection is expected to increase of project grants improved, with donor grants across the three key domestic revenue streams, in 2024Q1 increasing by 66 percent compared with trade taxes, which is the leading driver, with 2023Q1. set to increase by 7 percent compared with the 2023 outturn, mainly from customs and other Nevertheless, FGS expenditures continue import duties, and revenue from khat. Taxes on to exceed the available resources, leaving a goods and services, the third-largest category, cumulative financing gap of US$8 million in is expected to record the highest increase of 22 2024Q1 (Figure 2.9b). Total expenditures were percent, with sales tax estimated to drive the 24 percent higher compared with a similar overall increase. Non-tax revenue—the second- period in 2023, with the wage bill driven by largest category—is expected to increase only security personnel dominating total spending slightly by 0.1 percent, with continued increases and accounting for 64 percent. Goods and Figure 2.9: Revenue performance remains strong, but still too low to cover increasing expenditure needs a. FGS total revenue, US$ million b. Overall budget balance, US$ million Tax revenue Non-tax revenue Grants 80 140 60 120 40 100 80 20 60 0 40 -20 20 -40 2021Q1 2021Q2 2021Q3 2021Q4 2022Q1 2022Q2 2022Q3 2022Q4 2023Q1 2023Q2 2023Q3 2023Q4 2024Q1 - 2021Q1 2022Q1 2023Q1 2024Q1 Source: FGS Ministry of Finance, March 2024. 12 S om a l i a Eco n om i c Update Recent Economic Developments services expenditure accounted for 22 percent. that has plagued the country for over three Transfers to sub-national governments in decades. Somalia received full and irrevocable 2024Q1 increased by 14.4 percent over the same debt relief on US$4.5 billion of its debt, period in 2023 and accounted for 11 percent of reducing external debt to 5.4 percent of GDP at total spending. The Government continued to end-2023, down from 64 percent in 2018, prior service its debt obligations, with token interest to entering the HIPC process (Table 2.3). In the payments (0.7 percent of total expenditure) post-HIPC environment, the country has far during 2024Q1. greater opportunities to finance investments on development priorities and expand basic The FGS will need to pursue prudent fiscal policy service delivery. to ensure fiscal balances are manageable. This could include increasing domestic mobilization While debt sustainability has improved efforts, containing security costs, and continuing with debt relief, significant risks remain. implementation of measures to improve Somalia continues to have US$766 million of the transparency of wage bill spending (by debt outstanding, which must be managed integrating non-payroll staff in the SFMIS) and carefully. The Government should continue to advance pay and grade reforms. take important steps to avoid falling back into debt distress in the future. The Government’s Somalia achieved the historic debt relief milestone commitment to maintain fiscal discipline and in December 2023 increase domestic revenue, together with Somalia reached the HIPC Completion Point structural reform in key areas, will help to in December 2023, eliminating a debt burden safeguard long-term debt sustainability. Table 2.3: Somalia: Decomposition of total public debt over the HIPC initiative After arrears clearance, Before HIPC, end-2018 end-2022 Before HIPC, end-20181 (US$ (percent of (US$ (percent of (US$ (percent of million) GDP) million) GDP) million) GDP) Total Public Debt 5,345.1 64.6 3,894.8 37.4 766.3 6.6 Total External Debt 5,268.1 63.6 3,827.0 36.7 698.4 6.0 Multilateral 2/ 1,535.7 18.6 1,074.9 10.3 467.7 4.0 Bilateral creditors 3,730.1 45.1 2,749.5 26.4 230.3 2.0 Paris Club 3,037.6 36.7 2,004.5 19.2 Non-Paris Club 692.6 8.4 745.0 7.2 Commercial 2.3 0.0 2.5 0.0 0.5 0.0 Government wage arrears 77.0 0.9 67.8 0.7 67.8 0.6 Source: Somali authorities and IMF staff calculations. 1/ End-2023 estimates include full delivery of HIPC debt relief, MDRI, and beyond HIPC assistance. 2/ Includes disbursement from successor IMF ECF arrangement in December 2023. June 2 0 2 4 | Edition No. 9 13 Recent Economic Developments 3. Medium-Term Outlook and Risks Continued recovery in growth amid significant risks, supported by improving weather conditions, economic reforms, and increased public investment with debt relief dividends. Nonetheless, Somalia’s growth prospects depend on the global economic outlook and government policies. Further easing of global commodity prices is expected to keep inflation low and cushion household incomes. Favorable weather conditions, improving global environment, and post- HIPC reforms will improve trade and support higher domestic revenues. Medium-term economic growth is projected to increased broad-based private sector activity be modest, as risks remain significant. Real GDP and investment. The recovery in agricultural growth is projected to expand to 3.7 percent production and exports, coupled with further in 2024 and reach 4.0 percent in 2026 (Table easing of the global commodity prices and 3.1). This is due to a rebound in household continued social protection measures, should demand, domestic investment, and government help to cushion household incomes, especially spending. Private consumption growth—the among the vulnerable supporting private main driver of Somalia’s economy—is projected consumption growth. to average 4.1 percent over the medium term. Average Gu and Dyer rains in 2024 are projected Growth over the medium term will likely be to lead to continued recovery in agricultural driven by three factors: (i) continued political productivity, and improving household incomes stability and reduced security risks; (ii) a gradual and food security, which should serve to boost scaling-up of public spending (in sectors such as exports in 2024 and 2025. Economic reforms and energy, transportation, education, and health); increased public investment should also boost and (iii) financial deepening and financial investor confidence and attract FDI, encouraging inclusion, as financial sector reforms start to Table 3.1: Selected economic and poverty indicators (% of GDP unless otherwise indicated) 2021 2022 2023e 2024f 2025f 2026f Real GDP growth 3.3 2.4 3.1 3.7 3.9 4.0 CPI Inflation, annual percentage change 4.6 6.8 6.1 3.9 3.7 3.5 Current account balance -7.3 -8 -9.6 -8.6 -8.8 -10.4 Trade balance -50.9 -61.2 -58.8 -58.5 -57.7 -56.9 Private remittances 21.5 20.6 20.3 20.4 20.6 21.0 Official grants 23 33 29.3 29.8 28.6 25.9 Fiscal balance -0.8 -0.1 0.2 -0.4 -1.2 -1.8 Domestic revenue 2.3 2.5 2.8 2.8 3 3.3 External grants 1.5 4.4 3.5 4.3 3 1.5 Total expenditure 4.7 7 6.2 7.5 7.1 6.6 Compensation of employees 2.5 2.5 2.5 2.6 2.5 2.5 External debt 39.9 36.7 5.4 5.0 5.7 7.2 Source: World Bank, IMF, and FGS. Notes: Fiscal data are for the FGS. 14 S om a l i a Eco n om i c Update Recent Economic Developments pay off. Private investment is projected to pick and services expected to increase. Passing of up, with planned investments in sectors such these laws will build confidence in the market as fisheries, electricity, digital identification, and render the financial sector more robust and infrastructure expected to support growth and better aligned with international standards. and job creation. Moreover, the Somali Enhancements to financial infrastructure, Centennial Vision 2060 is critical for Somalia’s continued strengthening of payment systems, growth outlook, as the nation faces significant and building on the strongly permeation of economic and social challenges, including digital wallets could be significant opportunities state fragility, poverty, unemployment, for promoting financial inclusion. The corruption, food insecurity, illiteracy, clan- introduction of foundational digital ID will based conflicts, and migration. It represents a further allow for e-KYC introduction, and the comprehensive strategy designed to achieve inclusion of the underbanked and unbanked complete and sustainable development by populations. Introduction of Takaful insurance leveraging innovation, economic diversification, will help strengthen the financial safety net sustainable development, social justice, and and improve resilience against climate-related technological progress. challenges. The ongoing Middle East and North Africa Financial Action Task Force (MENA-FATF) External trade will continue to improve, mutual evaluation will clarify AML/CFT-related assuming favorable weather conditions risks and help develop an action plan to address continue and the global environment them, bringing Somalia closer to the global strengthens. The supply bottlenecks and trade standards and requirements needed to promote constraints are expected to continue to ease, cross-border investments and money transfers. helping to boost export demand. Similarly, These efforts will support better integration of improving agricultural productivity will support Somalia into the global financial system. increased exports. Growth in remittances is expected to rebound as global economic Reforms to tax policies and administration conditions improve, hence supporting household are expected to mobilize additional domestic incomes and investments. The current account revenue. Trade-related revenues (customs deficit is projected to remain around single-digit duties, sales tax on imports, and port fees) levels over the medium term, at 8.6 percent are expected to increase due to efficiency of GDP in 2024 and slightly widening to 10.4 gains from customs modernization, which percent of GDP in 2026 (Table 3.1). include implementation of SOMCAS, improved data collection, and enhanced customs Financial sector reforms and related harmonization processes. Approval of the new institutional capacity building are expected to Income Tax Law, which clarifies and streamlines continue increasing confidence, integrity, and deductions, and the introduction of excise taxes financial deepening. With several new laws and on money transfer businesses, airtime, and regulations expected to be implemented in the telecommunications, are projected to lead to coming months (namely the Financial Institutions an increase in income and sales tax revenues. Law, the Takaful Insurance Law, the National The revenue administration is also expected to Payment Systems, and the Central Banking continue adding new taxpayers to the tax net, for Law), financial sector oversight is expected to example large firms in banking and hospitality, be significantly improved and opportunities through expanding the use of digital tools and for the introduction of new financial products enhancing enforcement capacity. June 2 0 2 4 | Edition No. 9 15 Recent Economic Developments The wage bill, together with goods and services several significant challenges. These include expenditures, will continue to drive spending, the low mobilization of domestic revenues both accounting for two-thirds of the budget (only 3 percent of GDP is generated), excessive in 2024, at 33 and 30 percent, respectively dependence on donor grants, high spending (Table 2.1). Total transfers (including projects’ demands in the security and social sectors, weak capacity for implementing expenditures, lack of transfers) will account for 20 percent of the total expenditure, increasing by over 70 percent, an established fiscal federalism framework, low with project transfers driving the increase. A budget execution controls, low public financial supplemental budget by the FGS is envisaged in management (PFM) performance, and high risks 2024, which will reduce expenditures to be in stemming from weak governance and high levels line with available resources to ensure smooth of corruption. After identifying the challenges, it implementation of activities and continued is important for post-HIPC fiscal policy in Somalia fiscal discipline. to prioritize long-term fiscal sustainability, macroeconomic stability, socio-economic Higher domestic revenues will make room development, and climate shock resilience. To for greater spending on public investment ensure fiscal sustainability, domestic revenue and social services. Completing the HIPC debt mobilization should be improved, which relief process provides Somalia with new access will allow the Government to expand public to concessional borrowing, and grants are services gradually and gain the trust of citizens. expected to gradually decline and be replaced Furthermore, enhancing PFM to protect fiscal by concessional loans. While relevant external resources, and promoting good governance and public debt burden indicators remain below and implementing fiscal federalism, will all their respective thresholds and benchmarks in contribute toward fiscal sustainability. However, the long run, the upward trajectory of measures it is important to maintain a responsible budget of debt-to-GDP and debt service underline the deficit and only access concessional financing. need for Somalia to continue to seek grant financing and highly concessional borrowing to Over the medium to longer term, reforms to finance deficits, even beyond the medium term. the wage bill should be prioritized. Measures Somalia’s fiscal policy is currently encountering to enhance the fiscal sustainability of the wage Box 3.1: Somalia’s external debt profile Somalia’s external debt profile is projected to improve significantly in the context of post-HIPC Completion Point. The extension of IDA20 grant status by one year induces a downward level shift in the external debt profile, with external debt to GDP projected at 10.3 percent by 2028 in the current Low-Income Country Debt Sustainability Analysis (LIC-DSA) relative to 11 percent of GDP in the December 2023 LIC-DSA. It also results in lower levels for the ratios of PV of external debt to GDP in the current LIC-DSA, compared with the December 2023 LIC-DSA. The extension of grant status by one year also leads to a commensurate improvement in the primary fiscal deficit and the non-interest current account deficit in 2024. The PV of PPG external debt to GDP is forecast to gradually rise from 4.7 percent of GDP to 6.7 percent of GDP in the medium-term baseline, and to 9.6 percent in the long term—well below the indicative threshold of 30 percent. The PV of PPG external debt to exports, external debt service to exports, and external debt service to revenue all remain below the indicative thresholds over the projection horizon in the baseline. Debt service ratios are expected to increase toward the end of the projection period due to the resumption of payments on restructured debt and debt service payments due to the IMF starting in 2026. From 2025 to 2029, the baseline assumes that the external financing mix will be highly concessional, with an estimated average grant element of 58.2 percent, which is projected to decline to around 48 percent by 2034. Source: Somalia LIC-DSA, April 2024. 16 S om a l i a Eco n om i c Update Recent Economic Developments bill could include introducing ceilings on the On the upside, forceful implementation of number of positions in specific grades per year, structural reforms could support accelerated as well as the retrenchment of staff with no growth and tap into new sources of growth. formal education. All post-legal retirement age There is substantial potential in developing civil servants should also be removed from their Somalia’s agriculture sector, especially the crop positions. The consideration of the pensions bill and livestock subsectors, to boost economic could also support the retirement of personnel, growth, improving food security and the provided it is well designed with a fiscal prospects for trade. The crop and livestock sustainability lens. Over time, there should be a subsectors in Somalia are important sources greater orientation toward social and economic of livelihoods, particularly in rural areas. The expenditures, which can help to improve service fisheries sector also holds substantial potential delivery, perceptions of state legitimacy, and for Somalia. Somalia has a productive marine encourage higher levels of compliance with the ecosystem due to seasonal upwelling along its tax regime. Indian Ocean coast. However, weak governance is a major constraint. In addition, petroleum Risks to this outlook are significant and tilted to exploration potentially offers new opportunities. the downside Based on prospects of substantial offshore Somalia’s near-term uncertainty remains high, oil reserves, the Government is preparing and risks are tilted to the downside. Food the legal and fiscal framework for petroleum insecurity will worsen if the rains fail, or new management. Better access to financial services, natural disasters hit Somalia. Additional risks affordable electricity, and effective business stem from a deterioration of the global and/ regulation would spur the development of the or regional security situation (including the private sector and the creation of jobs. security situation in the Red Sea), risks related to the ATMIS transition, political risks linked to Overreliance on external grants can put federalism, and lower global growth. A further Somalia’s macroeconomic stability at risk, slowdown in global growth could contribute to especially if there are any shocks in the flow inflationary pressures up pushing commodity of grants, such as the one that occurred in prices. Higher oil prices would increase Somalia’s 2021 over the election impasse. While grant import bill, weakening its already vulnerable financing is expected to decline gradually going external sector. A slowdown in global economic forward, greater access to concessional funding growth could contribute to a further decline in post-HIPC may offer an opportunity to rebuild remittance inflows from Somalia’s large diaspora, and advance development efforts. Essential affecting private consumption and investment. prerequisites include well-thought-out public Furthermore, extreme climate events could investment strategies, improving government reverse the recovery of the agriculture sector, operations, strengthening public debt increasing food insecurity and water stress, management capacity, establishing a national and heightening already high humanitarian fiscal framework, and ensuring a country’s needs. Although Somalia’s economy remains ability to honor new debt liabilities. To address stable, simmering conflict continues to pose these challenges, it is crucial for the Government risks to economic activity. Terrorist attacks by to focus on increasing its internal revenues. This Al-Shabaab continue to threaten the security could be achieved by introducing policy reforms situation, discouraging domestic and foreign and devising innovative ways to generate new potential investors, putting more pressure revenue sources, in order to achieve financial on the government to increase spending on stability and meet the country’s developmental security and dampening growth prospects. needs. It is essential to allocate future loans to June 2 0 2 4 | Edition No. 9 17 Recent Economic Developments productive projects and programs that promote to deliver basic services, and also made some economic growth, job creation, and poverty progress on intergovernmental relations. alleviation. Post-HIPC fiscal sustainability is a Reflecting its good track record on reform, significant concern, given challenges such as low Somalia reached the HIPC CP on December 13, domestic revenue mobilization, excessive donor 2023, which provided substantial debt relief grant dependence, and high spending demands. moving Somalia out of debt distress. However, service delivery remains low, especially in areas Although there are many benefits in joining experiencing violence and conflict, and the the EAC, the depth of Somalia’s security state remains largely invisible in parts of the problems raises critical questions about the country. The FGS and the FMSs still face political bloc’s readiness and capacity to ensure peace, contestation on core constitutional matters and security and regional stability. Article 3 of the resource distribution, and domestic revenue EAC Treaty stipulates the criteria for admitting remains insufficient to fund expenditures on new countries. They must adhere to principles security and development needs. of good governance, democracy, the rule of law, human rights and social justice. Furthermore, Somalia continues to suffer from high levels of Somalia’s domestic market is economically conflict and violence. Al-Shabaab (AS) continues fragmented, with high price differentials to exploit divisions and conduct intermittent across the regions. Fragmentation of the attacks to maintain control in rural areas. domestic market raises costs for producers Conflict-related fatalities fell by 47 percent from and dampens competitiveness. Addressing the 2017 to 2021, though they rose again by nearly drivers of fragmentation requires tackling illegal 90 percent in 2022 and continued to rise in checkpoints through improved governance, as 2023, largely due to a large-scale government well as high transportation costs particularly in offensive against the group. The government the south and central regions. Strengthening offensive has had some success in recovering infrastructure along strategic corridors through territory, and mobilizing local support against AS, improved access to a reliable road network but also faced setbacks to hold some territory. and power could support trade within Somalia, The African Union Mission in Somalia (AMISOM) the region and beyond. Moreover, advancing a had planned to depart Somalia at end-2021, national trade strategy that supports Somalia’s though the Government and partners agreed trade-related institutions, harmonization of to replace the AMISOM with the AU Transition customs and border management processes, Mission in Somalia (ATMIS) to operate until and the strengthening of producers’ capacity end-2024. Risks of instability may increase with to meet importers’ sanitary and phytosanitary ongoing discussion on the mandates, roles, and measures can help develop regional integration. resources related to the transition to Somali forces. Insecurity exacerbates fragility, requires Somalia has made significant progress in higher expenditures, limits access to parts of the consolidating its federal system, building core country, and undermines the implementation of government capacity, and supporting inclusive development activities. private sector-led growth. However, it still faces foundational governance, security, and other Somalia’s fiscal federalism is nascent, but development challenges that threaten state progress has been made for the FMSs to legitimacy and impede its path out of Fragility, assume more functional responsibilities, with Conflict, and Violence (FCV). Since establishing corresponding increases in their resource a federal system in 2012, the FGS and the FMSs envelope. Important parts of Somalia’s federal have made incremental headway on financing model remain undefined, including agreement and building the capacity of state institutions on a model for fiscal federalism—in other words, 18 S om a l i a Eco n om i c Update Recent Economic Developments which level of government has the power to Somalia has reached an important milestone raise and spend revenue. This is a critical pillar of with the HIPC Completion Point but reform the federal architecture, as it ultimately defines momentum should be sustained to avoid re- the level of autonomy that FMSs will have vis- accumulating debt arrears. The external debt à-vis the FGS. This makes it a very contentious stock is now significantly reduced and relatively issue, with FMSs seeking to maximize their manageable at around 6 percent of GDP. There are autonomy and the FGS seeking to assert greater substantial risks of re-accumulating debt arrears control. Competition between different levels unless significant bolder reform measures are of government over revenue sources can lead implemented. While complete and irrevocable to conflict and political instability. Given the debt reduction is an important milestone in inequalities of the current arrangement, this Somalia’s development history and its future may provoke further grievances between journey toward sustainable growth, post-HIPC different groups, undermining critical experience shows that almost all nations that development objectives. The FGS and the FMSs graduated from debt relief programs failed in continue to advance the federalism agenda, achieving debt sustainability in the post-HIPC though challenges remain. In March 2023, era (out of the 36 countries, 17 in moderate the National Consultative Council brought debt distress risk, 13 in high debt distress risk together leaders of the FGS, four out of five and five in debt stress). These HIPCs failed to FMSs, and the Mayor of Mogadishu. High-level maintain either growth-enhancing reforms, agreements were reached on creating a National or sustainable fiscal policies, or proper Revenue Authority, the assignment of revenue debt management policies. Thus, there are responsibilities across levels of government, substantial challenges and risks ahead, as the and the revenues that are to be shared between outlook is subject to ensuring that Somalia the FGS and the FMSs. In July 2023, the same continues with major post-HIPC reforms to group agreed on the distribution of external build resilience and promote inclusive growth budget support. However, as described in and sustainable fiscal and debt policy. Somalia’s Country Engagement Strategy, the lack of political consensus between the FGS and all five FMSs impacts implementation of federal fiscal reforms. 4. Conclusion and Summary Policy Options Supporting sustained and long-term growth development partners. Accessing resources in Somalia will require building economic from development partners will need to go in resilience through persistent reform efforts. tandem with strengthening the governance Rebuilding the economy from the effects of environment, as the country taps into the the prolonged civil war will require maintaining post-HIPC CP dividends. Moreover, structural macroeconomic stability, strengthening reforms are needed to reinvigorate private institutions, and advancing structural reforms investment, including improving the business that boost private sector development and environment, unlocking access to finance, and job creation. The country can only finance connecting workers to jobs through investing in much-needed investments if resources are human capital. available from both private investors and June 2 0 2 4 | Edition No. 9 19 Recent Economic Developments Achieving Somalia’s growth potential will need To enhance fiscal space for development to be supported by structural reforms to boost priorities, the Government needs to raise more private sector investment and jobs, access to revenue and strengthen expenditure controls. financial services (banks, microcredits, and The Somali authorities should maintain the insurance), affordable electricity, and effective commitment to avoid running a budget deficit regulation. Thus, there is substantial potential and to make timely payments supported by the for Somalia to: (i) increase renewable energy fiscal buffer. Federal and state governments supply that is affordable and efficient; (ii) should continue efforts to improve tax policy by develop an adequate regulatory framework focusing on the harmonization of fiscal regimes that can help reduce fragmentation and support for customs and inland revenues, which can growth of the power sector; (iii) create a also advance the federal agenda. Strengthening pipeline of work to develop road infrastructure, controls over the wage bill should be a priority, as this offers the potential to deepen strategic particularly regarding ad hoc personnel costs corridors, and helps traders and producers and allowances. Since wage bill expenditures reach a wider range of markets; (iv) implement account for more than half of all public tangible measures to deepen financial inclusion expenditures, improving controls is critical and enhance the stability of the financial sector;for enhancing fiscal sustainability. As Somalia and (v) while Somalia’s vibrant digital sector has reached the HIPC Completion Point, there can be credited with supporting the expansion may be opportunities to borrow to finance of affordable mobile money, to further expand new investments in human capital and physical digital inclusion going forward. infrastructure. The FGS can take steps now to develop an adequate legal framework to support Now that Somalia has graduated from the borrowing and strengthen capacity to manage HIPC CP, it will be essential for the authorities fiscal risks, particularly if federal and state to maintain broad-based macroeconomic governments enter public-private partnerships stability, and significant policies and new concessions arrangements. implementation. This includes strengthening domestic resource mobilization, containing Advancing the agenda on federalism can the wage bill and security spending, advancing help to improve the stability of the state. The PFM reforms, and further strengthening debt Provisional Constitution set the foundation management. In the short to medium term, for a federal structure in an effort to address Somalia should refrain from non-concessional the historical causes of conflict and instability. external borrowing. Prioritizing concessional However, decisions on the federal model were financing sources will allow the country to deferred to the Constitutional Review Process, continue domestic reforms to boost growth, and further pushed to the 11 th Parliament. To strengthen public finances, and raise more deliver public goods such as security, health domestic revenues to ensure debt sustainability. and education services, decisions need to be Also, debt management functions should be made on how functions will be allocated at institutionalized and the legal framework for different levels of government (federal, state, debt strengthened, with a Debt Management and municipal or district), and how resources Unit (DMU) being established in the civil service can support implementation. Strengthening to ensure the sustainability of functions. public systems to deliver services can also help to increase citizens’ trust in government. Advancing discussions on federalism can help to improve the stability of the state, which can enhance the overall environment for doing business. 20 S om a l i a Eco n om i c Update SPECIAL FOCUS SOMALIA CLIMATE CHANGE AND ADAPTATION POLICY ACTIONS @Abdihakim/World Bank Special Focus 5. Somalia Climate Change and Adaptation Policy Actions 5.1 The Context of Climate Change equally, however, according to the ND-Gain in Somalia Index, which measures countries’ vulnerability to climate change and the readiness to improve The Federal Government of Somalia (FGS) has their resilience to climate change. While the set poverty reduction, inclusive growth, and ND-Gain Index ranks Somalia among the most socio-economic development at the core of vulnerable countries, it is also in a group of its National Development Plan for 2020–2024 countries that receives the least climate finance. (NDP9), as the country works to break cycles Other countries that are categorized as being in of crises arising from decades of conflict, fragile and conflict-affected situations (FCAS) political instability, and underdevelopment. also consistently lag behind in accessing and The country is highly vulnerable to climate receiving climate finance. hazards, including those exacerbated by climate change, yet the country receives little in the Somalia continues to face multiple and way of climate finance. The drought that began overlapping shocks that reduce economic in Somalia in 2020 and continued until early growth and contribute to widespread poverty. 2023 resulted in famine that affected more than Climate change is making periodic droughts 6.6 million people (IPC, 2023). People faced and floods more frequent and severe and extreme personal hardships, from the loss of is inextricably linked to Somalia’s social and livelihoods to hunger, misery, illness and death. political vulnerabilities. Recurrent shocks, All of this is difficult to monetize. However, the including a prolonged 2020–23 drought, increase in humanitarian appeals, from US$1.09 disrupted Somalia's growth, devastating crops, billion in 2021 to US$2.27 billion in 2022 (OCHA, livestock, and exports. Many fled their homes in 2022), reflects the need for greater financial search of food and water. The severe drought, support to provide critical resources to these coupled with global commodity price surges, vulnerable people. Thus, there is a need to intensified inflation, hampering household better understand what barriers and enablers consumption. Somalia’s vulnerability to climate exist in Somalia to access international support change is rooted in its arid and semi-arid climate, to address the adverse effects of climate change with high temperatures, erratic rainfall patterns, through climate resilient development, and and lack of investment in climate mitigation and to improve understanding of the tradeoffs in adaptation, and its limited capacity in sound implementing various climate-related activities. environmental management. The country’s agriculture sector, which employs a substantial Embedding climate adaptation and disaster risk portion of its workforce, has been severely management (DRM) within socio-economic affected, leading to declining crop yields and development and land-use planning can livestock production. As Somalia has reached lessen vulnerabilities and exposure to climate the HIPC Completion Point and debt relief has change, thereby reducing climate change reduced the risk of debt distress to moderate, risks. The mitigation of greenhouse gas (GHG) growth is expected to accelerate as reforms emissions through a green energy transition, payoff, including reforms that were supported and sustainable land and water use can reduce by the HIPC process, the Extended Credit Facility the severity and extent of climate-related (ECF)-supported program, and IDA development hazards, while adaptation to a changing climate policy financing. However, the outlook is subject and emissions mitigation will also reduce to significant risks, including increasingly climate change risks. Not everyone will benefit frequent climatic shocks. 22 S om a l i a Eco n om i c Update Special Focus The country has witnessed severe climate Figure 5.1: Country climate vulnerability index versus readiness index score disasters, notably the longest drought in recent decades followed by severe flooding 0.9 in vulnerable areas. There is some overlap in 0.8 climate risk and poverty rates, with the poor 0.7 Readiness score vulnerable to climate change concentrated in 0.6 the Shabelle river basin (floods), the northeast 0.5 0.4 (excessive heat), and more broadly Somalia 0.3 (three risks). Somali households are frequently 0.2 exposed to shocks, with over two-thirds of 0.1 the country’s population reportedly having experienced at least one shock in 2021 or 2022 0.2 0.3 0.4 0.5 Vulnerability score 0.6 0.7 that severely affected their economic situation. Africa Climate-induced displacements, heightened Source: Notre Dame Global Adaptation Initiative (ND-GAIN). Note: The figure plots Country Climate Vulnerability Index scores against conflicts over scarce natural resources, and Readiness Index scores. Dots are sized by population. Index values vary from 0 to 1; higher values indicate higher vulnerability or readiness. increased vulnerability among marginalized groups such as rural populations, women, and The interplay between climate impacts and youth, exacerbate the country's fragility. Somalia’s social and political fragilities amplifies the risks. Addressing the immediate risks Somalia faces a multitude of climate risks that posed by recurrent climate disasters requires pose a serious threat to its future economic investments in disaster risk management (DRM), development, industrialization, trade, such as strengthening emergency response and urban development. Somalia is highly architecture, climate information systems, vulnerable to climate shocks that hurt growth and integrating DRM into strategic and spatial and hinder poverty reduction efforts. Frequent planning for key sectors, along with adaptive shocks such as repeated climate-related social safety nets and a national disaster risk weather events including cycles of droughts, financing strategy. Other key strategies include floods, and locust infestations, have interrupted enhancing the resilience of rural livelihoods and the country’s economic trajectory. As a result, natural resources, and investments in water growth has been low and volatile, exacerbating management systems. the high poverty across the country. Acute climate disasters, especially prolonged droughts Poverty remains high, with over half of the and inland flooding can have wide-ranging social Somali population living below the national and economic consequences for production and poverty line in 2022. There are also large exports, food security, and social vulnerability spatial differences, with the nomadic and cohesion. population having the highest poverty rate, while the poverty rate is lowest among in Somalia is the most climate-vulnerable country urban areas. However, due to the country’s in the world. Somalia is ranked as the most high urbanization, driven by conflict and climate-vulnerable country in the world by the climatic shocks, just under two-thirds of poor Notre Dame Global Adaptation Initiative (ND- individuals reside in urban areas. GAIN) methodology. It is also rated as being unprepared for climate change (Figure 5.1). June 2 0 2 4 | Edition No. 9 23 Special Focus 6. Climate Trends and Impacts 6.1 Climate Overview By the end of the century, Somalia’s climate is likely to be significantly different—and probably Somalia’s natural and human geography is even harsher. Unless global climate action shaped by its harsh climate. Lying at the eastern accelerates markedly, average temperatures extremity of the Sahel, Somalia has an arid to in Somalia are likely to be at least around semi-arid climate. Average annual rainfall is 3°C higher by the end of the century than at under 200 millimeters in much of the country, present, which means the country would be although it is significantly more in the northern hotter than any nation is currently (Mali and highlands and the south. Mean daily maximum Burkina Faso are the hottest countries, at a little temperatures exceed 30°C in most areas, over 29°C) or has been within human history. although they fall much lower in the northern Rainfall trends are uncertain: a moderate highlands and are tempered by cool offshore increase in rainfall is the most likely outcome currents along the eastern seaboard. Most over the course of the century, but Somalia of Somalia’s land area is covered by desert could either become significantly more arid and semi-desert ecosystems, with sparse or (close to a pure desert country such as Qatar) seasonal grassland vegetation. Over 50 percent or significantly wetter (becoming a generally of the country supports only extensive, semi-arid country such as Kenya). If realized, nomadic pastoralism, with just 13 percent such changes would have profound effects on suitable for cultivation, including seasonal both natural and agricultural ecosystems. agropastoralism, and a much smaller irrigated agropastoralism zone located along the two In addition to the changes in mean conditions, main river valleys (the Shabelle and the Juba). variability and occurrence of climate extremes These limited agricultural areas, and nearby or are also expected to increase. Recent trends coastal cities, support the vast majority of the toward increasing numbers of extremely hot population (Figure 6.1). and wet days are likely to continue or accelerate. Figure 6.1: Projected mean annual temperature (°C) Figure 6.2: Projected mean annual precipitation (mm) 34 1,250 32 1,000 30 750 28 500 26 250 24 0 2000 2020 2040 2060 2080 2100 2000 2020 2040 2060 2080 2100 Historical reference period, 1995-2014 SSP1-1.9 Historical reference period, 1995-2014 SSP1-1.9 SSP1-2.6 SSP2-4.5 SSP1-2.6 SSP2-4.5 SSP3-7.0 SSP5-8.5 SSP3-7.0 SSP5-8.5 Source: World Bank Climate Change Knowledge Portal: Somalia Source: World Bank Climate Change Knowledge Portal: Somalia 24 S om a l i a Eco n om i c Update Special Focus Figure 6.3: Trends in Somalia’s largest daily maximum temperature and precipitation a. Temperature b. Precipitation 38 50 40 37 30 mm 36 C o 20 35 10 34 0 1950 1960 1970 1990 2000 2010 2020 1950 1960 1970 1990 2000 2010 2020 Annual daily Trend Trend Trend Annual daily Trend Trend Trend maximum 1951-2020 1971-2020 1991-2020 maximum 1951-2020 1971-2020 1991-2020 Source: World Bank Climate Change Knowledge Portal: Somalia. Figure 6.4: Projections of the annual number of days (with max. temperature above 35°C) for different greenhouse gas (GHG) emissions scenarios 2000 2030 2050 2080 RCP2.6 RCP6.0 140 160 180 200 220 240 20 40 60 80 120 140 Very hot days (Number/year) Difference to year 2000 Source: PIK/Adelphi 2022. 6.2 Climate Disasters extreme weather and associated disasters, with droughts accounting for the largest share.6 Two Currently, the most critical risks for Somalia— consecutive below-average rainfall seasons (fall those that already have massive human and 2010 and spring 2011) devastated livestock and economic impacts likely to persist or worsen— crop production, causing an increase in food are major climate disasters, especially drought prices and leading to severe famine.7 Since then, and inland flooding. Since 1965, Somalia has famine conditions have been averted through endured multiple severe droughts, as well as the provision of emergency funding and food floods and storms. Since 2012, an average of 1. aid across Somalia during drought events (Heslin 8 million people per year have been affected by and Thalheimer, 2020). 6 Source: EM-DAT database. 7 Sources: Integrated Food Security Phase Classification IPC-CH Dashboard; World Bank Open Data. June 2 0 2 4 | Edition No. 9 25 Special Focus Droughts are Somalia’s most frequent and costly flooding8 responds to precipitation across natural disasters. They can occur anywhere river catchments, often accumulating over a in the country and have very strong poverty period of weeks. Somalia already has very high linkages. It is the most common shock reported variability in rainfall, and this will continue in by households, as well as affecting the largest the future. Inter-annual variability is projected share of population (according to geospatial to increase relative to the present day, resulting analysis). Severe and prolonged droughts are in more frequent wetter and drier years relative highly likely to be a prominent feature of to the mean. Heavy rainstorms are projected Somalia’s future climate for decades to come, to increase in frequency and intensity. A recent although long-term trends are uncertain due to World Bank study estimates that between 15 the range of potential precipitation outcomes. and 20 percent of Somalia’s total population While low levels of precipitation are a key driver is exposed to a 15 centimeter (cm) or more of droughts, higher temperatures cause greater flood risk. In the Juba and Shabelle river basins, evapotranspiration, which also contributes to this figure rises to between 20 and 30 percent reducing soil moisture. Even under the most (Rentschler and Salhab, 2020). Agriculturalists likely precipitation scenarios, which predict a and the urban poor are typically the most moderate increase in mean rainfall, drought exposed to floods. occurrence is likely to be at least as frequent as at present, or even to increase, due to increased 6.3 Chronic Climate Change Stresses on temperatures driving higher soil water loss Agricultural Productivity through evapotranspiration and high rainfall variability bringing more dry spells. Agriculture, including crop production and livestock husbandry, is essential to the Figure 6.5: Projected annual SPEI Drought Index livelihoods of the rural population. It is also essential to the country’s food security and 2 economic growth prospects. Climate impacts on agriculture and livestock have very direct 1 poverty implications. Pastoralists have the 0 highest poverty rates in the country and are poorly integrated into the wider national -1 economy, including limited access to veterinary services (Plaza and Cerruti, 2022). This severely -2 limits opportunities to manage climate risk to 2000 2020 2040 2060 2080 2100 livestock effectively and efficiently. Rural poor Historical reference period, 1995-2014 SSP1-2.6 SSP1-1.9 SSP2-4.5 households’ limited assets and social networks SSP3-7.0 SSP5-8.5 mean that they are unable to substitute for Source: World Bank Climate Change Knowledge Portal. Note: Negative values of the Standardized Precipitation income and subsistence food losses resulting Evapotranspiration Index (SPEI) indicate higher likelihood of drought, i.e., this graph is suggesting outcome is uncertain, but a slight trend from livestock loss and crop failures. Even toward increasing drought is more likely moderate losses can cause severe hardship, Somalia is also highly vulnerable to fluvial, and distress sales can severely compromise pluvial, and coastal floods. However, the poor rural households’ abilities to reestablish temporal and spatial scales differ between secure livelihoods. Failure of successive flood types, with pluvial flooding driven by growing seasons is a major driver of internal local and immediate events, whereas fluvial displacement. Displaced households frequently 8 Fluvial floods are common along Somalia’s two major rivers. The Shabelle and the Juba flood regularly after the Gu (March–June) and Deyr rains (October–December). 26 S om a l i a Eco n om i c Update Special Focus abandon their agricultural assets, making it an average of 20–30 percent in Somalia and very difficult to reestablish their livelihoods at these losses may exceed this range in some a later stage. cases. The greatest determinant of yields will be water availability, and the high uncertainty Erratic weather patterns and prolonged dry in predictions for Somalia means that there are spells are a constant constraint on Somalia’s currently no robust predictions. agricultural production, particularly in the absence of widespread irrigation. Crop yields Projected shifts in weather patterns are also are particularly sensitive to water stress in the likely to provide suitable environments for an middle portion of the growing season. Despite increasing incidence of crop pests and disease. the probability of modest increases in overall This will affect agricultural livelihoods and rainfall, the more pronounced increase in food availability across the region (Richardson temperature is likely to have a greater impact on et al., 2022). There may be a reduction in the crop production, with an increasing probability prevalence of some vectors if climatic conditions of failed growing seasons. Livestock production become too warm or humid for them to thrive. is also coming under increasing threat. Reasons At present, however, making robust predictions for this include climate change-related water of likely pest and disease impacts is not possible, shortages, lack of availability of and access to as there is inadequate understanding of the good pasture, invasion of unpalatable plant specific relationships between weather events, species, deforestation and other forms of land including seasonal patterns, and the severity of degradation, animal diseases, and natural impact of individual pests and diseases. shocks such as drought (FRS, 2018). Shortages of water and associated pasture Rising temperatures between the months of growth also contribute to reduced productivity September and March may cause the soils and reproductive performance of livestock. in Somalia to become drier. Dry spells may This includes a slow growth rate of animals, increase in frequency and duration, and the deterioration in body condition, reduced milk projected increase in temperature will also production, and poor reproductive performance increase evapotranspiration and, hence, crop in mature animals. Changes in temperature may water demand (Richardson et al., 2022). Staples, compromise the quantity and quality of forage by such as maize, sorghum, and millet will struggle increased lignification of plant tissues, reducing with rising temperatures in Somalia. Projections digestibility and the rate of degradation. suggest crop yields across SSA will decrease by 10 percent under warming scenarios of 2°C, Heat stress on livestock is also a threat given and up to 20 percent beyond 2°C (Carleton, that it decreases livestock productivity through 2022). Beyond a temperature increase of 3°C, reduced food intake and weight loss, reducing all present-day cropping areas for maize, millet, the chances of survival and reducing fertility and sorghum in Somalia are likely to become (Bernabucci et al., 2010; Lallo et al., 2018; unsuitable. Somali cereal production levels Nardone et al., 2010). Average maximum have not increased in the past 60 years. Studies temperatures and the number of very hot days have typically suggested a high level of current each year (daily maximum temperature above crop losses in Somalia due to climate change 35°C) are projected to increase with high certainty of around 30–50 percent. According to the across the country, with central Somalia—an Somalia Agriculture Technical Group (SATG), important area for livestock—particularly badly these grain losses (of the total harvest) rise to affected. The frequency of severe heat stress June 2 0 2 4 | Edition No. 9 27 Special Focus for livestock is estimated to have increased be impacted by increases in water temperature significantly within the recent past in 4–19 (and therefore decreases in dissolved oxygen) percent of East Africa. It is most pronounced for driving away active species, such as tuna, which dairy cattle (26 percent of the area), while heat are intolerant of low oxygen levels. To date, the stress risks for sheep and goat production only Somali upwelling does not seem to have been increased 4–7 percent (Rahimi et al., 2022). The impacted, but climate change is already altering main response strategy to livestock heat stress is water temperature and various aspects of ocean higher water consumption, which is challenging bio-geochemistry off Somalia’s coast (World where availability of water resources is already Bank, 2021a). Recent modeling (MEP, 2021) constrained (discussed above), as in much of indicates that by the end of the century under SSA (Porter et al., 2014). a strong climate change scenario the Somali upwelling system will be about 20 percent less Climate change shifts key environmental productive overall, and sea surface temperature factors that influence the abundance of pests, will rise by 4°C overall. More than a 3°C rise pathogens, and vectors that affect livestock. relative to baseline conditions is considered These effects are species specific, and in many catastrophic for most coral species, which in cases poorly understood, yet some predictions Somalia will occur as early as the 2050s. The can be made (Richardson et al., 2022). Somalia surface waters of the Somali Economic Exclusion has suitable environments for Rift Valley Fever Zone (EEZ) and upwelling region will become (RVF). For example, Ae. Aegypti (the vector for unsuitable thermal habitat for adult yellowfin RVF) is expected to be favored by temperature and bigeye, and for tuna larvae from as early and rainfall increases, hence RVF incidence as the 2060s. Climate change is likely to have a is likely to increase in the future (Diallo et al., substantially impact on mangrove ecosystems 2022). Historically, RVF outbreaks have been in Somalia due to sea-level rise of 1.1 to 3.8 most severe in the southern and central parts meters, changing ocean currents, increasing the of Somalia, but in future may become more intensity of storms, increasing temperatures, common in the north of the country (Diallo changing precipitation patterns, and reducing et al., 2022). Projected future increases in the overall oceanic acidity (pH) (Ward et al., 2016). frequency and severity of El Niño events will pose serious challenges for managing RVF 6.4 Heat Stress and Human Health outbreaks.9 Predicted increases in temperature are also expected to spread the tsetse fly, and High temperatures and humidity place therefore African trypanosomiasis. Increased physiological stress on human bodies, reducing flooding of fragile ecosystems can also lead to productivity and eventually leading to a outbreaks of desert locusts, African RVF, tsetse range of chronic and acute health problems. fly, or other vector-borne diseases, as well as to Heat stress results in lost labor productivity outbreaks of animal diseases as berkads (sub- as people adapt physiologically (sweating) surface water reservoirs) become contaminated and behaviorally (self-pacing). When heat (FRS, 2013). stress exceeds the body‘s ability to maintain a comfortable core temperature, a range of heat- Marine fisheries are also expected to related illnesses can occur (Cheung, Lee and be impacted by climate change through Oksa, 2016). High temperatures can exacerbate changes in ocean current that may disrupt cardiovascular disease (Cosselman, Navas-Acien the upwelling that drives the productivity of and Kaufman, 2015), strokes, renal diseases Somali waters. Moreover, it is also expected to (Barraclough et al., 2017), neurodegenerative See for example, Ying et al. (2022). 9 28 S om a l i a Eco n om i c Update Special Focus diseases (Killin et al., 2016), and type 2 diabetesdiseases are all transmitted by mosquitoes, (Cook, Wellik and Fowke, 2011). During extreme whose range is largely determined by heat events, people with existing cardiovascular temperature, humidity, and the availability of disease are at greater risk of hospitalization standing water. Recent modeling of malaria and death. Extreme temperatures (particularly prevalence across Africa suggests that the sustained wet bulb temperatures above 36°C) incidence of malaria in Somalia may reduce can be fatal. over time. This is in contrast with the rest of East Africa, where a rise in endemic cases of malaria Heat stress will affect agricultural production is projected across the region. Conversely, and urban residents. Occupational heat- dengue and RVF, which are spread by a different related mortality is 35 times higher among mosquito species, are predicted to increase in agricultural workers than workers in other the future (Diallo et al., 2022). Increasing urban industries. Agricultural workers in Somalia are populations and spells of high rainfall under El often exposed to hot environmental conditions. Niño conditions are additional risk factors for Hyperthermia from exertion and environmental dengue and RVF, respectively. conditions during agricultural work can trigger a range of symptoms and may lead to the death of There is a well-understood strong positive workers. Somalia’s cities and towns are all likely association between the prevalence to experience urban heat island (UHI) effects, in of gastrointestinal diseases and high which temperatures can be 1–3°C higher than temperatures. In addition, widespread outbreaks outlying areas. Structures such as buildings, of many waterborne diseases such as cholera, roads, and other infrastructure absorb and cryptosporidium, E. coli infection, giardia, re-emit the sun’s heat more than natural shigella, typhoid, and viruses such as hepatitis landscapes, including forests, grasslands, and A have strong links to extreme weather events water bodies. In addition, UHI effects can cause (WHO, 2003). Floods frequently contaminate smog to form, trapping particulate matter and drinking water sources and increase the other urban pollutants into aerosols that harm prevalence of diarrhea and other waterborne human health. diseases. During droughts, restricted access to clean water and/or large numbers of internally Changing rainfall patterns and rising displaced persons (IDPs) crowded together temperatures will affect the geographic range with inadequate access to water and sanitation and incidence of vector-borne diseases, can give rise to rapid increase and spread of including malaria, dengue, and RVF. These diarrheal diseases. June 2 0 2 4 | Edition No. 9 29 Special Focus 7. Social and Economic Impacts Climate change in Somalia is characterized by and purchasing power. The drought was the recurrent drought and regular inland flooding, longest—it started in late 2020 and continued leading to failed crops, loss of livestock, and up to early 2023—and most severe in recent Somalia’s chronic food insecurity. Climate crises history. Indeed, it surpassed the 2010–2011 threaten Somalia’s socio-economic progress by and 2016–2017 droughts in both duration and increasing water and food scarcity, the need severity. The debilitating drought left Somalia for humanitarian assistance, displacement, on the verge of a humanitarian catastrophe, and the degradation of traditional livelihoods. destroying crops and livestock, and forcing huge Climate change and natural disasters numbers of people to leave their homes in search increasingly affect people’s well-being and of food and water. Drought also decimated development prospects. A recent World Bank the performance of the agriculture sector as study shows that climate change may cause one-third of all livestock in the worst-affected 216 million people to migrate in their own areas had died since mid-2021. In addition, country by 2050 and push as many as 132 crop production remained extremely poor. This million people into poverty by 2030 (World intensified a humanitarian crisis, with nearly Bank, 2021). Fragile contexts such as those in half of the population being food insecure, and Somalia have recently faced cyclical climate- 1.3 million people being displaced. induced shocks from drought, to flooding and locust infestations. Because of Somalia’s Most of Somalia’s many climate challenges are economy reliance on natural resources and high-frequency events or chronic processes man-made degradation of natural resources that affect the poor disproportionately and such as charcoal production and overgrazing, are likely to increase with climate change. The climate change could make the country more extent and burden of climate impacts will shift vulnerable to poverty and food insecurity. due to both climate change and wider socio- Greater drought exposure tends to decrease economic trends. Demographic growth and consumption by a significant margin in rural economic development will expose more urban Somalia, increasing poverty levels. This and infrastructure assets to flood hazards, and adverse impact of climate change on the poor shifting climate conditions will put more chronic will be far-reaching. stress on livestock and agricultural systems, human health and productivity, and the water The recent drought in Somalia was among supply. Extreme events such as droughts and the most devastating in recent history. floods currently impose the largest economic Following news about numerous livestock impacts, but slow-onset impacts on agriculture deaths from shortage of water, grim stories of and human health may surpass them in future. human suffering started to emerge. Drought Biophysical effects of climate change impact the dampened economic activity in 2022, wiping economy through a number of impact channels, out the agriculture sector and intensifying a the main ones of which are discussed below humanitarian crisis. Relentless drought and high (Table 7.1). food prices weakened household livelihoods 30 S om a l i a Eco n om i c Update Special Focus Table 7.1: Summary of Somalia’s climate risks with magnitude and trend measures Note: Impact is figured per event, or per year for routine or chronic events, for economic cost and mortality. Frequency ranges from rare (multidecadal), to occasional (once or twice a decade); to frequent (at least 50 percent of years); to routine (generally every year); to chronic (constant impact, not discrete acute events). Economic cost is figured in US$ and includes damage and losses; those that are particularly uncertain are denoted with a “?” Mortality is indicated if applicable. Poverty linkage is whether impact disproportionately affects the poor, with a very weak link meaning the poor are much less affected than others, weak less affected, neutral affected similarly to others, strong affected more, and very strong meaning the poor are much more affected than others. Climate trend reflects strength of expected change in climate stressors influencing risk, as well as the strength of their influence on the risk (as most risks will be complex processes involving many drivers). 7.1 Damage and Physical Capital of poor quality and offers little protection from flooding and heat. Somalia is ranked lowest of Disruption of infrastructure and associated all African countries in the African Development services (largely associated with flooding, but Bank’s Africa Infrastructure Index (AfDB, 2020). also the direct effects of heat) can be a major Around 90 percent of Somalia’s primary roads drag on the economy, particularly affecting the development of trade and urban economies. require extensive rehabilitation: only 13 percent Roads and air transport are particularly of its roads are paved, with the remaining earth vulnerable to flooding and high temperatures. or gravel. Poor maintenance has impaired the Before the civil war, Somalia had 15 operational quality of many roads, including paved routes. ports. In recent years, only four ports— Seasonal flooding frequently makes roads Mogadishu, Bossaso, Berbera, and Kismayo— inaccessible or impassable. Moreover, in a hot have been fully operational and are most country like Somalia, the potential risk to paved vulnerable to storm surges and sea-level rise. road surfaces is high. Somalia’s residential building stock of largely June 2 0 2 4 | Edition No. 9 31 Special Focus Electricity supply in the country is fragmented The costs imposed on Somalia’s economy and extremely limited, based on mini- and by the impacts of climate change on its micro-grids operated by private sector energy infrastructure are yet to be systematically service providers (ESPs). Almost all of these are estimated. Despite the relative frequency of currently powered solely by diesel generators floods, the direct costs of physical damage to (Aynte et al., 2022), but there are a few hybrids infrastructure are probably relatively modest mini-grid systems that combine diesel with compared with many countries simply because wind and/or solar power.10 Wood fuels remain stocks of infrastructure remain low. Major floods the overwhelming source of domestic energy can result in several hundreds of million dollars in Somalia. However, the current relevance in losses and damage to infrastructure. Damage of these risks to Somalia is low, as there are from coastal flooding is limited at present, but currently no large thermal power plants, and later in the century major costal floods could very limited distribution infrastructure or power result in hundreds of million dollars in damage generation based on renewables. due to increased sea level and far greater coastal asset stocks (based on data below). The failure Urban water supply could become a major to provide and maintain key infrastructure to challenge in future, although much of the support robust water, transport, energy and change will be driven by the increase in cooling services in the face of climate pressures population and demand rather than climate. is likely to be a major constraint on development Rising temperatures and changes in runoff and economic diversification, and therefore the patterns—within Somalia and upstream in opportunity costs are likely to be very high. Ethiopia—are expected to influence the future yield of both groundwater and shallow water 7.2 Impacts on Labor and Human Capital (Gökçekuş, Kassem and Yusuf, 2022). The water There are no Somalia-specific studies on and sanitation sector is already underdeveloped the impacts of heat on labor productivity. A in Somalia, with only 56 percent of the population recent diagnostic covering several locations in having access to a basic water supply. A recent East Africa suggested that, by end of century, survey, covering 15 of Somalia’s 18 regions, productivity losses in locations similar to Somalia found that around 65 percent of households could range from 6 to over 13 percent in high- had no access to safe drinking water, with the intensity work, from 2 to 8 percent for medium- current ongoing drought being a major reason intensity work, and up to 2.5 percent for low- for this (SCS, 2022). intensity work. Other international studies Table 7.2: Projected impacts of coastal flooding with 25-year return period, excluding damage to crops and livestock Baseline 2030 2050 2080 2010 Urban damage (annual, US$ million) 25 200 650 2,500 Affected population (’000 people) 3 10 14 24 Affected GDP (annual, US$ million) 1.3 9.2 27 120 Proportion of GDP (%) 0.03 0.07 0.09 0.13 Source: World Resources Institute: https://www.wri.org/aqueduct Note: These figures are derived from a global dataset with limited direct empirical inputs, and hence should be treated with some caution. The World Resources Institute Aqueduct flood risk tool uses a cascade of models within the Global Flood Risk with IMAGE Scenarios (GLOFRIS) modelling framework. The methodology is described in full by Ward et al. (2020). NESCOM, a large ESP in Garowe, and BECO, a large ESP in Mogadishu, are two examples of successful hybrid systems. Details of these experiences are documented by 10 Aynte et al. (2014). 32 S om a l i a Eco n om i c Update Special Focus have suggested higher losses (e.g. Roson and 7.3 Agricultural Production Sartori, 2016; Table 7.3). Based on an existing temperature rise of 1°C, and on an assumption Currently, climate disasters have the biggest that the value of agricultural and other exposed impacts on agricultural and rural production, forms of labor exceeds US$1 billion, the current particularly drought, which is much more cost of heat stress is conservatively estimated widespread than inland flooding. Assessment of the 2016–17 drought estimated economy- to lie in the range of US$10–US$100 million per wide losses over US$3.3 billion, mostly in the year. Current heat-related mortality is estimated agriculture and livestock sectors (FGS, 2018). at around two deaths per 100,000 people (or Livestock and crop losses affected 17 out of 18 over 300 in total) per year (PIK/Adelphi, 2022). regions in the country and there were significant price increases for key staples. In 2016, GDP The costs of climate-related diseases are growth dropped by around 3.5 percent and estimated to increase significantly. Based wages temporarily dropped by around 6.9 on extremely broad extrapolations from percent during the acute drought period, international estimates, the costs of climate- although they rapidly recovered (increasing related diseases (i.e., vector-borne and slightly) soon after the drought broke. gastrointestinal disease) may be in the order of several tens of millions of dollars per year (Climate Livestock production is several times the size Risk Review). How this burden will increase with of crop production in Somalia, at around US$3 climate change is not well understood, but it is billion per year. Typical losses from climate- likely to increase significantly. Droughts are also related impacts on pasture productivity and associated with a high human capital impact and animal health may be in the order of a few mortality rate. UNICEF (2022) estimates that the hundred million dollars per year (World Bank, severe drought-related famine of 2011 killed 2023). Outbreaks of livestock disease can about 260,000 people in Somalia—more than result in significant losses of exports due to the half of whom were children. The main causes of imposition of import bans in market countries. death were malnutrition, diarrhea, and measles. For instance, the 2006–07 RVF outbreak in Human health impacts have a set of implications Somalia is estimated to have resulted in total for human capital that affect productivity and economic losses to the livestock sector of around growth more broadly, particularly in relation to US$470 million at 2007 prices (FAO, 2017). efforts to industrialize the economy or develop Moreover, the average annual losses to camel higher-value service sectors. milk and meat production from one species of Table 7.3: Heat impacts on labor productivity, by sector (percentage change) Agriculture +1°C +2°C +3°C +4°C +5°C -3.51 -7.73 -12.82 -18.21 -24.87 Manufacturing +1°C +2°C +3°C +4°C +5°C -1.23 -3.14 -5.54 -8.41 -11.84 Services +1°C +2°C +3°C +4°C +5°C 0.00 -0.11 -1.33 -2.33 -2.88 Source: Roson and Sartori, 2016. June 2 0 2 4 | Edition No. 9 33 Special Focus trypanosome has been estimated at a couple of ability of the agriculture, livestock, and fisheries hundred million dollars (Salah, Robertson and sectors to ameliorate rural poverty, improve Mohamed, 2015), implying that losses brought food security, improve the balance of trade, and on from that disease alone could be about twice contribute to overall economic growth. as high. 7.4 Large-scale Displacement The fisheries sector also holds substantial potential for Somalia, provided governance Devastation of the rural economy, particularly improves. Somalia has a productive marine from the effects of drought, combined with ecosystem due to seasonal upwelling along its high levels of conflict and insecurity, has Indian Ocean coast. However, weak governance resulted in the large-scale displacement of the is a major constraint, due to the lack of an Somali population. Drought is the biggest single adequate regulatory environment, insufficient driver of internal displacement, which creates a coordination between the federal and regional raft of additional vulnerabilities, particularly for fisheries ministries, and a lack of monitoring women and other vulnerable groups. Because control and surveillance. The value of commercial these events can also trigger conflicts, the fishing in Somali waters has been conservatively combined economic impact is far-reaching and estimated at around US$135 million annually complex. Between 2008 and 2023, almost 6.7 (SomInvest, 2022). Future catch reductions million people were displaced (IOM, 2024), and by 2100 due to climate impacts (based on the climate-related disasters are most commonly modeling described above) are very uncertain, reported as the cause of displacement. Statistical but range between 9.5 percent (RCP 2.5) and analysis of displacement, conflict, and weather 60.9 percent (RCP 8.5). data over 2016–18 shows that temperature anomalies from 1°C to 2°C (which commonly Losses to agricultural and rural productivity occur in Somalia) led to an approximate tenfold have wide-ranging social and economic increase in IDPs. A reduction to 50 mm in consequences on exports, food security, social monthly rainfall from 100 mm is associated with vulnerability and cohesion, and have also an approximate doubling of IDPs, and a further contributed to entrench Somalia’s governance reduction in precipitation from 50 mm to 0 mm and conflict crises. Addressing increasing leads to another fourfold increase in predicted stresses on rural livelihoods will be critical to the IDPs (Thalheimer, Schwarz and Pretis, 2023). Figure 7.1: Weather-related disasters in Somalia, 2008–23 a. Internal displacements Total: 6.7 million b. Disaster events reported Total: 270 2,200 Storm 2,000 1% 1,800 Thousands 1,600 1,400 1,200 1,000 Drought 800 Flood 43% 600 56% 400 200 - 2008 2010 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Source: Based on International Displacement Monitoring Centre Dashboard, Somalia. 34 S om a l i a Eco n om i c Update Special Focus 7.5 Poverty and Vulnerability are less likely to be impacted by drought, but within nomadic populations, the impacts are Almost all climate risks affect the poor relatively even across economic classes. The disproportionately because they are more poor are at much higher risk of heat stress exposed to climate risks and less able to buffer due both to exposure being most severe for the impacts. Initial findings of the upcoming those engaged in physically demanding work Somalia Poverty Assessment reveal that over 40 outdoors, particularly agricultural workers and percent of the Somali population live in areas construction laborers. Furthermore, poorer that have been exposed to either drought, urban and internally displaced populations extreme heat, or extreme flooding, and with are usually the most affected by urban heat over two-thirds of the country’s population islands, as they live in crowded conditions, reported having experienced at least one with limited tree cover and open green areas, shock in 2021 or 2022 that severely affected and their buildings are poorly constructed, their economic situation (World Bank, 2024). poorly insulated, and often have metal roofs Regions with higher poverty rates typically have (Li et al., 2021). a larger share of the population that has been exposed to a climate shock, with most affected The poor have far fewer and less effective by drought, the Shabelle river basin most often coping strategies available to them. Pape and affected by floods, and the northeast exposed Wollburg (2019) identified significant adverse to excessive heat. impacts of the 2016–17 drought on poverty, consumption, and hunger. However, richer The poor are more exposed to climate households have much greater capacity to impacts because they are more likely to work cope with impacts through relying on savings, in vulnerable sectors and live in vulnerable whereas poorer households are much more settings. Impacts of drought are focused on likely to resort to maladaptive responses, nomadic and rural residents (affecting 87 and including reduced food consumption, removing 53 percent, respectively, in 2022), although children from school, sale of land or livestock, they are also remarkably widespread, with 36 and displacement. Rural poor households’ percent of urban residents also affected. Richer limited assets and social networks mean that urban (and to a lesser extent rural) households they are unable to substitute for income and Figure 7.2: Share of households affected by drought by Figure 7.3: Poverty headcount by region and share of residency and consumption quintile, 2022 population exposed to climate shocks, 2022 80 100 Share exposed to drought, flood, heat shock Gedo Bay 70 90 Middle Shabelle 60 80 50 70 Lower Shabelle Hiraan Percent 60 Galgaduud 40 Nugaal 50 30 Bari 40 Awdal Lower Juba 20 30 Waqooyi Galbeed 10 Mudug 20 Togdheer Banadir Sool Bakool 0 10 Poorest 2nd 3rd 4th Richest Poorest 2nd 3rd 4th Richest Poorest 2nd 3rd 4th Richest Sanaag 0 30 40 50 60 70 80 90 100 Rural Urban Nomadic Poverty Headcount (2022) Source: Somalia Poverty and Equity Assessment, Forthcoming; WorldPop, FAO, GFDRR and Fathom (version 3). Notes: Drought hazard is defined as areas where at least 30 percent of cropland/grassland have experienced drought (VHI below 35) for the past 39 years. Percentage of people exposed to extreme heat (33°C day max WBGT). Percentage of people exposed to river flood hazard (inundation depths of at least 50 cm during 1-in-100-year flood events). June 2 0 2 4 | Edition No. 9 35 Special Focus subsistence food losses resulting from livestock age, education, religion, livelihood, family status, loss and crop failures. Even moderate losses can displacement, and disability. These markers of cause severe hardship, and distress sales can exclusion intersect and compound each other— severely compromise poor rural households’ access to natural and material resources, abilities to reestablish secure livelihoods. Failure including land and water, livestock, employment, of successive growing seasons is a major driver self-employment, business development, credit of internal displacement. Displaced households facilities, and wealth creation opportunities frequently abandon their agricultural assets, depend, to varying degrees, on whether an making it very difficult to reestablish their individual is: a man, a woman, a minority group livelihoods at a later stage. Pastoralists have man or woman, an IDP or a young man, as well the highest poverty rates in the country and as clan kinship network and increasingly, what are poorly integrated into the wider national form of Islam one follows (Musse and Gardner, economy, including limited access to veterinary 2013). These dimensions of social vulnerability services (Plaza and Cerruti, 2022). This severely compound climate vulnerability. limits their opportunities to manage climate risk to livestock effectively and efficiently. Mobility IDPs are especially vulnerable to the effects of is important to Somali pastoralists to respond climate events, such as drought and flooding. to the spatial-temporal heterogeneity of forage The estimated 3.9 million people who were resources, but increasing barriers to mobility internally displaced in Somalia at the end of have contributed in a significant way to the 2023 are among the poorest people in the increased severity of drought impacts in the country. Displacement can also compound the country. Work-related exposure to extreme effects of drought in areas where IDPs choose heat is also exacerbated where people are to settle by increasing competition for scarce more dependent on day-to-day income, resources (Figure 7.4). They faced higher risks and unable to take breaks or access cooling during the pandemic, especially because of the solutions (air conditioners, cold water, etc.). limited space in temporary shelters and internal Poor families may be unable to access or pay displacement camps. for medical care to treat heat-related health problems (Gronlund, 2014). Somalia’s socio-economic indicators are among the lowest in the world for both males and Despite some progress, social vulnerability females, but gender disparities are especially and fragility remain high in Somalia. Social stark. The Gender Inequality Index for Somalia fragmentation is a prevalent feature of Somali is 0.776 (1.0 = complete inequality), and the society, and in the absence of trusted public country performs particularly poorly on health, institutions, communities increasingly rely on empowerment, and economic measures. For informal networks and traditional structures. almost two decades now, women’s incomes Certain categories of citizens stand out as being have become crucial for household survival, more disempowered and disadvantaged than irrespective of whether there is a male individual others. These groups are discriminated against within the household. Nonetheless, women in existing legal and political institutions, through continue to be excluded from political and public social norms and values, and by the clan-based decision-making and have limited space (even system of power relations that underpins social at the community level) to exercise agency and organization. Markers of exclusion include participate in society. Despite having played gender, ethnic and/or clan identity, geography an especially dynamic role in Somali society (e.g., rural/urban), social and/or economic class, as community mobilizers and peace builders, 36 S om a l i a Eco n om i c Update Special Focus Figure 7.4: Violence, food insecurity, and internal displacement across Somalia a. Armed violence b. Food insecurity and internal displacement Fatalities J an 2019 – Sep 2022 400 150 10 Urban Areas Rivers Source: NUPI and SIPRI 2022 based on data from ACLED, Africapolis and Natural Earth. women and girls are assigned social and legal the most valuable agricultural assets (land and status within the clan system, and confront livestock) are primarily owned by men. In times multiple dimensions of disempowerment and of crisis, such as the current ongoing drought, discrimination across most categories of social, men migrate looking for pastures and water for economic, and human development (Musse their livestock or move to urban centers looking and Gardner, 2013). for work. Women remain at home with children and the elderly, sometimes moving to IDP camps All forms of vulnerability are deeply gendered, or to small towns for petty trading. While the with women and girls confronting significant aim of these strategies is to access resources gender disparities, including high levels of and security, in practice they expose women sexual and gender-based violence. Although to additional security threats (World Bank and both Somali men and women are reliant on FAO, 2018). climate-sensitive economic activities such as agriculture, livestock, and fisheries, women Youth face critical challenges of unemployment, are more likely to be engaged in subsistence- underemployment, and the absence of level production, providing over 60 percent sustainable livelihood opportunities more of the labor. Consequently, their livelihood generally. Almost 2 million youth under age 25 and food security are more sharply affected live in displacement due to violence, conflict, and by climate-induced downturns in production extreme weather events across Somalia (IDMC, (Somalia Institute for Development Research 2022). About 76 percent of displaced boys and and Analysis, 2019). Women are also more 71 percent of displaced girls are enrolled in likely to engage in agricultural value chains that schools (IDMC, 2020). Displaced children with require less land and capital due to gender- disabilities face an additional burden in enrolling inequitable inheritance laws, as well as limited in schools and receiving needs-specific support collateral availability compared with men. (IDMC, 2021). Many vulnerabilities intersect They are less mobile and less likely to employ and compound each other; a young female productive inputs or utilize available extension IDP belonging to a minority clan is likely to be services. Women have weak land tenure rights disadvantaged on multiple counts. and limited access to extension services, and June 2 0 2 4 | Edition No. 9 37 Special Focus 7.6 Climate, Fragility and Conflict Small-scale conflict over land resources is widespread in Somalia and is considered Resource scarcity and displacement are the two to aggravate the existing resource scarcity major pathways through which climate change and humanitarian crisis (Thulstrup et al., shapes social fragility and conflict. About 40 2020). Protracted land-based conflicts have percent of all intrastate conflicts can be linked also weakened customary natural resource to the exploitation of natural resources (UNEP, management systems, rendering traditional 2021). There is growing evidence that links dispute resolution mechanisms ineffective increased temperatures and drought to conflict or disempowered (Vivekananda et al., 2019). risk in Africa, particularly in populations that Customary law has become an ineffective depend on agriculture and natural resources. tool to settle the growing number of resource conflicts, often driven by extreme weather and In Somalia, climate crises have historically been becoming increasingly complex and virulent. influenced by political factors—specifically, In such situations, shifts in resource access conflict and political instability (Maxwell and competition have a high potential to both and Majid, 2016). In particular, the shape and escalate into violent conflict and to further intensity of competition over natural resources degrade the resource base. It is widely accepted has been formed by Somalia’s climate and that the combined social impacts of climate continues to be affected by climate change. This and conflict contribute to maintaining weak in turn has influenced the social divisions and institutions and governance in Somalia, which in hierarchies, and the political economies that turn exacerbates or at least perpetuates conflict. have driven conflict. While there is little clear evidence of internal displacement leading directly to increased Control of its scarce arable land has been conflict, it exacerbates general vulnerability and closely connected to power in Somalia’s erodes local conflict-management institutions. recent political history in ways that intersect with climate change (Jaspars, Adan and Al-Shabaab has exploited crises and Majid, 2019). During the Barre military junta vulnerabilities linked to climate impacts government in the 1970s and early 1980s, there in ways that drive further fragility. High was intensive cash cropping in the fertile land youth unemployment associated with shocks along and between the rivers, relying on cheap and displacement is also believed to have and exploitable labor. After state collapse in the contributed to al-Shabaab recruitment late 1980s, clan-based militias fought for control (UNDRR, 2022; El-Bushra and Gardner, 2016). over resources. Competing claims of ownership During a key period of al-Shabaab control of are also common in urban areas, frequently southern Somalia (2006–12), it also exploited over land that was once public or either looted charcoal production that drove the loss of over or vacated by fleeing households (RVI and HIPS, 7 percent of remaining forest (Rembold et al., 2017). The history of nationalizing land has 2013), while earning it US$38–US$56 million, allowed for patronage between the state and strengthening its ability to both conduct influential clan members and political elites, attacks and expand recruitment (Dek, 2021; while marginalizing vulnerable groups such Ujunwa et al., 2021). Even following a charcoal as those living in displacement and increasing export ban, Kismayo port is alleged to be a conflict (Deherez, 2009). major conduit for illegal charcoal, involving local businesspersons, political leaders in the Jubaland administration, al-Shabaab, and units of AMISOM (Majid and Abdirahman, 2021). These further drives land degradation and vulnerability to climate impacts. 38 S om a l i a Eco n om i c Update Special Focus 8. Integrating Climate Considerations into Somalia’s Development Somalia has made progress in developing a Climate adaptation and development cannot climate policy framework, but more work be separated in Somalia; neither can one is needed to mainstream climate in sector succeed without the other. This will require policies and strategies. Climate and disaster risk working on two overall priorities in parallel: management in Somalia is increasingly featured (i) managing the impact of climate disasters, within the national conversation around political so they do not torpedo development; and (ii) stabilization and development trajectories. The climate-proofing development for economic core Somalia climate change policy documents growth and diversification away from inherently recognize Somalia’s dire climate status and vulnerable sectors. In the first area, DRM, social reference its ranking as one of the world’s most safety nets, and providing for more resilient vulnerable countries. Somalia’s Ninth National rural livelihoods and production systems are key. Development Plan 2020–2024 (NDP9) identifies For the second, it will be imperative to support environmental and climate change as one of the development of livable cities supported the most critical drivers of poverty, linked to by resilient infrastructure and services, as well food insecurity and reliance on food imports. as sustainable human capital growth through It identifies a direct correlation between addressing increasing climate health stressors. increasing frequency of climate emergencies Given a wide range of important climate and displacement, and calls for improving the risks that Somalia faces, the lists of relevant resilience of the traditional livestock and crop measures are extensive. Most are already cited production subsectors, while diversifying away in Somalia’s Nationally Determined Contribution from climate-dependent sectors to achieve (NDC). More detailed work on key sectors and climate-proof economic growth. However, risks will be needed to identify and prioritize most policies and initiatives remain very high specific interventions and investment options, level. Considerable work is still required to and to assess their economic, social, and develop policy frameworks that mandate or environmental feasibility. incentivize specific priority actions and to build institutions capable of implementing, enforcing, For adaptation for the agriculture sector and monitoring these. Other challenges with respect to water storage and irrigation, impeding adaptation include the law-and- we recommend the FGS to: (i) invest in soil order situation, an unstable bureaucracy, and and water conservation infrastructure such ineffective capacity development, coupled with as terraces, subsurface dams, and rainwater significant climate finance needs. Given the harvesting; (ii) invest in upgrading and high degree of uncertainty around medium- expanding irrigation in the Juba and Shabelle and longer-term climate outcomes in Somalia, river basins (as irrigated agriculture is a it will be important to prioritize responses to key component to ensuring national food current and immediate, rather than to uncertain security; and (iii) incorporate a requirement future, conditions. Moreover, given very limited to enhance rainwater harvesting through financial resources in relation to the scale of water ponds for both livestock and wildlife needs, it is critical that national development in large linear infrastructure projects (e.g., planning should be informed by climate risks, roads, fiber-optic cables). and adaptation planning needs to be focused around key growth sectors. June 2 0 2 4 | Edition No. 9 39 Special Focus Most adaptation priorities in Somalia are Climate adaptation in Somalia must be rooted focused on addressing the acute challenges in efforts to disrupt the linkages between caused by current climate conditions, and climate, social fragility, and conflict. This requires are inherently no-regrets,11 but the risk of a do-no-harm approach, i.e., interventions to maladaptation must be taken seriously. address one dimension of the problem should Managing the impacts of climate disasters is not exacerbate another, by employing social risk largely about responding to current extreme management tools informed by the social and climate conditions, whether this involves building political context. Peacebuilding and mediation DRM systems or adopting more sustainable need to be informed by climate and security agricultural and rangeland management risks, including through appropriate social and approaches. Many investments to support climate screening. Ensuring that women, youth, resilient development, whether providing flood- disadvantaged clans, and other vulnerable resistant infrastructure or investing in human groups have full and equitable representation capital, will also respond mainly to current in the adaptation planning process is key to climate conditions, especially where they avoiding adverse social impacts of climate support general adaptability or infrastructure investments. Wherever possible, win-win that has a relatively short economic life. The solutions should be identified to address both priority interventions discussed below are the climate and social dimensions of risk in overwhelmingly no-regrets. However, to avoid tandem, so climate adaption efforts are pro- maladaptation long-term investment decisions peace and peacebuilding initiatives support should be supported by sensitivity analysis for climate adaptation. a range of climate outcomes, and/or by using other tools to support decision-making under Climate adaptation investment will need to uncertainty. In particular, this includes major be undertaken by the state, as well as private and long-lived infrastructure investments whose individuals and companies. The role of the performance will depend on future rainfall, and state is critical in facilitating farmers, property- spatial planning. Maladaptation may involve owners, and businesses to act in their own best suboptimal investments (e.g., a large water interests through providing appropriate climate storage project when smaller distributed information, technical guidance, incentives, structures would have been more cost-effective), and regulatory requirements. The largest public ineffective investment (e.g., a water storage investments will probably be in infrastructure structure no longer fit for purpose because (e.g., transport, power supply, and urban the rainfall is either much lower or higher development), where the primary objective than predicted), or harmful investments (e.g., will rarely be climate focused, but climate a water storage structure that is causing more resilience will need to be built in, in accordance losses to downstream users than local benefits). with climate-informed planning and design Decisions on where to invest resources in either specifications, typically at some significant rural or urban development should consider incremental cost. the risk of livelihoods becoming non-viable or that extremely expensive defensive structures would be required. These are particularly important considerations for transport network development and urban planning. No Regrets strategies are based on concepts and measures that can begin to be enacted now without being certain about all dimensions of future climate change. 11 Measures are taken and strategies are thus adopted in a precautionary sense with the aim of responding to possible negative impacts before they intensify. Such measures are advisable for future generations, but also relevant to enhancing the living conditions of people in the present. 40 S om a l i a Eco n om i c Update Special Focus 8.1 Resilience to and Preparedness for The NEOC is at an early stage in its establishment Extreme Climate Events and, while work has started on an office building, it is currently without dedicated A priority of the FGS is to strengthen national accommodation nor a full complement of crisis preparedness and response capacities, staff. Using the World Bank’s Ready2Respond and to link these more closely with nationally- diagnostic tool, the FGS and the World Bank owned recovery and development planning commissioned an assessment of national processes. Following the inauguration of a emergency preparedness and response (EP&R) new federal government in mid-2022, the capacity in Somalia. This includes nearly US$77 decision was made to abolish the Ministry of million in investment needs, which has informed Humanitarian Affairs and Disaster Management millions of dollars of ongoing capacity support and to consolidate (under Law No. 17) the to SODMA/NEOC. national emergency response and preparedness function in a re-constituted Somalia Disaster Somalia lacks a nationally-owned and Management Agency (SODMA). Under the new managed emergency alert and early warning arrangement, SODMA is responsible for the system. Currently, early warnings are produced oversight and coordination of the entire national by the Food and Agriculture Organization (FAO) DRM function, including early warning, disaster Somalia Water and Land Information Monitoring preparedness, disaster response (including (SWALIM), the Food Security and Nutrition displacement), and the development of durable Analysis Unit (FSNAU), and the Famine and Early solutions to displacement. In this capacity, Warning Systems Network (FEWS NET). Seasonal SODMA houses both the National Emergency climate outlook information is provided by the Operations Center (NEOC) and the Multi- Inter-Governmental Authority on Development Hazard Early Warning Center, and is required Climate Prediction and Application Center. While to maintain active relations with relevant progress has been made to strengthen hydrology ministries, departments and agencies (MDAs) at and meteorology (hydromet) and early warning the federal level, and with disaster management services over the past decade, these services agencies within the five FMSs and the Benadir are still fragmented and not integrated into Regional Administration (Mogadishu). government institutions. Somalia still lacks a nationally unified and coordinated hydromet The Government’s federal and state-level service. In addition, the limited capacity of the DRM capacities interact directly with the UN- Government in translating and disseminating led humanitarian system that, through the hydromet information is inhibiting users’ access humanitarian planning process, coordinates and uptake of early warning information, and the delivery of most emergency assistance in thus rarely results in mitigative actions. Based Somalia. In this way, SODMA is a member of the on the strategic assessment of hydromet Humanitarian Country Team (HCT) and federal services conducted with the FGS, led by the ministries participate in various UN-led cluster Hydromet Working Group (HWG) and other (technical) working groups. Similarly, state-level development partners (notably FAO-SWALIM, DRM agencies are members of “Area HCTs” UNDP, and regional partners including the IGAD and technical ministries will participate in local Climate Prediction and Applications Center cluster working groups. There are no equivalent [ICPAC]), the implementation of the first phase coordination structures for early warning or of its investment plan was initiated. A National preparedness. Hydromet Policy was developed under the June 2 0 2 4 | Edition No. 9 41 Special Focus supervision of the HWG. However, recently a Supporting policy actions new Hydromet Bill has been introduced and is a. Introducing selection of more resilient crops/ still under discussion, which appears to be at varieties/breeds, their effective cultivation/ odds with the National Hydromet Policy. husbandry, pest and disease control, and improved land and water management Resilient rural livelihoods techniques. • Soil and water conservation/agroforestry/ b. Extending extension support (including digital rangeland management. Most on-farm agricultural services encompassing agri- measures would primarily be private actions, forecasts, climate-smart practices and market but public funding would still be needed to information and linkages) and guidance to facilitate large-scale uptake of adaptation agriculture marketing and value chains. measures by individual farmers. This would c. Developing feed and fodder trade to assist include public investment in: (i) demonstration pastoralists in the timing of livestock sales. sites and extension services; (ii) support to community institutions; (iii) digital and d. Improving post-harvest handling, processing, physical market access infrastructure; and and storage to improve sanitary and quality (iv) potentially large-scale subsidy, payment standards (and therefore export markets). for environmental service, or labor-intensive e. Establishing policy frameworks and support to public works schemes. local and community institutions for natural • Sustainable rural energy provision. This would resource management and sustainable include training and support for switching to resource-based livelihoods. alternative energy sources, efficient stoves, f. Mainstreaming forest and biodiversity and regulation and management of wood fuel concerns in policy development and supply chains. investment planning within key sectors. • Protection and management of key natural g. Establishing integrated water resource habitats. This would include the establishment management planning systems and and management of terrestrial and coastal institutions to support farmer-led irrigation, protected areas, and active restoration of flood control, soil and water conservation, critical habitats, such as protective forests, and the management of key river basins. nursery grounds, wetlands, key biodiversity areas, and ecological corridors (especially 8.2 Build Resilience into Somalia’s across altitudinal and climate gradients). Development Resilient infrastructure and livable cities Investment in water infrastructure will support both DRM and resilient rural livelihoods. Somalia is urbanizing rapidly with an estimated 54 percent of the population living in cities • Water storage and irrigation infrastructure. already. Close to 75 percent of Somalia’s 2.6 Small-scale schemes, such as subsurface million IDPs are thought to be living in cities. If dams and farmer-led irrigation are proving managed well, urbanization can help Somalia to effective. develop faster and further. Global evidence shows • Flood defenses for critical locations. To avoid that, on average, for every 1 percent increase in displacement, which causes disruptions urbanization, GDP per capita grows by 4 percent. across the socio-economic spectrum, If Somalia fails to meet the needs of growing urban mechanisms can be implemented to defend populations, however, its modest successes and against flooding. wider stability could be undermined. 42 S om a l i a Eco n om i c Update Special Focus • Climate-smart public investment illegal land grabbing by non-state actors management: This includes resilient by establishing a mechanism to legally construction standards and the establishment expropriate land in the public interest of national building codes covering public and provide fair compensation to affected infrastructure (ports, roads, water, and persons. energy supply), and private construction and d. Establish a sound regulatory environment services, together with climate-smart public for third-party service delivery by taking investment management. Given financial stock of current rules governing the private constraints and resource scarcity, suboptimal sector and their incremental improvement, investments (e.g., a large water storage project consulting with providers to ensure their when smaller distributed structures would buy-in, and training communities in their have been more cost-effective), ineffective rights as consumers. investment (e.g., a water storage structure no e. Nurture the informal economy by longer fit for purpose because the rainfall is articulating the minimum regulatory either much lower or higher than predicted), standards for informal businesses. Invest in or harmful investments (e.g., a water storage human capital through improved education structure that is causing more losses to and vocational training. Invest in major downstream users than local benefits) need corridors, ports and access to electricity to to be avoided at all costs. foster private sector growth. • Resilient urban development and livable f. Adopting climate-smart public investment cities. Urban development needs to go management systems, including tools for beyond reactive construction standards screening and identifying climate risk in to encompass: (i) climate-smart urban investment appraisal. development to reduce disaster risks; (ii) ensure sustainable energy, transport, and Investing in public health for resilient human water services; and (iii) include green spaces development and efficient cooling to manage urban heat a. Managing risks of heat stress and floods by island effects. employing health and safety regulations • Flood and drought-resilient WASH for public buildings (especially schools and infrastructure. In the longer run, the viability medical facilities) and workspaces. of desalination to supply water to coastal b. Introducing post-disaster emergency health cities may also need to be assessed. provision (e.g., mobile clinics, screening and a. Adapting climate-informed spatial planning, prevention programs) in coordination with including planning for resilience of key broader disaster response architecture and infrastructure networks, resilient urban institutions. planning, and rural land use planning. c. Establishing vector control programs, b. Clearly demarcate responsibilities including active control programs, between national, state, and district or infrastructure standards, and public municipal authorities, including financing awareness. arrangements. d. Undertaking public health awareness c. Strengthen the tenure security of IDPs/ campaigns on: heat stress; water, sanitation, informal settlers by (semi) formalizing and hygiene (WASH); vector-borne disease; currently informal settlements. Curb and post-disaster health and safety. June 2 0 2 4 | Edition No. 9 43 Special Focus 8.3 Accessing Finance for Climate finance from multilateral development banks Adaptation Related Activities (MDBs). The Green Climate Fund (GCF), the Adaptation Fund and the Global Environmental Climate finance for both adaptation and climate Fund (GEF) account for only 1 percent of the total resilient development is limited in Somalia. finance going toward climate-related activities in Even though the country’s 2021 NDC to the Somalia (based on 2019 and 2020 data from the UNFCCC states climate finance needs of US$5.5 OECD DAC database). Bilateral financial providers billion a year (equivalent to US$55.5 billion and MDBs currently provide 51 and 35 percent, between 2021 and 2030), current inflow stands respectively, of the climate finance to Somalia. at just over US$300 million a year, representing However, most bilateral finance is allocated to just 6 percent of need (SPARC, 2023). However, meet humanitarian needs related to the famine it is important to understand that this figure for crisis, such as food security. Humanitarian climate finance needs is unrealistic, especially actions do not necessarily address medium- or given Somalia’s size. Compared with Somalia’s longer-term climate risks that will arise due to GDP of US$7.6 billion, an annual investment of climate change interacting with demographic US$5.5 billion is not technically feasible. Vast and economic shifts. This continued focus resources are needed to help Somalia adapt to on short-term needs without understanding climate change and address the famine that the the implications of various interventions for country has faced since 2020. This means that medium- and long-term climate change risk access to, and the effectiveness of, finance for management can perpetuate a dependence climate-related activities is fundamental. on humanitarian finance and deter efforts to promote climate-resilient and risk-informed Of the five sources of climate finance— development. Bilateral funding is also uncertain international vertical funds (e.g., GCF, GEF), and volatile. Although it involves greater carbon finance, Overseas Development discretion on the part of donors compared with Institute (ODI), domestic revenue, and private VCF funding, bilateral funding depends on the investment—ODI and private investment are thematic and political priorities of the donor likely to remain the key sources for Somalia countries, which often change. Furthermore, in the foreseeable future. Although steps to bilateral donors may prefer to allocate finance increase concessional funding from the vertical to countries with a stable investment climate, climate funds (VCFs) are of course very welcome, where the returns may be higher. 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