69511 SOMALI JOINT NEEDS ASSESSMENT MACROECONOMIC POLICY FRAMEWORK AND DATA DEVELOPMENT CLUSTER REPORT Document of the United Nations & the World Bank August 2006 FISCAL YEAR January 1—December 31 CURRENCY EQUIVALENTS (Exchange Rate Effective March 31, 2006) Currency unit Somali shillings (So. Sh.) US$1.00 = 13,400 Somali shillings Somali shillings 1.00 = US$0.00007 Currency unit Somaliland shillings (Sol. Sh.) US$1.00 = 6,400 Somaliland shillings Somaliland shillings 1.00 = US$0.00016 WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS CBS Central Bank of Somalia CIRRs Commercial Interest Reference Rates CPI Consumer Price Index CRD Centre for Research and Dialogue CSC Civil Service Commission DSOs District Statistical Offices FAO Food and Agriculture Organization FCC Federal Constitution Commission FEWS Famine Early Warning System FEWSNET Famine Early Warning Systems Network FMA Financial Management Agency FSAU Food Security Analysis Unit GDP Gross Domestic Product GNP Gross National Product HESPI Horn Economic and Social Policy Institute HIV/AIDS Human Immunodeficiency Virus/Acquired Immunodeficiency Syndrome HIPC Heavily Indebted Poor Countries IDA International Development Association IDPs Internally Displaced Persons IMF International Monetary Fund MDBs Multilateral Development Banks MDGs Millennium Development Goals MFIs Microfinance Institutions MoF Ministry of Finance NGO Nongovernmental Organization NPV Net Present Value NSO National Statistical Office NTB National Tender Board OCHA United Nations Office for the Coordination of Humanitarian Affairs ODA Official Development Assistance OECD Organization for Economic Cooperation and Development PFM Public Finance Management PPP Purchasing Power Parity PRGF Poverty Reduction and Growth Facility PSG Puntland State Government RDP Reconstruction and Development Program REER Real Effective Exchange Rate SIMAD Somali Institute of Management and Administration Development SDR Special Drawing Rights SSA Sub-Saharan Africa SSD State Statistical Department SWG Statistical Working Group TB Tuberculosis TCG Technical Coordinating Group TF Trust Fund TFG Transitional Federal Government UNDOS United Nations Development Office for Somalia UNDP United Nations Development Program UNESCO United Nations Educational, Scientific and Cultural Organization UNFPA United Nations Population Fund UNICEF United Nations Children’s Fund UNIFEM United Nations Development Fund for Women UNOPS United Nations Office for Project Services VAT Value Added Tax WFP World Food Programme WHO World Health Organization CONTENTS 1. RECONSTRUCTION AND DEVELOPMENT PRIORITIES.......................................1 A. MACROECONOMIC POLICY FRAMEWORK FOR SOMALIA .....................................................1 Background ....................................................................................................................1 Key Economic Developments .........................................................................................2 Macroeconomic Policy Strategy and Priority Initiatives ..................................................9 B. ESTABLISHING ACCOUNTABLE BUDGETARY PROCESSES, PUBLIC FINANCE MANAGEMENT, AND REVENUE SYSTEMS .......................................................................................................17 Legal Framework..........................................................................................................18 Budgetary Process ........................................................................................................20 Prioritization and Outcome Targets...............................................................................23 Priority Initiatives.........................................................................................................25 Implementation and Monitoring Arrangements .............................................................28 C. ESTABLISHING CIVIL SERVICE INSTITUTIONS .....................................................................29 Current Status, Challenges, and Opportunities...............................................................29 Priorities.......................................................................................................................35 D. ESTABLISHING THE CENTRAL BANK AND STRENGTHENING FINANCIAL SERVICES..............37 Rebuilding a Financial System......................................................................................37 Assessment of Priority Needs and Policy Options for Initiatives....................................38 E. STRENGTHENING DATA DEVELOPMENT .............................................................................46 Current Status, Challenges, and Opportunities...............................................................46 Overall Strategy for Data Development.........................................................................48 Proposed Initiatives ......................................................................................................49 BIBLIOGRAPHY ...................................................................................................................51 2. RESULTS-BASED MATRIX.........................................................................................52 i BOXES, FIGURES, AND TABLES Boxes Box 1.1. Short-Term Revenue Generation Options ...................................................................11 Box 1.2. Estimating the Cost of Printing New Currency ...........................................................14 Box 1.3. Confederate, Asymmetric State ..................................................................................31 Box 1.4. Key Findings of the Diagnostic Phase.........................................................................42 Box 1.5. Responsibilities of the Central Bank of Somalia .........................................................43 Figures Figure 1.1. Sectoral Contribution to GDP ...................................................................................3 Figure 1.2. Price Indexes ............................................................................................................6 Figure 1.3. Nominal Exchange Rate ...........................................................................................7 Tables Table 1.1. Macroeconomic Indicators, 1980–1990......................................................................1 Table 1.2. Trade Flows, 1980–2004............................................................................................3 Table 1.3. Poverty Estimates, 2002.............................................................................................4 Table 1.4. Millennium Development Goals.................................................................................5 Table 1.5. Stock of Public and Publicly Guaranteed External Debt at end-2004 ..........................8 Table 1.6. Combined Comparison of Options ...........................................................................33 Table 1.7. Highest/Lowest Annual/Monthly Salaries ................................................................33 Table 1.8. Data Development in Somalia: Current Status, Challenges, and Opportunities..........47 The Macroeconomic Policy and Data Development cluster report was prepared by Sibel Kulaksiz (World Bank), Cluster Leader for Macroeconomic Policy and Data Development, from contributions by a large team of Somali and sectoral experts. The core team consisted of Abdiweli Ali (UNDP Consultant), Mike Bicker (UNDP), Harry Garnett (WB), Erik Caldwell Johnson (WB), Walter Mahler (WB Consultant), Samuel Munzele Maimbo (WB), Rose Mutunga (PWC Nairobi), KNS Nair (UNDP), Mayank Patel (UNDP), Andrea Purdekova (WB), Aues Scek (UNDP Consultant), Hussein Siad (WB Consultant), Vivek Srivastava (WB), Dahir Elmi Warsame (WB), and Asbjorn Haland Wee (WB). The team visited Kenya, Somalia, and the United Arab Emirates between November 2005 and March 2006. Fred Kilby (WB), Gert Van Der Linde (WB), Moses Wasike (WB), Ayoo Odicoh (UNIFEM), Hendrica Okondo (UNIFEM), Oumar Kane (UNDP), Mohammad Pournik (UNDP), Andrew Harberd (UNDP), Johan Svensson, and Jerry McCann (WSP) provided comments to the draft paper and advised the team. The report benefited from comments by its peer reviewers Ali Issa Abdi (HESPI), Peter Miovic (WB), Stephen Ndegwa (WB), and Gianni Zanini (WB). Kathie Krumm (Sector Manager, WB) and Lloyd Mckay (WB) provided advice and guidance. The team would like to thank all its counterparts, including local technical experts Abdirahman Salad Aden, Sharif Mohamed Hassan, and Abdirizak Ismail Yusuf for their excellent cooperation during the course of various missions. Technical and financial assistance from the Department for International Development (U.K.) is gratefully acknowledged. The cluster report was prepared under the overall guidance and coordination of David Bassiouni (UNDP) and Lloyd Mckay (WB), JNA Senior Technical Coordinators. The cluster team wishes to express its gratitude to Louise Cottar (UNDP), Susan Muiruri (UNDP), Nafisa Santur (UNDP), and Margaret Onyango (UNDP) for the excellent operational and administrative support they have provided for all missions. ii EXECUTIVE SUMMARY 1. Context. With a population of 7.7 million and an income per capita of $2261 (compared with an average of $515 in Sub-Saharan Africa),2 Somalia is one of the poorest countries in the world. During the 1980s, Somalia experienced stagnant per capita output, accompanied by the deterioration of physical infrastructure, a decline in the quality of public services, severe macroeconomic imbalances, and negative growth in the 1988–90 period. During this time, significant net inflows of external resources facilitated some investment and government expenditure on government social services. However, much of this expenditure was not efficient because of the weak quality and corruption of the civil service and the poor quality of the leadership of the country. Inflation remained high throughout the 1980s as a result of a rapid increase in credit expansion by the state-run commercial bank, generally to uncreditworthy public enterprises and individuals favored by the ruling regime; money creation; and bank financing of budget deficits. The eventual collapse of the commercial bank, and the loss of depositors’ money, exacerbated a lack of public confidence in government and banks. The tax system was generally distortionary and cumbersome, the tax administration was weak, and government revenue was only 5 to 7 percent of Gross Domestic Product (GDP) between 1984 and 1990, one of the lowest levels in Africa. 2. Since 1991, the economy has suffered from droughts and the absence of government combined with local conflicts. Unlike the 1970s and 1980s when most of the output of the small industrial sector and many services were provided by the public sector, there has been significant (but unmeasured) private investment in commercial ventures, including in trade and marketing; money transfer services; transport; communications; airlines; telecommunications; other services including construction and hotels; education and health; and fishery equipment. This private investment has been largely funded by remittances from the Diaspora that amount to at some US$1 billion per annum today (71.4 percent of Gross National Product [GNP]) compared with an average of $370 million in the 1980s and 1990s. Except for the diaspora remittances, there has been very little foreign investment in recent years. In regard to real sector activity, agriculture, specifically agropastoralism and crop production, dominates GDP. 3. The incidence of poverty is very high; 43 percent of the population lives below the extreme poverty line of $1 per day at purchasing power parity (PPP).3 Poverty in rural areas at 53 percent is higher than the average, and in urban areas it is 24 percent (table 1.3). For a poverty line of US$2 per day (PPP), the incidence of poverty rises to 61 percent in urban areas, 80 percent for rural people, and 73 percent overall. Income inequality is significant, with a GINI coefficient of 0.4 among households as well as regions. Household surveys suggest that the poorest 10 percent of the population receives only 1.5 percent of the total income in Somalia, whereas the top 10 percent receives 35.6 percent of the total amount (UNDP 2003). In Somalia, 47.4 percent of the workforce-age population is unemployed (UNDP/WB, Somalia: Socio-Economic Survey 2002). 4. Objectives. In regard to the macroeconomic policy framework, the proposed key short- to medium-term objectives are to (a) establish and maintain macroeconomic stability; (b) develop a stable currency and a sound and growing public revenues base; (c) establish core civil service institutions along with accountable budgetary processes, public finance management, and revenue systems; and (d) reestablish financial services. In addition, it is important to establish data 1 UNDP/WB, Somalia: Socio-Economic Survey, 2002. 2 WB, World Development Indicators 2002. 3 This poverty analysis is based on estimates of household income in a household survey conducted in Somalia in 2002, which is in contrast to the expenditure-based household surveys conducted in other countries. systems to secure the data needed to monitor social and economic developments and to inform sound policy and institutional development. 5. Maintain macroeconomic stability. The key instruments for maintaining macroeconomic stability are to avoid budget deficits at all levels of government and to contain the supply of local currency. To rebuild public confidence, governments at all levels—federal, state, regional, and local—should avoid spending beyond their revenue base, which is expected to be a blend of local revenues and development assistance. It is proposed that this commitment to fiscal discipline be supported by a “no-overdraft� rule and a budget act that precludes unfunded commitments. Given the widespread dollarization of the economy, the overall money supply cannot be strictly controlled. But containing the supply of local currency will still be important in maintaining stable local currency prices. 6. A macroeconomic policy department in the Ministry of Finance and a monetary policy department in the Central Bank should eventually formulate and implement macroeconomic policy. However, for the first two years, small units would be sufficient to carry out this function and this would be in keeping with the limited availability of public resources. The macroeconomic policy department, or unit, in the Ministry of Finance would be responsible for formulating tax policy changes, making revenue forecasts for the annual budget, monitoring monthly revenue collections, and making at least quarterly revisions of the annual revenue forecasts. Staff need to be recruited and trained in accounting and budgeting as a matter of urgency. These federal units along with state and local government units need to prepare preliminary local administrative budgets for the next year. In the medium term, such units should strengthen budgeting and policy-making functions through on-the-job training. 7. Mobilize public revenue. Although a number of donors are interested in providing budgetary support to government to help jump-start Somali reconstruction and development, the dependence on such assistance needs to be reduced over time. Indeed, the continuation of such support would be partly dependent on the ability of government to show it has the support of the Somali people by acting in a united way to collect an increasing amount of revenue. Thus, one of the most urgent tasks of government is to put in place a tax system and tax administration at the federal, state, and local government levels to generate public resources. Because this is a high priority, it is proposed that government put such a revenue system in place within the second year of the RDP. 8. Given the relatively weak revenue collection capacity in the early stages of a totally new revenue collection service, it would be best to initially concentrate on taxes on economic transactions, such as wholesale sales tax, and apply it uniformly to imports, and major services, i.e. hotels and telecoms. Moreover, to make administration as simple as possible and to keep the cost of compliance low, it will be important to keep the tax system very simple. That suggests a relatively low ad valorem import tax of 5 percent for most imported goods but then increased if necessary once it is operational. A few goods, luxuries and goods that have harmful health or environmental effects, could have a higher customs duty rate or alternatively excise taxes. Service fees should apply to passports and the use of key infrastructure, such as airports. In place of a general income tax it seems reasonable to initially have a low export tax on livestock and a tax on the profits of remittance companies and other potentially large taxpayers, but to have these replaced by an income tax as and when that can be effectively implemented. Similarly, a simple turnover tax on services such as hotels and telecommunications needs to be considered as a means of generating additional domestic revenue. 9. Currently no federal government tax administration exists. There is an agreement, however, between the TFG and Puntland to share revenue. The assignment of taxes between different levels of government needs to be clarified and laws need to be enacted governing federal iv tax administration. Similarly, lean and well-paid independent customs and domestic tax revenue departments need to be established. The need for transparency and accountability requires that a lean, separate, well-paid revenue administration agency be established, under a separate tax administration law, with a policy to recruit staff on the basis of merits only. To aid administration and tax compliance, a simple tax procedures code and tax identification number and payments system need to be established quickly. Meanwhile, support is needed to strengthen existing Somaliland and Puntland capacity to more effectively administer taxes in their jurisdiction. 10. There are also very limited local administrative structures in Somalia for revenue mobilization. A few district administrations levy licenses, charges, and fees and provide some services. Therefore, in the short term, viable, minimal local administrative units need to be established and core staff recruited. Also, staff training in computers, record keeping, and simple revenue collecting procedures should be initiated. Thus lean local administration would be in place providing social services jointly with donors and NGOs and also progressively would be in charge of local tax revenue mobilization. 11. Establish sound public finance management systems. A third major priority is establishing public finance management and accountable budgetary processes. All levels of government need an efficient and sustainable financial management system that provides relevant, accurate, and reliable financial information to management at each of the decentralized levels, in a timely manner, not only to ensure that resources are used well for intended purposes, but also to rebuild public confidence. Moreover, that is essential for making sure development partners have the confidence in government necessary to underpin development assistance. Domestically it is essential that budgetary processes be transparent and participatory to further strengthen public confidence and support and by so doing help enhance revenue mobilization efforts as taxpayers want to be assured that their contributions are used well. At present the government lacks both financial resources and staff capacity to effectively establish this needed financial management system at the federal level and in South Central Somalia, and Puntland and Somaliland both have limited capacities that need strengthening. 12. To meet this need it is proposed that a financial management agent and a procurement agency be contracted for the first two years to provide these services and as part of an extensive program of institution building, which would include computerization, software acquisition, accounting and training on financial management, procurement, and participatory budget preparation and monitoring systems. Actions to clarify modalities for intergovernment transfers and to establish the needed laws (e.g., procurement) and institutional systems to underpin this establishment of sound financial management systems will also be needed. To operationalize the system, staff and other operating resources will be needed at all levels of the financial management process and at all levels of government—federal, state, regional, and local. 13. In South-Central Somalia, operationalizing the system involves building financial management capacity from scratch. In Puntland and Somaliland building on existing capacity is involved. For example, actions need to be included that develop comprehensive procurement regulations, amend laws as needed, establish procurement units, train staff, and produce standard bidding documents. Naturally, at each level of government, outcomes of the constitutional review process need to be reflected with regard to the role and function of various levels of government. At all levels of government it will be important for these financial management systems to focus on effective service delivery in a transparent and accountable manner. 14. Establish core civil service. The key immediate civil service priorities for the federal government are to (a) hire a small number of professional staff to constitute a policy management and advisory unit for the president, prime minister, and cabinet; (b) complete establishment of a civil service commission to assist in staffing the federal civil service along professional lines and at the same time advise on the relationship between the federal, state, regional, and local civil services; (c) establish the expenditure management and financial accountability system so that budgets can be prepared, executed, and accounted for in an effective and transparent manner; and (d) establish the revenue mobilization capacity. A longer-term challenge is gradually building up the role of government and meeting the service delivery needs of the poor in the south. The recruitment of public sector staff can be potentially a major source of conflict. Recruitment will require transparent and consistent policies applied across government and the NGO/aid sector. Moreover, although the focus will be on objective qualifications to establish a professional civil service, care will be needed to ensure equal access for women. 15. In Puntland the civil service priority is to complete a review of the role and functions of the Puntland, regional, and local governments together with that of the various ministries and agencies and then proceed with capacity building and training as needed to implement agreed outcomes. In Somaliland the civil service priorities are to continue rightsizing and to build the capacity of Somaliland and local government services to deliver services in accordance with agreements about the assignment of public services to the various levels of government. In both Puntland and Somaliland care is needed to ensure equal access for women in the civil service and to ensure access by people who are physically disadvantaged or handicapped. 16. Expand financial services. Expanding financial services will be essential for private sector development and for domestic firms to compete effectively for reconstruction contracts. In this regard, efforts need to initially focus on expanding financial services by attracting sound and credible commercial banks to Somalia and expanding non-bank financial institutions to provide small-scale and microcredit. This extension of financial services should build on the existing money transfer system. Ideally, foreign banks will enter into joint venture partnerships with remittance companies and expand into deposit and lending services. Naturally, prudential regulations and supervisory arrangements will need to be established by the government though this could initially be provided through the supervision of joint venture partners. Success in attracting joint venture investors will depend on establishing an environment in which providers of financial services can make reasonable profits and develop an expanding business. That involves efforts toward strengthening corporate governance and reinforcing property rights. Success with efforts to expand small-scale and microfinance is most likely to come through focused local initiatives rather than through an attempt to build a nationwide system. 17. Although the initial absence of a role for monetary policy lessens the urgency for establishing the full array of central bank functions, there is an urgent need to strengthen the payments system and to provide banking services to government. Hence, updating of the central bank and financial services legislation is a priority along with these limited central banking functions. Developing a capacity for monetary policy can wait until the latter part of the reconstruction and development program as can the introduction of new and larger denomination local currency notes. 18. Secure needed statistical data. Because of the absence of formal statistical systems in Somalia and continuing conflict in many areas, data collection has remained fragmented and incomplete. Some of the basic macroeconomic statistics of most of the past two decades, including national income, balance of payments, and money supply, do not exist for Somalia. Nor do the types of social statistics needed to design and implement well-managed social services. It is crucial to have reliable statistics for decision making in policy formulation, planning, budgeting and service delivery. Statistics also play a central role in supporting the implementation of policies through monitoring and evaluation, which in turn supports transparency and accountability. At present the information systems in Somalia are inadequate, and the trained staff and resources needed to collect economic and social data are lacking. There is a need to design and implement a national strategy for data development in Somalia with a strong partnership vi between data producers and users as the reestablishment of the Somali statistical system will require new institutional structures. 19. The data development priorities in Somalia are the launching of the population census and further data collection on social sector and macroeconomic indicators. The major statistical need dominating all others is the population census because it is essential for socio- and macroeconomic policy analysis and it would provide a framework for almost all further data collection activities (e.g., household surveys.). However, this census needs to be kept relatively simple by focusing on a limited amount of essential data to ensure that the census will be implementable. There is a need for data on population and social indicators by gender to design effective investments in people and programs to protect the vulnerable. 1. RECONSTRUCTION AND DEVELOPMENT PRIORITIES A. M ACROECONOMIC POLICY FRAMEWORK FOR SOMALIA Background 1. With a population of 7.7 million and an income per capita of $2264 (compared with $515 in Sub-Saharan Africa [SSA]),5 Somalia is one of the poorest countries in the world6. During the 1980s Somalia experienced stagnant per capita output, accompanied by the deterioration of physical infrastructure, a decline in the quality of public services, and severe macroeconomic imbalances resulting in negative growth in 1988–90 (table 1.1). During this period, significant net inflows of external resources facilitated some investment and expenditure on government social services; however, much of this expenditure was not efficient because of the weak quality and corruption of the civil service and the poor quality of the leadership of the country. Inflation remained high throughout the 1980s as a result of a rapid increase in credit expansion by the state-run commercial bank, generally to uncreditworthy public enterprises and individuals favored by the ruling regime. Money creation and bank financing of the domestic budget deficits also contributed to the high inflation. The eventual collapse of the commercial bank and the loss of the depositors’ money led to a lack of public confidence in government and banks. The tax system was distortionary and cumbersome, and the tax administration weak. The revenue to GDP ratio at 5 to 7 percent, between 1984 and 1990, slid to one of the lowest levels in Africa. Table 1.1. Macroeconomic Indicators, 1980–1990 1980–83 (aver.) 1984– 87 (aver.) 1988– 90 (aver.) GDP (constant prices, Somali shilling millions) 80,842 88,330 93,790 Real GDP growth (annual % change) 0.3 5.0 -0.7 Population (millions) 6.6 6.5 6.7 Mogadishu CPI (annual % change) 34.2 48.5 107.3 REER (1980=100) 102.5 93.2 21.3 Gross domestic investment (% of GDP) 30.4 25.3 19.8 Private investment (% of GDP) 13.4 9.7 6.3 Gross domestic savings (% of GDP) -17.1 -15.1 -12.1 Private savings (% of GDP) -9.5 -0.8 3.1 Total expenditure (% of GDP) 22.2 26.7 36.7 Total revenue (% of GDP) 9.6 6.4 5.6 Fiscal deficit (including grants, % of GDP) -9.0 -9.3 -9.9 Fiscal deficit (excluding grants, % of GDP) -12.6 -20.4 -31.0 4 UNDP/WB, Somalia: Socio-Economic Survey, 2002. 5 WB, World Development Indicators 2002. 6 World Bank, 2006. Somalia Country Economic Memorandum: From Resilience to Recovery. Washington, DC: World Bank. 1 Exports of goods and services (% of GDP) 17.2 9.5 7.1 Imports of goods and services (% of GDP) 65.2 46.2 33.1 Current account deficit (including grants, % of GDP) -18.2 -14.6 -12.9 Current account deficit (excluding grants, % of GDP) -40.3 -43.3 -38.6 Gross international reserves (months of import) 0.4 0.6 1.0 Broad money, including foreign currency deposits (% change) 17.7 69.9 71.2 a Nominal stock of debt (US$ millions) 837 1,451 1,801 Debt service/GDP 3.8 14.3 15.4 Stock of arrears (US$ millions) 83 124 348 Source: WB World Development Indicators; WB Somalia PER 1991. a. Public and publicly guaranteed external debt. Key Economic Developments 2. Sources of growth in a conflict economy. Since 1991 the economy has suffered from droughts and the absence of government combined with local conflicts. Unlike in the 1970s and 1980s when most of the output of the small industrial sector and many services were provided by the public sector, there have been significant (but unmeasured) private investments in commercial ventures, including trade and marketing, money transfer services, transport, communications, airlines, telecommunications, and other services including construction and hotels, education and health, and fishery equipment, funded mainly by the large remittances from the diaspora. Remittances amount to at least US$1 billion today, 71.4 percent of gross national product (GNP), compared with an average of $370 million in the 1980s and 1990s. There has been very little foreign investment (exclusive of remittances) in recent years. 3. Remittances, the single largest source of foreign exchange and hard currency in Somalia, have strong positive effects on the current account balance of the country. Remittance companies, in the absence of commercial banks, have been the main mechanism to transfer money in and out of Somalia. Especially in times of economic depression and external shocks, remittances have been extremely important to the Somali economy because they tend to smooth consumption and thus create a “buffer� against shocks. Most Somali remittances are used for direct consumption by the household, including education and health. A study on Somaliland shows that remittances are also increasingly used to fund new organizations and development projects.7 Whether invested or consumed, remittances have important macroeconomic effects, stimulating various sectors of the economy, creating positive multiplier effects.8 Recent studies analyzing links between remittances and poverty in Ghana (2005) suggest that raising remittance by 10 percent decreases the share of those in poverty by 3.5 percent and has a negligible effect on inequality, as measured by the GINI coefficient. 9 One negative effect is that remittances might discourage job seeking and therefore keep unemployment high. 7 Peter Hansen. Migrant Remittances as a Development Tool: The Case of Somaliland. Danish Institute for Development Studies (DIIS), Department of Migration Policy, Research and Communications, p. 2 8 Adelman and Taylor (1990) found that for every dollar Mexico received from migrants working abroad, the GNP rose by US$2.69 to $3.17 depending on whether remittances were received by urban or rural households. Ratha, Dilip. Workers Remittances: An Important and Stable Source of External Development Finance. World Bank Development Finance 2003. 9 Richard Adams, 2005. Remittances and Poverty in Ghana. Development Research Group (DECRG), World Bank. 2 4. In regard to real sector activity, agriculture, specifically agropastoralism and crop production, dominates gross domestic product (GDP). Because of the lack of GDP data by sectoral breakdowns, the share of the productive sectors in the Somali economy at present is not known. Some assessment can, however, be made on the basis of information available for 1990 and earlier. In 1990, the agricultural sector accounted for about 64 percent of the total GDP (figure 1.1). About 52 percent of this share was generated by the livestock subsector and some 37 percent by agricultural crops Figure 1.1. Sectoral Contribution to GDP including fruits. The 50.0 (percent) most prominent 40.0 subsectors in services were trade 30.0 and hotels and 20.0 transport and 10.0 communications. 0.0 Although shares 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 might remain similar to the pre- Livestock Crop production Forestry&fishing Manufacturing Services 1991 period, the level of agricultural production is well under the mid-1980s peaks, owing mainly to continued insecurity, destruction of irrigation systems, and absent or weak government. Camel and cattle population declined by about 8 to 10 percent, sheep and goat population went down about 15 to 20 percent, and the value of crop production is at 38 percent of the 1989 levels. Livestock off-take (slaughters and exports), however, remains in the same range as it was during the late 1980s, suggesting a less negative impact on these sectors than on crop production. In all agriculture subsectors, including fishing, potential output is considerably higher than historical and current output. The contribution of manufacturing to GDP in the late 1980s was no more than 5 percent, and it remains low today. 5. Cross-border trade has been growing steadily during the past six years. Aggregate trade data reported by partner countries to the IMF show that imports have almost doubled, reaching a historical record in 2004 at $461 million (table 1.2). Similarly, exports have almost tripled during the past six years, by reaching $266 million in 2004. Agricultural products dominate exports, as in the pre-1991 period. Before the civil war, livestock and livestock products accounted for 80 percent of exports; bananas for 10 percent; and fisheries and frankincense accounted for the rest. Today, livestock continues to dominate exports—despite the Saudi ban on Somali livestock imports—followed by charcoal, fish, and hides and skins. Banana exports almost stopped in the late 1990s. The largest recorded imports through Berbera and Bosasso ports are food (sugar, wheat and wheat flour, rice, and cooking oil), building materials, and fuel. Khat, a mild narcotic, is the second top import product after sugar, with annual recorded imports value estimated between US$30 million and US$50 million. Table 1.2. Trade Flows, 1980–2004 1980 1988 1990 2000 2001 2002 2003 2004 Total merchandise exports 166.4 137.4 163.7 68.2 77.6 118.3 157.9 265.5 Total merchandise imports 439.5 267.0 351.8 263.6 280.8 299.8 340.3 460.8 Source: IMF Direction of Trade Statistics based on partner data. 6. Poverty and Millennium Development Goals (MDG)s. The incidence of poverty is very high; 43 percent of the population lives below the extreme poverty line of $1 per day at 3 purchasing power parity (PPP).10 Poverty in rural areas at 53 percent is higher than the average, whereas in urban areas it is lower at 24 percent (table 1.3). For a poverty line of US$2 per day (PPP), the incidence of poverty rises to 61 percent in urban areas, 80 percent for rural people, and 73 percent overall. Income inequality is significant, with a GINI coefficient of 0.4, among households as well as regions. Household surveys suggest that the poorest 10 percent of the population receives only 1.5 percent of the total income generated in Somalia, whereas the top 10 percent receives 35.6 percent of the total income (United Nations Development Program [UNDP] 2003). In Somalia 47.4 percent of the workforce is unemployed (UNDP/World Bank [WB], Somalia: Socio-Economic Survey, 2002). Table 1.3. Poverty Estimates, 2002 Extreme poverty General poverty Share of Average per Share of Average per population capita income population capita income (percent) ($ PPP) (percent) ($ PPP) Somalia 43.2 210.3 73.4 338.1 Urban 23.5 240.3 60.7 428.7 Rural and nomadic 53.4 203.4 79.9 302.7 Source: UNDP/WB, Somalia: Socio-Economic Survey, 2002. Extreme and general poverty: per capita income less than $1 and $2 per day, respectively, in purchasing power parity (PPP). 7. There has been a significant deterioration in the food security situation owing mainly to the lack of access to and the unavailability of food, water, and pasture resulting from a severe regional drought in the Horn of Africa and continuing civil strife. In April 2006, 1.7 million people in Somalia faced an acute food and livelihood crisis. Preliminary estimates show that, in the worst-case scenario of below normal Gu ‘06 rains, that number could increase to 1.8 million between July and December 2006—which poses the risk of a deepening humanitarian catastrophe (Food Security Analysis Unit [FSAU] and Famine Early Warning Systems Network [FEWSNET]). 8. Somalia is ranked 161 of 163 countries in the 2001 UNDP Human Development Index. Although the statistics are abysmal, human development conditions have improved slightly as a result of the intense efforts of community-based groups and private sector initiatives. Primary school enrollment was only 19.0 percent in 2006 (table 1.4), an improvement compared with the even lower enrollment rate of about 12.0 percent in 1988. 11 Similarly, although under-five and maternal mortality rates are among the worst in the world at a staggering 22.4 percent and 11 to 16 per 1,000 live births, respectively, under-five mortality is lower than before the start of the civil war.12 Life expectancy at 47 years in 2002 is abysmally low and is lower than in Senegal and Eritrea (52 and 51 years, respectively), but it is higher than just before the war when it was estimated at 44 years (in 1987) and is also higher than in Kenya and Nigeria (45 years), Tanzania (43 years), and Ethiopia (42 years). Similarly, the under-five child malnutrition prevalence rate is higher (26 percent) than in Senegal (23 percent) and Kenya (20 percent), but is lower than in Ethiopia (47 percent), Eritrea (40 percent), Nigeria (29 percent), and Tanzania (29 percent). 10 This poverty analysis is based on estimates of household income in a household survey conducted in Somalia in 2002, which is in contrast to the expenditure-based household surveys conducted in other countries. 11 The old estimate is drawn from official statistics reported in the World Bank’s 1991 Public Expenditure Review, whereas the more recent estimates are produced by UNICEF from its nationwide surveys. 12 A range estimate is used because the higher estimate is reported in the published UNDP Somalia Human Development Report, 2001, and the lower figure is reported in the draft UNDP MDG Report Somalia, 2004. 4 Table 1.4. Millennium Development Goals Somalia Somaliland Puntland South- Central Target for 2015 Eradicate extreme poverty and hunger Population living below $1/day (%) 43.0 (2002) .. .. .. 22.0 Poverty gap ratio at $1/day (%) 18.3(2002) .. .. .. 9.0 Share of poorest quintile in national consumption (%) 4.1 (2002) .. .. .. 2.0 Children underweight for age (percent of children under 5) 35.0 (2006) 19.6 (2006) 26.2(2006) 27.5 (2006) 13 Achieve universal primary education Net primary enrollment ratio (% of school-age population) 19.0 (2006) 39.7 (2006) 27.7 (2006) 10.4 (2004) 100 Youth literacy rate (% ages 15–24) 20.0 (2004) .. .. .. 100 Promote gender equality, and empower women Ratio of girls to boys in primary & secondary education 0.55 (2000) 0.44 (2004) .. .. 1.0 Ratio of literate females to males (ages 15–24) 0.52 (2002) .. .. .. 1.0 Proportion of seats in parliament held by women 25/275 (2003) 2/82 (2006) 4/68 (2006) .. Promote gender equality, and empower women. Reduce child mortality Under-five mortality rate (per 1,000) 156 (2006) 116 (2006) 115 (2006) 173 (2006) 75 Infant mortality rate (per 1,000 live births) 96 (1999) 73 (2006) 73 (2006) 105 (2006) 44 One-year-olds immunized against measles (%) 19.0 (2006) .. .. .. Improve maternal health Maternal mortality rate (per 100,000 live births) 1,013 (2006) 1,600 (2005) .. .. 275 Births attended by skilled health staff (%) 33.0 (2006) 41.0 (2006) 36.8 (2006) 29.7 (2006) Combat HIV/AIDS, malaria, and other diseases HIV prevalence (% adults ages 15–49) 0.9 (2004) 1.4 (2004) 0.9 (2004) 0.5 (2004) Halt and begin to HIV prevalence (% females ages 15–24) 0.9 (2004) .. .. .. reverse spread of HIV prevalence among 15- to 24-yr-old pregnant women 0.9 (2004) 1.4 (2004) 1.0 (2004) 0.9 (2000) HIV/AIDS, (%) incidence of Contraceptive prevalence (% of women ages 15–49) 15.0 (2006) 26.0 (2006) 12.0 (2006) 12.0 (2006) malaria and other Prevalence associated with malaria (per 100,000) 118 (2000) .. 113 (2005) .. major diseases. Death rates associated with malaria 81 (2000) .. .. .. Incidence of TB (per 100,000) 412 (2003) 460 (2000) .. .. TB cases detected under DOTS (%) 42.0 (2003) .. .. .. Percentage of children under 5 treated with antimalarials 3.0 (2006) 1.6 (2006) 4.9 (2006) 2.8 (2006) (within 24 hours) Ensure environmental sustainability; land, air, and water Proportion of land area covered by forest (%) 12.0 (2002) .. .. .. Integrate Ratio of area protected to maintain biological diversity to 0.01 (2002) .. .. .. principles of surface area (%) sustainable Energy use per unit of GDP 50.43 kg p.a. .. .. .. development into (2000–2) policies; reverse Proportion of population using solid fuels (%) 99.6 (2006) 99.8 (2006) 99.4 (2006).. 99.9 (2006).. loss of environmental resources. Access to an improved water source (% of population) 29.0 (2006) 40.5 (2006) 25.0 (2006) 25.5 (2006) 64.5 Access to improved sanitation (% of population) 37.0 (2006) 40.0 (2006) 43.7 (2006) 35.3 (2006) 62.5 Develop a global partnership for development Fixed-line and mobile phones (per 1,000 people) 15 (2002) 20 (2004) .. .. With the private Personal computers in use per 1,000 people 0.5 (2002) 0.5 (2004) .. .. sector, make Internet users per 1,000 people 9 (2003) 6.7 (2003) .. .. benefits of new technologies available. Source: WB World Development Indicators 2006; UNDP MDG Report Somalia, 2004; UNDP and the WB, Somalia Socio-Economic Survey 2002; UNDP Somalia Human Development Report, 2001; Multiple Indicator Cluster Survey, 1999; Conflict Analysis Regional Report: Puntland, 2004; UNICEF Primary School Survey 2004/5; UNICEF, The State of the World s Children, 2004; Ministry of Planning of Puntland, Facts and Figures 2004; WHO Annual World Health Report, 2004; WHO Report on Seroprevalance Sentinel Sites, 2004. 9. Inflation and exchange rate. In the absence of a cohesive government for 15 years, inflation rose even further compared with prewar years, because of substantial amounts of 5 foreign-printed currency injected into the economy by various political and business entities. Apart from the monetary expansion, the prices rose as a result of higher fuel prices and food insecurity. In South-Central Somalia, the market price data suggests inflation went up from 14.4 percent in 2002 to 16.4 percent in 2003. Recent inflation data based on Mogadishu market prices suggest average inflation of 5 percent for the first quarter and 2.4 percent for the second quarter of 2005, measured across 102 consumer goods (figure 1.2). In Somaliland, based on the price developments of 115 consumer goods in the Gobanimo market in Hargeisa, average inflation for the period of January to July 2005 stood at 3.9 percent (figure 1.2). Price developments at the Shiraaqle market in Hargeisa for the same goods and the same period show an average inflation of 8.0 percent. In 2006, as a result of drought and two consecutive seasons of below-normal and failed crop production, cereal and sorghum prices in local markets continued to rise. In Somalia, sorghum prices increased 66.0 percent between November 2005 and March 2006. Maize prices in the Juba region are now 214.0 percent higher than they were before the drought. 13 Figure 1.2. Price Indexes Mogadishu Price Indice s Harge i sa Price Indi ces (Jan 2004=100) (Jan 2004=100) 240 160 210 130 180 150 100 120 90 70 Aug 04 Feb 04 Jun 04 Sep 04 Feb 05 Jun 05 Jul 04 Aug 0 4 Jan 04 Nov 04 Apr 04 Jan 05 Dec 04 Apr 05 May 04 May 05 Mar 04 Mar 05 Oct 04 Jun 04 Jun 05 Feb 04 Jul 04 Sep 04 Feb 05 Jul 05 Jan 0 4 Dec 0 4 Jan 0 5 Mar 0 4 Apr 0 4 May 0 4 Nov 0 4 Mar 0 5 Apr 0 5 May 0 5 Oct 04 Maize Local Sorghum Petroleum Maize Local Sorghum Petroleum 10. Money exchangers operate freely in the country, and the monetary system is becoming increasingly dollarized. Both the Somali and the Somaliland shilling have remained relatively stable since October 2004, at 14,500–15,600 So. Sh/US$ for the Somali shilling, and at 5,900–6,400 SLSh/US$ for the Somaliland shilling (figure 1.3). 13 International prices for sorghum and maize are also rising. Sorghum prices rose 8.4 percent during the first quarter of 2006 compared with the last quarter of 2005 because of strong demand and expectations of reduced supply from Australia, Spain, and Indonesia (WB, DECPG Commodity Markets Review, May 2006). Maize prices rose 5.2 percent in international markets during the same period. Crude oil prices reached a nominal record $72.3/bbl in May 2006. Prices continue to be supported by fears of supply disruption in a number of oil producing countries. 6 Figure 1.3. Nominal Exchange Rate (So. Sh. and Sl. Sh. per US$) Nomi nal Exchange Rate (SoSh and SlS h pe r US$) Nomin al Exchange Rate (SoSh and SlS h pe r US$) (annual average, % change) (mont hly average, % change) 120.0 10.0 100.0 5.0 80.0 60.0 0.0 Aug'04 Feb'04 Jun'04 Jul'04 Sep'04 Feb'05 Jun'05 Mar'0 May'0 Dec'04 Mar'0 May'0 Nov'0 Apr'04 Jan'05 Apr'05 Oct'04 40.0 -5.0 20.0 0.0 -10.0 -20.0 1998 1999 2000 2001 2002 2003 2004 2005 -15.0 South-Central Somaliland South-Central Somaliland 11. Fiscal management. Since 1991, only limited information has been collected on fiscal flows for Somaliland and Puntland, and no estimates are available for South-Central Somalia. Fiscal management in Somaliland and Puntland suffers from the same problems as in the prewar years: low revenue collections, expenditures mostly for security and general administration, and poor planning and coordination of development projects. Trade taxes, mostly specific rather than ad valorem, including export taxes, have been the source of more than 80 percent of annual revenue; they have fluctuated widely in recent years, but are currently about US$22 million for Somaliland and US$16 million for Puntland. Minimal allocations of expenditure are made for the provision of public goods such as infrastructure and social services. Compared with in the prewar period, now deficit financing is limited to semivoluntary loans from major businesspeople who are repaid through tax exemptions rather than monetary financing by the Central Bank. 12. In 2005, Somaliland had a budget of Sl. Sh. 133 billion (or US$22 million), of which only 7.6 percent devoted to health and education expenditures. Most recurrent costs are for salary and allowances and for security, with the armed forces and the police receiving 46 percent of budgetary allocations. Somaliland allocated only 7.6 percent of its 2005 budget of Sl. Sh. 133 billion or US$22 million to development expenditures. The Puntland government had a budget of So. Sh. 281 billion (or US$18.8 million). Salaries and allowances constituted the major expenditure item in the budget (61 percent of budget). The military and police force constitute 45 percent of budgetary expenditure. Only 11 percent is spent on development, which is low, but there is a slight improvement over the previous year. In 2006, the government of Puntland reports a budget of So. Sh. 299.8 billion (or US$20 million). Of this amount, 63.2 percent is allocated for salary and allowances, owing to the enlargement of the civil service to about 11,000 as a result of absorption of demobilized militia. Only 7 of 23 districts are fiscally self-sufficient; 9 districts need a subsidy from the regional state government to cover half of their administrative costs, and 7 districts are financed entirely by the regional state administration. In South-Central Somalia, which has been without regional administration since 1991, revenue has been extracted by various warring groups in control of numerous checkpoints on the roads that join the major cities and towns. 13. External debt and ODA. At the end of 1989, Somalia’s external debt was estimated at US$1,774 million, almost twice the value of GDP or nearly 30 times the value of merchandise exports. Of the total debt outstanding, 47 percent was owed to multilateral institutions. Somalia’s economic performance deteriorated rapidly in late 1987 and early 1988. The government, after a major reorganization in December 1987, showed little interest in working with external creditors. Financial policies slipped out of control, the exchange rate became increasingly unrealistic, and official aid virtually ceased. In May 1988, with arrears of 7 US$33 million, and no prospects for an agreement on an economic program in sight, the executive board of the International Monetary Fund (IMF) declared Somalia ineligible to use Fund resources. The undrawn balance of International Development Association (IDA) credits with the World Bank was also frozen. 14. From 1990 to 2006, lacking of a fully functional national government, Somalia neither borrowed nor serviced its public debt. Nonetheless, as a result of significant arrears accumulation, Somalia’s total external debt at the end of 2004 (public and publicly guaranteed) was estimated at US$3.2 billion, of which an estimated US$2.5 billion was in arrears (table 1.5). Of this debt, 40 percent is owed to multilateral creditors, 46 percent to Paris Club bilateral creditors, and 14 percent to non–Paris Club bilateral and commercial creditors. The net present value (NPV) of the total debt obligations is US$2.9 billion. Somalia remains at predecision point for HIPC. Table 1.5. Stock of Public and Publicly Guaranteed External Debt at end-2004 (in US$ millions) Nominal stock NPV of Creditor Total Arrears a total debt b Stock (%) Principal Interest Total 1. Multilaterals 1,273 39.7 479 344 822 1,118 World Bank–IDA 491 15.3 81 46 127 353 IMF 345 10.8 174 171 345 345 African Development Bank Group 126 3.9 37 21 57 102 Others 310 9.7 187 106 293 318 2. Bilaterals and commercial 1,935 60.3 924 833 1,757 1,861 Paris Club creditors 1,472 45.9 573 740 1,314 1,398 Non–Paris Club & commercial creditors 462 14.4 351 93 444 463 Total debt (1+2) 3,207 100.0 1,403 1,177 2,580 2,979 Sources: Creditor statements and World Bank Global Development Finance. a. Includes principal and interest arrears as well as penalty charges. b. Calculated using end-2004 exchange rates and, as discount rates, currency-specific average commercial interest reference rates (CIRRs) from Organization for Economic Cooperation and Development (OECD). 15. In the absence of lending, all foreign aid is now in the form of grants. Total official development assistance (ODA) to Somalia has been rising steadily with actual expenditure reaching US$120 million in 2003 (annex table 4). 16. Challenges. In Somalia, the challenge of implementing economic reform programs is uniquely daunting because of the following special circumstances that prevail: • Efforts to reestablish a governing structure, especially in South-Central Somalia, are currently stalemated. The Somali National Reconciliation Conference, which began in October 2002 in Kenya, led a power-sharing agreement under a transitional charter and over the principle of federalism among regions for the future. Representatives of 22 Somali groups established a 275-member Transitional Federal Parliament in August 2004, largely based on clan affiliation. In October 2004, the parliament elected Abdullahi Yusuf Ahmed, the former president of Puntland, as the interim president of the Transitional Federal Government (TFG). The following month, Mr. Yusuf selected as prime minister Ali Mohammed Ghedi, who in turn obtained approval of his cabinet in January 2005. The establishment of a broad-based TFG is a positive, but only a first, step in the long road of rebuilding the Somali nation, ensuring continued peace and stability, and moving the country onto the path to sustainable development. The lack of functional and accountable institutions is another major challenge in Somalia. 8 • The proposed federal structure has been agreed to in principle, but is yet to be defined and agreed on in specific administrative terms by all political entities. Following lengthy negotiations in Kenya, an agreement has been reached on a power sharing arrangement under a transitional charter and based on the principle of federalism among regions for the future. However putting this agreement into practical effect will require further efforts to achieve reconciliation among clans, warlords, and political leaders. The process is further complicated by Somaliland’s wish to secure international recognition as an independent state. • The extremely low levels of private sector and public confidence in public institutions, including public financial establishments. Before the civil war, general public management was characterized by frequent policy reversals, weaknesses in fiscal management, slippages on the monetary side, poor governance, inadequate public expenditures, and security problems that discouraged the private sector from investing in long-term production-oriented activities and that generated low or negative returns for public investment. Further, banking sector closures, due primarily to mismanagement, eroded confidence in publicly owned financial institutions. Overall, the Somali people still harbor suspicion and ambivalence toward public authorities. • An extremely poor investment climate. In a postconflict environment, attracting new foreign and domestic firms is central to private sector development. New decisions about investment, especially financial institutions, usually depend on the availability of five basic factors: political and economic stability and security, unambiguous regulations, reasonable tax rates that are equitably enforced, access to finance and infrastructure, and an appropriately skilled workforce. In Somalia, these conditions are lacking. The challenges facing the new federal government in addressing these constraints are formidable. • Deterioration of human and physical capital. The civil conflict, absence of government, continuing insecurity in many parts of the country, and inadequate access to social and financial services caused severe deterioration of human and physical capital. Overall productivity declined compared with pre–civil war times, causing a negative effect on economic growth. Today, there are critical gaps in the provision of key public goods, in which the absence of an effective state role is felt more profoundly. Macroeconomic Policy Strategy and Priority Initiatives Vision for Fiscal Policy and Institutions 17. The main goal of the new government will be to achieve peace throughout the country. To do this, it will necessary to disarm, demobilize, rehabilitate, and reintegrate ex- militia members so that they can become productive members of society. The cost of doing this will be the main component of budget expenditure for at least the first few years. To preserve peace, a critical goal will be to establish government institutions that are vital to maintain the rule of law, including a well-vetted and managed police force, and a functioning judiciary and criminal courts. 18. For at least the first couple of years of operation of the new government, there should be no fiscal deficit requiring domestic financing by printing money. Given the experience of the pre–civil war Somalia government with high levels of domestic deficit financing through money creation, it would be prudent to avoid any domestic financing of the deficit until a firm 9 record of good fiscal management has been established. One possibility would be to legislate a fiscal restraint, a “no overdraft rule,� as was done for example in Afghanistan. 19. However, there is likely to be a need for financing to balance revenue and expenditure on a monthly basis with a strong commitment to fiscal discipline. Thus, there is an important issue of what would be the most appropriate mechanism for such temporary financing. Selling government securities to the public is not likely to be feasible until a track record for prudent fiscal policy is established. It would also be unwise to do the kind of ad hoc borrowing from prominent businessmen, which has frequently been done in the past. A limited and well- managed overdraft facility may be an appropriate tool. 20. A Macroeconomic Policy Department in the Ministry of Finance and a Monetary Policy Department in the Central Bank should eventually formulate macroeconomic policy. However, for the first two years, small units will be sufficient to carry out the function. The Macroeconomic Policy Department would be responsible for formulating tax policy changes, making revenue forecasts for the annual budget, monitoring monthly revenue collections, and making at least quarterly revisions of the annual revenue forecasts. It should also monitor developments in monthly expenditure commitments, payments, and any payment arrears. On the basis of this analysis, the Department should make recommendations on whether any adjustments in revenue or expenditure policy appear necessary to meet the objective of no fiscal deficit. A Gender Advisory Unit should be formed under the Ministry of Planning to provide technical expertise on gender budgeting, and to monitor efficient budget execution in women empowerment. Revenue Generation 21. Short-term options. While a number of donors are interested in providing budgetary support to a new government to help jump-start the establishment of the Somali state, the continuation of such support will eventually be partly dependent on the ability of the new government to show it has the support of the Somali people by acting in a united way to collect some of its own revenue. Thus, one of the most urgent tasks of the new government will be to put in place a tax system and tax administration. It will be desirable to put this revenue system in place in the first year. In the short to medium term only marginal progress will be possible towards giving the new government autonomous sources of revenues. Donor support will be needed to provide direct budget support for at least 5 years on a declining basis. 22. It will be important to design a tax system that is consistent with the basic objective of the new government to severely limit the role of government and to concentrate on providing a favorable enabling environment for the private sector to prosper. Thus, the new tax system should not be a constraint on private sector growth and development. The objective should be to make the initial tax base as broad as administratively feasible, while keeping the initial tax rates quite low. Such a system can yield a significant amount of revenue in an equitable manner, while not having any serious adverse impact on business activity. Toward that end, it is important to identify the major potential tax bases, including some that have not frequently been taxed, and to design effective mechanisms to tax them. 23. Given the relatively weak revenue collection capacity that will be feasible in the early stages of a totally new revenue collection service, it will be best to concentrate on taxes on economic transactions, especially imports. Another important objective is to make the tax system as simple as possible to keep the cost of collection low and to keep the cost of compliance by businesses low. In the short term, excises should be imposed on selected imported goods and a wide range of service should be taxed. Excisable goods subject to 10 considerable price volatility (petroleum products) and with a high risk for price underreporting (cigarettes) should be subject to a specific rather than ad valorem rate. In order to extend the tax base, other post-conflict countries (e.g. East Timor and Kosovo) successfully taxed a range of high-value services, covering bars and restaurants, hotels, telecommunications, transport rental and aviation charter. The tax was based on a simple turnover calculation and levied on the service provider. Experience shows that this tax was not difficult to administer and can be introduced within a short period. Box 1.1 presents the revenue generation options that could be considered for short-term implementation. Box 1.1. Short-Term Revenue Generation Options Tax on Imports. The simplest and most efficient option would be to tax most imports at a uniform low ad valorem (percentage) rate of 5 percent, and to tax a few specified goods, ones that are either luxuries or have harmful affects on health or the environment, at higher rates of 10 to 50 percent. Excisable goods subject to considerable price volatility (petroleum products) and with a high risk for price underreporting (cigarettes) should be subject to a specific rather than ad valorem rate. Exports. The normal international practice is to not tax exports because that would put the country’s exporters at a competitive disadvantage and it is usually not possible for the exporter to pass on the tax to the foreign consumer. However, because it will not be possible to tax income for a number of years, a 5 percent tax on the following exports might be considered: livestock, fish, frozen meat, hides and skins, and fruits and vegetables. Because of the severe environmental damage charcoal causes, it would be best to seek to prohibit the export of charcoal from Somalia, rather than to tax it. However, the alternative of levying an increasingly high rate of export tax on it for a transitional period might also be considered. Sales Tax on Domestic Production of Goods and Services. For a considerable period there is not likely to be enough manufacturing or other value-added activity to justify a general value-added tax or sales tax on goods and services. However, consideration could be given to the levy of a 5 percent tax on sales by manufacturers of selected domestically produced goods and the services provided by luxury hotels. A tax on sales should be introduced on major domestic output of goods and services. This tax can later be transformed into a value-added tax whose base will also cover the SMEs. Telecommunications. Levy a 5 to 10 percent tax on the total value of airtime sold by companies for use in cell phones, as well as charges for land lines and on the revenue received by the telephone companies from handling incoming international calls. Remittances. Levy a tax at a low rate of 0.5 to 1 percent of the value of all remittances made through money exchange companies to individuals or businesses in Somalia. For amounts above $1,000, the rate could be cut in half. Offshore Fishing Rights. This has been an important source of revenue in the past and should be made an important source of revenue in the near future, along with a policy to limit the amount of fishing in offshore waters to avoid depleting the stock of fish. However, this is an area of possible conflict. Tax on Departing Passengers on International Air Flights from Somalia. This could be levied at a rate of $20 on foreigners and $10 on Somalia passport holders. It should be considered an airport usage fee and should also apply to diplomats. Passports and Visas. Once the new government has effectively restored law and order and has received some international recognition, it will be desirable to issue new passports to all Somali citizens who wish to obtain them. Passports could be issued at a price of US$50. It is also recommended that Somalia issue visas at points of entry into the country. Non-Somali citizens could be charged a fee of about $20 for a single entry visa and $50 for a multiple entry visa. Business Licenses. A dual system of issuing annual business licenses could be considered. The central government would issue licenses for financial institutions, telecommunications companies (including telephone, TV, and radio companies), airlines, large manufacturers, and firms engaged in the import and export trade. All other businesses with fixed premises would be issued licenses by local governments. Motor Vehicle Licenses. Motor vehicle and driving licenses should also be issued as soon as the modalities for issuing them can be put in place. 11 24. The two most controversial suggestions for revenue sources given above are those relating to exports and remittances. In a fully developed tax system, there would generally be no tax on remittances or any other financial transactions. Instead the firms in the financial sector would be taxed on income. However, for a number of years it is unlikely that the new revenue administration will have the capacity to levy an effective income tax on businesses. 25. Medium-term revenue measures. Broadening the tax base should be the main medium- to long-term priority. Once a reasonably effective revenue administration is in place, it should be possible to do that without encountering a significant increase in tax evasion. In addition, consideration could be given to the introduction of a 5 percent excise duty on bottled water and carbonated drinks. A personal and corporate income tax should also be introduced in the medium or long term. In the past Somalia had in place quite extensive systems of business and personal income taxation. However, the administrative apparatus to effectively implement these taxes was always weak. Their introduction will require significant work in drafting legislation and putting trained specialized tax officials in place. Further work needs to be done in reforming tax systems in Somaliland and Puntland, and introducing revenue generation and mobilization measures, incentives and assurances in the South. Monetary Policy Supported by Fiscal Framework 26. There is little room for monetary policy in Somalia as long as there is no central bank, no commercial banking system, and no stock of government securities. In the Country Economic Memorandum for Somalia, the World Bank estimated that the amount of currency in circulation was about $52 million in 2001, when the exchange rate was 20,000 shillings to the dollar, and that the foreign currency in circulation, mainly US dollars, is about $150 million to $200 million. It is important to note that the total amount of foreign currency in the domestic economy is much more than the value of local currency. In a highly dollarized economy, the foreign currency in circulation cannot be directly influenced by the monetary authorities. As long as there is no, or little, bank credit outstanding, the monetary authority cannot influence interest rates by refinancing mechanisms nor can it influence the money supply by bank reserve requirements. 27. Although the monetary authorities can seek to alter the amount of local currency in circulation by buying or selling foreign currency, that is not likely to have much impact on the total value of domestic and foreign currency in circulation. Thus the fiscal policy will play the critical role in putting domestic currency into circulation. However, the central bank is likely to need to make gradual purchases of dollars in the foreign exchange market to put additional shilling currency into circulation to meet the increase in the demand for money, which will accompany the increase in economic activity, and to meet an objective of reasonable price stability in the price index for domestically produced goods and services. This purchase of dollars will also tend to inhibit the appreciation of the shilling relative to the dollar. 28. It would be desirable to give the central bank a significant degree of independence in carrying out its monetary policy function. However, until the capacity building targets are reached, a strong cooperation between the Ministry of Finance and the Central Bank is essential. Foreign Exchange Policy 29. High dollarization implies losing flexibility in exchange rate policy as a mechanism to adjust to external shocks. However, high dollarization also provides considerable protection against exchange rate risks. International trade related transactions and large domestic transactions are settled entirely in foreign currency, while the Somali and Somaliland shillings 12 are used mainly for dealing with small- and medium-scale domestic transactions. As a result, in the case of exchange rate depreciation, the pass-through effect of higher import prices on inflation is limited because there is little impact on the prices of nontradables, which are settled in local currency. 30. In a highly dollarized economy the external credibility of the national currency is already compromised. However, a modest level of foreign currency reserves, along with a prudent fiscal policy, does help strengthen the domestic credibility of the national currency. Once the central bank prints local currency and starts putting it into circulation, the bank will gradually acquire a stock of foreign currency. It will then be in a position to provide short- term intrayear financing in either local currency or dollars to cover temporary budget deficits. A Somali central bank generally should not intervene in the foreign currency market, except to smooth out what are perceived to be disorderly market conditions. 31. The foreign exchange market in Somalia has very little overhead and is very efficient. However Somaliland provides for a special rate of 3,500 shillings per U.S. dollar compared with a market rate of 6,500, for the special purpose of calculating the local currency payments due from taxpayers. The tax is first calculated in dollar terms, and then the taxpayer is allowed to pay in local currency at a very favorable special official rate. This special rate for tax purposes serves no legitimate purpose and should be abolished. Currency Issues and the Cost of Printing New Currency 32. The only local currency in circulation is the Somali 1,000 shilling note, which is presently worth about US7¢. This makes the currency highly inefficient as a means of payment. In addition, the storage and transport of the local currency is cumbersome. All of the current 1,000 shilling notes are similar in design to the notes produced by the pre–civil war government and have been produced for various businessmen. All of the notes have a date of either 1990 or 1996, but most have been printed more recently. 33. There is a need to introduce a new 10,000-shilling note. That would make it easier to count and transport money and carry out transactions. The current cost of producing the Somaliland note is about US6¢, and the cost of producing the Kenyan note is about US4.4¢. In addition, the existing 1,000-shilling note should be gradually replaced with a new note or coin. It would appear to be useful to introduce 500- and 1,000-shilling coins in Somalia. The quality of the coins should be modest so that the cost of production is kept low and there is no incentive to melt them for their metal content. Two important advantages of coins are that they are more difficult to counterfeit and that they last much longer in circulation than notes. It would also be desirable to change the value of the local currency by making 1 new shilling equal to 1,000 existing shillings. The new currency should be introduced after the new government has been widely accepted by the Somali people and is implementing an efficient budget policy. Box 1.2 presents the estimated cost of printing new currency. 13 Box 1.2. Estimating the Cost of Printing New Currency To give some idea of the cost of issuing a new currency, the following assumptions could be made: • 75 million new 10-shilling notes at a cost of $0.06 each would cost a total of $4.5 million (compared with a face value of $52.5 million) • 180 million 1-shilling coins at a cost of $0.04 each would cost $7.2 million (compared with a face value of $12.9 million) • 40 million ½ shilling coins at a cost of $0.03 each would cost $1.2 million (compared with a face value of $1.4 million) 34. On the basis of the estimations in box 1.2, the total cost would be $12.9 million to produce $66.8 million worth of local currency, which would replace $60 million of existing local currency, so the net cost would be $6.1 million. That might be a realistic assumption of the cost for the first two years of the new currency. However in the subsequent years the seignorage is likely to be significantly positive. If it were assumed that in the next three years 45 million 10-shilling notes would be produced at a cost of $2.7 million, with 30 million used to retire old notes and 15 million as a net addition to the money supply, the value of the 15 million net new notes would be $10.5 million; thus, the net positive seignorage would be $7.8 million. The important point to make here is that there would be a significant cost in the first two years of issuing a new currency, but after that, seignorage could be expected to cover much of the operating cost of the central bank. However in its first couple of years of operation the central bank will require either donor or budget assistance to meet both its infrastructure costs and its operating costs. It might be appropriate for the government to pay a commission of 1 or 2 percent of the value of all revenue receipts and expenditure payments for the. That would give the central bank a source of some revenue during this period. 35. One issue that will emerge for the new government is whether it should introduce a dual legal tender system, in which both the dollar and the Somali shilling are accepted for payments to the. In practice this will not be an important issue, except that for revenue collection purposes, the new government will probably wish to have most revenue payments made in US dollars. Because the new tax laws will wish to calculate most sources of revenue in US dollars, it would probably be preferable to recognize the dollar as legal tender, along with the local currency. Somalia is likely to remain a mainly cash-based economy for at least the medium term. Introducing notes and coins that make counterfeiting more difficult should increase the people’s confidence in the local currency. 36. The introduction of higher denominations in some African countries (including pre– civil war Somalia) has led to significant inflation because it was used as a means to greatly increase the total value of local currency in circulation by deficit financing. However, it is important to realize and explain to the population that the introduction of a high-denomination note is not by itself something that will lead to inflation. When the new higher denomination of currency is substituted for low denominations so that the total value of local currency in circulation is unchanged, there is no inflationary effect. 37. In Somaliland, the same considerations discussed above would apply, including the advantages of issuing a higher denomination of local currency, low denomination coins, and redenomination of the currency. External Debt Policy and Normalization of Relations 38. Although domestic and foreign government debt management is normally an important component of budget and macroeconomic policy, it is not likely to be important in 14 the first few years of the operation of the new government. The pre–civil war government of Somalia accumulated external debt of about $2 billion, and with accrued interest arrears this increased to $3.2 billion by the end of 2004. However, it is clear that the new government will have virtually no capacity to service any of this debt. In the short to medium term, while borrowing will not be possible, multilateral development agencies can still work with Somali authorities to help manage and use effectively the aid resources received from bilateral donors. To attract and sustain the necessary grant financing from bilateral donors for the recovery phase, Somali authorities should focus on security, transparency, accountability, and their capacity to carry out essential public functions. Beyond the medium term, when the need for additional net financial resources from multilateral institutions will be more pressing, a mechanism of handling the outstanding debt arrears to multilateral agencies will become a priority task. 39. For treatment of arrears under the Heavily Indebted Poor Countries (HIPC) Initiative, a normalization of relations with all creditors is essential because failure to do so could cause some creditors to refrain from taking action. The clearance of arrears is a first step toward restoring inflows of concessional resources and an important element in enabling a country to qualify for assistance under the initiative. Currently, Somalia remains at predecision point. Arrears toward multilateral development banks (MDBs) should be cleared, or an agreement reached for their clearance, before the country reaches its HIPC decision point. These agreements are reached in the context of an IMF upper tranche conditionality arrangement, normally a poverty reduction and growth facility (PRGF). Gender Dimension of Macroeconomic Policy 40. Providing legal reform and stable macroeconomic policy supportive of private sector activity and economic growth will create an enabling environment for women. The sector that may benefit most is the agricultural sector because it will be possible to put agricultural land back into productive use. The small-trader sector, which is composed mainly of women, will also be a major beneficiary of improved law and order and economic growth. Macroeconomic policy, which includes strategies for facilitating access to labor markets for women, investing in women’s human capital, and addressing inequalities in the public and private sector jobs, would bring opportunities for women to access resources. Thus a sustained growth accompanied by law and order will create opportunities for women to obtain new or better jobs. Macroeconomic policies need to focus on creating an enabling environment for women in all areas of economic activity as well as in the government. There is a need to form a small gender advisory unit in the government that would be responsible for providing technical expertise in designing, implementing, and monitoring strategies for women’s development. 41. Gender-sensitive macroeconomic policy should include strategies for facilitating access to labor markets for women, investing in women’s human capital, and addressing inequalities in the public and private sector jobs, all of which would enhance the ability of women to access resources. In regard to specific action plans, a gender-sensitive budget preparation process needs to be developed along with a more gender-sensitive civil service strategy. Currently, there are almost no women in senior positions in the civil service. This could be corrected by setting minimum quotas for women and creating career options for women. Access to resources could be improved by supporting the creation of women’s entrepreneurship networks, and by facilitating women’s access to credit through microfinance institutions. Finally, there is a need to collect gender-disaggregated data to assess women’s needs and to help create action plans to empower Somali women. 15 Employment Creation 42. Building a long-term employment strategy should be the focus of the macroeconomic policy framework. This would involve the design of a labor-intensive public works program which would ideally include planned investment on rural infrastructure and sound environmental conditions for sustainable land-and coast-based livelihood development. 43. i. Long-term strategy for growth and employment. In the 1990s, nearly three quarters of African livelihoods were earned in the agricultural sector—a whole standard deviation above the level characteristic of other developing countries thirty years back.14 Yet the experiences of high performing Asian economies suggests that a central feature of modern economic development is a reallocation of factors of production from low-TFP (traditional) to high-TFP (modern) sectors. The intersectoral shift, whereby labor moves from agriculture to industry, is one of the most systematic correlates of rising per capita incomes. 44. Crop production and livestock sectors nevertheless do remain the major contributors of economic growth in Somalia. Besides triggering growth and employment through increased quality and production, and extension of existing markets for primary commodities such as livestock, fish, sesame or raisins or new markets in mining of gems, gold or coal, Somalia should focus on developing its almost non-existent manufacturing sector and explore possibilities in the growth of services. Manufacturing, such as processing of the primary export commodities, would generate further value added. Meat, fish, milk, hides and skins processing facilities, high-value honey plants, pasta plants, steam distillation plants for a new oil-extraction industry and other specialized processing plants would all serve the purpose of adding value to export commodities such as sesame, frankincense, myrrh, aloe vera, yeeb and gum Arabic, among others.15 Services would grow concurrently, especially through backward linkages from other expanding sectors. Demand for transport services, storage, banking and insurance as well as telecommunications will likely grow as manufacturing and agricultural activity expands. 45. ii. Short-term income and employment generation options. A short-term job creation strategy is essential for smooth and successful transition, especially in a post-conflict setting where it serves as means of stabilizing communities and keeping peace. Numerous ‘rapid employment’ schemes have been developed and implemented in other similar contexts.16 An opportunity for a short-term employment generation program could be considered in labor-intensive reconstruction and rehabilitation activities, mainly in infrastructure and agriculture sectors. In post-conflict countries, new jobs could also be created through community-based social and economic infrastructure rehabilitation projects, such as social investment fund programs that rehabilitate schools, roads, health clinics, and water supply networks, in accordance with priorities set by the local communities. Finally, microfinance institutions could be strengthened because they promote private sector development through small-scale investments and help vulnerable groups meet emergency needs and build assets. 46. In addition to specific employment-creation schemes, there is a strong need to develop a strategy for special groups and the vulnerable- women, youth, demobilized militia and the 14 O’Connell, Stephen A. and Benno J. Ndulu. 2000. “Africa’s Growth Experience: A Focus on Sources of Growth.� 15 Ideas extracted from the CEM section on “Prospects for Somalia’s Development.� 16 The following suggestions are mainly based on recommendations of the 2003 UN/WB Iraq Joint Needs Assessment. 16 returnees. Coupling labor-intensive programs with skills-development programs would help provide marketable skills for sustainable job markets. Field Assessments and the Macroeconomic Policy Priorities 47. As a part of the JNA process, a group of experts have visited different regions and districts of Somalia to discuss with local communities their views on the priorities for reconstruction in areas ranging from infrastructure and the environment to macroeconomic policy and public resource use. Field assessments were undertaken in the form of questionnaires in remote as well as more accessible areas, expanding on the work done by technical experts who have previously visited the main cities and towns. By targeting various stakeholder groups, including women, youth, traditional and religious leaders, regional/district authorities, civil society, and business groups, the consultations aimed to create an opportunity for a wide-ranging set of actors to take an active role in improving their quality of life by defining a shared vision of their region’s future. The field assessment presented a more comprehensive picture of local priorities in different regions (see annex 4 for a summary of priorities in four zones). According to the participants, macroeconomic priority in Somaliland is employment creation, whereas in Puntland and the South West Zone it is financial services, and finally in Benadir, it is the creation of institutions accountable for the economic policy and sustainable revenue sources. B. ESTABLISHING ACCOUNTABLE BUDGETARY PROCESSES, PUBLIC FINANCE MANAGEMENT, AND REVENUE SYSTEMS 48. A transitional federal government has come into being, but has yet to implement a budget or provide government services. There are weak, yet functioning institutions in the two northern regions and a patchwork of ad hoc structures in the South-Central areas. In general, the decentralization of fiscal responsibility follows a pattern in line with the age of the system; with Somaliland is the most advanced, followed by Puntland, and then the South-Central region, which has no division of fiscal responsibility in the absence of any state authority. 49. The TFG lacks both financial resources and the staff capacity needed to effectively establish appropriate financial management systems for Somalia. It is seeking assistance from the international community to engage a reputable financial management agency to establish financial management systems based on a computerized system and best public sector practices for budgeting, accounting, and reporting. There is an urgent need to build efficient and sustainable financial management systems. The challenges at the federal level include lack of a functional budget, effective accounts and audit departments, and a macroeconomic policy unit at the Ministry of Finance. 50. There are a number of challenges in the current system that will need to be addressed in improving the public finance management (PFM) in Somaliland. The main challenge is the inappropriate budget preparation process, which would make it difficult to operate in an environment of increased funding, accompanied by a requirement for effective output monitoring and transparency. This is due to weaknesses in the public system, such as (a) the lack of full participation of all stakeholders, (b) lack of medium- and long-term planning, (c) inadequate budget analysis, (d) noncompliance with government regulation, and (e) inadequate transparency in horizontal allocation of district funds. Other challenges in Somaliland include use of inefficient manual accounting procedures with high error risk, inadequate coding structure, inconsistency in classification of data in cashbook, lack of adequately trained staff to operate modern computerized systems, low staff morale due to low 17 salaries, lack of computer equipment, and lack of a comprehensive and updated procedures manual. 51. In Puntland, a number of noncompliance weaknesses and other challenges exist in the current PFM and will need to be addressed in improving the systems. Similar to Somaliland, in Puntland the major challenge is noncompliance with budgetary controls. Budget limits are violated when instructions to do so are issued by senior government officials, who normally attribute such control violations to sensitive political considerations. Other challenges include inconsistency in entering payment stamps on paid vouchers; failure to record commitments in the vote book; inconsistencies in classification of data in cashbook; lack of evidence of reconciliation of cashbooks to the statements from the bank; nonparticipatory one-year budget with limited analysis; manual and high error risk accounting systems, and lack of adequate accounting and computer skills among the key budget and accounting staff. 52. Both Somaliland and Puntland have procurement systems that are generally adequate for procurement implementation under the prevailing economic conditions of the administrations. However, because of the deficiencies in the legal framework and institutional arrangements for procurement management and law enforcement, the current systems will not be suitable for handling large-scale activities. Legal Framework 53. The area that made up the former Republic of Somalia is currently guided by three separate legal frameworks: the Transitional Federal Charter (2004), the Somaliland Constitution (2001), and the Puntland Charter (1998). All three include guidance on a decentralized system of governance, with significant devolution of power to the district level, particularly for the purpose of local service delivery. The strategy of the TFG is to aim at a bottom-up approach in which districts are formed before regions and states. It seems clear that the decentralized approach is a response to the widespread rejection of the centralized governance system of Somalia’s last central government under Siad Barre. On this basis, there is a strong likelihood that the sentiment will continue to be at the core of governance debates and that the process will continue to materialize also in the south and central parts. 54. The Transitional Federal Charter. The charter, signed in February 2004, specifies that Somalia “shall have a decentralized system of administration based on federalism,� and it outlines the main principles and building blocks for the envisaged governance structure. The key construct in this regard is the proposed four-tiered administrative hierarchy: new federal institutions, state governments (with regions forming into states according to their free will), regional administrations, and district administrations. The charter also directs the TFG to promote decentralization through establishing and promoting mechanisms for the decentralization of power and decision making, and it empowers the TFG to name a 13- member Federal Constitution Commission (FCC). The FCC will have the task of determining the details and guiding the process of how to transform Somalia’s government into a federal government, developing legislation to guide the decentralization process, and making decisions on how many states, regions, and districts Somalia will consist of, and what relationship they will have with the federal government. The TFG has submitted an act for the formation of the FCC to the Council of Ministers and is awaiting its approval. 55. The charter provides further guidance on the structure of government by defining and identifying a proposed structure at the federal level, with formal division of powers between the executive, legislative, and judiciary. The charter articulates a division of functions and powers between the federal and state governments, but does not identify specific responsibilities for regions and districts. 18 56. It needs to be noted that there are already 42 TFG ministries, yet Schedule 1 of the charter only provides the federal government with core functions related to security, macroeconomic stability and trade, planning and monitoring, and foreign affairs, justifying a far smaller and more focused TFG. 57. The Puntland Charter. The charter, which was enacted in 1998, specifies Puntland is a temporary state that will be incorporated into Somalia as a federal state once a functional government is in place in Mogadishu. The state is managed by an elected president and supported by a three-tier structure of government consisting of the state executive, regional governors, and district councils. There are currently seven regions—an increase of three from 2004—each headed by a governor. The region, which is an administrative level funded through the budget of the Ministry of Local Government and Rural Development, performs mainly coordination, security, and political functions. Below the regional level the state is divided into 27 to 30 districts. Each district is led by a district council, which is chaired by a district commissioner/mayor. The district councils were originally appointed by the president, but a reform process is currently under way to have them elected. So far, seven districts have completed that process. 58. The framework for decentralized governance and service delivery is embedded in the 2003 Local Government Act, which provides a significant degree of devolved power to the districts, backed by revenue and expenditure assignments. It also outlines the districts’ right to domestic and international borrowing, on previous approval from the state government. 59. Because of extremely limited fiscal capacity, the state government has had little involvement with service delivery responsibilities. It has been concerned largely with regulatory functions and some revenue collection. Appointments down to the district level are made centrally, but the districts have significant autonomy over their revenue sources. 60. The Somaliland Constitution. In contrast to the Puntland charter, the Somaliland Constitution makes no reference to eventual integration into a larger federal Somalia. In fact, the constitution was first established long before the Puntland and TFG charters, beginning with a charter in 1993 and finalizing the constitution in 2001. 61. Setting the pace for the structures outlined in the Puntland and TFG charters, the Somaliland Constitution also elaborates a three-tiered system of state, region, and district. Although the regions and districts in Puntland come under the authority of the Ministry of Local Government, it is the Ministry of the Interior that has the power to create and dissolve regions and districts according to guidelines established in the constitution and the regions and districts law (law no: 20/2002). Currently there are 6 administrative regions (Hargeisa, Togdher, Sanag, Awdal, Sool, and Sahil) and 42 districts. 62. During the past couple of years, Somaliland has decentralized administrative power from the Ministry of the Interior to district councils. One constraint to the administrative autonomy of the district is the fact that the main executive officer in each district is still employed by the Ministry of the Interior. Currently, 24 of 42 districts have elected councils and have thus established their autonomy. The remaining 18 have their councilors nominated by the Somaliland government. 63. Similar to the setup in Puntland, in Somaliland regional governors are appointed by the Ministry of the Interior and have no political or financial autonomy. The Regions and Districts Law provides for the election of regional councils, but this institution has yet to emerge and seems unlikely to do so for the foreseeable future. 19 64. Somaliland’s procurement law (the National Tenders Law no. 79/96) was enacted by parliament in 1996. The law creates a national tender board (NTB) of seven members: a chairperson, a deputy chairperson, a permanent secretary to the board, and four other members (including the procuring entity of the tender in hand), and it delineates the roles and responsibilities of the NTB and other government entities in the management of the tendering process and decisions on the award of government contracts. 65. NTB is an autonomous entity in the Office of the President with the authority to do the following: • Review tender documents from procuring entities, administer the tendering process, award and sign (on behalf of the procuring entities) contracts for works and goods (including non-security-related military goods) exceeding Sl. Sh. 6 million, and forward a copy of the contract documents of the tender awarded to the respective procuring entity for the management of contract implementation. • Monitor implementation of the contracts it awards. • Appoint a technical subcommittee to assist the board in the technical aspects of the tenders and use the services of competent technical experts in the procurement process of large contracts for complex works and specialized equipment. 66. Puntland’s procurement system is based on two pieces of legislation established by the administration in 1999 and 2000. In 2000, the parliament passed a law that created a tender board and outlined the responsibilities of other actors in public procurement processes and decisions and prescribed the procurement procedures to be followed by government agencies. 67. The tender board is an autonomous entity that reports to the president. The board has seven members: a chairperson; a legal expert; and five senior managerial-level representatives. The representatives are from the Bank of Puntland, Ministry of Finance, Ministry of Public Works and Transport, Ministry of Trade and Industry, and the procuring entity. The law allows the tender board to co-opt professional experts to assist the board in its deliberations. For decision making, a quorum of five tender board members is required. Furthermore, the law allows the board to establish its internal regulations to be proposed by the chairperson and approved by the president. 68. Procuring entities have the authority to award contracts not exceeding the equivalent of US$5,000. The law requires procuring entities to award contracts, as far as practicable, on the basis of price comparison. 69. Puntland has a law on local governments enacted in 2003. The procurement arrangements for the local governments are not as elaborate as those for the central government agencies. All contracts under the district authorities are signed by the chairperson of the district council in the presence of the secretary to the council. The law empowers the district executive committee to approve contracts up to So. Sh. 100 million. Contracts exceeding So. Sh. 100 million require the approval of the district council. Contracts are to be awarded to the bidder with the lowest evaluated bid (taking into account both price and quality). Budgetary Process 70. Federal budget. The TFG prepared its first budget in December 2005. The US$150 million request sets out to establish government functions through paying salaries and allowances, reconstructing government infrastructure, and providing equipment and 20 maintenance. Because the government has no present revenue collection capacity, the budget was presented to international donors. A number of donors are now providing budgetary support to the Somali government. 71. One of the key challenges presented by the federal charter as it stands today is the fact that it identifies a significant portion of revenue coming from sources that are currently contributing to the revenue base in Puntland—most notably customs duty from the port of Bosaso. It seems likely that the continuation of external budget support eventually also will depend on the ability of the new government to show it has the support of the Somali people through collecting some of its own revenue. 72. State budgets. Ministries of Finance in both Somaliland and Puntland have been preparing budgets for several years now. The budgets are not properly classified, but functional in the sense that expenditures are aggregated from the various ministries and agencies of government. Current budget preparation processes fail to take into account the needs, priorities, and participation of rights holders, particularly women, minority, and low- income groups. Both budgets are coded and classified along similar expenditure heads, with the main ones being wages and salaries, operating expenses,17 and other general expenses (amounting to about 73 percent of the total budget in Somaliland and 83 percent in Puntland). On the revenue side, customs duties and indirect taxes account for about 90 percent of the total in both states, with “government service charges� making up the remainder of the rest. Budgets are not prepared through a consultative process, and most of the expenditures are committed to wages and salaries. Analysis of the Puntland budget showed that the budget increase from 2004 to 2005 was entirely due to increase in the size of the civil service and security forces. 73. In the Somaliland central government, the Ministry of Finance is responsible for preparing revenue projections and providing budget preparation guidelines to government ministries and agencies. The budget covers one financial year (annual budget) and is classified by heads (ministries and agencies) and subheads (expense types), in the same way the actual performance is analyzed. The budget is based on the preceding years’ budget, which is normally increased in line with expected revenue increases. The districts, however, are independent of the central government and their budgets are prepared by the district executive secretary and the accountant, in consultation with user units. 74. The budget preparation process in Puntland is the same as that observed in Somaliland; the central government budget is guided by the MoF, and the municipalities/local authorities independently prepare their own budgets. The one-year financial period, classification by heads and subheads, and rationalization and approval mechanisms are the same in both regions. 75. District and regional budgets. Local government administrations exist to a varying degree throughout Somalia. In South-Central areas, there is nevertheless far too little data available to describe the financial status of even the limited governance structures that do exist. There are governors and district commissioners that collect some revenue and provide limited services (mainly security). It can be assumed, however, that nearly all public services delivered are offered by nongovernmental organizations (NGOs) or the private sector and financed either by user fees or the donor community. One of the most intractable financial and governance problems facing districts in the South-Central region is the fact that resources are still highly contested by various factions, thereby making it difficult to manage them through future district councils. 17 Also referred to as “services.� 21 76. Revenue control procedures. The main source of revenue for the central government of Somaliland is customs duty, which forms 87.5 percent of revenue estimates for 2006. Other major sources of income include telecommunication and postage, rural development charges, court charges, water income and fishing charges. The accountant general is responsible for control of all official receipts. On receipt of the collections, the cashier issues a collector’s receipt. The funds are banked intact in the central government account in the nearest branch of the Bank of Somaliland. The accountant general is supported by subaccountants in eight stations in the six regions of Somaliland who maintain revenue accounting records. Receipts are recorded in a cashbook analyzed by revenue subheads. On a monthly basis a revenue report is prepared and forwarded to the accountant general. 77. In the Somaliland districts, the process of recording, including use of official receipts and cashbooks, maintained by the district accountant, is the same as in the central government. The monthly revenue reports submitted by subaccountants to the accountant general do not include collections by the districts because these are spent in the respective districts and are not submitted to the central government. However, part of the funds collected by the central government from the districts is returned to them. That includes (a) 10 percent of the customs tax from the district and (b) 12.5 percent of the total customs revenue that the central government collects from all the districts. 78. In Puntland, the main source of revenue for the government is customs duty, which forms 73.3 percent of revenue estimates for 2006. Government service charges contribute 11.2 percent of the revenue estimates. The other sources of revenue include indirect taxes, transfers, government property charges, and income taxes. Revenue accounting records are maintained in the regional accounting offices, and a monthly revenue report is prepared and submitted to the accountant general in the first 10 days after the close of the month. As in Somaliland, a part of the customs duties collected by the central government is paid back to the districts. The proportion is 7 percent of all customs duties collected in Puntland; 2.5 percent of the 7 percent is paid to Bosaso and 4.5 percent of the 7 percent to the other 20 districts of Puntland. 79. Devolution. Both Somaliland and Puntland are proceeding with the devolution of financial and administrative responsibility to elected district councils. From 2004 to 2006, the number of elected district councils in Somaliland increased to 24, whereas the number of elected councils in Puntland rose from 0 to 7 during the same time period. Although this shift will increase the fiscal and administrative autonomy of the districts, it will also mean that district councils will need to strengthen their ability to perform a range of new functions, including budget planning and prioritization, financial accountability, and revenue generation. 80. Although the districts have been granted autonomy in determining the size and composition of their establishments, they are constrained by the use of the central government pay and grading structure and the fact that their budgets are forwarded through the Ministry of Interior (Somaliland) and Ministry of Local Government and Rural Development (Puntland) to parliament for approval. Although it is unlikely that the parliament has yet to exert any significant influence on district budgeting, ministries do often provide guidance (and sometimes instructions) to districts in the use of their funds. There are also signs that the devolution of responsibility in the North could be followed by further decentralization of state resources. 81. Matching expenditure allocation with revenue. Currently, most districts are under great fiscal stress and face significant challenges in finding the resources to pay for their legally mandated responsibilities. Revenue collection capacity is limited and is barely 22 sufficient to pay for salaries and wages, operating expenses, security, and some sanitation. Besides, oversized district staffing places a burden on local revenue. 82. Although the TFG Charter provides no specifics on the district level, the Somaliland and Puntland legal frameworks itemize a long list of functions that district councils are expected to fulfill. On the revenue side, district councils are given broad latitude to establish their own revenue base, including the choice of instruments and rates, as long as these do not interfere with state revenue collection. In practice, few of the assigned revenue sources are being collected, due to lack of capacity and political control, and districts are for the most part resorting to applying different mixes of local revenue sources, with mixed results. 83. Revenue sharing and transfers. In addition to raising their own revenue, districts in Somaliland also receive funds from the state (annex 1). Two mechanisms are used: • Shared revenue—Districts that possess customs collection points receive 10 percent of customs taxes collected in their districts. Funds are deposited in a separate account at the local office of the Bank of Somaliland. • Intergovernmental transfer Of the total customs taxes collected by the Ministry of Finance (after the 10 percent deduction noted above), 12.5 percent are redistributed among all districts (except for Berbera and Darbulakhare). The formula for redistribution is roughly aligned with the size of district expenditures. 84. No transfer system exists in Puntland although a series of different surcharges are placed on top of regular customs duty at the Bosaso Port. Of these, 2.5 percent are collected on behalf of the municipality of Bosaso, and another 3.5 percent is collected for the Ministry of Local Government and Rural Development to finance the process of electing district councils. Preliminary analysis showed that the surcharges are “off-budget,� and it is unclear whether the funds collected in fact reach the intended recipient. Prioritization and Outcome Targets Establishing the Federal System for Economic Management 85. The entire process of federating Somalia is guided by the FCC. Given the broad range of tasks to be performed by the commission, it is suggested that an FCC subcommittee be established to look specifically at the fiscal decentralization. It is expected that the subcommittee would perform the following broad functions: • Defining a preliminary perspective on the relative spheres of each level of government, and deciding on the manner in which local government will be constituted • Assigning specific revenue sources and expenditure responsibilities to the different levels of government • Agreeing on the structure of intergovernmental transfers between the center and state, commensurate with assigned responsibilities • Establishing institutions and decision-making processes that can support the federal structure and be responsible for establishing, implementing, and monitoring the allocation criteria 86. The vision for a highly decentralized system. The vision is contribution to democratic development, poverty reduction, and sustainable peace through establishing a highly decentralized system for service delivery, with districts bearing the primary 23 responsibility for responding to citizen needs. To reach that vision, a two-pronged approach should be adopted, focusing on the district and central levels:18 • At the federal level, specifically in areas without existing states, focus on clarifying the levels of government and the associated roles and fiscal responsibilities.19 • At the district level, – In areas with existing states, focus on strengthening district capacity for service delivery through fiscal decentralization and enhanced district capacity for financial management, revenue collection, contracting-out, and other key functional areas. – In areas without existing states, focus on establishing and expanding district capacity for service delivery while recognizing that most services will be delivered by nongovernmental actors during the transition period. 87. Service delivery. The responsibility of various levels of administration to collect revenue and provide services needs to be clearly defined. Once that has been done, the existing revenue base at the district level can be increased through supporting institutions and structures, building core capacities, developing structures for monitoring and accountability, and establishing a financial management system. Currently, little property and income tax is collected, nor is the value added tax (VAT), and customs revenue is far below capacity. With increased capacity to collect and manage their own revenues, the districts can attain the significant degree of autonomy outlined in the charters and take a leading role in delivering community services on the ground. 88. Contracting out. Rather than hiring staff to directly provide services, districts should follow the many successful models for contracting out to NGOs or the private sector or for facilitating and encouraging public-private partnerships (i.e., in water, electricity, and garbage removal) as the most efficient means of service delivery. On the other hand, if districts have legitimate political leadership recognized by the state and the region, and if they establish a track record of good financial management, service delivery should be done by local administrations. In this case, it is critical to strengthen administrative and institutional capacity for successful fiscal decentralization. 89. Revenue collection capacity. There is significant scope for increased revenue collection and service delivery at the district level, supported by an emerging commitment to a decentralization framework in which the federal and state authorities will have mainly policy and regulatory functions and in which staff and other resources are reserved mainly for frontline service provision through devolved district governments that may contract out to private sector or NGO providers. 90. Transitional arrangements. Each region of Somalia will need to be treated differently depending on its own unique starting point. For example, although districts in the 18 This strategy could be supported by developing criteria for levels of access to services that could guide the RDP implementation and additional domestic and external efforts. As mentioned previously, federal government involvement in delivery should be avoided through the establishment of a lean federal structure and legally assigned functions matched by fiscal capacity. 19 Creation of a “raison d’être� for the TFG. Given that the TFG has no present revenue source and thus depends on more or less voluntary transfers from the lower levels of governments to be able to perform its intended functions, it will have to prove its value as a national government. This can most likely be done through providing a stable and secure environment and the reintroduction of Somalia to the international market. Efforts should nevertheless be resisted to establish a large federal structure with specific functions and involvement in local-level functions. 24 North are building their capacity to directly administer donor funding, an interim solution such as a semiautonomous social fund may be the best way to provide funds (i.e., block grants) to support district service delivery needs through a good financial management system. Establishing an Efficient and Sustainable Financial Management System 91. The government needs an efficient and sustainable financial management system that provides relevant, accurate, and reliable financial information to management in each of the decentralized levels, to the central government, and to other stakeholders in a timely manner. To operationalize the system, the right capacity of staff and other operating resources is needed at all levels of the financial management process. Priority outcome targets for Somalia include the following: • Computerized accounting and reporting system that has the capability to analyze data and generate periodic reports by defined programs and activities • Comprehensive financial policies and procedures manual written in a simple step- by-step format that is easy to follow and includes accounting policies and controls, computer interfaces, accounting structure, and accounting forms • Efficient budgetary control system operating in a computerized environment with budget holders accessing budget balances on a user need basis • Adequately trained accounting staff able to operate computerized financial management systems • Timely generation of accurate and reliable financial reports showing budget versus actual in a manner that supports output monitoring without hindering required cost controls by heads and subheads • Comprehensive budgeting system with a multiyear perspective that ensures linkage of development policies to the expenditure framework and incorporates development associated recurrent costs Priority Initiatives 92. In line with the two-pronged approach mentioned above, actions will need to be taken on two different levels. A broad set of institutional arrangements will need to be gradually put in place at the federal level, and a more targeted set of actions can be taken to improve the systems that are already operating in the North. The following actions should be pursued on the federal level: • Provide technical assistance to the FCC on the implications and choices for intergovernmental fiscal relations in the federal structure. This assistance should emphasize the need for continuity in fiscal systems between the existing structures in the North and new structures in the South. • Conduct a comprehensive assessment of local government capacities and needs, including financial management systems in the South-Central region, and present options for how to support transition to a federal system. • Establish key federal functions to support the fiscal system, including capacity for policy formulation, financial management, and monitoring. 25 • Agree on modalities for intergovernmental transfers and application of a formula tied to appropriate criteria determining vertical and horizontal allocations, and establish institutional arrangements to support and operationalize the system. 93. In parallel, the following actions should be pursued in the North within existing state structures, and in the South-Central region there might be sufficiently established administrative structures: • Draw up state constitutions and local government acts where appropriate to reflect the decisions on functions, assignments, and institutional structures at the different government levels. • Establish governments at different levels to reflect the constitutional requirements. • Develop and agree on a model for service delivery, including planning and budgeting, implementation, reporting mechanisms, and systems and practices of local public- private partnership. • Assess the revenue collection capacity of district governments, and invest in upgrading skills, technology, systems, and procedures to increase revenue flows. • Establish appropriate funding mechanisms to address the absence of any existing form of poverty, targeting fiscal transfers in the northern states and the South. The process of selecting, implementing, and monitoring Fund recipients should be tied to the governance framework provided by elected district councils, where available. • Set up the systems for public service management for the different levels of government, and arrange personnel accordingly. • Facilitate dialogue in the North where further decentralization of state finances is being debated for district-level service delivery. Revenue Mobilization 94. Currently no federal government tax administration exists nor is there any federal institution established to administer taxes. At the same time there is no agreement with Somaliland or Puntland about their roles vis-à-vis federal government revenue collections. In the short term, laws need to be enacted governing federal tax administration and the establishment of lean and well-paid independent customs and domestic tax revenue departments. The need for transparency and accountability requires that a lean, separate, well- paid revenue administration agency be established, under a separate tax administration law, with a policy to recruit staff on the basis of merit only. A simple tax procedure code should be developed to this effect, covering filing and payment procedures based on self-assessment principles, collection enforcement and audit powers, dispute resolution procedures and penalty and interest regime. 95. There are no local administrative structures in Somalia for revenue mobilization. A few district administrations levy licenses, charges, and fees and provide some services, but records are not accountable. Therefore, in the short term, some viable minimal local administrative units need to be established and some staff recruited. Also staff training in computers, record keeping, simple revenue collecting procedures, and simple accounting and budgeting should be initiated. The units that are established need to prepare preliminary local administrative budgets during the first year of the RDP, and simplified local budgets for the subsequent year. In the medium term, these units should strengthen financial planning, budgeting, and accounting functions through on-the-job training. Thus lean local 26 administration would be in place providing social services jointly with donors and NGOs and also would be progressively in charge of tax revenue mobilization. 96. The new government will need to strengthen its capacity to raise revenue through an efficient taxation system. In the short and medium term, the total tax revenue would be raised through efficient collection, extending the tax base, and lowering the tax rates, thus encouraging compliance for tax payments and thereby generating more revenue. Somaliland and Puntland would strengthen their fiscal relations with the local administrative units. In the short and medium term, harmonized roles and functions between these states and the economically viable local administrative units or districts would be established. These would be translated into specific expenditure responsibilities and revenue sources that would support the decentralized services of the local administrative units. Similarly, the viable local administrative units in South-Central Somalia would also emulate the decentralized expenditure responsibilities and revenue sources adopted by Somaliland and Puntland. 97. Recommendations for priority initiatives for procurement can be analyzed under short- and long-term interventions. Short-Term Interventions 98. Hire a procurement agent (PA). In consultation with the new government and authorities of the functioning administrations, the administrator of a possible Trust Fund (TF), referred to hereinafter as “the TF administrator,� will hire a procurement agent to assist the government and state administrations in the implementation of the TF-funded procurement. A team of the PA, comprising a manager and adequate staff with the right skills mix, will work with each administration and the federal government. The PA may sign, together with the TF administrator, a separate contract with each authority, for example, federal government, Somaliland, and Puntland. 99. The PA’s responsibilities under each political authority will be, among others, to jointly do the following: • Prepare annual procurement plans with the beneficiary public entities. • Manage the procurement process at all stages with procurement units of the beneficiary entities. • Award contracts with the central tender board. • Manage implementation of contracts with the beneficiary entities including acceptance of deliveries of goods and completion of services and authorization of payments to contractors. • Use standard bidding documents/forms for administering the procurement process and awarding contracts, approved by the TF financiers. • Train the staff of the procurement units, tender committees, and central tender committees. To ensure that the PA meets this obligation, the contract should provide an incentive and a monitorable indicator for achieving this objective. 100. In each beneficiary administration, the TF financiers and the authority of the administrations will create a complaints review office to which aggrieved bidders may present their complaints. 27 101. Improve the procurement systems in Somaliland and Puntland. In the short term, Somaliland and Puntland are to be assisted in the following: • Developing comprehensive procurement regulations that (a) define clearly the procurement procedures and the roles and responsibilities in procurement implementation decisions and (b) establish procurement units and tender committees in the public organizations, managed by teams selected from existing public servants, including women and minorities • Training staff procurement units, tender committees, and central tender board • Producing standard bidding documents/forms • Amending current laws with the aim of changing the responsibilities of the central tenders from administering the procurement process and awarding contracts to (a) approving recommendations by tender committees of procuring entities for award of contracts exceeding a set threshold, (b) approving requests from procuring entities for procurement of goods and services through procedures other than open competition, (c) conducting random audits on the procurement procedures of contracts that are not subject to its approval, and (d) recommending punitive measures against culprits of irregular procurement decisions or corrupt practices 102. Assist the new government in establishing procurement regulations. Because of the uncertainty about the form of national government that may emerge after the transition period comes to an end, it may be more appropriate to provide government with the necessary technical assistance in formulating two sets of procurement regulations for procuring goods and services to be implemented (a) at the national level and (b) at the regional level by the regions that have no administrations at the moment. It might be appropriate to allow the self- governing regions to produce their own regulations based on the existing legislation and recommended amendments. An important aspect of the procurement regulations at the federal level will be to provide equal opportunities to companies from all over Somalia. This has to be particularly specified in the procurement legislation. It may, otherwise, be a potential area for conflicts. Long-Term Interventions 103. Establishment of national procurement system. Assist the national authorities that may be formed after TFG in formulating a comprehensive procurement legal framework that is based on the procurement principles of economy, efficiency, transparency, fair competition among eligible bidders, and accountability, together with the procurement regulations. Implementation and Monitoring Arrangements 104. Among key outcomes to be monitored are the number of elected district councils, levels and effectiveness of transfers, gradual increase in total value invested in service delivery in selected districts and localities, degree of civil society involvement in district planning, implementation and provision of services, and general level of access to services. In addition, targets will include the accountability of budgeting procedures, pay adequacy and management of the wage bill at the district level, and number of decentralized public servants in comparison with international practice. 105. The proposed strategies for implementing the priority public financial management tasks are as follows: 28 • Outsource the design and implementation of the computerized financial management systems to a financial management agency (FMA). That should include procurement and setup of the computerized systems, documentation of the financial management policies and procedures, and operation of the systems in the first two years (subject to review). This approach will ensure immediate existence of adequate financial management capacity as the local capacity is developed and will emphasize transfer of skills and knowledge as the FMA provides on-the-job training to staff. • Adopt a phased approach in establishment of the systems. Phase 1 will cover the accountant general’s office and 20 pilot regional accounting locations. Phase 2 will cover the remaining accounting locations. Selection of pilot locations will be done in a consultative manner to ensure balance and promotion of peace as the capacities are enhanced. • Training. Contract a certified computer trainer to provide training on software packages. Following the training on basic computer skills, the FMA and the certified vendor of the accounting software should train the accountants on the financial policies and procedures and the computerized accounting systems. The FMA should provide on-the-job training during the contract period. 106. The PFM monitoring systems should include the following: 1. Review of the adequacy of the established financial management systems 2. Review of agreed financial reports submitted quarterly 3. Joint stakeholder field review conducted annually to cover: • Adequacy of the budget preparation process in regard to key indicators such as degree of participation, timeliness, outturn and variance explanations, comprehensiveness, and transparency • Timeliness in submission of annual accounts and completion of independent auditor’s report • Adequacy and effectiveness of the systems and periodic reporting C. ESTABLISHING CIVIL SERVICE INSTITUTIONS Current Status, Challenges, and Opportunities 107. The TFG now consists of 275 members of parliament; 84 ministers and deputy ministers plus 5 ministers of state are drawn from them. The government is based in South- Central Somalia rather than in Nairobi as was the case last year. Parliament met in Somalia for the first time in February 2006, in Baidoa. There is still fighting in some parts of Somalia. Ministers have not established civil servants. Almost all of the budget is provided by donors; the rest is in the form of loans from the private sector. 108. The TFG has taken the first steps toward setting up a civil service. A six-person civil service task force was established by presidential decree in January 2006. The mandate of the task force includes carrying out the preparatory steps required for the constitution of a civil service commission (CSC). The task force has drafted its own internal regulations and is revising the 1980 Civil Service Law. 29 109. In Somaliland, the executive branch of government is led by a directly elected president. Somaliland has 40 ministries and agencies, 6 regions, and 42 districts. There are also 4 autonomous public agencies, including the Port Authority, the central bank, and water and electricity authorities. The districts, including the municipalities, manage their own staff although the CSC of Somaliland acts in an advisory capacity. The legislative branch of government consists of a House of Elders and a directly elected House of Representatives. There are about 90 judges in the judicial branch. The CSC advises the president on matters of policy; is responsible for recruitment, promotions, and discipline; examines and interviews candidates for vacant positions and promotion; advertises vacancies; and prepares and supervises the implementation of rules and regulations on the civil service. The CSC is also responsible for reviewing structures and functions of central government ministries. Achievements to date include establishing a screening system for all staff, applying the system to all ministry and agency staff, and reducing the staffing level by about 2,000. 110. Public administration at the state level in Puntland comprises 14 ministries, each headed by a minister and either one or two vice ministers. In addition, there are two state ministers for Ministery of Interior and Security, and the President’s Office. Although an exercise was conducted in 2003 to define the functions of each ministry and to standardize their structures, the proposal was not implemented; each ministry determines its own internal structures. In some cases that has led to a proliferation in the number of departments, with staffing sizes that would generally not be considered as operationally viable. For instance, the Ministry of Local Government and Rural Development has 65 staff and 10 departments, which, after discounting its DGs and regional staff, means an average of fewer than 6 staff per department. Staffing 111. The Civil Service Structures Study makes proposals concerning the size of the civil services on the basis of population, GDP, and what it refers to as “structures criterion.� On a population basis, the report has the size of the civil service ranging from 42,000 (at 200 citizens per civil servant) to 85,000, at an African average for civil servants as a proportion of the population.20 The target becomes 32,000 assuming that 7 percent of the TFG wage bill will be spent on civil service salaries.21 112. Using the “structures criterion,� the report develops the following options: • Federal civil service with 42 ministries (as now) 11,028 • Or clustering support for ministries 9,283 • Or mergers and abolition 9,815 • Semiautonomous agencies 1,258 • States 22,836 • Regions 108 • Districts 13,624 20 In each case “civil servant� for the comparator countries does not include frontline service providers such as teachers and nurses. 21 However, in this case “wage bill� for the comparator countries does include frontline service providers. 30 113. Such a civil service seems out of line with the sizes of the civil services in the North. Somaliland has 5,559 and Puntland about 2,200 civil servants, including frontline service providers. Both plan to reduce staffing by eliminating unnecessary jobs and unqualified staff. The report’s structural and staffing proposals should be regarded as a long-term goal. The South-Central part of the country will have to be brought up to the same level administratively as the Northern states. The objective of the proposals is to establish what might be called a balanced federal state in a country in which, at the moment, there are emerging government structures in two parts of the country and no formation at all in the rest. 114. It will be important to plot a course from the current situation to the ideal laid out in the report. However, for many years, administrative solutions and associated donor support will have to be asymmetric, in line with Somalia being in fact an asymmetric state. Such a state is described as one of the options in the background paper on Somalia Public Sector Issues of the Somalia Country Economic Memorandum, May 2005 (box 1.3). Box 1.3. Confederate, Asymmetric State Under a confederate, asymmetric state not all parts of the nation would be structured the same. For example, in Spain Catalonia is given a measure of independence not accorded to other regions in the country. Scotland, Ireland, and Wales have their own assemblies, each with different powers, but England does not. The case for such a solution in Somalia would be based on the fact that Somaliland and Puntland, unlike South-Central, already have operating governments. The federal government would have a relationship to the two regional states similar to that of Switzerland’s federal government to its provinces, but it would have a more active role in running the South, as if it were the regional state government there. The regional states would be able to raise most of their own revenue, as they do now, and decide on spending priorities. The federal government would be responsible for legal framework, foreign affairs, macroeconomic policy, and defense for the whole of the country. The federal government would for example decide which taxes could be levied but would leave it up to lower levels of government to decide on the rates, as do the cantons in Switzerland. There would be a single central bank. The main instrument of economic policy in the hands of the federal government would be monetary policy because most revenue would be raised at lower levels of government, as in Switzerland. If the Swiss model were followed, each level of government would raise direct taxes, with the lower levels depending somewhat on user charges, and the federal government depending on a new tax, VAT, but also able to raise direct taxes. Responsibility for service provision would be assumed by the lowest level able to provide those services efficiently. This would tend to be the district/municipal level. It would be possible for districts to join together to provide services characterized by scale economies. This district focus for service delivery would apply to all parts of Somalia, not just the regional states. That would mean that at the district, and perhaps regional, level there would be no asymmetry. 115. In Somaliland, the central government employs 5,559 staff. Of these, 37 percent are in education, and 18 percent in health. Finance is the next largest ministry with 6 percent. There are four grades, A (most senior), B, C, and D. About 60 percent of the staff do not have a secondary education, a further 35 percent have a secondary education, and about 5 percent are graduates. Women make up 27 percent of the civil service; 2 women are ministers or vice ministers; 1 of the 40 directors-general is a woman, and 7 of the 420 directors are female. Almost all the women are in very “subordinate� jobs, such as cleaning and clerical work. Sixty-six percent of staff work in the regional offices of central government agencies or in schools and hospitals. There are about 3,500 staff in local government, almost 900 of which work for the municipality of Hargeisa and 305 for the municipality of Berbera. There are about 15,000 military, who are progressively being disarmed and demobilized. Staffing was reduced to 3,750 following the 2001–2002 restructuring, but is now on a rising trend. 116. Puntland currently pays salaries to a staff estimated to total more than 10,000, including approximately 8,000 police and militia and between 2,100 and 2,300 civil servants (government figures from different sources vary on the exact numbers). The three largest ministries are health (419 staff), finance (412) and education (206). 31 Salaries 117. The report on civil service recruitment prepared by POWER in 2005, proposed professionally based recruitment characterized by equal opportunity, affirmative action, advertising of posts, transparent selection, meritocracy, upward mobility, compulsory retirement, and succession planning. A CSC for the government is proposed (it is being formed) as well as a director of human resources in each ministry and region. 118. The Somali Institute of Management and Administration Development (SIMAD) prepared a report on civil service terms and conditions that presents human resource management practices around the world. Seven salary options were proposed for the federal government: A. The regional mean (for this part of Africa) with 6,000 civil servants B. 75 percent of the regional mean with 4,500 civil servants C. 50 percent of the regional mean with 6,000 civil servants D. The mean of Puntland and Somaliland with 6,000 civil servants E. The mean of NGOs and the private sector in Somalia with 6,000 civil servants F. 50 percent of the mean of NGOs and the private sector in Somalia with 6,000 civil servants G. 50 percent of the regional mean with 5,000 civil servants 119. The study made the following assumptions when generating the data on salaries and salary scales: 1 The civil service will grow to a total of 6,000 and remain constant during the transition period. 2 The wage bill will grow at the rate of 10 percent during the second year, 7.5 percent in the third year, 5 percent in the fourth year, and 2 percent in the fifth year (the point at which it will stabilize). 3 A four-band salary (A, B, C, and D) structure will be used in which A is the highest and D is the lowest. This structure was recommended by various informants throughout the study. Furthermore, some regions of Somalia currently use a similar structure. 4 Civil service employees will be distributed into bands according to the following percentages: Band A: 8 percent Band B: 14 percent Band C: 56 percent Band D: 22 percent 120. The proposed scenarios by SIMAD are summarized in tables 1.6 and 1.7. 32 Table 1.6. Combined (annual salary + annual cost of employment) Comparison of Options (US$) OPTION Basis #CS Year 1 Year 2 Year 3 Year 4 Year 5 Total A Regional mean 6,000 20,487,436 22,536,180 24,226,393 25,437,713 25,946,467 118,634,189 B 75% of regional mean 4,500 11,991,604 13,190,764 14,180,072 14,889,075 15,186,857 69,438,372 C 50% of regional mean 6,000 14,011,951 15,413,146 16,569,132 17,397,589 17,745,540 81,137,358 Puntland & Somaliland D 6,000 7,655,340 8,420,874 9,052,440 9,505,062 9,695,163 44,328,878 mean NGO & private sector mean E 6,000 37,307,040 41,037,744 44,115,575 46,321,354 47,247,781 216,029,493 50% of NGO & private F sector mean 6,000 20,079,120 22,087,032 23,743,559 24,930,737 25,429,352 116,269,801 G 50% of regional mean 5,000 9,724,431 10,696,874 11,499,140 12,074,097 12,315,579 56,310,120 Note: #CS = number of civil servants Table 1.7. Highest/Lowest Annual/Monthly Salaries (US$) Option Highest Annual Monthly Lowest annual Monthly Difference Difference (band A) (band A) (band D) (band D) annual monthly A 9,072.00 756.00 493.00 41.08 8,579.00 714.92 B 6,804.00 567.00 370.00 30.83 6,434.00 536.17 C 4,536.00 378.00 185.00 15.42 4,351.00 362.58 D 1,586.00 132.17 630.00 52.50 956.00 79.67 E 16,050.00 1,337.50 500.00 41.67 15,550.00 1,295.83 F 8,025.00 668.75 250.00 20.83 7,775.00 647.92 G 4,536.00 378.00 185.00 15.42 4,351.00 362.58 121. Lowest salaries in band A are the ones that are based on current salaries in Puntland and Somaliland (scenario D). The report concludes that “Option G offers a scenario that suits the federal government’s immediate resource constraints. The costed plan for Year 1 is within the proposed TFG budget. Also, the growth of the wage bill over the five-year transition period seems reasonable, assuming that the reduction of the number of civil servants from 6,000 to 5,000 during the transition period can be justified.� On the basis of an immediate need of 210 staff and a medium-term need of 2,000, the Civil Service Task Force is proposing monthly salaries ranging from a $155 minimum wage to a maximum of $1,910 (for the chief justice and governor of the central bank). 122. However, the federal government should carefully set the minimum wage level taking into consideration current living standards in the country, because if the salaries are set too low this can cause corruption and ineffectual civil service. It would be useful to make a comparison with private sector salaries for people with similar qualifications. Public sector wages for all but high grades should be less than public sector wages for comparable work 33 (i.e., 70-80 percent of the private sector wage) since the public sector jobs have some stability to them and usually some additional benefits. On the other hand, although in the early postconflict period it will be necessary to pay high salaries to attract the top professionals, the federal government will need a medium-term pay strategy that will address incentive issues in the national budget framework. As in other low-income countries, it is likely that salary surveys will show that the lower grades and perhaps even those at the very top are paid as well as they would be outside the civil service, perhaps even more, the salaries of key technical and professional staff will be found to be lagging behind the growing private-, donor-, and NGO- sector salaries. Studies throughout low-income countries have shown that it is impossible to pay high salaries to civil servants and at the same time keep the wage bill down to a level (i.e. 7 to 8 per cent of GDP or 40 per cent of recurrent expenditure) that leaves enough funding for "other recurrent expenses" to meet even modest service delivery objectives. 123. In Somaliland, salaries range from an average of Sl. Sh. 120,000 ($20)22 a month for grade D to an average of Sl. Sh. 326,000 ($54.3) for grade A. Taking into account a 115 percent devaluation of the currency and a 10 percent increase in domestic costs since the last increase in pay, the CSC has proposed a higher “stop-gap� pay scale ranging from averages of Sl. Sh. 286,000 ($47.7) in grade D to Sl. Sh. 725,000 ($120) in grade A. That would more than double the wage bill from Sl. Sh. 14 billion to Sl. Sh. 31 billion. The CSC has proposed what it calls a “permanent� pay scale that would increase salaries still more and make it easier to attract and retain the better-qualified staff. On this scale, salaries would range from Sl. Sh. 294,000 ($49) at the bottom of grade D to Sl. Sh. 1,543,000 ($257) at the top of grade A. The compression ratio (the ratio of the highest to the lowest salary) is low by the standard now aimed at in many African countries: 5:1. 124. In Puntland, civil service salaries range from So. Sh. 2.5 million23 ($172) for a director general (the senior civil servant in a ministry) to So. Sh. 600,000 ($41) for a secretary. Civil servants in senior positions are also entitled to allowances. Including non-civil servants, 2,516 persons are on the government’s payroll in 2006, up from 2,320 in 2004 (an increase of 8 percent).24 The major increase in staff is due to an addition of 200 teachers proposed to be hired in 2006. The total budget wage bill for 2006 is So. Sh. 190,753 million (US$13.2 million), up from So. Sh. 178,845 million (US$12.3 million) in 2004. Thus, the share of the wage bill has gone up from 58 percent in 2004 to 63.6 percent in 2006. The share of the security establishment has fallen from about 75 percent of the wage bill in 2004 to about 70 percent in 2006. 125. The state government has experienced repeated difficulties in recent years in making civil service salary payments on time, as evidenced by the president of Puntland’s recent announcement that from January 2006 all civil service salaries of So. Sh. 800,000 and above would be subject to a 15 percent pay cut with immediate effect. At the same time the element in ministries’ budgets for recurrent costs was reduced by 30 percent. Challenges 126. The main immediate challenges for the government are to hire a small number of professional staff to help the president and his ministers prepare plans to implement the charter progressively over a period of years and to find national sources of revenue to support the government in its federal role. A longer-term challenge is to gradually build up the role of the government and meet the service delivery needs of the poor in the South, who have no 22 Based on US$1 = Sl. Sh. 6,000 23 Based on US$1 = So. Sh. 14,500 24 This does not include the uniformed services, which reportedly employ 8,000–8,500 personnel. 34 formally functioning government. The recruitment of government and public sector staff can be a potentially important source of conflict. Recruitment will require transparent and consistent policies applied across government and the NGO/aid sector. 127. In Somaliland, the major challenges are summarized in the CSC’s Five Years Action Plan for the Somaliland Civil Service Reform Program for 2006–2010. These challenges include (a) overstaffing relative to available resources; (b) poor collection of revenue; (c) fraud, corruption, and nepotism; (d) low pay; and (e) too many low-level staff and too few senior- and professional-level staff. In addition, the civil service does not have many staff qualified to prepare legislation. Many new laws and regulations have been prepared, but usually with help from outside the civil service. For example, for the recent review of pensions legislation, the CSC brought together a wide range of stakeholders and informants from within and outside the public sector. Another challenge is that article 14 of the Somaliland Civil Service Law, which pronounces that any candidate to the civil service employment should be physically fit, discriminates against people with disabilities by denying them access to civil service positions. There are also wide gender disparities in the representation of women and minorities in the civil service. 128. Challenges in Puntland include (a) professionalizing the civil service and inculcating a culture of client focus, (b) attracting competent managers into the civil service, and (c) changing the public’s perception of the civil service. Besides, ministries do not generally develop legislation in their fields of operation and lack the capacity to do so. Most current legislation dates from pre-1991 because the Puntland Constitution states that the laws of prewar Somalia shall be adopted, except in cases in which that would be contrary to Puntland’s own interests or would lead to a return to dictatorship. Other challenges include civil service policies and gender issues. At present, the Ministry of Labor, Youth, and Sports, of Puntland state government, does not possess the capacity to plan and execute policy in this field, lacking the skills and basic equipment to carry out the tasks effectively. The ministry has recently been trying to ensure that all ministries adhere to existing regulations on procedures such as recruitment, but appears to lack the influence to enforce regulations. The ministry does not have disaggregated figures by gender for civil servants. However, hardly any women hold senior civil service posts or have been appointed to high political office. There is only one female minister, at Women’s Affairs, and no women vice ministers or DGs. 129. The number of staff in ministries in both Somaliland and Puntland are quite large given the type of services rendered. Retrenchment and downsizing in Puntland and Somaliland government structures have to be carried out accompanied by wide consultation and transparency. This is an area that may lead to tensions in government, and it also poses the risk of a conflict between clans. Priorities 130. To build early confidence, the government will have to rapidly develop its own capacity to act. In addition to parliamentary and judicial staff, four sets of civil servants are 25 needed immediately. 1. Policy management and advisory unit for the president, prime minister, and cabinet. This unit would manage the flow of policy ideas to the leadership, review policy proposals from a professional and political point of view, and generally 25 These same four immediate priorities are identified in the SIMAD Civil Service Terms and Conditions Report. 35 support the leadership in the transition and thereafter. An effective decision- making process must also be established at the center. The president and cabinet should have access to professional advice in making those key early decisions (and all later ones). 2. Civil service commission. The commission would assist in staffing the federal civil service along professional lines, while respecting political necessities, and would advise on the relationship between the federal and regional state civil services. 3. Expenditure management and financial accountability system. The system would ensure that budget would be prepared, executed, and accounted for in an effective and transparent manner. 4. Federal revenue agency. This agency can advise on how to source revenue for the new government in the immediate and the longer term. 131. Directors and key staff with experience in policy analysis, human resources management, public finance, and revenue mobilization should be appointed in the next few months. It will prove easier to attract qualified staff from the diaspora if international salaries are paid to these key staff. Appointing senior staff from diaspora needs to be done sensitively, as this can be a source of tension. It is important to note thet the salary gap should not be kept too high between diaspora staff and qualified and senior local servants. In the early months and even years, it may prove necessary to hire experienced foreign consultants to fill key line positions. In addition, there is a need for adoption of regulations assuring equal access to civil service jobs for both genders. Care and caution must be given to the recruitment process to avoid any further discrimination/marginalization against minority group members and women, bearing in mind that in the past the staff was hired on a clan affiliation basis. Mechanisms need to be put in place to monitor the implementation of human rights and gender principles. 132. An experience from other postconflict countries is that it is unrealistic to rely on the national budget to pay the salaries of the high-quality staff needed to reestablish government and the public service. In such situations it is common for salaries of top staff to be funded by donors. For example, donors are paying the salaries of the top 100 or so civil servants in Sierra Leone at levels that could not possibly be covered by the national budget in early years of the reconstruction. Donors are initially funding the whole of the personnel budget in Afghanistan. Donor support for the salaries of key staff has been proposed under the UNDP Somalia Emergency Budget Support Project. It is probably best if salary support is given by the donors through the national budget, or at least through a common pool, rather than on an individual basis, as was the case at first in Sierra Leone. 133. In Somaliland, the CSC Action Plan for Civil Service Reform, 2006–2010, represents the second phase of a longer-term reform program. Under the first phase, rightsizing and rationalization was largely completed. There will be modest additional rightsizing in central government as well as rightsizing in all local governments. The principal objective of the second phase is to improve performance by building the capacity of staff. 134. Priorities in Puntland include the following: • Functional review of federal government at various levels. Review roles and functions of individual ministries, staffing, and salaries. • Civil service reform. Implement the recommendations of the review process. 36 • Capacity development for civil servants. Implement the training plan, in partnership with existing training providers. • Gender equity. Carry out targeted initiatives in training women for promotion in civil service and in genderizing policy making, implement M&E systems, and propose regulation to combat discriminatory practices against women that comply with international human rights principles. • Creation of an enabling environment for business. Streamline bureaucratic processes and establish transparent tendering and related processes. • Increased public revenue collection. Increase revenue collection and accompany that with enhanced service provision and a public awareness campaign. D. E STABLISHING THE CENTRAL BANK AND STRENGTHENING FINANCIAL SERVICES Rebuilding a Financial System Achieving the high rates of growth necessary to reduce poverty significantly will require increased mobilization of domestic and foreign savings to support higher rates of private sector investment. Mobilizing savings implies a broadening and deepening of financial markets, institutions, and products, particularly long-term project finance. It also means supporting the creation of banks and non-bank financial institutions offering a range of products and services that compete with or complement those traditionally provided by banks. 135. Collapse of the financial system. In January 1991, all state institutions that provided financial services and regulated them collapsed, including the central bank of Somalia and the entire banking system. Some semblance of a central banking authority has evolved in Somaliland and Puntland. The two regional banks established in both northern regions have several branches and offer very limited commercial banking services in deposit accounts and trade finance. However, their primary function remains that of treasurer of their respective regional governments. No banking institutions currently exist in South and Central Somalia. 136. The mistrust in government-owned banks runs deep since the collapse of the only commercial bank in 1989. Private citizens use their accounts in the two regional banks primarily for accumulating taxes they owe to the regional governments. Overall, in all Somali regions, the economy functions without commercial banks, with most small transactions conducted on a cash basis and the remittance companies providing efficient form of payment services. Given the current state of the financial sector, Somalia will fail to attract the level of private sector investment that is necessary to alleviate poverty, create economic opportunities, generate employment, and contribute toward overall economic growth. 137. Rebuilding a financial system after a period of sustained conflict is a challenging task. Managing the expectations of government, the private sector, and the public is complicated by the evolving assumptions made about the likely direction of the political process and the resulting state structure. But it can be done. Somalia, like other conflict- afflicted countries can reestablish the following: • Commercial banks and non-bank financial institutions that are sound, efficient, and competitive 37 • Commercial banks and non-bank financial institutions, instruments, and services that meet the needs of the government, NGOs, businesses, and households in both rural and urban communities • Financial infrastructure that is based on modern information technology and telecommunications • An autonomous central bank that is equipped to carry out its monetary and financial sector regulatory and supervisory responsibilities in the medium to long term 138. This task, however, should not be underestimated. Postconflict financial sector reforms are beset with several challenges, including the failure of legal and regulatory structures; the complete disruption of international and domestic payments systems; the virtual cessation of all lending activities within the country; significantly reduced deposit taking activities; and a stoppage of most international correspondent banking relationships, particularly in the absence of a unified government structure. 139. Somalia faces many challenges in the absence of a functioning formal banking system. As in most conflict-affected countries, the financial market in Somalia is organized largely around the money exchange dealers and their ability to transfer funds into and outside the country through networks. Although impressive, these service providers do not provide the full range of financial services required for dynamic private sector–led growth. Consequently, private sector–led growth will remain highly constrained unless a functioning banking system is developed to provide financial resources and other supporting banking services. 140. The establishment of a full-fledged commercial banking system is a high financial sector priority. Reinvigorating the financial sector is a critical step toward setting Somalia on the road to sustained self-sufficiency, creating economic opportunities, and ultimately reducing poverty in the country. Assessment of Priority Needs and Policy Options for Initiatives 141. Although the initial absence of a role for monetary policy lessens the urgency for establishing the full array of central bank functions, there is an urgent need to strengthen the payments system and to provide banking services to government. Hence, updating the central bank and financial services legislation is a priority along with these limited central banking functions. Developing a capacity for monetary policy can wait until the latter part of the reconstruction and development program as can the introduction of new and larger- denomination local currency notes. 142. In a complex, postconflict country like Somalia, the chosen strategy will—by necessity—have to be opportunistically evolutionary and reactionary. For example, in proposing a development strategy for developing the banking sector in Somalia, it is important to bear in mind the emerging interest in Islamic banking and finance practices. Somalia is one of many countries in which Islamic banks and other financial institutions, when they are established, are expected to take an interest in financial transactions based on the principles of Islamic finance laid down in the Qur’an and the Prophet’s traditions of 14 centuries ago. Islamic banking, based on the Qur’anic prohibition of charging interest, has moved from a theoretical concept to embrace more than 100 banks operating in 40 countries with multibillion dollar deposits worldwide. Islamic banking is widely regarded as the fastest growing sector in the Middle Eastern financial services market. Therefore, the proposed legal and institutional framework will need to take into account Islamic finance tenets and integrate them into the financial regulation, supervision, and financial intermediation process. The 38 changing dynamics in Somalia preclude a rigid ex ante financial sector strategy. Recognizing that the financial sector in Somalia has varying levels of development and capacity for reform, reformers need to bear in mind that sustainable financial reforms have a long maturity period. Commercial Banking 143. The financial sector development efforts should focus on attracting sound and credible commercial banks. It is essential that public awareness be raised on the licensing and prudential requirements needed to attract desirable private investors. To avoid the potential source of conflict, commercial banks licensing criteria need not only be based on sound financial basis and track record, but furthermore be founded on transparent and equitable procedures to avoid clan nepotism and corruption. A proper monitoring system needs to be put in place, and a feed-back mechanism to the legislative that can ensure full transparency in the process. 144. Soon after the reform process commences, financial regulators need to take stock of the existing state-owned financial institutions and quickly make a decision on which institutions or branches of institutions will be liquidated or disposed off. The assets of banks earmarked for liquidation need to be accounted for and systems put in place for their transparent disposal. In Somalia, the only state-owned commercial banking services are those owned and operated by the Bank of Somaliland and the State Bank of Puntland. Best corporate governance practice recommends that the commercial banking operations should be separated from the central banking functions (supervision and regulatory oversight) of the central bank. This should be considered as part of restructuring the central bank. The commercial banking assets can be liquidated, privatized, or can temporarily be corporatized into a separate viable state-owned financial institution. 145. Until the commercial activities are separated from the central banking functions, the government should focus on strengthening corporate governance structures through a variety of options, including guidelines for the appointment and dismissal of managers and board members, new organizational structures, revised credit policy and controls, new procedures for credit-risk evaluation, and enhanced asset/liability and treasury-management techniques. 146. Initial discussions have begun in connection with the establishment of a full fledged commercial banking operation in Somalia. Many of the remittance companies have expressed an interest in investing in such a bank. However, they have equally expressed concern about their lack of operational capacity and experience in venturing into commercial banking. And indeed, in addition to the lack of capacity there are other risks associated with the entry of commercial banks into Somalia, such as lack of capital, weak management, anticipated low profitability as a result of the lack of trust in commercial banks, restrictive approach on the number of bank licenses, and political interference in the licensing process. The licensing of commercial banks is a possible source of conflict. The criteria need to be based on a sound financial basis and track record, and they also must be founded on transparent procedures to avoid clan nepotism and corruption. A proper monitoring system needs to be put in place for this as well as a feedback mechanism to the legislature that can ensure full transparency in the process. 147. Despite the challenges listed above, there is a real and urgent need for banking services, and every effort should be encouraged to facilitate the entry of full-fledged banks into the country. Achieving the entry of good banks, however, is challenging. Initial steps necessary for evaluating the establishment of a commercial bank must include the following: • Discussions with prospective partners to ascertain interest and commitment 39 • Awareness raising among the private sector on banking and international good practices, as well as licensing and prudential requirements • Discussions among interested parties to ascertain feasibility of the concept • Solicitation of expressions of interest from multinational commercial banks to assume strategic management 148. Positioning the bank and others that emerge to provide commercially viable banking services will require improving the regulatory framework to increase the perceived creditworthiness of clients, using technology to lower transaction costs and improve transfer mechanisms, introducing new products and risk-reduction techniques, and encouraging the use of agency arrangements to leverage scarce or expensive infrastructure and to create flexibility and mobility in service provision. 149. Importantly, intermediate technical assistance will be required should the government move ahead to actively facilitate the entry of new banks into Somalia and build the necessary banking infrastructure to support the development of a viable and self-sustaining banking system. At the least, experts and advisors will be needed immediately for legal and regulatory advice on (a) the entry requirements of new banks and the necessary supervision and regulatory oversight of the same, (b) the separation of the central banking functions of the regional central banks from their commercial banking operations, and (c) the development of banking infrastructure for payments and clearing system. Central Banking 150. A strong legal and regulatory framework enforced by an equally strong central bank is important, but it is not a short-term priority. The current fragmented regional financial systems in Somalia complicate the essentialness of establishing a central bank in the short term, and they necessitate assigning the establishment of the basic functions of a central bank to the last phase of the reconstruction plan. Weaknesses in the legal and judicial framework governing commercial contracts and their enforcement and the slow and biased court system are common in conflict-affected countries in which years of conflict erode basic civil rights. These weaknesses will need to be addressed because sustainable financial sector growth and stability require a framework based on strong creditor rights. 151. Somalia’s legal and regulatory framework is virtually nonexistent. Although the TFG has appointed a governor, the central bank has not yet been established, and the banking supervision function will need to be developed from scratch. The current banking law and supervision regulations are inadequate. A new banking law setting the foundation for an autonomous central bank has been drafted, but it is yet to be enacted into law by the recently established parliament. Bank supervisors, once identified, will need to be trained in basic banking supervision and risk management skills. Further, in addition to the problems listed here that are common in other conflict-affected countries, Somalia also has the unique complication of having within its borders, entities operating as central banks for specific regions. 152. There are two banks performing both central and commercial banking functions on a limited, almost defunct, level. Both the Bank of Somaliland and the State Bank of Puntland provide limited commercial banking services—deposit-taking facilities primarily. The primary function of both banks remains as the treasurer of these governments. Still, by offering banking services they are in an undesirable conflict of interest with their central bank and banking supervisory activities. 40 153. During the final stages of the RDP, there will be a need for political decisions that must precede the commencement of central bank reforms. • There will need to be agreement on the location of the proposed central bank. • There will need to be agreement on the desired and expected strength of the federal regulatory structure of the central bank. 154. Once there is agreement on the two issues listed above, then technical assistance program for legal and regulatory reforms can commence. With no progress on these issues, especially the second issue, then suboptimal transitional reform options will need to be considered. Essentially this would entail parallel reforms in each region aimed at achieving technical harmony or financial legislation, policies, and procedures before attaining political harmony of state independence—a more expensive, but still achievable prospect. For example, officials from Somaliland, Puntland, and the TFG Central Bank can agree in principle to harmonize their respective prudential regulations because the expected applicants are likely to serve the same markets. That done, it would be possible in the interim to proceed with capacity-building programs before discussions on the final political structures are concluded. The bank in Puntland has in principle agreed to operate as a branch of the national central bank. 155. In the medium term, the overall objectives would be to rebuild capacity for formulating and implementing monetary and exchange rate policies and to restore functioning banking and payment systems in an appropriate institutional framework. Through these actions, the foundations will have been laid for a sound monetary and financial system, which is critical for promoting economic recovery. 156. The steps to be taken toward reestablishing a central bank and a rudimentary financial system in a postconflict economy are grouped into four phases. The time frame for these time periods vary depending on local circumstances. The stages may be identified as the (a) diagnostic phase, (b) institution-building phase, (c) two-tier banking system phase, and (d) exit phase. Somalia is preparing itself for the institution-building phase. 157. The diagnostic phase. A number of studies and activities have been undertaken recently by the UNDP and the World Bank that provide sufficient information on the state of the financial sector to support the preparation of a comprehensive financial sector needs assessment. Box 1.4 presents the key findings of the work to date. 41 Box 1.4. Key Findings of the Diagnostic Phase Financial Sector Legislation • New central banking and commercial banking legislation need to be prepared and adopted. The current banking law and supervision regulations are inadequate. A new banking law setting the foundation for an autonomous supervision function, and subsequently the drafting of prudential regulations, needs to be enacted as soon as the rebuilding of the financial sector commences. Priorities are regulations on licensing of banks and prudential norms. • New regulatory provisions for licensing banks and non-bank financial institutions need to be prepared and adopted. • New currency provisions need to be developed and adopted as a transitional measure to stabilize the monetary system in the country. Banking Supervision • The banking supervision function needs to be developed from scratch. Banking supervision according to international standards is not being conducted. • There is virtually no capacity for modern banking supervision, risk management, or accounting according to international standards. Banking supervision staff at both central banks, together with other staff in other departments, will need to be trained in basic banking economics accounting standards and risk assessment. • Banking supervision will need to assess the current status of the banking and non-banking sectors and design a strategy to address identified weaknesses. The objective should be to redress the weaknesses as soon as possible, so that banks and non-bank financial institutions meet minimum international prudential standards or surrender their licenses. National Payment System • Somalia is essentially a cash society. • There is no common platform for international or domestic payments between existing financial institutions. • Cash and payment orders are the only meaningful payment instruments widely used in the economy. • Because of the lack of confidence in the banking system, significant savings are held outside the financial system. • Through the current money transfer system, the Somali remittance companies provide an energetic and competitive alternative to the formalized payment systems via the central bank and formal banks. 158. The institution-building phase. The starting base for financial sector reforms in Somalia is extremely low. Ordinarily, reestablishing a national payments system would be a priority in a postconflict country. In Somalia, this may not be the case given the extensive nature of the remittance sector. Instead, the challenges will be making decisions and reaching agreement on the legal tender and the exchange rate regime. 159. Prompt settlement of government obligations such as salaries and pensions is important not only in its own right, but also in that it increases the credibility of the central government and its central bank. Such credibility is crucial for supporting the government’s other political objectives. The central bank will need to agree on a mechanism for accomplishing this efficiently through a combination of its own branch network and the organized remittance sector in the first instance, and commercial banks later. In the face of limited resources, it is not advisable for the central bank to try to fully reestablish its domestic payment capacity. Box 1.5 presents responsibilities of the Central Bank of Somalia. 42 Box 1.5. Responsibilities of the Central Bank of Somalia In the medium term, the interim government needs an institution that can serve as its fiscal agent and its banker, to provide payments, storage, and safekeeping services and to manage financial assets and reserves at home and abroad. In the first instance it is recommended that the Central Bank of Somalia (CBS) focus on the following responsibilities: • Act as banker to the Ministry of Finance and provide financial advice at its request. • Act as fiscal agent of the Ministry of Finance and other public authorities. • Publish foreign market exchange rates on a daily basis. • Prepare banking legislation and prudential regulations. • Train local staff. • Maintain a depository for safekeeping of currency. • Ensure adequate supply of banknotes of the legal tender for settlement of cash transactions. • Provide temporary payment and storage services to the Treasury and other public authorities. • Open or reactivate accounts abroad. During the second stage of the institution-building phase, with progress on the political process, the principal objectives of the central bank will be to foster an efficient and safe system for domestic payments and foster the liquidity, solvency, and efficient functioning of a stable market-based banking system, focusing on monetary policy, payment services, banking operations, services for the government, supervisory activities, and sundry tasks. At this phase of the reform process, special effort should be made to ensure that only safe and sound banks are licensed and allowed to operate in the system. Bank licensing policies and procedures are an important aspect of the development of the financial sector. The design, development, and implementation of effective entry regulations contribute significantly to the structure and quality of the banking sector. To reduce political interference, it is recommended that an independent supervisory authority be responsible for bank licensing. Generally, best practice requires that the licensing process set out in the banking laws verify at least the sufficiency of a bank’s initial capital, the suitability of its major shareholders and management, and the transparency of its corporate and organization structure. The Core Principles for Effective Banking Supervision issued in September 1997, by the Basel Committee on Banking Supervision (BCBS)—the global standard setter— recognize the importance of the licensing process in Principle 3, which states that the following: “The licensing authority must have the right to set criteria and reject applications for establishments that do not meet the standards set. The licensing process should consist of an assessment of the bank s ownership structure, directors and senior management, its operating plan and internal controls, and its projected financial condition, including its capital base. Where the proposed owner or parent organization is a foreign bank, the prior consent of its home country should be obtained.� During this phase of the recovery period, the economy will require functioning institutions for financial intermediation and the reestablishment of a banking system to restore public confidence. It is important to bear in mind the following key points on legislation for the financial sector: • The new legislation should stipulate that institutions with “fit and proper� owners and managers, sufficient capital, and viable business plans would not be denied banking licenses. • The banking legislation should apply only to institutions taking deposits from the general public. The operations of the banks should be based solely on commercial considerations. State ownership and influence on banks’ lending decisions should be restricted. Rules on bank insolvency should be elaborated on. • All licensed financial institutions would be under the regulation and supervision of the Central Bank of Somalia and, by agreement, the state-level central banks. They would be required to comply with prudential rules and banking regulations issued by the central bank, all of which should be in compliance with the Basel Core Principles. • Supervision is not the only instrument for ensuring the financial soundness of a bank. It would be equally important that the institution’s internal governance is sound and that the bank is transparent in its reporting and disclosure to the market of its performance. 160. The two-tier banking system phase. At this stage, the objective would be the establishment of a traditional two-tier banking system. In Somalia, the exact functions of the central bank would depend on the outcome of decisions on the legal tender and exchange rate regime. It would be important to ensure that whatever decision is made, the exchange rate 43 regime should help to maintain monetary stability in the face of major shifts in policy often experienced in economies with a troubled past. 161. Based on decisions made on legal tender and exchange rate regime, a review of the central bank legislation may also be necessary. The objective should be, among other things, to bring strong provisions for central bank autonomy and accountability. 162. The exit phase. In the final stage, progress in restoring normal conditions should be sufficient to indicate that exceptional technical assistance provided by donors could be phased out. 163. Among the many important factors leading to such a situation, advancement in capacity building would be crucial. Technical assistance should in all areas contain a pronounced training component aimed at strengthening core activities in financial operations. Training programs should be formulated and implemented at all phases with the aim of building critical capacities in the monetary policy, payments, banking operations, and supervisory tasks. 164. It would be important to train local staff for middle- and senior-ranking positions because increased mobility of highly skilled staff would most likely result in a chronic shortage of critical skills. Any selection process should ensure that equal opportunity is given to the participation of appropriately qualified women, national minorities, and physically disabled persons. Access to Financial Services 165. Fundamentally, the urgency for financial sector reforms in Somalia is driven by the commonplace complaint about the inability of the private sector to access formal financial services. Cost is not even an issue, as there are simply no formal services available at the moment. 166. In Somalia, as is the case in many developing countries, the provision of funds through directed and subsidized credits by development-finance institutions contributed to the failure of many financial sector programs, even before the commencement of conflict. Still the pressure for government directed credit will be immense. 167. In Somalia, the real challenge lies first in attracting credible banks to enter the market. For that purpose, initially introducing modest criteria concerning capital and “fit and proper� requirements for the entry of banks should help. Furthermore, accommodating some of the Somali money transmitters as “narrow� banks could be considered. Commercial banks are likely to serve the upper segments of the population and private sector; developing a sustainable microfinance sector would ensure that a more inclusive financial sector is built for the long run. 168. The banking sector is likely to remain the largest component of the financial system for some time after the end of sustained conflict. But there is a need to also develop alternative financial institutions that broaden and deepen the financial sector, including microfinance institutions, leasing companies, commercial credit companies, credit unions, factoring companies, insurance companies, and pension and provident funds and, in the longer term, to develop debt and equity markets. Banks are notoriously inept at expanding services to rural communities, particularly those afflicted by conflict. The establishment of a broad range of instruments into which savers can deposit their funds and through which companies and consumers can obtain access to capital and credit will spur economic recovery. 44 169. Newly licensed banks might not be able or willing to extend services, particularly lending services, outside major urban centers. For commercial reasons, the banks may initially focus primarily on trade financing, foreign direct investment, and currency exchange operations or service the wealthier communities and expatriates in the postconflict territory. It would, therefore, be essential to also promote the establishment of non-bank financial institutions as a means of channeling financial services to rural or deprived areas or to lower- income segments and women. 170. Microfinance. Somalia’s development needs would demand building an inclusive financial system so that savings and credit facilities would be available to the lower-income segments of the population and to micro and small businesses. The microfinance sector in Somalia is perhaps comparable with the situation in other postconflict countries, except that there are two microfinance institutions (MFIs) that have been in operation for more than seven years now, albeit not on a commercial basis. Otherwise, most microfinance activity is focused on relief and reintegration through a number of NGO microfinance programs or projects. In total, these organizations probably account for fewer than 10,000 active clients with an outstanding credit portfolio of under $1 million. Obviously, the sector is very small and, in general, characterized by very poor outreach, unacceptable repayment rates, and unsustainable operations. Moreover, the long period of conflict in Somalia has led to people’s reliance on grants. More positively, more than half of the active clients at the two MFIs are women. In fact, on the basis of loans granted at one of the MFIs recently, more than two-thirds of the borrowers were women. 171. To successfully develop the microfinance sector on a sustainable basis, the needs of the economically active poor must be well understood, and demand-driven products need to be developed to increase customer base. Moreover, the interest rates (or service charges) of 10 to 16 percent currently charged by the two MFIs need to be reviewed to reflect more commercial rates of return. Appropriate business support services should be made available to micro and small entrepreneurs and vulnerable segments (i.e., internally displaced persons [IDPs], demobilized militia) of the population. 172. In the early stages of developing the microfinance sector, the essential need for capacity building of both individuals and new or existing MFIs is massive. So is the need for donor funding to support the capacity building and infrastructure requirements to enable MFIs to grow profitably and achieve sustainability. Perhaps, efforts could be focused on developing one or two sustainable MFIs with private sector management and capital supported by technical assistance from donors. In the short to medium term, the government should look to introduce a national microfinance policy. 173. Short- to medium-term options. In addition to microfinance, over the short and medium term, the following options may be considered: • Short term (up to 18 months): Creating channels for the delivery of sustainable credit programs in postdisaster areas is challenging because recipients will expect grants from the government and the international donor community. It is therefore essential that a clear distinction be made between emergency grant–based programs aimed at restoring basic living conditions and longer-term financial resources aimed at restoring income-generating livelihoods. In the short term public finance might be used to bridge the gaps in financing. Public financial assistance programs must complement rather than compete with private financing that could be available on commercial terms from other sources. Although in the immediate aftermath of establishing a functioning government, grants, not loans, may be provided to 45 entrepreneurs, later in the recovery period funds to entrepreneurs should shift to mainly loan-based products. • Medium to long term (18 months to 5 years): In the absence of data on the financial requirements of the Somali business community, it is recommended that in the medium to long term a multiple-client approach be adopted. The chosen financial program(s), for example, venture capital and microfinance, must be programs that are applicable to banks and non-bank financial institutions to ensure maximum geographical coverage. Options for providing financial resources to firms include a business development fund, long-term development fund, SME risk fund, credit lines and guarantee schemes, remittance companies, and microfinance. E. STRENGTHENING DATA DEVELOPMENT Current Status, Challenges, and Opportunities 174. Because of the absence of formal statistical systems in Somalia, data collection has remained fragmented and incomplete. The absence of government and related institutions and the prevailing conflict situation have constrained the collection and compilation of statistics. Some of the basic macroeconomic statistics, such as national income, balance of payments, and money supply, have not existed for Somalia for almost two decades.26 175. It is crucial to have reliable statistics for decision making in policy formulation, planning, and budgeting. Statistics also play a central role in supporting the implementation of policies, in particular, monitoring and evaluation, which in turn support transparency and accountability. The challenge is that there are inadequate information systems in Somalia as well as a lack of trained staff and resources to collect economic and social data. 176. In the absence of a Statistics Institute and supporting infrastructure, some of the statistical data on Somalia are currently being collected and disseminated by a diverse number of UN agencies and NGOs and, to a limited extent, by Somali administrations. However, there are still critical data gaps, in all regions. There has been a growing awareness among development partners, in particular the World Bank, of the need to monitor socioeconomic recovery and economic development based on accurate statistics. 177. There has been almost no formal mechanism to validate the accuracy and reliability of the available data, whether they are generated from functioning administrations, primary surveys, or other secondary sources. To address this issue in the absence of national institutions, the United Nations Development Office for Somalia (UNDOS) had established an interagency statistical working group (SWG) for Somalia in 1996, consisting of major data producers and users to promote a common approach to and coordination of data collection activities of the international agencies. However, the SWG ceased to exist when UNDOS’ term expired in 1999 as a UNDP project, and there was no formal mechanism available to replace UNDOS for coordinating statistical activities during 26 There are no reliable estimates on national accounts, balance of payments, and money supply at the regional or national level since the civil war. Limited data exist for two food grain crops; no other production data are available. There are no estimates of livestock and livestock products, fisheries, and other primary products. Besides, there are no data available to reflect the size and composition of the informal sector. Consumer prices and exchange rate data, however, are regularly collected from selected markets. Total export and import data from major ports are collected in physical quantities. However, there are no data on the size of the transit trade. 46 the 1999–2002 period. In 2004, UNDP set up a UN interagency theme group on statistics with limited membership and scope. This group currently reviews all major data collection efforts of UN agencies and also provides statistical advisory services. 178. A technical coordinating group (TCG) on statistics was set up by UNDP in 2004 to implement the Somalia Watching Brief Program supported by UNDP and the World Bank. The TCG consists of the director generals and directors of the Department of Statistics of the Ministries of Planning in the three Somali administrations. The group supports the participation of statistical offices in data collection and statistical capacity building initiatives of the international and regional agencies, while enabling these administrations to harmonize their respective work plans and statistical procedures. Currently, the Somalia Watching Brief Program has been playing a key role in promoting the collection and compilation of data for planning and policy purposes. Other major partners involved in statistical data collection include United Nations Children’s Fund (UNICEF), World Health Organization (WHO), World Food Programme (WFP), Food and agriculture Organization (FAO), FSAU, and Famine Early Warning System (FEWS). Annex table 2 provides summary details of the past and ongoing data collection efforts by various agencies. 179. There are challenges for the current data collection and dissemination efforts. Without the overall supervision and coordination of a national statistical office, there is a risk of inconsistency in data collection efforts. Besides, surveys are carried out in peaceful areas; therefore, survey results are not representative of all of the population. The scope, methodology, coverage, assumptions, and limitations of the surveys are seldom documented, and the results generally are not validated. The accuracy and comparability of the results are questionable because of limited coverage. Currently, there is no coordinated strategy for data dissemination and sharing efforts; UN agencies are using DevInfo (sponsored by UNICEF) to monitor MDGs for Somalia. Table 1.8 presents current challenges and opportunities for data development. Table 1.8. Data Development in Somalia: Current Status, Challenges, and Opportunities Current status Challenges Opportunities Data collection and Local capacity is limited to Prevailing conflict conditions Growing regional analysis supporting statistical data discourages data collection awareness on the collection and analysis efforts need for reliable data for policy making Lack of reliable and and planning disaggregated baseline data purposes Lack of managerial and technical human resources Lack of in-house training facilities Monitoring, Lack of statistical standards and Absence of monitoring and Somalia Watching coordination, and quality control coordination mechanisms Brief Program dissemination supported by UNDP No systems to validate and World Bank statistical results Limited coordination and data dissemination No dialogue between data users and producers Statistical Weak state statistical Absence or weak presence of A number of regional institutions, institutions major multilateral institutions and global initiatives 47 legislation, and in Somalia that are available to staffing No national and district support statistical statistical institutions capacity building No statistical law Low level of skills, wages, and productivity of current staff Access to Outdated technology and low Inadequate financial UN Theme Group on information level of ICT integration resources to upgrade IT statistics technologies Statistical Limited resources for statistical Inadequate access to global Somalia Watching development development statistical networks Brief Program supported by UNDP Lack of a strategic plan and the World Bank Source: Selected results of a SWOT analysis undertaken by a group of professionals engaged in statistical capacity building, data collection, and analysis. Overall Strategy for Data Development 180. The reestablishment of the Somali Statistical System will require new institutional structures. There is a need to design and implement national strategy for data development in Somalia that would include a strong partnership of data producers and users. This would be the principal instrument for achieving the objectives of the framework, building on the past and existing statistical framework as well as on current initiatives. 181. Statistical act. Somalia did not have a clear and up-to-date statistical act even before the civil war. The Central Statistical Department was using the act that was put in place in the mid-1950s. This was revised several times to include some specific legal requirements. That includes the Census Act of 1974/05, which was required for the implementation of the 1975 Census of Population and Livestock and the 1986 Census Act. Data legislation in Somalia will have to be enacted to ensure that it is up-to-date. This legislation should support and facilitate statistical operations by establishing proper structures. 182. The data development priorities in Somalia are the launching of the population census and the further data collection exercise on social sector and macroeconomics data. The major statistical need dominating all others is the population census; it is essential for socio- and macroeconomic policy analysis and leads almost all further data collection activities, such as household surveys. Given the importance of human capital and its erosion, there is a need for data on population and social indicators by gender to design effective investments in people. 183. Data on the social sector. The statistical system in Somalia should aim to achieve an overall improvement in the quality and timeliness of statistical information on social sectors. Improved access to, and use of, qualitative and quantitative information are critical for planning, monitoring, and evaluation purposes. To achieve a social statistical system providing reliable and comparable gender-disaggregated data for all regions, with particular respect to the MDGs, statistical information strategy needs to address further data generation and institution capacity. 184. Data for macroeconomic policy decisions. To carry out macroeconomic policy, it is crucial to have data on consumer prices, exchange rate, national income accounts, and trade. It is also critical to have data on inflows into the country through remittance companies, foreign NGOs, and foreign donors. At present, in Somaliland and Puntland the only data available are 48 data for the exchange rate, limited data on market prices, and data on the volume of imports and exports by product categories. The value of imports and exports by major product categories is not calculated; however this information will be important in making projections of government revenue. It will probably take a number of years to create the production data that would be the main component of the national income accounts. If a tax is levied on all remittance inflows, information on the total value of remittance inflows on a monthly basis would be provided. It should also be possible to establish mechanisms to track donor and NGO inflows on a monthly or quarterly basis. 185. To increase the quality of data obtained, data collection efforts in Somalia need to be coordinated in the context of an integrated national statistical system. The data collection supervision need to be carried out by a central statistical agency with the regional statistical agencies vested with collection duties (Medium-Term Plan for Statistical Data Collection and Capacity Building for Somalia, UNDP Report 2004). 186. National/local needs and priorities. As a result of the federal governance structure, there is a high demand for geographically disaggregated statistics, as well as statistics by gender, social, and vulnerable segments. Because reliable data are scarce for most sectors, it is necessary to prioritize and sequence the data collection consistent with reconstruction and development needs and priorities, monitoring requirements, and resource constraints. 187. Coordination between data producers and users. The current capacity for data collection among various development partners needs to be progressively transferred to the Somali statistical institutions. Constructive dialogue between data users and producers could play a major role in identifying the scope, coverage, and priorities. 188. Administrative reporting systems in Somaliland and Puntland. Administrative reporting systems exist, though with weak capacity, within many of the public agencies of Somaliland and Puntland. However, these systems need to be strengthened and streamlined by providing adequate training and supervision, incorporating comparable reporting formats and timely dissemination. 189. Statistical capacity building. Shortage of skilled human resources is one of the major constraints in developing functional statistical systems in Somalia. There is a need for on-the- job training for the current staff. In addition, internship programs for college graduates with statistical training could be provided to meet the growing demand for enumerators, data processors, and analysts in the public and private sector. As a medium-term strategy, universities could be supported to introduce certificate, diploma, and degree programs in statistics by in-house and distance learning. Further, medium-term partnerships with other countries that have introduced best practices in data development could be encouraged. 190. MDG/poverty monitoring. MDG and poverty monitoring necessitates reliable and disaggregated baseline data and their periodic updating. Somalia will have to set up appropriate and adequate systems at various levels of government to monitor the progress toward MDGs and poverty reduction. Proposed Initiatives 191. Somalia could benefit from international initiatives for statistical capacity building by (a) adherence to key internationally agreed standards, methods, and good practice as promoted by the UN Statistical Commission; (b) partnership in Statistics for Development in 21st Century (PARIS21); (c) partnership in International Comparison Program for Africa (ICP-Africa) and other initiatives of the Economic Commission for Africa and African 49 Development Bank; and (d) subscription to IMF’s General Data Dissemination Standards (GDDS) and other similar initiatives. 192. Proposed organizational structure of the National Statistical Office. A three-tier statistical institution is proposed to undertake statistical data collection and analysis. The National Statistical Office (NSO) will be the apex technical and coordinating institution. At the state level, state statistical departments (SSDs) will be the responsible bodies for coordinating and managing the data collection. The fieldwork will be carried out by statistical offices to be established at the local/district level under the technical and administrative directive of the state statistical departments. The NSO is envisaged to provide advice and policy guidance to the statistical offices. 193. The NSO will be composed of four departments with a number of sections. The NSO will be headed by a director general to be assisted by four directors of the departments and other technical staff. The four departments are the following: National Accounts and Economic Statistics; Census and Social Statistics; Data Processing; Web Site; Publication; and Administration and Finance. 194. The departments and their sections will be led by professionals to be assisted by trained and skilled staff. The NSO is proposed to have 59 professionals/skilled staff as shown below: • Director general 1 • Directors 4 • Heads of sections 18 • Professionals 36 • Support staff 46 195. State statistical departments (SSDs). Statistical departments similar to those of Somaliland and Puntland will be established in all states. These state departments will plan and guide the collection of data under the administration of the NSO. The SSDs will establish local/district statistical offices and will delegate to them the field survey and collection of the data. Each SSD will initially employ a staff of 10 skilled workers, which will expand to 20 during the five-year period. Each SSD will be headed by a director, who will be assisted by 2 heads of sections (namely, coordination/supervision and data processing/training) and 7 middle-level technicians. 196. Statistical units in the federal and state line ministries. Statistical units composed of NSO or SSDs staff will be established in the federal and state line ministries with the responsibility of administering data collection related to their sector activities. A minimum of 11 statistical units will be established for the federal line ministries27 and a lower number for the states’ line ministries. Each will hire two to three trained staff for the first year; the staff will grow marginally until the fifth year. The units of the line ministries will be under the planning departments of the concerned ministries. 197. Local/district statistical offices (DSOs) will be established in all large districts or groups of small districts. These offices will collect mainly data delegated to them by the SSDs under their supervision. The district statistical offices will be staffed by three to four middle- level technicians. 27 These ministries include finance, energy and water, livestock, fisheries, crop production, labor, crime and migration, transport and telecommunication, and the central bank. 50 BIBLIOGRAPHY Adams, Richard. 2005. Remittances and Poverty in Ghana. Washington, DC: DECRG (Development Research Group), World Bank. Committee on Economic Recovery, Institutional Building and Resource Mobilization. 2003. Third Draft Report. The Economist Intelligence Unit. 2005. Somalia: Country Profile. London, UK. FAO (Food and Agriculture Organization of the United Nations), Statistical Division, Online database. 1991. Major Food and Agricultural Commodities and Producers.. Hansen, Peter. 2004. Migrant Remittances as a Development Tool: The Case of Somaliland. Danish Institute for Development Studies (DIIS), Department of Migration Policy, Research and Communications. Holleman, Cindy. 2003. The Socio-Economic Implications of Livestock Ban in Somaliland. Nairobi: Famine Early Warning System Network, February. IMF (International Monetary Fund). 1991. Somalia: Staff Report for the 1991 Article IV Consultation. Washington, DC: IMF. ——. 1991. “Statistical Appendix� Somalia: Staff Report for the 1991 Article IV Consultation. Washington, DC: IMF. ——. 2006. Direction of Trade Statistics. Washington, DC: IMF. Little, Peter D. 2003. Somalia: Economy Without a State. Indiana University Press. Mc Carthy, Gerry, Mohamed Abshir Waldo, and Abdirizaq Mohamed Warsame. 2005. “Somalia Private Sector Appraisal and Recommendations� (mimeo). Washington, DC: IFC and World Bank. June. Mubarak, Jamil. 2003. “Case of Private Supply of Money in Stateless Somalia.� Journal of African Economies. 51 O’Connell, Stephen A. and Benno J. Ndulu. 2000. “Africa’s Growth Experience: A Focus on Sources of Growth.� Puntland. 1998. The Charter of Puntland State of Somalia. Ratha, Dilip. 2003. Workers Remittances: An Important and Stable Source of External Development Finance. Washington, DC: World Bank Development Finance. SIMAD (Somali Institute of Management and Administration Development). 2005. New Beginnings Somalia Civil Service Project: Terms and Conditions of Civil Service for Somalia. Somaliland, 2001. Constitution of the Somali Democratic Republic. The Transitional Federal Charter of the Somali Republic. 2004. Adopted by the Somali National Reconciliation Conference in Nairobi, Kenya. UNDP (United Nations Development Program). 1998. Somalia Human Development Report. Deleted: RESULTS-BASED MATRIX¶ ——. 2001. Human Development Report. ¶ ¶ ¶ ——. 2004. A Medium-Term Plan for Statistical Data Collection and Capacity Building for Somalia. ¶ ¶ ——. 2005. Options for Revenue Systems and Administration for the Transitional Federal Government of Somalia. ¶ ¶ ¶ UNFPA (United Nations Population Fund). 1997. Report of the UNFPA Consultant on Population Statistics of Somalia. ¶ ¶ ¶ UNICEF (United Nations Children’s Fund). 2000. Multi Indicator Cluster Survey. ¶ ¶ World Bank and UNDP. 2003. Somalia Socio-Economic Survey 2002. ¶ ¶ ¶ World Bank. 1991. Somalia: Crisis in Public Expenditure Management, Vol. I, II, and III. Washington, DC: World Bank. ¶ ¶ ¶ ——. 2004. World Development Report: Making Services Work for Poor People. Washington, DC: World Bank. ¶ ¶ ——. 2004a. Commodity Price Data. Development Prospects Group. Washington, DC: World Bank. ¶ ¶ ¶ ——. 2006. Somalia Country Economic Memorandum: From Resilience to Recovery. Washington, DC: World Bank. ¶ ¶ ¶ ——. 2006. World Development Indicators. Washington, DC: World Bank. Macroeconomic Policy Framework ... [1] Results Matrix—Federal Government 52 Page 52: [1] Deleted louise.cottar 1/29/2009 2:40:00 PM RESULTS-BASED MATRIX Macroeconomic Policy Framework Results Matrix—Federal Government Target outcomes Baseline Constraints to Key actions and intermediate outcomes (all costs are in US$ millions) for Year V 2006 achieving outcomes by Year I Year II Year III - V 1. Ministry of Finance. No Ministry of Finance Need to hire and train Establish core Ministry Monitor implementation Separate macroeconomic Establish effective MoF staff or facilities staff in basic functions of Finance (MoF). of Year II budget. policy department from functions covering of the Ministry of budget department. budgeting, treasury Finance Hire staff for basic Prepare budget for Year functions, and functions of MoF. III. Hire additional staff. macroeconomic and tax policy. Provide training to staff. Prepare budget for Year I. Prepare budget for Year II. Put in place procedures for collecting revenue and making government payments. Costing Physical infrastructure: $0.4 Costing Costing Technology: $0.4 Physical infrastructure: Costing $11.1 Vehicles: $0.2 $0.2 Physical infrastructure: $1.0 Staff: $0.7 Technology: $0.2 Technology: $0.9 Technical assistance: Vehicles: $0.2 Vehicles: $0.3 $0.7 Staff: $0.9 Staff: $3.7 Technical assistance: $0.4 Technical assistance: $0.9 Revenue collection. Put in Old tax laws and No legal system to Enact tax laws covering Enact laws on additional Raise customs duty rates. place broad-based, all- agreements support revenue agreed revenue areas tax areas, such as sales tax inclusive and participatory collection (e.g. customs, fishing on selected goods and Expand sales taxes. system of revenue to rights). services. progressively finance an Enact laws on personal and expanding share of public corporate income taxes. expenditure. Macroeconomic Policy Framework Results Matrix—Federal Government Target outcomes Baseline Constraints to Key actions and intermediate outcomes (all costs are in US$ millions) for Year V 2006 achieving outcomes by Year V Year I Year II Year III - V Fiscal deficit. Ensure that No federal government No willingness of the No resort to deficit No resort to deficit Modest levels of budget federal government budget in place general public to hold financing financing deficit (no more than 10 expenditure is kept in line government securities percent of revenue with revenue, so domestic collection) deficit financing is limited. Low revenue base now mainly in the hands of Consider issuing state administrations government securities to private sector. 2. Tax administration. No federal government No law governing Enact law governing Start collecting taxes on Develop administration Capacity to administer tax administration federal tax tax administration. items covered by tax laws capacity and regulations for customs duties, domestic administration passed in Year I. collecting income tax on sales tax, and personal and Establish revenue wage earners and corporate income taxes No agreement with administrative agency. corporations. Puntland or Somaliland as to their role in the Recruit staff and collection of federal provide necessary government revenue training. Start collecting import duties at stage of export from Kenya and Dubai and at additional ports and airports. Costing Costing Costing Costing $11.6 Physical infrastructure: Physical infrastructure: Physical infrastructure: $1.0 $0.7 $0.2 Technology: $0.7 Technology: $0.4 Technology: $0.2 Vehicles: $0.3 Vehicles: $0.2 Vehicles: $0.2 Staff: $3.9 Staff: $0.8 Staff: $1.0 Technical assistance: $0.9 Technical assistance Technical assistance: $0.4 including training: $0.7 3. Employment strategy No strategies available Develop employment Implement employment Implement employment Macroeconomic Policy Framework Results Matrix—Federal Government Target outcomes Baseline Constraints to Key actions and intermediate outcomes (all costs are in US$ millions) for Year V 2006 achieving outcomes by Year V Year I Year II Year III - V and policy. creation strategies creation strategies. creation strategies. through a consultative process. Support participatory Special programs for process in public services women and youth continued Hire staff in public that includes women and offices taking into other underrepresented Emergency rehabilitation consideration women groups. and microprojects funds for and minorities returnee localities continued representation. Special programs for women and youth Special employment continued programs and credit facilities for women Emergency rehabilitation established and microprojects funds for returnee localities Special employment continued programs targeting youth developed Emergency rehabilitation and microprojects funds for returnee localities developed Costing Costing Costing Costing $11.0 $2.0 $2.0 $7.0 Total costing Total costing Total costing Total costing $33.7 $7.2 $5.9 $20.6 Macroeconomic Policy Framework Results Matrix—Somaliland Key actions and intermediate outcomes (all costs are in US$ millions) Target outcomes Baseline Constraints to for Year V 2006 achieving outcomes by Year V Year I Year II Year III - V 1. Government Modest deficits No willingness of the No resort to deficit No resort to deficit Modest levels of budget expenditure. general public to hold financing financing deficit (no more than 10 Ensure that regional and Regional and local government securities percent of revenue local government governments on cash collection) expenditure is kept in line budgets Low revenue base with revenue so that domestic deficit financing is limited. Costing Costing Costing Costing $5.6 $1.2 $1.0 $3.4 2. Tax administration. 90 percent of tax No law governing tax Enact law governing Start collecting taxes on Develop administration Capacity to administer collected comes from administration tax administration. items covered by tax laws capacity and regulations for customs duties, domestic customs duties and passed in Year I. collecting income tax on sales tax, and personal and indirect taxes; Establish revenue wage earners and corporate income taxes “government service administrative agency. corporations. charges� make up the rest. Recruit staff, and provide necessary training. Costing Costing Costing Costing $5.8 $1.4 $1.0 $3.4 3. Employment strategy Interim strategy Develop employment Implement employment Implement employment and policy. available from Ministry creation strategies creation strategies. creation strategies. of Labor. through a consultative process. Support participatory Special programs for process in public services women and youth continued Hire staff in public that includes women and offices taking into other underrepresented Emergency rehabilitation consideration women groups. and microprojects funds for Macroeconomic Policy Framework Results Matrix—Somaliland Key actions and intermediate outcomes (all costs are in US$ millions) Target outcomes Baseline Constraints to for Year V 2006 achieving outcomes by Year V Year I Year II Year III - V and minorities returnee localities continued representation. Special programs for women and youth Special employment continued programs and credit facilities for women Emergency rehabilitation established and microprojects funds for returnee localities Special employment continued programs targeting youth developed Emergency rehabilitation and microprojects funds for returnee localities developed Costing Costing Costing Costing $6.0 $1.0 $1.0 $4.0 Total costing Total costing Total costing Total costing $17.4 $3.6 $3.0 $10.8 Macroeconomic Policy Framework Results Matrix—Puntland Key actions and intermediate outcomes (all costs are in US$ millions) Target outcomes Baseline Constraints to for Year V 2006 achieving outcomes by Year V Year I Year II Year III - V 1. Government Significant deficit No willingness of the No resort to deficit No resort to deficit Modest levels of budget deficit expenditure. financing funded by direct general public to hold financing financing (no more than 10 percent of Macroeconomic Policy Framework Results Matrix—Puntland Key actions and intermediate outcomes (all costs are in US$ millions) Target outcomes Baseline Constraints to for Year V 2006 achieving outcomes by Year V Year I Year II Year III - V Ensure that federal, borrowing from government securities revenue collection) state, regional, and businesspeople local government Low revenue base Consider issuing government expenditure is kept in securities to private sector. line with revenue, so that domestic deficit financing is limited. Costing Costing Costing Costing $3.4 $5.6 $1.2 $1.0 2. Tax administration. 90 percent of tax collected No law governing Enact law governing tax Start collecting taxes on Develop administration Capacity to administer comes from customs federal tax administration. the items covered by capacity and regulations for customs duties, duties and indirect taxes; administration tax laws passed in Year collecting income tax on wage domestic sales tax, and “government service Establish revenue I. earners and corporations. personal and corporate charges� make up the rest. No agreement with administrative agency. income taxes Puntland or Somaliland as to their roles in the Recruit staff, and provide collection of necessary training. federal government revenue Costing Costing Costing Costing $5.8 $1.4 $1.0 $3.4 3 Employment No strategies available Develop employment Implement employment Implement employment strategy and policy. creation strategies through creation strategies. creation strategies. a consultative process. Support participatory Special programs for women Hire staff in public offices process in public and youth continued taking into consideration services that includes women and minorities women and other Emergency rehabilitation and representation. underrepresented microprojects funds for groups. returnee localities continued Special employment Macroeconomic Policy Framework Results Matrix—Puntland Key actions and intermediate outcomes (all costs are in US$ millions) Target outcomes Baseline Constraints to for Year V 2006 achieving outcomes by Year V Year I Year II Year III - V programs and credit Special programs for facilities for women women and youth established continued Special employment Emergency programs targeting youth rehabilitation and developed microprojects funds for returnee localities Emergency rehabilitation continued and microprojects funds for returnee localities developed Costing Costing Costing Costing $6.0 $1.0 $1.0 $4.0 Total costing Total costing Total costing Total costing $17.4 $3.6 $3.0 $10.8 Public Financial Management Results Matrix—Federal Government Target outcomes Baseline Constraints to Key actions and intermediate outcomes (all costs are in US$ millions) for Year V 2006 achieving outcomes by Year V Year I Year II Year III - V 1. PFM System and No systems Contract a financial Acquire software license, Operate computerized systems institutions. management agent computers, printers, and generate periodic and Establishment of sound (FMA) to assist in the power backups, and annual financial reports for and transparent public establishment and computer accessories for informed decision making. financial management operation of suitable phase 2 implementation systems computerized financial in the accounting systems for the first 2 locations in the regions. Public Financial Management Results Matrix—Federal Government Target outcomes Baseline Constraints to Key actions and intermediate outcomes (all costs are in US$ millions) for Year V 2006 achieving outcomes by Year V Year I Year II Year III - V Establishment of simple, years. user-friendly Implement computerized comprehensive financial Acquire computers, accounting systems in the management policies and printers, power accounting locations in procedures based on backups, and computer the regions. computerized systems accessories for phase 1 implementation at the Implement financial Center/Accountant management policies and General’s Office. procedures. Contract FMA to define requirements and design computerized systems, identify suitable software package, procure the software, and implement and operate the systems. Contract FMA to prepare simple user- friendly financial management policies and procedures based on the computerized systems and incorporating accounting controls, forms, and accounting structure. Costing Costing Costing Costing $3.65 FMA FMS and support: FMA FMS and support: Software maintenance: $0.01 (2 years of FMA support $1.56 $1.39 Public Financial Management Results Matrix—Federal Government Target outcomes Baseline Constraints to Key actions and intermediate outcomes (all costs are in US$ millions) for Year V 2006 achieving outcomes by Year V Year I Year II Year III - V including software and Computer and software: Computer and software: establishment of $0.34 $0.2 accounting systems) Vehicles: $0.15 2. Capacity building. Accounts staff not yet Contract a Microsoft Self-training on Self-training on Microsoft Accountants equipped in place. To be certified trainer to Microsoft Excel and Excel and Word with basic computer skills appointed. provide Microsoft Word on Microsoft Excel and Excel and Word Monitor and provide on-the- Word training to accountants. job training. Accountants equipped Provide Microsoft with relevant skills to Excel and Word operate the computerized training to accountants. accounting systems Provide training on the appropriate financial management systems to accountants at the Center/Accountant General’s Office. Costing Costing Training: $0.08 Training in FMS & MS Office: $0.08 3. Budget preparation Lack of adequate Introduce and Operate appropriate Operate appropriate budget process. budget preparation effectively operate a budget preparation preparation process, and Participatory, transparent, experience participatory, process, and provide provide guidance as comprehensive, and transparent, and guidance as appropriate. appropriate. gender-sensitive budget comprehensive budget preparation process with a preparation process and multiyear perspective and effectively implement proper classification. budgetary control. Support recurrent and development budget Public Financial Management Results Matrix—Federal Government Target outcomes Baseline Constraints to Key actions and intermediate outcomes (all costs are in US$ millions) for Year V 2006 achieving outcomes by Year V Year I Year II Year III - V allocation to ministries responsible for gender and human rights issues. 4. Monitoring and No formal financial Develop appropriate Operate financial Operate financial management reporting. progress reporting accounting structure management systems, systems, and generate Appropriate budget and progress reports and generate appropriate appropriate progress reports. reporting showing actual showing actual versus progress reports. versus budgeted, and budgeted, and variance variance by defined by defined programs/activities, heads, program/activities, and subheads heads, and subheads. Costing Costing Costing Costing Budget monitoring: $0.28 $0.13 $0.06 $0.09 Total costing Total costing Total costing Total costing $4.01 $2.26 $1.65 $0.1 Public Financial Management Results Matrix—Somaliland Target outcomes Baseline Constraints to Key actions and intermediate outcomes (all costs are in US$ millions) for Year V 2006 achieving outcomes by Year V Year I Year II Year III - V 1. PFM System and Manual accounting and Financial regulations of Contract a financial Acquire software license, Operate computerized institutions. reporting systems that 1961 (and amendments) management agent computers, printers, systems, and generate periodic Establish sound and are duplicative, inadequate under (FMA) to assist in the power backups, and and annual financial reports transparent public inefficient, and subject enhanced and establishment and computer accessories for for informed decision making. financial management to high data input and computerized operation of improved phase 2 implementation Public Financial Management Results Matrix—Somaliland Target outcomes Baseline Constraints to Key actions and intermediate outcomes (all costs are in US$ millions) for Year V 2006 achieving outcomes by Year V Year I Year II Year III - V systems. processing error risk environment and suitable in the regional computerized financial accounting locations. Establish simple, user- systems for the first 2 friendly comprehensive years. Implement computerized financial management accounting systems in the policies and procedures Acquire computers, regional accounting based on the computerized printers, power locations. systems. backups, and computer accessories for phase 1- Implement financial implementation at the management policies and Accountant General’s procedures. Office. Contract an FMA to define requirements and design computerized systems, identify suitable software package, procure the software, implement the systems, and operate the systems in the Accountant General’s Office. Contract an FMA to prepare simple, user- friendly financial management policies and procedures based on the computerized systems and incorporating accounting controls, forms, and accounting Public Financial Management Results Matrix—Somaliland Target outcomes Baseline Constraints to Key actions and intermediate outcomes (all costs are in US$ millions) for Year V 2006 achieving outcomes by Year V Year I Year II Year III - V structure. Costing Costing Costing Costing $2.92 FMA FMS and support: FMA FMS and support: Software maintenance: $0.01 (2 years FMA support $1.23 $1.06 including software and Computer and software: Computer and software: establishment of $0.32 $0.18 accounting systems) Vehicles: $0.12 2. Capacity building. Inadequate skills to Contract a Microsoft Self-training on Self-training on Microsoft Accountants equipped operate basic computer certified trainer to Microsoft Excel and Excel and Word with basic computer skills systems provide Microsoft Word on Microsoft Excel and Office training to Monitor and provide on-the- Word Inadequate accounting accountants. job training skills among staff Accountants equipped Provide Microsoft with relevant skills to Excel and Word operate the computerized training to accountants. accounting systems Provide training on the improved financial management Costing Costing Training in FMS and MS Training in FMS and Office: $0.06 MS Office: $0.06 3. Budget preparation Inappropriate, Introduce and Operate improved budget Operate improved budget process. nonparticipatory, and effectively operate a preparation process, and preparation process, and Participatory, transparent, gender-neutral budget participatory, provide guidance as provide guidance as comprehensive, and preparation process transparent, and appropriate. appropriate. gender-sensitive budget with limited perspective comprehensive budget preparation process with a and classification. preparation process, multiyear perspective and and effectively proper classification. implement budgetary Public Financial Management Results Matrix—Somaliland Target outcomes Baseline Constraints to Key actions and intermediate outcomes (all costs are in US$ millions) for Year V 2006 achieving outcomes by Year V Year I Year II Year III - V control. Support recurrent and development budget allocation to ministries responsible for gender and human rights issues. 4. Monitoring and Financial reports Develop appropriate Operate financial Operate financial management reporting. classified by heads and accounting structure management systems, systems, and generate Improved budget subheads, which is and progress reports and generate appropriate appropriate progress reports. reporting showing actual inadequate for output showing actual versus progress reports. versus budgeted, and monitoring budgeted, and variance variance by defined by defined programs/activities, heads, program/activities, and subheads heads, and subheads. Costing Costing Costing Costing Budget monitoring: $0.25 $0.11 $0.05 $0.09 Total costing Total costing Total costing Total costing $3.23 $1.84 $1.29 $0.1 Public Financial Management Results Matrix—Puntland Target outcomes Baseline Constraints to Key actions and intermediate outcomes (all costs are in US$ millions) for Year V 2006 achieving outcomes by Year V Year I Year II Year III - V Public Financial Management Results Matrix—Puntland Target outcomes Baseline Constraints to Key actions and intermediate outcomes (all costs are in US$ millions) for Year V 2006 achieving outcomes by Year V Year I Year II Year III - V 1. PFM System and Manual accounting and Financial regulations of Contract an FMA to Acquire software license, Operate computerized institutions. reporting systems that 1961 (and amendments) assist in the computers, printers, systems, and generate periodic Sound, transparent public are duplicative, inadequate under establishment and power backups, and and annual financial reports financial management inefficient, and subject enhanced and operation of improved computer accessories for for informed decision making. systems established to high data input and computerized and suitable phase 2 implementation processing error risk environment computerized financial in the regional Establishment of simple, systems for the first 2 accounting locations. user-friendly, years. comprehensive financial Implement computerized management policies and Acquire computers, accounting systems in procedures based on the printers, power regional accounting computerized systems backups, and computer locations. accessories for phase1- implementation at the Implement financial Accountant General’s management policies and Office. procedures. Contract FMA to define requirements and design computerized systems, identify suitable software package, procure the software, implement the systems, and operate the systems in the Accountant General’s Office. Contract an FMA to prepare simple, user- friendly financial management policies and procedures based on the computerized Public Financial Management Results Matrix—Puntland Target outcomes Baseline Constraints to Key actions and intermediate outcomes (all costs are in US$ millions) for Year V 2006 achieving outcomes by Year V Year I Year II Year III - V systems and incorporating accounting controls, forms, and accounting structure. Costing Costing Costing Costing 2 years of FMA support FMA FMS and support: FMA FMS and support: Software maintenance: $0.01 including software and $1.23 $1.06 establishment of Computer and software: Computer and software: accounting systems: $2.88 $0.30 $0.16 Vehicles: $0.12 2. Capacity building. Inadequate skills to Contract a Microsoft Self-training on Self training on Microsoft Accountants equipped operate basic computer certified trainer to Microsoft Excel and Excel and Word with basic computer skills systems provide Microsoft Word on Microsoft Excel and Excel and Word Monitor and provide on-the- Word Inadequate accounting training to accountants. job training. skills among staff Accountants equipped Provide Microsoft with relevant skills to Excel and Word operate the computerized training to accountants. accounting systems Provide training on the improved financial management systems. Costing Costing Training in FMS and Training in FMS and Excel: $0.06 MS Office: $0.06 3. Budget preparation Inappropriate, Introduce and Operate improved budget Operate improved budget process. nonparticipatory, and effectively operate a preparation process, and preparation process, and Participatory, transparent, gender-neutral budget participatory, provide guidance as provide guidance as comprehensive, and preparation process transparent, and appropriate. appropriate. Public Financial Management Results Matrix—Puntland Target outcomes Baseline Constraints to Key actions and intermediate outcomes (all costs are in US$ millions) for Year V 2006 achieving outcomes by Year V Year I Year II Year III - V gender-sensitive budget with limited perspective comprehensive budget preparation process with a and classification preparation process and multiyear perspective and effectively implement proper classification budgetary control. (See MoF section for Support recurrent and costing in budget development budget preparation.) allocation to ministries responsible for gender and human rights issues. 4. Monitoring and Financial reports Develop appropriate Operate financial Operate financial management reporting. classified by heads and accounting structure management systems, systems, and generate Improved budget subheads, which is and progress reports and generate appropriate appropriate progress reports. reporting showing actual inadequate for output showing actual versus progress reports. versus budgeted, and monitoring budgeted, and variance variance by defined by defined programs/activities, heads, program/activities, and subheads heads and subheads. Costing Costing Costing Costing Budget monitoring: $0.25 $0.11 $0.05 $0.09 Total costing Total costing Total costing Total costing $3.19 $1.82 $1.27 $0.1 Civil Service Results Matrix–Federal Government Target outcomes Baseline Constraints to Key actions and intermediate outcomes (all costs are in US$ millions) for Year V 2006 achieving outcomes by Year V Year I Year II Year III - V 1. Professionalization. Human capacity low Competitive selection Process completed Staff professionalized, with process developed and new staff meeting at least Skill base low carried out minimal qualifications for job. Costing Costing $0.03 $0.011 Costing $0.019 2. Rightsizing. TFG now consists of Surplus staff eliminated in Rightsizing process extended Federal and local government 275 members of selected districts with to other districts rightsized parliament help of CSC; pay scales reviewed Costing Costing $0.0175 Costing $0.05 $0.0325 3. Civil Service Commission CSC nonexistent but a Although the quality of Personnel management Survey finalized, and human (CSC). six-person civil service the staff in the civil training and survey of resources development CSC established and task force established in service is low, there is civil servants carried out strategy prepared institutionally strengthened January 2006 no plan for developing the skills of the staff. Costing Costing Costing $0.0875 $0.1625 $0.25 4. CSI premises. No premises Construction of new premises Premises built initiated Costing Costing $0.5 $0.5 5. Capacity building. CSI entirely dependent Capacity enhancement Training of trainers under Process continued, leading to Civil Service Results Matrix–Federal Government Target outcomes Baseline Constraints to Key actions and intermediate outcomes (all costs are in US$ millions) for Year V 2006 achieving outcomes by Year V Year I Year II Year III - V Capacity built at CSI, and role on donor and for 35 women and 20 way greater sustainability of women and minorities government funds; no minority members with enhanced fees for service potential to be directors Capacity enhancement process for women Most women in low- continues; awareness skill jobs campaign launched Costing Costing Costing $0.03 0.075 Costing $0.32 $0.215 6. Pensions and pay reform. No pension fund in 45 Pension law reviewed Pension fund and Pensions and pay reform years administrative arrangements carried out Technical assistance on approved by cabinet and establishing viable fund parliament and pensions administration contracted; Preferred pay policy plan prepared approved by cabinet Pay reform report prepared Costing $0.07 Costing $0.18 Costing $0.11 Total costing Total costing Total costing Total costing $1.33 $0.03 $0.26 $1.04 Civil Service Results Matrix—Somaliland Target outcomes Baseline Constraints to Key actions and intermediate outcomes (all costs are in US$ millions) for Year V 2006 achieving outcomes by Year V Year I Year II Year III - V 1. Professionalization. Many staff are not Staff will be interviewed by Process will be completed. Staff to have at least minimal qualified for their jobs. a panel, and those approved qualifications for jobs will be placed in jobs. Most have not even Outcome will be better- completed secondary qualified female and male staff education. able to deliver better services. Situation has most Costing serious impact at senior $0.03 levels. Costing $0.011 Costing $0.019 2. Local government Many districts have Possible tension when CSC will assist A and B Process will be extended to rightsizing. more staff than they staff are reduced/ districts to eliminate surplus other districts. Budgetarily viable and need to provide the few replaced. staff and review pay scales. effective district councils services they are responsible for, particularly so in big municipalities. Costing Costing $0.0175 Costing $0.05 $0.0325 3. CSC institution building Most CS staff have not Although the quality of Training for two staff in Finalize survey, and prepare and human resource been trained in staff in the civil service personnel management; human resource planning and development. personnel management; is low, there is no plan training for rest of staff at development strategy. all experience has been for developing the skills CSI CSC staff better able to on-the-job. of the staff. manage the civil service Carry out survey of civil servants. Preparation of a human resource development plan to result in better-qualified staff delivering better services Civil Service Results Matrix—Somaliland Target outcomes Baseline Constraints to Key actions and intermediate outcomes (all costs are in US$ millions) for Year V 2006 achieving outcomes by Year V Year I Year II Year III - V Costing $0.25 Costing Costing $0.0875 $0.1625 4. CSI premises. CSI is renting premises Construction begins New premises built in CSC site from a university some in center of Hargeisa. A more distance from its main attractive and effective training clientele in central center will lead to more, better- government. trained staff. Costing $0.5 Costing $0.5 5. CSI capacity building; CSI dependent entirely Study tour to Ethiopia’s Training of trainers Continue process, leading enhancing the role of women on donor and Civil Service College to greater sustainability and enlarging participation government funds and Management Widening range of courses, of minority groups and Development Center including longer-term people with disabilities. No fees for services. courses leading to Capacity enhancement certification Build the capacity of CSI staff, Very few senior staff are for 35 women and 20 widen range of courses, and women. Most women in minority members with Continue process as well as become more financially are low-skill jobs. potential to be directors conduct awareness sustainable. Outcome: better campaign. qualified staff in private and Women are about one- public sectors quarter of the staff in the civil service. Empower female civil servants to apply successfully for DG Minority groups are and directors’ positions. almost absent in civil Outcome: more women, people service positions. with disabilities, and minority groups in senior positions Civil Service Results Matrix—Somaliland Target outcomes Baseline Constraints to Key actions and intermediate outcomes (all costs are in US$ millions) for Year V 2006 achieving outcomes by Year V Year I Year II Year III - V Costing $0.32 Costing $0.03 Costing Costing $0.08 $0.21 6. Pensions and pay reform. No one benefited from Implement the “stop- Prepare pay reform report Fund and administrative Establish a viable pensions pension fund for 45 gap� pay increase. that will develop policy arrangements approved by fund. Outcome: retirees paid years. scenarios on pay levels and cabinet and parliament. pensions; retirements clear way Review pensions law. differentials and staffing for promotions from below New law has been Consultancy on levels. Cabinet to approve drafted. establishing a viable Include resources to address preferred pay policy. Introduce sustainable pay fund and setting up the child care and maternity scales that will be attractive to A “stop-gap� increase in pensions leave. Develop and adopt gender- top professionals yet also salaries has been administration. responsive pay policy. provide a living wage for proposed, but not yet lower-level staff. implemented. Make sure that the wage bill A more permanent does not absorb too much of solution to the incentive the recurrent budget. Outcome: problem has also been professional staff can be hired, proposed. motivated, and retained. Difficult to hire and retain professional staff Costing $0.18 Costing $0.02 Costing Costing $0.05 $0.11 7. Redirection program for Some staff will lose Program has been Implement retraining Continue implementation. retrenched staff. their jobs as a result of prepared. program. Introduce program to retrain restructuring and pay Civil Service Results Matrix—Somaliland Target outcomes Baseline Constraints to Key actions and intermediate outcomes (all costs are in US$ millions) for Year V 2006 achieving outcomes by Year V Year I Year II Year III - V retrenched staff. Outcome: reform. retrenched staff will have skills needed to regain employment. Costing: $0.3 Costing Costing $0.03 Costing $0.195 $0.075 Total costing Total costing Total costing Total costing $1.63 $0.08 $0.32 $1.23 Civil Service Results Matrix—Puntland Target outcomes Baseline Constraints to Key actions and intermediate outcomes (all costs are in US$ millions) for Year V 2006 achieving outcomes by Year V Year I Year II Year III - V 1. Professionalization. As a result of the Accelerated training Succession planning Job-related training in New entrants to civil service to disruption to education needs assessment of exercise conducted priority areas continues meet minimal qualifications for caused by the period of state-level civil service job civil disorder and its conducted Training plan adopted by Regular impact studies of aftermath, significant PSG job-related training Staff in key positions to possess numbers of civil Partner training conducted basic competencies for position servants did not institutions identified and Job-related training in held complete secondary capacity built priority areas continues In partnership with education nor, in some external training Staff to be given appropriate cases, primary Training started in 1–2 Performance appraisal and institutions, certificate, job-related training before being education. In addition, priority areas merit increments introduced diploma and/or degree promoted almost none of the courses in public Civil Service Results Matrix—Puntland Target outcomes Baseline Constraints to Key actions and intermediate outcomes (all costs are in US$ millions) for Year V 2006 achieving outcomes by Year V Year I Year II Year III - V staff, including senior Job descriptions for core administration and other Future managers to be identified managers at department posts developed and key areas developed and will complete core training director and director adopted in public administration general positions, have Promotion system received any Standardized recruitment dependent on Greater representation of women professional training procedures to be competencies and minorities specific to their jobs. implemented implemented A more efficient and better- Reportedly, high levels Survey of existing civil motivated civil service of absenteeism are servant qualifications symptomatic of conducted, to include widespread recommendations on demotivation within the retraining, retrenchment, service. redeployment Currently women and 3-year civil service minority groups are training plan drafted limited to low wage and skill levels. Job-related training in priority areas continues Induction course for new entrants to civil service developed and piloted Costing $0.04 Costing Costing Costing $0.42 $0.1 $0.28 2. Local government Some municipalities Possible tension when On the basis of findings rightsizing. have more staff than staff are reduced/ of the review of roles and Civil Service Results Matrix—Puntland Target outcomes Baseline Constraints to Key actions and intermediate outcomes (all costs are in US$ millions) for Year V 2006 achieving outcomes by Year V Year I Year II Year III - V Budgetarily viable and effective needed for the services replaced. functions of levels of district and municipal councils they are responsible federal government, for. staffing levels reviewed by councils Costing Costing $0.03 $0.03 3. CSC institution building. No CSC exists. Civil CSC office at PSG Creation of a CSC independent service issues are the established, with clear from state government, linked to responsibility of reporting lines to FCSC federal CSC MOLYS, which lacks the capacity to Training for two staff in CSC staff possessing basic coordinate and to personnel management; competencies to carry out ensure adherence to appropriate job-related mandate existing regulations. training for rest of staff in region Costing Costing $0.07 $0.07 4. Human resource planning No plan yet developed, On the basis of findings Structure and staff Regular M&E of human and development; and although the 5-Year of the review of roles and establishment adopted by resources development enhancing the role of women Development Plan functions of levels of PSG conducted and enlarging minority currently in process federal government, participation. may include overview proposal on structure and Human resources M&E system on gender Human resource development staff establishment development strategy issues continues plan introduced Very few women hold drafted developed and adopted by senior positions of PSG A more efficient civil service responsibility. Training for two staff in human resource planning Selected women fast- Empower female civil servants No data are available tracked into supervisory and to apply successfully for DG and on numbers or Minimum quotas for management positions Civil Service Results Matrix—Puntland Target outcomes Baseline Constraints to Key actions and intermediate outcomes (all costs are in US$ millions) for Year V 2006 achieving outcomes by Year V Year I Year II Year III - V directors’ positions. positions held by women for training female civil servants. courses are agreed to by Gender and civil service More women in senior positions PSG and are strategy adopted by PSG Minority groups are implemented. almost absent in civil M&E system on gender service positions. Gender and civil service issues implemented strategy developed Conduct public awareness campaign. Gender issues included in policy making, including human resource planning, recruitment, and M&E systems Gender- and human rights–based approaches infused into all civil service training Costing $0.03 Costing $0.26 Costing $0.075 Costing $0.155 5. Pension and pay reform. No pensions are In conjunction with Viable pension fund established provided to civil federal scheme, establish servants. a viable fund. Retirees paid pensions The civil service is In conjunction with Civil Service Results Matrix—Puntland Target outcomes Baseline Constraints to Key actions and intermediate outcomes (all costs are in US$ millions) for Year V 2006 achieving outcomes by Year V Year I Year II Year III - V Retirements clear way for unable to hire and federal level, prepare pay promotions from below. retain sufficient high- reform report that will caliber managers and develop policy scenarios Introduce budgetarily other senior staff. on pay levels and sustainable pay scales that will differentials and on be attractive to top professionals staffing levels. yet also provide a living wage for lower-level staff. Make sure that the wage bill does not absorb too much of the recurrent budget. Professional staff can be hired, motivated, and retained. Costing $0.09 Costing $0.09 6. Retraining for retrenched Some staff may lose Retraining program staff. jobs as a result of designed and implemented Introduce program to retrain restructuring and pay retrenched staff. reform. Retrenched staff will have skills needed to regain employment. Costing Costing $0.08 $0.08 7. Policy-making capacity and There is a lack of Assessment of policy- Technical support in interministerial cooperation. information sharing and making requirements at legislation made available to Civil Service Results Matrix—Puntland Target outcomes Baseline Constraints to Key actions and intermediate outcomes (all costs are in US$ millions) for Year V 2006 achieving outcomes by Year V Year I Year II Year III - V Enhance opportunities for cooperation between state level conducted PSG cooperation. PSG ministries. Questions on cooperation included in Training Needs Assessment (see professionalization) Opportunities for cooperation and information sharing created through enhanced ICTs and facilities Costing $0.189 Costing $0.54 Costing $0.351 8. Enabling environment for A perception exists in Survey of state Recommendations of survey business. the private sector that government procedures adopted and implemented bureaucratic processes relating to private sector are excessively conducted complicated and lengthy. Costing Costing Costing $0.005 $0.015 $0.02 Total costing Total costing Total costing Total costing $1.51 $0.45 $0.62 $0.44 Decentralization, Intergovernmental Fiscal Relations, and Service Delivery Results Matrix—Federal Government Key actions and intermediate outcomes (all costs are in US$ millions) Target outcomes Baseline Constraints to for Year V 2006 achieving outcomes Year I Year II Year III - V by Year V 1. Expenditure and revenue The charter outlines Capacity constraints FCC established, with Expenditure and revenue Pilot transfers expanded assignments. Agree on and broad guiding and extremely limited subcommittee for fiscal assignments agreed to and to an increased number of operationalize expenditure and principles to ensure that scope for federal and decentralization fully new law passed by diverse districts revenue assignments across delivery is done at local revenue makes operational and awareness parliament levels of government, and district level, but is operationalization raising events implemented Transfers to districts develop policy for targeting of vague and many challenging. Capacity needs at state and across Somalia intergovernmental transfers by assignments overlap. Initial mapping of state- and district level mapped out, progressively rolled out applying a formula that is tied district-level capacity needs staff identified, and training based on districts’ to poverty reduction goals and Transfer systems exist activities initiated preparedness the principle of subsidiarity. in Somaliland, but there Initial policy draft on are constraints to assignments prepared and Transfer criteria designed operating these discussed based on assignments, with systems. system and procedures for targeted transfers Local government law needed. Tied block grants for service delivery piloted in two more advanced districts Costing Costing Costing Costing $0.8 $0.08 $0.16 $0.56 2. Local budget legislature Two local government New laws in South- Awareness raised among Awareness raising campaign TFG Constitution in created. Develop and pass laws exist in the Central region are district councils concerning initiated to inform district place, and local local government laws northern regions of dependent on new changes councils of rights and government laws drafted incorporating expenditure Somaliland and successful adoption responsibilities in line with existing laws responsibilities of district Puntland. of a new federal in northern states governments and revenue constitution. sources that would adequately No such laws exist in Laws refined as needed support the decentralized local South-Central Somalia. service delivery envisioned in the current legal framework. Costing Costing Costing Costing $0.3 $0.03 $0.06 $0.21 Decentralization, Intergovernmental Fiscal Relations, and Service Delivery Results Matrix—Federal Government Key actions and intermediate outcomes (all costs are in US$ millions) Target outcomes Baseline Constraints to for Year V 2006 achieving outcomes Year I Year II Year III - V by Year V 3. Staffing capacity Limited or no Unclear recruitment Civil Service Commission Job retraining in pilot Staff downsizing initiated improved. knowledge of staffing procedures and established, working with districts initiated in districts in which staff Ensure that capacity needs at of local governments in responsibilities districts to conduct are prepared for departure district level are addressed and large part of the country functional reviews of Work with CSC continued that recruitment is undertaken apart from northern Expectations among existing staff and capacity, in additional districts Additional retraining in where needed, adhering to regions of Somaliland former civil servants define needs, and districts rolled out principles of lean structure and and Puntland to return to service recommend actions to Staffing in new districts taking into consideration across Somalia rectify shortfalls and reviewed, and changes quotas for women. inefficiencies recommended Risk of transitional Allow higher salary payments systems becoming Staffing needs in new for qualified staff and permanent districts assessed and increased resources for service training initiated delivery. Costing Costing Costing Costing $0.46 $0.05 $0.1 $0.31 4. Functional capacities at Larger districts in Ministries in National policy and Training institutions All district financial local level strengthened. Somaliland with ad hoc Somaliland and curriculum for certifying accredited to carry out managers certified by Strengthen financial planning, training Puntland still exert district financial managers training; training courses Year V; advanced and budgeting, and accountability significant fiscal developed initiated refresher courses functions of district councils No significant training control over districts. available at accredited and financial management provided elsewhere Budget planning and Policies and procedures training institutes staff. Very limited execution capacity at district developed to ensure availability of level established, and staff transparency in use of funds Transparent transfer training institutions identified mechanism and District budgets linked to monitoring capacity Low level of federal—closed accounts developed at federal level education among provided for Year I budget targeted participants Costing Costing Costing Costing Decentralization, Intergovernmental Fiscal Relations, and Service Delivery Results Matrix—Federal Government Key actions and intermediate outcomes (all costs are in US$ millions) Target outcomes Baseline Constraints to for Year V 2006 achieving outcomes Year I Year II Year III - V by Year V $1.2 $0.12 $0.24 $0.84 5. District revenue increased. Somaliland and Limited ability of Stocktaking of all revenue FCC decision made on Build capacity to utilize Increase district revenue Puntland employ a poor population to sources employed by revenue assignments new systems, and support through establishment of an diverse mix of revenue pay increased taxes districts carried out, and evolving revenue effective and equitable system sources and collection and fees success rates determined Training modules developed collection needs. for setting and collecting approaches with and delivered to address revenue. varying degrees of Limited capacity of Review of tax collection priority collection needs success. district staff to collect potential, including vertical and horizontal imbalances, Procurement of materials No formal means of Conflict over undertaken and equipment needed to revenue collection in authority to collect strengthen collection ability South-Central Somalia revenue, especially in Workshops set up among the South-Central districts to discuss revenue Revenue authority in place region collection issues and to guide the process prioritize needs Temporary measures for getting resources to lower levels designed to allow distribution of first tranche Costing Costing Costing Costing $1.5 $0.15 $0.3 $1.05 6. Data availability improved. Relevant ministries Ministries are Somali researchers Reports produced on a Institutionalize production Increase the availability of data collect data but do not reluctant and lack contracted to work with periodic basis, and trends of reports in relevant on district finances to produce reports. capacity to compile relevant ministries on report discussed with districts and ministries, research strengthen capacity to engage reports and make formats and production of ministries institutes, or local in financial planning more Data limited to annual them available. reports government association successfully. budgets and monthly financial reports Costing Costing Costing Costing $0.3 $0.03 $0.06 $0.21 Decentralization, Intergovernmental Fiscal Relations, and Service Delivery Results Matrix—Federal Government Key actions and intermediate outcomes (all costs are in US$ millions) Target outcomes Baseline Constraints to for Year V 2006 achieving outcomes Year I Year II Year III - V by Year V Total costing Total costing Total costing Total costing $4.56 $0.46 $0.92 $3.18 Decentralization, Intergovernmental Fiscal Relations, and Service Delivery Results Matrix—Somaliland Key actions and intermediate outcomes (all costs are in US$ millions) Target outcomes Baseline Constraints to for Year V 2006 achieving outcomes by Year I Year II Year III - V Year V 1. Functional capacities at Larger districts in Ministries still exert Curriculum developed for Training institutions All district financial local level strengthened. Somaliland with ad significant fiscal certifying district financial accredited to begin offering managers certified by Strengthen financial planning, hoc training control over districts. managers and providing training Year V; advanced and budgeting, and accountability refresher courses functions of district councils Very limited Policies and procedures available at accredited and financial management staff. availability of training developed to ensure training institutes institutions; low level transparency in use of funds of education among Transparent transfer targeted participants mechanism and monitoring capacity developed at federal level Costing Costing Costing Costing $0.6 $0.06 $0.12 $0.42 2. Targeting of transfers Simple transfer Simple system in New criteria, system, and Pilot transfers expanded to Transfer system fully improved. Improve new formula exists that Somaliland is unclear procedures for targeted an increased number of implemented and targeting of intergovernmental does not apply and difficult to transfers designed and districts reviewed transfers by applying a formula poverty or other administer. agreed to that is tied to poverty reduction outcome-oriented goals. targeting criteria. Limited access to Tied block grants for service Decentralization, Intergovernmental Fiscal Relations, and Service Delivery Results Matrix—Somaliland Key actions and intermediate outcomes (all costs are in US$ millions) Target outcomes Baseline Constraints to for Year V 2006 achieving outcomes by Year I Year II Year III - V Year V poverty data for delivery piloted in more targeting advanced districts Costing Costing Costing Costing $0.18 $0.02 $0.04 $0.12 3. Lean and efficient staffing. Most large districts in Significant resistance Civil Service Commission Job-retraining initiated in Staff downsizing Taking into consideration Somaliland have up on the part of staff due finalized current pilot districts initiated in districts in quotas for women, reduce the to twice as many staff to a lack of alternative decentralization push and is which staff are prepared level of district government as they need. job opportunities working with districts to Work with CSC continued for departure staff to allow higher salary conduct functional reviews in additional districts payments for qualified staff and Policy under way to and recommend rightsizing Additional retraining in increased resources for service decentralize service based on initial feedback. Staffing reviewed in new districts rolled out delivery. delivery staff districts; changes recommended Costing Costing $0.02 Costing Costing $0.2 $0.04 $0.14 4. District revenue increased. Revenue collection Limited ability of poor Stocktaking of all revenue New taxation law finalized Capacity to utilize new Increase district revenue centralized but population to pay sources employed by and approved systems built, and generating capacity through employing a diverse increased taxes and fees districts undertaken, and evolving revenue establishment of an effective mix of revenue success rates determined Revenue authority collection needs attended and equitable system for setting sources and No mapping of property redesigned, and capacity to and collecting revenue and collection approaches or reporting of income, Review of tax collection needs identified; training decentralizing adequate staff. with varying degrees and limited capacity of potential, including vertical modules developed and of success district staff to collect and horizontal imbalances, delivered to address priority carried out collection needs Workshops set up among Procurement of materials districts to discuss revenue and equipment needed to collection issues and strengthen collection ability prioritize needs Decentralization, Intergovernmental Fiscal Relations, and Service Delivery Results Matrix—Somaliland Key actions and intermediate outcomes (all costs are in US$ millions) Target outcomes Baseline Constraints to for Year V 2006 achieving outcomes by Year I Year II Year III - V Year V Temporary measures for getting resources to lower levels designed to allow distribution of first tranche Costing Costing Costing Costing $0.4 $0.04 $0.08 $0.28 5. Data availability improved. Relevant ministries Ministries are reluctant Somali researchers to work Reports produced on a Production of reports Increase the availability of data collect data, but do and lack capacity to with relevant ministries on periodic basis and trends institutionalized in on district finances to not produce reports. compile reports and report formats and discussed with districts and relevant ministries, strengthen capacity to more make them available. production of reports ministries research institutes, or successfully engage in financial Data limited to local government planning. annual budgets and association monthly financial reports CBS has limited capacity to collect relevant data. Costing Costing Costing Costing $0.1 $0.01 $0.02 $0.07 Total costing Total costing Total costing Total costing $1.48 $0.15 $0.3 $1.03 Decentralization, Intergovernmental Fiscal Relations, and Service Delivery Results Matrix—Puntland Key actions and intermediate outcomes (all costs are in US$ millions) Target outcomes Baseline Constraints to for Year V 2006 achieving outcomes by Year I Year II Year III - V Year V Decentralization, Intergovernmental Fiscal Relations, and Service Delivery Results Matrix—Puntland Key actions and intermediate outcomes (all costs are in US$ millions) Target outcomes Baseline Constraints to for Year V 2006 achieving outcomes by Year I Year II Year III - V Year V 1. Expenditure and revenue Some basic transfer Limited access to Revised expenditure and Pilot transfers expanded to Transfer system fully assignments. system exists in poverty data for revenue assignments agreed an increased number of implemented and Clarify expenditure and revenue theory, based on targeting on, local government laws districts reviewed assignments, establish system surcharges at the amended, awareness of new for intergovernmental transfers Bossaso port, but Limited capacity to changes raised among district Awareness raising based on appropriate criteria there is no reporting budget and report at councils campaign continued to tied to poverty reduction goals, on this system, and district level inform district councils of and clarify existing legal its workings remain Criteria, system, and rights and responsibilities framework. unclear. The system procedures for targeted is not based on transfers based on revised poverty- or other law designed and agreed to outcome-oriented targeting criteria. Tied block grants for service delivery piloted in one or two districts Costing Costing Costing Costing $0.2 $0.02 $0.04 $0.14 2. Functional capacities at Budgets controlled District budgets Current capacity at district Training activities scaled All district financial local level strengthened. by MoF, which controlled entirely by level assessed, and needs up managers certified by Strengthen financial planning, approves district central government identified Year V, advanced and budgeting, and accountability budget Policies and procedures refresher courses functions of district councils Very limited Curriculum for certifying developed to ensure available at accredited and financial management staff. No closed accounts availability of training district financial managers transparency in use of training institutes or reporting back institutions developed funds Transparent transfer Limited capacity for Low level of education Training activities initiated mechanism and public financial among targeted for a limited number of staff monitoring capacity management, and no participants developed at federal level significant training provided Costing Costing Costing Costing $0.6 $0.06 $0.12 $0.42 Decentralization, Intergovernmental Fiscal Relations, and Service Delivery Results Matrix—Puntland Key actions and intermediate outcomes (all costs are in US$ millions) Target outcomes Baseline Constraints to for Year V 2006 achieving outcomes by Year I Year II Year III - V Year V 3. District revenue increased. 95 percent of Limited ability of poor Stocktaking of all revenue Revenue authority Capacity to use new Increase district revenue by revenue collected population to pay sources employed by districts restructured and resized systems built, and establishing an effective and through trade tax, increased taxes and fees undertaken, and success rates with clearly defined evolving revenue equitable system for setting and primarily from the determined mandate collection needs attended collecting revenue. Bossaso port Limited capacity of to district staff to collect Review of tax collection New taxation law approved Diverse mix of potential finalized, including revenue collection Conflict over authority vertical and horizontal Training modules approaches with to collect revenue imbalances developed and delivered to varying degrees of address priority collection success Workshops set up among needs districts to discuss revenue collection issues and Procurement of materials prioritize needs and equipment needed to strengthen collection ability Temporary measures for getting resources to lower levels designed so that first tranche can be distributed Costing Costing Costing Costing $0.4 $0.04 $0.08 $0.28 4. Data availability improved. Relevant ministries Ministries reluctant and Somali researchers Reports produced on a Production of reports Increase the availability of data collect data, but do lack capacity to contracted to work with periodic basis, and trends institutionalized in on district finances to not produce reports. compile reports and relevant ministries on report discussed with districts and relevant ministries, strengthen capacity to more make them available formats and production of ministries research institutes, or successfully engage in financial Data limited to reports local government planning. annual budgets and associations monthly financial reports Costing Costing Costing Costing $0.1 $0.01 $0.02 $0.07 Decentralization, Intergovernmental Fiscal Relations, and Service Delivery Results Matrix—Puntland Key actions and intermediate outcomes (all costs are in US$ millions) Target outcomes Baseline Constraints to for Year V 2006 achieving outcomes by Year I Year II Year III - V Year V Total costing Total costing Total costing Total costing $1.3 $0.13 $0.26 $0.91 Procurement Results Matrix—Federal Government Key actions and intermediate outcomes (all costs are in US$ millions) Target outcomes Baseline Constraints to for Year V 2006 achieving outcomes by Year I Year II Year III - V Year V 1. Procurement law and No federal No federal procurement Hire a consulting firm for Enact and enforce the regulations. procurement regulatory framework one year to produce (1) federal procurement law. A federal procurement law and regulations or including standard federal procurement law; (2) procurement regulations in place standard procurement bidding documents federal procurement at the federal government level documents regulations; (3) standard bidding documents, and (4) No procurement law procurement training in regions outside program (both short and Puntland and long term). Somaliland 2. Procurement institutions. No central tender No procurement policy Create federal-level Procurement units in place All institutions fully Tender committee and board and entity procurement authority. in line ministries established and functional procurement authority at federal procurement level and in all public entities, authority at federal Weak capacity for Establish central tender federal procurement oversight level to administer enforcement of laws or board. authority,. federal procurement procurement process fighting corruption complaints review boards and award contracts; Establish federal procurement complaints No federal review boards. procurement complaints board 3. Capacity building. Strong No procurement No public institutions Recruit procurement unit Continue training Training of government procurement capacity developed capacity or public servants staff. government staff. staff continued Weak capacity of No or limited number Carry out short-term On-the-job training of staff On-the-job training of local private sector of contractors, suppliers training program for of procurement institutions staff of procurement agents to undertake of large equipment procurement institutions. including the procurement institutions including the large-scale contracts oversight authorities by the procurement oversight No banking system for Hire a procurement agent procurement agent teams authorities by the facilitation of payments with procurement teams to procurement agent teams to foreign contractors support TFG for 3–4 years and suppliers in the implementation of procurement activities under the Trust Fund. Total costing Total costing Total costing Total costing $2.85 $0.25 $0.55 2.05 Procurement Results Matrix—Somaliland Key actions and intermediate outcomes (all costs are in US$ millions) Target outcomes Baseline Constraints to for Year V 2006 achieving outcomes by Year I Year II Year III - V Year V 1. Procurement law and Procurement law in Hire a consulting firm for Amend existing regulations. place in Somaliland one year to (a) revise procurement law, and State procurement laws and procurement laws, (b) publish procurement procurement regulations in place No procurement produce procurement regulations. regulations or regulations, (c) produce standard procurement standard bidding documents documents, and (d) develop a procurement training program (both short- and long-term) 2. Procurement institutions. A Central tender board No procurement policy Elevate central tender board All institutions fully tender committee and for administering entity(ies) to a procurement oversight established and functional procurement unit in all public procurement process authority. entities; state procurement and awarding Low capacity for complaints review boards contracts exists enforcement of laws or Strengthen existing fighting corruption ministerial tender Ministerial tender committees. committees with limited powers for Create procurement units in administering public entities. procurement process and awarding contracts 3. Capacity building. Strong Low procurement Low wages of civil Recruit procurement unit Continue training local Training of government procurement capacity developed capacity service staff. government staff. staff continued Weak capacity of Limited number of Carry out short-term On-the-job training of staff On-the-job training of local private sector contractors and training program for of procurement institutions staff of procurement agents to undertake suppliers of large procurement institutions. including the procurement institutions including the large-scale contracts equipment oversight authorities by the procurement oversight Hire a procurement agent procurement agent teams authorities by the Extremely weak with procurement teams to procurement agent teams banking system for support the state in the facilitation of payments implementation of to foreign contractors procurement activities under and suppliers the Trust Fund. Total costing Total costing Total costing Total costing $1.425 $0.125 $0.275 $1.025 Procurement Results Matrix—Puntland Key actions and intermediate outcomes (all costs are in US$ millions) Target outcomes Baseline Constraints to for Year V 2006 achieving outcomes by Year I Year II Year III - V Year V 1. Procurement law and Procurement law in Hire a consulting firm for 1 Amend existing regulations. place in Somaliland year to (a) revise procurement law, and State procurement laws and procurement laws, (b) publish procurement procurement regulations in place No procurement produce procurement regulations. regulations or regulations, (c) produce standard procurement standard bidding documents documents, and (d) develop a procurement training program (both short- and long-term) 2. Procurement institutions. Central tender board No procurement policy Elevate central tender board All institutions fully A tender committee and for administering entity(ies) to a procurement oversight established and functional procurement unit in all public procurement process authority. entities; state procurement and awarding Weak capacity for complaints review boards contracts enforcement of laws or Create ministerial tender fighting corruption committees. No ministerial tender committees for Create procurement units in administering public entities. procurement process and awarding contracts 3. Capacity building. Strong Low procurement Low wages of civil Recruit procurement unit Continue training local Training of government procurement capacity developed capacity service staff. government staff. staff continued Weak capacity of Limited number of Carry out short-term On-the-job training of staff On-the-job training of local private sector contractors and training program for of procurement institutions staff of procurement agents to undertake suppliers of large procurement institutions. including the procurement institutions, including the large-scale contracts equipment oversight authorities by the procurement oversight Hire a procurement agent procurement agent teams authorities by the Extremely weak with procurement teams to procurement agent teams banking system for support the state in the facilitation of payments implementation of to foreign contractors procurement activities under and suppliers the Trust Fund. Total costing Total costing Total costing Total costing $1.425 $0.125 $0.275 $1.025 Financial Sector Development Results Matrix—Federal Government Key actions and intermediate outcomes (all costs are in US$ millions) Target outcomes Baseline Constraints to for Year V 2006 achieving outcomes Year I Year II Year III - V by Year V 1. Central banking. An No federal central Nascent federal Commence capacity building Enact central bank law. Commence physical autonomous central bank that is bank governing structure for licensing and supervising rebuilding of central banks. fully equipped to carry out its banks and money transmitters. Pass prudential monetary and financial sector Unresolved political regulations. Assume basic monetary and regulatory and supervisory status of Somaliland supervision functions. responsibilities Design interim payments Lack of legislative system. Expand monetary and framework for central supervisory responsibility. bank Restructure existing regional central banks in Somaliland and Puntland to exit from commercial banking. Undertake currency reforms Costing Costing Costing $8.85 Staff: $0.25 Seed capital: $2.5 Technical assistance: $0.3 Physical infrastructure: $0.25 Technology: $0.25 Technical assistance: $0.3 Domestic currency reforms: $5 Redenominate local currency, Only one local Effective government Government establishes law Introduce new 10-shilling Increase amount of local and have at least 3 currency widely supported by and order and a central bank. note (equal to 10,000 old currency in circulation in denominations in circulation. denomination of the population needs Somali shillings) and ½ line with growth in 1,000 shillings (worth to be in place to and 1 shilling coins. economic activity, and gain US7¢), leading to ensure acceptance of significant seignorage from serious inefficiencies new local currency. increasing currency in making small- and outstanding.. medium-size transactions. Financial Sector Development Results Matrix—Federal Government Key actions and intermediate outcomes (all costs are in US$ millions) Target outcomes Baseline Constraints to for Year V 2006 achieving outcomes Year I Year II Year III - V by Year V Conduct monetary policy to There are no No commercial banks Some commercial banks Reserve requirements Limited amount of Treasury maintain price stability. commercial banks and public distrust of established with central bank are securities issued to financial with deposits and both commercial started. institutions and general loans and no treasury banks and public securities. Hence, no government mechanisms through which to pursue monetary policy, other than the direct injection/withdrawal of local currency. 2. Commercial banking. One private Lack of legislative Enact commercial bank law. Conduct annual on-site Encourage rural expansion Private financial institutions that commercial bank framework for inspection of each new of private financial are sound, efficient, and registered by regional commercial banks Pass prudential licensing bank. institutions that are sound, competitive authorities in regulations. efficient, and competitive. Puntland Low public Develop international confidence in public Commence monthly accounting and auditing institutions performance reporting of standards. commercial banks and money transmitters. Costing Costing $0.25 Technical assistance: $0.25 3. Access to finance. Financial No national access to Public discomfort Encourage banks to lend to Small business Broaden and deepen the institutions, instruments, and finance program for with interest rate private sector. development fund financial sector with a wider services that meet the needs of commercial range of financial services the government, NGOs, enterprises Public expectation of Pass prudential licensing Credit lines and and products. businesses, women, and public/donor grants regulations for non-bank guarantees schemes households in both rural and financial institutions. Introduce licensing and urban communities Prepare national prudential regulations for Commence capacity building microfinance policy. microfinance. of existing MFIs and/or Financial Sector Development Results Matrix—Federal Government Key actions and intermediate outcomes (all costs are in US$ millions) Target outcomes Baseline Constraints to for Year V 2006 achieving outcomes Year I Year II Year III - V by Year V development of new MFIs. Develop legal and regulatory framework for Provide financial sector– insurance sector. related training and business development services. Support women’s entrepreneurship networks to enable access to resources. Costing Costing Costing Costing $4.0 Technical assistance: $0.5 Loan funding: $1.5 Technical assistance: $1.5 Technical assistance: $0.5 Total costing Total costing Total costing Total costing $13.1 $0.5 $2.8 $9.8 Financial Sector Development Results Matrix—Somaliland Key actions and intermediate outcomes (all costs are in US$ millions) Target outcomes Baseline Constraints to for Year V 2006 achieving outcomes Year I Year II Year III - V by Year V 1. Central banking. Regional central bank Nascent federal Capacity building for Nationally coordinated Existing regional central governing structure nationally coordinated prudential regulations for bank restructured to exit licensing and supervision of regional central bank from commercial banking Unresolved political banks and money transmitters designed and status of Somaliland commenced implemented Nationally coordinated monetary and supervisory Lack of legislative responsibility expanded framework for central bank Costing Costing Costing Financial Sector Development Results Matrix—Somaliland Key actions and intermediate outcomes (all costs are in US$ millions) Target outcomes Baseline Constraints to for Year V 2006 achieving outcomes Year I Year II Year III - V by Year V $4.425 $0.275 $4.15 2. Commercial banking. No commercial banks Lack of legislative Nationally coordinated Annual on-site inspection Rural expansion of private framework for commercial bank law enacted, of new banks conducted financial institutions that are commercial banks and commercial banks sound, efficient, and established International auditing and competitive encouraged Low public accounting standards confidence in public Prudential licensing implemented institutions regulations enforced Monthly performance reporting of commercial banks and money transmitters commenced Costing Costing $0.125 $0.125 3. Access to finance. No access to finance Public discomfort Commercial banks encouraged Small business Financial sector broadened program for with interest rate to lend to private sector development fund and deepened with a wider commercial established range of financial services enterprises Public expectation of Prudential licensing and products public/donor grants regulations enforced for non- Credit lines and Women in particular bank financial institutions guarantees schemes Licensing and prudential have limited access to developed regulations for microfinance finance Capacity building of existing introduced MFIs and/or development of Regional microfinance new MFIs policy developed Legal and regulatory framework for insurance Financial sector–related sector developed training and business development services Women’s entrepreneurship provided networks to enable access to resources supported Financial Sector Development Results Matrix—Somaliland Key actions and intermediate outcomes (all costs are in US$ millions) Target outcomes Baseline Constraints to for Year V 2006 achieving outcomes Year I Year II Year III - V by Year V Costing Costing Costing Costing $2.0 $0.25 $1.0 $0.75 Total costing Total costing Total costing Total costing $6.55 $0.25 $1.4 $4.9 Financial Sector Development Results Matrix—Puntland Key actions and intermediate outcomes (all costs are in US$ millions) Target outcomes Baseline Constraints to for Year V 2006 achieving outcomes by Year I Year II Year III - V Year V 1. Central banking. Regional central bank Nascent federal Capacity building for Nationally coordinated Existing regional central governing structure nationally coordinated prudential regulations for bank restructured to exit licensing and supervision of regional central bank from commercial banking Unresolved political banks and money transmitters designed and status of Somaliland commenced implemented Nationally coordinated monetary and supervisory Lack of legislative responsibility expanded framework for central Costing bank Costing Costing $4.425 $0.275 $4.15 2. Commercial banking. One private Lack of legislative Nationally coordinated Annual on-site inspection Rural expansion of commercial bank framework for commercial bank law enacted, of new banks conducted private financial registered by regional commercial banks and commercial banks institutions that are sound, authorities established International auditing and efficient, and competitive Financial Sector Development Results Matrix—Puntland Key actions and intermediate outcomes (all costs are in US$ millions) Target outcomes Baseline Constraints to for Year V 2006 achieving outcomes by Year I Year II Year III - V Year V Low public confidence accounting standards encouraged in public institutions Prudential licensing implemented regulations enforced Monthly performance reporting of commercial banks and money transmitters commenced Costing Costing $0.125 $0.125 3. Access to finance. No access to finance Public discomfort with Commercial banks encouraged Small business Financial sector program for interest rate to lend to private sector development fund broadened and deepened commercial established with a wider range of enterprises Public expectation of Prudential licensing financial services and public/donor grants regulations enforced for non- Credit lines and products Women in particular bank financial institutions guarantees schemes have limited access to developed Licensing and prudential finance Capacity building of existing regulations for MFIs and/or development of Regional microfinance microfinance introduced new MFIs policy developed Legal and regulatory Financial sector–related framework for insurance training and business sector developed development services provided Women’s entrepreneurship network to enable access to resources supported Costing Costing Costing Costing $2.0 $0.25 $1.0 $0.75 Financial Sector Development Results Matrix—Puntland Key actions and intermediate outcomes (all costs are in US$ millions) Target outcomes Baseline Constraints to for Year V 2006 achieving outcomes by Year I Year II Year III - V Year V Total costing Total costing Total costing Total costing $6.55 $0.25 $1.4 $4.9 Data Development Results Matrix—Federal Government Key actions and intermediate outcomes (all costs are in US$ millions) Target outcomes Baseline Constraints to for Year V 2006 achieving outcomes by Year I Year II Year III - V Year V 1. Improved federal Statistical delivery Lack of statistics Develop a draft statistical act Statistical Act approved A coherent and consistent statistical program. system has collection entity and by parliament federal statistical system is practically funding for data Allocate budget for statistical in place disappeared collection activities Statistical work program developed Increased use of statistics All statistical records, Lack of coordination, Hire qualified statisticians in evidence-based decision data processing and institutional Establish basic statistical making, planning, and equipment, and conflict Reestablish data collection physical infrastructure budgeting documents have been system ransacked and Data processing together Statistical system is fully destroyed Collect monthly exchange rate with required staff in operational data, data on remittances and place No data for national inflows from donors and Data on national income accounts are foreign NGOs Begin collecting import accounts and poverty are collected and export data by major collected products Limited data on trade, prices, Collect data on net financial inflows increases in local exist currency issued by the CB Data on exchange rates and some data on donor aid and NGO inflows exist Costing Costing Costing Costing $13.1 $3.2 $4.8 $5.1 2. Census. Preparation of the census Census under way Census conducted, and initiated results finalized Costing Costing Costing Costing $10.9 $0.9 $4.9 $5.1 3. Capacity building. Procurement for modern data Procured equipment Statistical infrastructure processing instruments installed improved completed Training of staff in Staff training under way technical issues and IT skills under way Costing Costing Costing Costing $3.7 $0.7 $1.5 $1.5 4. Data for macroeconomic No data for national Lack of statistics Collect monthly exchange rate Start collecting import Collect data on national policy. accounts, and limited collection entity and data, data on remittances and and export data by major income accounts. data on trade, prices, funding for data inflows from donors and products. financial inflows collection foreign NGOs Start collecting data on Start collecting gender poverty. There is a lack of disaggregated data. gender disaggregated data. Collect data on net increases in local There are statistics on currency issued by the exchange rates and central bank. some data on donor aid and NGO inflows. Total costing Total costing Total costing Total costing $27.7 $4.8 $11.2 $11.7 Data Development Results Matrix—Somaliland Key actions and intermediate outcomes (all costs are in US$ millions) Target outcomes Baseline Constraints to for Year V 2006 achieving outcomes by Year I Year II Year III - V Year V 1. Improved regional At the central level Dependency on Develop a draft statistical act Statistical act approved by A coherent and statistical program. there is a statistical piecemeal donor parliament consistent national department under the funding Allocate budget for statistical statistical system is in Ministry of Planning activities Statistical work program place Inadequate knowledge developed Regional proposed management Hire qualified statisticians Increased use of statistics but no qualified staff Establish basic statistical in evidence-based exist Lack of coordination, Reestablish data collection physical infrastructure decision making, and institutional system planning, and budgeting Weak institutional conflict Data processing together capacity to undertake with required staff in place Statistical system is fully national statistical operational initiatives (census, Basic macroeconomic, HH surveys) financial, and fiscal data are collected, compiled, Data system, and published collection, analysis, and publication of Basic social data (health, statistics practically education, water, and stopped by 1989 sanitation) are collected, compiled, and published Costing Costing Costing Costing $3.3 $0.8 $1.2 $1.3 2. Census. Preparation of the census Census under way Census conducted, and initiated results finalized Costing Costing Costing Costing $2.7 $0.2 $1.2 $1.3 3. Capacity building. Procurement for modern data Procured equipment Statistical infrastructure processing instruments installed improved completed Training of staff in Staff training under way technical issues and IT skills under way Costing Costing Costing Costing $1.0 $0.2 $0.4 $0.4 4. Data for macroeconomic No data for national Lack of statistics Collect monthly exchange rate Start collecting import and Collect data on national policy. accounts, and limited collection entity and data, data on remittances and export data by major income accounts data on trade, prices, funding for data inflows from donors and products financial inflows collection foreign NGOs Start collecting data on Start collecting gender poverty There is a lack of disaggregated data gender disaggregated data Collect data on net increases in local currency There are statistics on issued by the central bank exchange rates and some data on donor aid and NGO inflows Total costing Total costing Total costing Total costing $7.0 $1.2 $2.8 $3.0 Data Development Results Matrix—Puntland Key actions and intermediate outcomes (all costs are in US$ millions) Target outcomes Baseline Constraints to for Year V 2006 achieving outcomes Year I Year II Year III - V by Year V 1. Improved At the central level Dependency on Develop a draft statistical act Statistical act approved by A coherent and regional statistical there is a statistical piecemeal donor parliament consistent national program. department under the funding Allocate budget for statistical statistical system is in Ministry of Planning activities Statistical work program place Inadequate developed Regional proposed but knowledge Hire qualified statisticians Increased use of statistics no qualified staff exist management Establish basic statistical in evidence-based Reestablish data collection physical infrastructure decision making, Weak institutional Lack of coordination, system planning, and budgeting capacity to undertake and institutional Data processing together with national statistical conflict required staff in place Statistical system is fully initiatives (census, HH operational Surveys) Basic macroeconomic, financial, and fiscal data are Data system, collection, collected, compiled, and analysis, and published publication of statistics practically stopped by Basic social data (health, 1989 education, water, and sanitation) are collected, compiled, and published Costing Costing Costing Costing $3.3 $0.8 $1.2 $1.3 2. Census. Preparation of the census Census under way Census conducted, and initiated results finalized Costing Costing Costing Costing $2.7 $0.2 $1.2 $1.3 3. Capacity Procurement for modern data Procured equipment installed Statistical infrastructure building. processing instruments improved. completed Training of staff in technical issues and IT skills under way Staff training under way Costing Costing Costing Costing $1.0 $0.2 $0.4 $0.4 4. Data for No data for national Lack of statistics Collect monthly exchange rate Start collecting import and Collect data on national macroeconomic accounts and limited collection entity and data and data on remittances and export data by major products income accounts policy. data on trade, prices, funding for data inflows from donors and foreign financial inflows collection NGOs Start collecting gender Start collecting data on disaggregated data poverty There is a lack of gender disaggregated Collect data on net increases data in local currency issued by the central bank There are statistics on exchange rates and some data on donor aid and NGO inflows Total costing Total costing Total costing Total costing $7.0 $1.2 $2.8 $3.0 Costing Summary by Activities and Regions Year I Year II Year III - V Total Macroeconomic Policy Framework Federal Government 7.2 5.9 20.6 33.7 Somaliland 3.6 3.0 10.8 17.4 Puntland 3.6 3.0 10.8 17.4 Public Financial Management Federal Government 2.3 1.7 0.1 4.0 Somaliland 1.8 1.3 0.1 3.2 Puntland 1.8 1.3 0.1 3.2 Civil Service Federal Government 0.03 0.3 1.0 1.3 Somaliland 0.1 0.3 1.2 1.6 Puntland 0.5 0.6 0.4 1.5 Decentralization, Intergovernmental Fiscal Relations, and Service Delivery Federal Government 0.5 0.9 3.2 4.6 Somaliland 0.2 0.3 1.0 1.5 Puntland 0.1 0.3 0.9 1.3 Procurement Federal Government 0.3 0.6 2.1 2.9 Somaliland 0.1 0.3 1.0 1.4 Puntland 0.1 0.3 1.0 1.4 Financial Sector Development Federal Government 0.5 2.8 9.8 13.1 Somaliland 0.3 1.4 4.9 6.6 Puntland 0.3 1.4 4.9 6.6 Data Development Federal Government 4.8 11.2 11.7 27.7 Somaliland 1.2 2.8 3.0 7.0 Puntland 1.2 2.8 3.0 7.0 Grant Total 30.3 42.3 91.7 164.3 Section Break (Next Page) ANNEXES Section Break (Next Page) Annex 1. District Revenue and Expenditure, 2005 (million Somaliland shillings) Category A Category B Category C Category D Gebiley Oodweyne Sheekh Xasan Lughaya Geele Revenue category Tax category Goods 2,538.2 950.5 125.0 58.0 Of which 10% transfer 1,933.0 36.0 15.0 0 12.5% transfer 300.0 120.0 58.0 40.0 Land 242.3 156.0 42.0 0.0 License 92.0 16.0 11.0 5.0 Market 381.5 70.2 15.0 2.0 Agricultural production 24.0 11.0 12.0 0.0 Registration 5.0 2.3 15.0 0.0 Investments 0.0 0.0 25.0 0.0 Budget support 0.0 0.0 0.0 0.0 Unexpected revenue 22.0 17.0 5.0 6.0 Cash 0.0 0.0 0.0 0.0 Total revenue 3,305.0 1,223.0 250.0 71.0 In US$ millions 0.5508 0.2038 0.0417 0.0118 Expenditure category Wages and allowance 751.0 256.0 80.0 30.0 Pensions/liability 15.0 11.0 0.0 0.0 Maintenance 180.0 188.0 21.0 4.0 Fuel 315.0 201.0 22.0 13.0 Administrative costs 769.3 272.0 46.0 10.0 Health services 8.0 12.0 1.5 3.0 Investment capital cost 505.0 158.0 9.5 3.0 Counterpart fund for dev. projects 0.0 6.5 0.0 0.0 Welfare 92.0 15.5 6.0 6.0 Humanitarian assistance 227.7 20.0 3.0 0.0 Other assistance 62.5 10.0 0.0 0.0 Police 68.5 44.0 10.0 0.0 Political stability 303.0 15.0 41.0 0.0 Contingency 8.0 14.0 10.0 2.0 Repayment of loans 3,305.0 20.0 30.0 0.0 Cash balance 0.0 0.0 0.0 0.0 Reserve 0.0 0.0 0.0 0.0 Total expenditure 3,305.0 1,223.0 250.0 71.0 In US$ millions 0.5508 0.2038 0.0417 0.0118 Annex 2. Agencies Leading Data Collection in Somalia Lead agency Data Type Source/coverage Frequency Availability Academy for Socioeconomic Sample survey, Somaliland 2004–5 Peace and assessments Development CARE Early warning indicators Monitoring District (24) Monthly > 1998 Centre for Socioeconomic Sample survey, South Central 2004–5 Research and assessments Dialogue (CRD) Food and Water and Land Information Monitoring Primary/secondary; Agriculture System national, regional, Organization districts (FAO) Vegetation (NDV index) Monitoring Satellite images Every 10 days > 1981 Famine Early Early warning indicators Monitoring District (24) Monthly > 1998 Warning System Rainfall Monitoring 10 stations, satellite (FEWS) imagery Food Security Crop production Monitoring District/regional > 1982 Analysis Unit (excluding (FSAU) 1993–98) Regional/district population Monitoring District/regional > 1998 under livelihood crisis Livelihood baseline data Monitoring Food economy zones (22) Monthly > 1998 Vegetation (NDV index) Monitoring Satellite images Every 10 days > 1981 Market prices (30 items) with Monitoring 36 markets Weekly > 1998 FEWS Health, nutrition, demographic Monitoring Health information Monthly system International Early warning indicators Monitoring District (24) Monthly > 1998 Committee of the Red Cross Ministries of Public finance Administrative Somaliland, Puntland Annual 2004 Finance data Municipalities Municipal finance Administrative Hargeisa, Bosasso, Burao, Annual 2004–5 data Boroma Puntland Socioeconomic Sample survey, Puntland 2004–5 Development and assessments Research Centre (PDRC) United Nations Population estimates and Planning National/regional/urban Yearly 1995–2015 Development projections and nonurban and by Program (UNDP) gender Reproductive health statistics Primary survey Sample survey/Somalia Only 1 survey 2004 (mother and child health care, fertility, prevalence of FGM, awareness on HIV/AIDS) Socioeconomic (demographic, Primary survey National, urban, Only 1 survey 2002 housing, employment, income, nonurban, and gender health facilities, water sources, disaggregated through education facilities, sample survey covering communication, participation all regions of Somalia of women in household decision making, environmental concerns) Annex 2. Agencies Leading Data Collection in Somalia Lead agency Data Type Source/coverage Frequency Availability Demographic and Primary survey 9 Somali regions through Only 1 survey 1995–98, 2004 socioeconomic data at census settlement levels Number of fishermen, fishing Assessment Somaliland, Puntland, Only 1 2004/2005 fleet, fish production South and Central assessment Somalia Poverty, vulnerability, and Primary survey Somalia (census covering Only 1 survey 2005/2006 governance indicators all settlements) UNDP/airport Flights, passenger, and cargo Administrative Major airports Daily 2004 + authorities data UNDP/line Electricity generation, Administrative Somaliland, Puntland, Quarterly/semi- 2004 + ministries generator capacity, and prices data South and Central annual Somalia Number and type of health Administrative Somaliland, Puntland, Quarterly/semi- 2004+ facilities and personnel, disease data South and Central annual cases Somalia Number of schools, students, Administrative Somaliland, Puntland, Quarterly/semi- 2004 + and teachers by gender data South and Central annual Somalia UNDP/line Telecommunication Administrative Somaliland, Puntland, Quarterly/semi- 2004+ ministries/STA data and survey South and Central annual Somalia UNDP/ministries Consumer prices (110 items) Administrative Mogadishu, Hargeisa, Weekly 2004 + of national data Bosasso, Garowe planning UNDP/ministries Exchange rates Administrative Somaliland, Puntland, Daily 2004 + of planning data South and Central Somalia UNDP/port Trade (export and import Administrative Somaliland, Puntland, Daily 2004+ authorities through major ports) data South and Central Somalia United Nations Quick count of population at Primary survey 3–4 districts to establish Only 1 survey 2005/2006 Population Fund district level census methodology (UNFPA) UNICEF HIV/AIDS Survey HIV/AIDS KAP survey 2003, 2004 Maternal and child health care, Survey MICS 2000, 2005 malnutrition and education, knowledge on HIV/AIDS, water and sanitation Number and type of health Survey EPI + polio coverage Yearly facilities and personnel, disease survey cases Primary education (schools, Survey Primary school survey Yearly > 1997 students, and teachers by gender) Social Survey Child protection survey Water Monitoring Water sources Health, nutrition, demographic Monitoring Health information Monthly system Early warning indicators Monitoring District (24) Monthly > 1998 Nutrition, health, Survey Nutrition survey Monthly > 1998 socioeconomic World Food Gender Survey Gender baseline survey Planned Programme (WFP) Nutrition Survey School feeding survey Pilot Early warning indicators Monitoring District (24) Monthly > 1998 World Health Demographic with UNDP Settlement/district 2000–5 Annex 2. Agencies Leading Data Collection in Somalia Lead agency Data Type Source/coverage Frequency Availability Organization Number and type of health Regional 2000, 2001 (WHO) facilities and personnel, disease cases Health, nutrition, demographic Monitoring Health information Monthly system Note: Most of the data collection undertaken by these administrations is supported by WB and UNDP under the Somalia Watching Brief and LICUS (Low-Income Countries Under Stress) Projects. Annex 3. Donor Contributions, 2000–2004 (US$) 2000 2001 2002 2003 2004 Actual Actual Actual Actual expenditure expenditure expenditure Pledges expenditure Pledges Australia 3,000 … 5,000 5,000 … 389,415 Belgium 700,000 … 1,500,000 1,450,893 1,132,193 1,200,000 Canada 78,600 895,800 1,716,622 2,029,331 … 2,077,093 Denmark 4,394,100 2,849,800 4,587,411 6,966,292 … 4,583,517 EC 44,560,500 21,082,109 37,661,830 120,647,321 24,566,979 16,074,074 ECHO … 2,039,300 4,250,000 10,044,643 12,400,794 11,296,296 Egypt … 1,000,000 1,000,000 1,600,000 … … FAO … 974,800 348,100 658,000 670,000 12,788,441 Finland 703,200 842,000 1,089,991 1,459,376 1,614,322 2,211,107 France … … 71,447 76,200 … … Germany 1,411,500 585,400 2,130,744 1,778,000 1,682,000 2,248,823 GFATM … … … 13,982,511 … 7,325,197 ILO … 1,500,000 1,408,579 1,014,281 1,014,281 1,824,725 IOM … 9,100 722,238 … … … Italy 21,041,100 19,133,800 9,583,039 17,850,435 19,745,667 7,777,778 Japan 3,125,700 8,107,900 6,438,300 1,072,680 1,600,000 2,900,000 Netherlands 5,171,700 3,212,700 4,548,000 3,631,000 4,482,716 5,903,838 NGO … … 20,631,176 8,542,969 … 7,638,859 Norway 3,717,200 4,729,254 8,300,000 8,971,783 … 13,736,817 OCHA … 979,800 … 468,500 … 1,152,963 Sweden 4,136,800 5,403,700 5,403,700 6,633,092 … 10,578,750 Switzerland 1,234,300 … 839,538 521,221 521,221 735,267 UNDP … 8,515,800 4,751,362 4,678,188 … 4,578,569 UNEP … N/A 682,715 19,750 … … UNESCO … 920,000 1,241,323 320,000 … … UNFPA … … 200,000 622,207 … … UN-HABITAT … … … 215,000 1,148,797 9,358,902 UNHCR … 1,733,500 6,803,616 5,777,228 5,777,248 6,273,223 UNICEF … 15,797,800 4,327,000 6,623,278 … 8,215,714 UNIFEM … … 146,451 151,365 … … UK 2,556,000 4,000,100 2,832,000 6,431,349 3,680,261 22,898,675 UNOPS … 434,100 … … … … UNV … … 32,000 65,000 65,000 65,000 USA 25,779,600 25,359,100 31,765,683 29,569,167 29,569,167 28,210,167 WFP … 3,641,400 2,205,322 1,184,071 8,300,000 22,415,197 WHO … 3,808,000 … 4,934,826 … 5,771,589 World Bank … … 522,684 1,609,443 1,609,443 2,072,420 WSP … 1,267,500 … … … … Total 118,613,300 138,822,763 167,745,871 271,604,400 119,580,089 222,302,416 Source: Somalia Aid Coordination Body (SACB). Annex 4. Field Assessments and Macroeconomic Policy Priorities As a part of the Joint Needs Assessment process, a group of experts visited different regions and districts of Somalia to discuss with local communities their views on the priorities for reconstruction in areas ranging from infrastructure and environment to macroeconomic policy and public resource use. Field assessments were undertaken in the form of questionnaires in remote as well as more accessible areas, expanding on the work done by technical experts who have previously visited the main cities and towns. By targeting various stakeholder groups, including women, youth, traditional and religious leaders, regional/district authorities, civil society, and business groups, the aim of the consultations was to create an opportunity for a wide-ranging set of actors to take an active role in improving their quality of life by defining a shared vision of their region’s future. Somaliland. The assessment on macroeconomic policy priorities is based on 122 responses from participants in four Somaliland districts (Awdal, Sahal, Hargeisa, and Todgheer). According to most participants, the first priority in policy formulation at the central level is macroeconomic stability, specifically economic growth, price stability, and employment creation. In regard to sources of public revenue, called-for priority actions comprise setting up well-administered land registration fees; improving collection of customs duties, inland revenues, and property fees; and upgrading licensing fees. Civil service reform ranks among the highest on the list of priority actions, including clarification of responsibilities for civil servants, proper recruitment, and appropriate human resources policy. In the area of microfinance, most people highlighted the necessity to provide financial services to the poor and the removal of financial constraints such as physical collateral. Another priority in the area of private sector development is trade liberalization, followed by creating an environment for foreign direct investment. According to Somaliland participants, other priorities include participating in the budgetary process, establishing decentralized tax collection, and reducing poverty through human development. Status of Women. According to participants, limited budget allocation and lack of development programs for women are the main obstacles to empowering Somaliland women. A key activity needed to achieve gender-sensitive policies is to allocate development budget to the Ministry of Family Affairs. Puntland. The assessment is based on responses from 121 participants in regions of Mudugh, Nugaal, Sanaag, Bari, Sool, and Karkaar. After law and order, the establishment of financial institutions and trade regulations are seen as the most important priority by respondents. According to Puntland participants, the Ministry of Finance, and the Ministry of Planning should have the responsibility to formulate, implement, and monitor economic policies. Revenue generation should be based on taxation and public finance. Civil service appointments should be based on individual merit. To create an environment conducive to private development, tax incentives should be offered, private ownership should be better protected, and laws and regulations should be put into effect. Central authorities should be involved in preparing the budget, and public resources should be transferred to programs aimed at poverty reduction. Budget allocation for women’s development needs to be increased. South-West Zone. The analysis on the South West zone is based on perspectives of the communities consulted in various districts (rural, nomadic, and urban) in the regions of Bay, Bakool, and Lower Shabelle. Fifty people participated in the assessment workshop. On the institutional side, the majority of participants believe that local authorities should have the responsibility to formulate, implement, and monitor economic policies, and about a quarter of the participants suggested that the federal government should have that responsibility. Development of the livestock sector is the economic priority, followed by agriculture, health, and water. On the criteria of hiring the civil service, communities believe that individual merit should be applied to all those jobs that require a formal education background. In regard to public budget, the majority of participants suggested that regional authorities should fully participate in budget formulation. Resources should be allocated according to national priorities with consideration of specific local needs. Budget should be allocated to support economic activities practiced predominantly by women. The responsibility of providing service delivery should be entirely vested with the district institutions. The relationship between regional authorities and federal government in resource allocation and management should be based on the principles of consultation and coordination. Benadir Zone. The assessment on economic priorities for the Benadir zone is based on questionnaires filled out by 52 representatives of local stakeholders. Participants believe that the economic policy of the country should be decided at the federal level and that municipalities are better placed for service delivery. The group identified nongovernmental organizations and other civil society groups as among the primary service providers. Participants suggested that the regional government should have the primary role in the budgetary process, but that other stakeholders should also contribute. The most critical support needed to help women in the Benadir zone is commercial loans.