Somalia: Time to Invest?

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Somalia is planning its second Somalia Investment Summit (SIS), scheduled to take place on April 6th-7th in Dubai, according to the Somalia Economic Forum, which is organising the event.

Mogadishu, Somalia (Picture credit: TedX Photos)

Mogadishu, Somalia (Picture credit: TedX Photos)

The summit aims to bring together more than 250 investors, industry partners, multinational companies and policymakers to promote business activity and investment in Somalia, and forge strategic partnerships that benefit the Somali economy.

It is expected to address ways to transform financial growth into sustained prosperity, including in the energy, telecommunications, finance and agricultural sectors.

The first Somali Reconstruction and Investment Conference and Exhibition was held in Nairobi, Kenya in May 2013 and focused on exploring investment opportunities in the Horn of Africa country.

Somalia could look doubtful as an investment destination. However, the economy has maintained reasonable levels of output throughout the country’s two-decade-long civil war. It has maintained an informal economy largely based on the export of livestock – mainly camels – and remittances of money from one of the world’s largest diasporas, estimated at over 5m living in North America, Europe and the Middle East. This group sends home billions of dollars annually. Despite continuing violence investors have come to Somalia looking to cash in on the rebuilding process and abundant natural resources.

Somalia is about the same size as France, and is endowed with uranium, iron ore, tin, gypsum, bauxite, copper, salt, natural gas and oil. It also exports fish, hides, charcoal and bananas. With the longest coastline on the African continent (3,025km), this could be a major hub between Africa and the Middle East. Gulf Arab states have started to make strategic investments in the country, with Saudi Arabia building livestock export infrastructure and the United Arab Emirates purchasing large tracts of farmland for commercial agriculture. The country is slowly overtaking the Gulf States dependence on its major source of livestock market – Australia.

The country of some 10m people badly needs investment in energy, manufacturing, finance, telecoms, infrastructure and agribusiness.

Innovative fields such as mobile technology have been taking off, although they still only impact a minority of the population (22.5 out of every 100 inhabitants have a mobile phone subscription in Somalia, significantly lower than the developing world average of 84.3).

Somalia has huge oil and gas potential, but “the current uncertainty surrounding federal and regional states and the lack of agreement over resource sharing and taxation means that it will be very difficult for that sector to take off until those issues are resolved,” notes Nick Haslam of advisory firm Adam Smith International. The second pillar of the President’s Six Pillar Strategy to stabilise the country is economic recovery. In line with this, Somalia aims to build a transparent, formalized, globally competitive economy that collects tax revenues. But, with political recovery and transition slowly underway, the country’s economy faces many challenges.

One is certification. The government does not have the capacity to participate in certification schemes or to provide authenticity documentation that would enable businesses to sell goods globally. Firms instead have to find unconventional, and often costly, workarounds.

Transport links are problematic; there are no direct flights between Mogadishu and Ethiopia, for example, although there are to Djibouti, Kampala and Nairobi. As a result, businesses have to go to great lengths to trade with other countries – businesses register in Dubai in order to get access to finance and so forth.

This also means that businesses are less transparent. “Who is behind certain business sectors? It’s like an onion. Every time you peel some layer, you discover other friends behind it without necessarily being very officially present,” according to Luca Alinovi, regional director of the Food and Agricultural Organization (FAO). In 2012, Somalia exported goods worth US$693m, according to data from the European Commission’s Directorate-General for Trade. While this represents a significant increase – in 2008, exports were less than half that number – the country still runs a large trade deficit. In 2012, its imports were valued at $1,818bn. It also exports less than other countries: Somalia is the 171st largest exporter in the world, and it has the fourth lowest GDP per capita, according to the CIA World Factbook.

Somalia is not a member of the World Trade Organization (WTO), compounding the difficulties local firms face when competing regionally and internationally. It is not a member of any regional economic blocs, and it has few formal trade deals with other nations. Regional partners often impose strict restrictions on Somalia, mainly out of security fears. The US and the European Union (EU) currently have no trade agreements with Somalia. Its biggest export market is to the UAE, which takes in more than half its total exports. Just three countries (UAE, Yemen and Oman) account for 82.5% of all exports, predominantly in livestock, out of Somalia.

Restoring the credibility of the currency, the Shilling, will also be crucial to economic development. The International Monetary Fund (IMF) has highlighted currency reform as a major priority, and the Central Bank has identified “the introduction of new and unified currency” for Somalia as one of its strategic goals for the next five years.

“There were (and still are) several versions of the same currency (Shilling) in circulation concurrently, and most of them are fake currencies,” the bank noted in its Strategic Plan 2013-2018.

There is a large black market for currency. Officially, Somalia’s shilling trades at around 1,200 to the US dollar, but it is about 15 times that rate on the black market.

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