Somaliland: Prospects for Economic Development and Future Priorities for Investment

 

Written by Adam Ismail Hassan

Dec 29, 2011 at 07:29 PM
1. INTRODUCTION
Although Somaliland is not recognized internationally it continues to be peaceful, relatively stable, with central administration, a multi-party political system, elected government, an active civil society and vibrant private sector. In the context of a post-conflict economic base and without international development aid, due to lack of international recognition, consecutive governments in Somaliland have to varying degrees succeeded in establishing functioning administrations, promoted peace, reconciliation and stability, and created positive and enabling environment for economic growth and social development. It is no secret that the bulk of state-rebuilding efforts and activities were initially focused more on peace and security rather than on building the capacities of public institutions to deliver basic services such as health, water and education to the poor and the vulnerable sections of the society, and those consecutive governments were not in a position to regulate the growing private and non-state sectors which filled in the vacuum left by the central government, after the collapse of the Somali state in 1991.
 

Having established peace, reconciliation and security Somaliland has now entered into a period where it needs to consolidate its achievements in terms of developing governmental institutions and functions, promoting economic growth and recovery as well as good governance and democratization. The new government headed by President Ahmed Mohamed Mohamoud (Silanyo) is expected to focus more on its core economic development activities and functions, including: formulating and implementing strategies, policies, regulatory frameworks and mechanisms etc. with a view to enable the right environment for economic recovery, livelihood improvements, employment creation, fair competition and equitable access to resources as well as investment opportunities. This article is a prelude to many future articles that I intend to write with a view to get away from the political morass and intellectual inept that has befallen on the academics of Somaliland who rarely write and/or debate about the pros and cons of the economy and the direction of the country in terms of socio-economic development and ways of improving the lives of its citizens. The article outlines the prospects of Somaliland’s economic development and future investment priorities with a view to elucidate how Somaliland is poised to take advantage of its peace and stability dividend and those opportunities offered by friendly countries and private investors from different parts of the world.

2. ROLE OF THE GOVERNMENT
It is important to emphasize the role of the new government which needs to set out clear policies and strategies which are in turn geared up towards economic development, social inclusion and poverty reduction. Indeed the new government’s main remits should include providing security, investing in human capital, and articulating and implementing a social policy focused on assistance to the vulnerable sections of the population and the elimination of poverty in all regions of the country. In order to achieve that the government should improve the capacity development of the public sector and seek to create an enabling environment for the activities of the private, and make effective use of aid to attract trade and investment, and put the economy on a sustainable path to recovery and growth.

In addition the government must commit itself to building on community level participation and effective management at the local level. The government must not see itself as the producer and manager of the economy, but rather as a regulator and promoter of the entrepreneurial energies of the people of Somaliland. It will only enter into a direct managerial role when social justice demands its presence and interventions. The government, through its public sector service providers (i.e. Ministries and semi-autonomous agencies), must act in partnership with all relevant economic actors including; private sector, NGOs, donors, UN organizations and the national and international investors to implement its economic development programs, and realize its vision for the country, as articulated by the ruling party (Kulmiye) during last year’s Presidential election, in which it won on that platform. Furthermore, as the legitimate representative of the people of Somaliland the key tasks and challenges of the government is to create the institutions and organizations that would embody principles and practices of democratization, accountability and good governance, and encourage the private sector to become the driving force behind sustainable economic development and improve the future prospects of the country.

One of the areas that the government must seek to mitigate is the large importers who are supposed to limit their business activities solely on wholesale and not get involved in retail business which puts legitimate small business at a competitive disadvantage. Setting out clear rules and regulations in terms of business license would mean that the government policies will encourage the formalization of the economy as a major contribution to the overall economic development of the country with a particular emphasis on medium, small and micro enterprises (MSMEs). In the meantime the government must strengthen the institutions that impact on private sector development within the formal economy to create a level playing field; improving enforcement, eliminating corruption and reducing red tape, bureaucracy and wastage because all these things tend to serve as a disincentive to foreign investment, and reduce government revenues. In addition to the above the government must understand that Somaliland’s economy is what is called cash economy or “dollarized economy”, which means that our economy is dependent on maintaining the exchange rate of both the local currency and the US Dollar at a stable level and this could be easily done by allocating a small reserve of less than US $2 million to maintain the supply and demand of both currencies (a whole article will be written on this issue, in which the Ministry of Finance seems to be oblivious).

3. PRIVATE SECTOR
While in most African countries, the state is the lead actor in the provision of essential public services, in Somaliland, it is the private sector that provides most of the basic services. Indeed in Somaliland private sector controls most of the economic and social services and infrastructure provision, including telecom services, energy (petroleum and electricity), hotels, construction companies, schools, clinics, pharmacies, transports, etc. For instance, Telecom services are 100% private, while about 96% of electricity and 80% of water are provided by private companies who were started to fill in the vacuum left by the collapse of the Somali state in 1991.

One of the major changes in Somaliland over the past decade has been the phenomenal growth of the private sector. Indeed, Somaliland’s private sector has experienced rapid growth that is more in line with the fast growing economies of Asia (China and India) during the past 10 years. Although there are no reliable statistical figures showing the scale of economic growth, it is estimated that in Somaliland, the economy has been growing between 8% and 11% for the past 5 years and had not been affected by the downturn in the global economy. Some of the main businesses that have been growing most include; remittances, telecommunications and Import-Export companies as well as the service sector like hotels and restaurants and small industries.

Although this growth has been closely linked to the processes of globalization another major factor is the spread of many Somalilanders in the Diaspora, as refugees, and the staggering amount of money, estimated between US $650 and $800 million that they remit annually back to the country. In the context of weak and often ineffectual public sector, the private sector has been playing an instrumental role in providing social services and shaping economic development and recovery. As market economy has replaced the centrally planned economy, development had become market-driven rather than government-led. The absence of restrictive government regulations and controls has tended to encourage competition and entrepreneurship. On the other hand, and somewhat paradoxically, lack of government regulations has allowed a handful of private companies to dominate essential sectors like food imports and telecommunications. Nevertheless, in Somaliland, the successes of the private sector could not be underestimated, and the future investment and growth prospects for the whole economy appear to be very promising, provided that the financial services and banking sectors are “unchained” and strengthened.

This vibrant private sector has not only moved into establishing basic markets such as wholesale and retail trading but has also entered into critical social services such as health and education as well as financial sectors. For example, there are private hospitals and clinics which offer health care provisions to the public and in education private schools and colleges run alongside the public ones. However both of these sectors need to be regulated by the government otherwise unscrupulous profiteers could cause more harm than good, which appears to be the case now in areas like private hospitals and clinics where there is no regulation whatsoever and the higher education where every tom, dick and harry could come, rent out a bungalow and call it a “university” without any regulations from the part of the Ministry of Education, whose lack of resolve to tackle such a failure was made apparent by the recent formation of “commission of higher education” which is not even worth to be called commission of higher education but rather a Ministerial Committee chaired by the Minister which is neither independent nor free from conflict of interest (a whole article is coming soon on this important subject).

In terms of the financial services it is remittance companies who provide basic banking provisions such as deposit and savings accounts in the absence of proper banking services. The success of the private sector in Somaliland has encouraged traders to penetrate markets in neighbouring countries and remained competitive. Given the success of the private sector in Somaliland it is believed that over-regulation is not the answer for economic development, however it is equally believed that free-market alone cannot meet the needs of the poor and the weak members of the society. To put it differently heavy regulation carries the risk of corruption, weak property rights, and state capture, just as private solutions have their limits in correcting for the market failures, hence both approaches can stunt growth and sustainable development, and that is why it is extremely important to find a balance between appropriate government regulations and thriving free markets.

4. FINANCIAL SECTOR
It is widely acknowledged that countries who tend to experience financial turmoil and collapse of their banking sector, as a result of prolonged civil conflict, find it very difficult to restart their financial sectors even long after the conflict had ended. This is so because the collapse of the central authority would mean that the international and domestic payments cease to function as existing financial institutions stop operating due to the chaos that usually follows the destruction of state institutions. Somaliland has gone through this process after the disintegration of the Somali state in 1991. It has been the informal financial sector that has led the economic recovery of Somaliland and this has been largely organized around the remittance or money transfer companies and their ability to transfer funds into and outside the country through informal networks. These service providers, however, do not provide the full range of financial services required for dynamic private sector-led recovery and growth. Consequently, private sector-led growth remains highly constrained unless a functioning banking system is developed to provide financial resources and other supporting banking services to underpin these investments.

This means that an efficient financial sector is a crucial enabler of economic growth and income generation. On the one hand government institutions will create the stable macro-economic environment that is vital for sustainable economic growth and private sector development. On the hand financial institutions are critical in channelling scarce resources to the areas in which they are most productive and in enabling transactions between savers and investors in financial intermediation. Hence it is imperative that the financial sector development should form one of the main pillars of the new government’s private sector development agenda by doing the following:

Creating a financial system that offers both businesses and individuals’ access to credit and other basic financial services.
Establishing the institutional basis for government to pursue appropriate macro and micro-economic policies and regulate the financial sector.

In the meantime Somaliland presents a huge strategic place to invest in, since it is regarded as the gateway to Africa and it is important that the government should offer a transparent legal framework that will provide financial and fiscal incentives to all genuine and serious foreign and domestic investors, and in particular, Somaliland must provide a high advantage to companies from fast growing Asian economic giants like China, India and Indonesia etc, who might be interested to invest in the country. Because, it is quite possible that Western companies are not willing to take the risks that investing in the region will entail that is why it is imperative for Somaliland not to shy away to invite companies from the above noted Asian countries, who are more willing to take the risks and invest in the country.

5. CREATING ENABLING ENVIRONMENT
Infrastructure development is a policy priority for Somaliland’s recovery and reconstruction. That is why it is extremely important for the government to create an enabling environment for investment and productive work based on strong and reliable infrastructure that are prerequisite for sustainable economic growth and development. Among these include; good roads, telecommunications, electricity and water etc. to promote important sectors like; agriculture, fishery, livestock, energy, health and education etc.

The experience of Somaliland for the past decade or so has shown that economic growth and sustainable development would require essential infrastructures to be established across the country. Hence there is a consensus in development economists on the need for investment in infrastructure as a means of creating employment and promoting growth and equity and to keep the government out of the business and services that private sector can deliver more efficiently. It is equally imperative that clear policies and strategies put forward by the government vis-à-vis the implementation of infrastructure projects which will be entrusted to the private sector, including international companies through, for example, Public Private Partnership (PPP) arrangements and these companies must be given incentives to invest in all infrastructure development projects across the country.

In order to fulfill such a role for the promotion of the private sector for service delivery and infrastructure development, the government will need to acquire the capacity for setting priorities, evaluating alternative policy options, and regulating and monitoring the activities of its implementing partners and managing infrastructure facilities. In considering the options, the government has to promote the use of labor-intensive methods to create employment and generate income. In this regard the government must be committed to creating the enabling environment for the operation of national and international firms that would implement its major development projects through performance-based contracting. International best practice must be drawn upon to promote the emergence of Somaliland’s investment portfolio. Timely preparation of infrastructure projects depends on an effective planning and the government, investors and donors should work together to attract reputable international firms into the country and promote joint ventures between capable local institutions and potential international firms.

In addition the government must be fully aware that the successful transformation of the economic fortunes for the people of Somaliland will depend on the capacity development of all economic actors (public, private and non-state sectors). In this regard the government must recognize the strengths and constraints of various actors and institutions that will be the key towards the successful rebuilding of the country and improving the livelihoods of its population.

6. INVESTMENT PRIORTY SECTORS
As mentioned in the investment law of the country priority shall be given to foreign investment only in those areas where they:

Put to productive use of Somaliland’s human and natural resources;
Introduce innovative and labour technology suited to the country’s conditions;
Generate new earnings or savings of foreign exchange, through exports, resource-based import substitution or service activities;
Contribute to regionally balanced and sustainable socio-economic development;

According to the Ministry of Commerce, Industry and Tourism (MOCIT) and based on the National Development Plan (2009 – 2014) there are sectors in the economy that are regarded as priority sectors, and the government is seeking to encourage foreign investment on those sectors, and these include:

Agriculture
Livestock
Fishery
Energy
Mineral resources

7. OTHER SECTORS FOR INVESTMENT
In addition to the above noted sectors that are prioritized for investment, there are, in the following section, other sectors in the economy of the country that are equally important for investment.

Exports
One of the most important areas that the government needs to promote and encourage is the export oriented enterprises with a view to increase exports while fulfilling domestic demand. However it is important to note that these export oriented enterprises become more competitive if they are going to succeed in international and domestic markets. In other words Somaliland has traditional areas of economic activity for exporting which can be developed further by making them more competitive, but it is equally important to encourage new entrepreneurial spirit and innovation. In order to achieve this, the government must establish Somaliland Export Promotion Agency (SEPA). This agency will serve as a source of market information, promote Somaliland products internationally, and work in close cooperation with current and on-going private sector development initiatives (See the table below).

Volume of Exports in 2010

Month Sorghum Kg Water Mellon Kg Maize Kg Soap Powder Kg Camel Hds Shoat Hds Oxen Hds Skins pcs Frank- incense kg Myrrh kg Sesame kg
Jan 55000 9000 100000 12000 7408 108707 9691 291700 5600 – -
Feb 48000 3000 320000 12000 10036 52082 8899 167124 200 19000 -
March 65000 80000 – - 4260 32976 2,812 252088 7000 1705 -
April 45500 5000 10000 12000 7930 69155 5862 218790 2044 – 43950
May 57000 5000 50000 12000 2223 34936 7280 199200 20468 10200 17000
June 7000 – - – - 87667 6921 130300 5460 – -
July 107000 29000 – - 5292 168923 8351 180200 1736 47350 -
Aug 7000 145000 – - 7845 95353 7825 201223 1680 1250 -
Sept 116000 75000 – - 4333 232018 13030 119820 – 4000 25000
Oct 140500 – - 103000 12516 457145 21971 254505 11144 1500 -
Nov 83500 3000 – 120000 1193 779157 20294 182400 – 22650 -
Dec 58000 – - 24000 3144 79194 6387 251200 – 225200 -

Total 789500 354000 480000 295000 66180 2197313 119323 2448550 55332 332855 85950
Source: Ministry of Commerce, Industry and Tourism (MOCIT)

Industry
Among the sectors that need to be invested include manufacturing or industry. There are already some embryonic manufacturing and light industry base activities that have been established in the past few years in various parts of the country, particularly in the town of Burao, which is becoming the industrial city of the country. In this regard it is paramount that the government puts more effort to promote, encourage and find more investors for this sector given the potential for exporting manufactured items to neighbouring Ethiopia and beyond.

Oil Drilling
Another area that has got huge potential for investment and could transform the future economic prospects of the country and its small population is hydro-carbon deposits including oil and gas which can be explored. Oil has already been identified and discovered in various sites (both on/off-shore) of the country. Some of these discoveries go back to the 1950s and 1980s. There is no doubt that the increasing global demand for oil fuelled by the expanding Asian economies will make Somaliland’s oil drilling prospects more urgent than before and it would be sensible if the right institutions were to be established to pave the way for oil drilling and the distribution of any wealth from that oil to the poverty stricken population of the country.

Tourism
There is also a need to establish tourism industry ventures in the country and people must be encouraged to explore ancient caves, beautiful beaches and spectacular landscapes in the country. Tourism sector is an area in the economy that has got huge potential for investors. This means the government has to welcome all potential investors in this sector and relax its visa requirements and restrictions to allow more people to visit the country and enjoy the hospitality of its people.

Civil Aviation
This sector is expected to provide important support to the future growth of the economy of Somaliland. Air passengers at Hargeisa airport between 2006 and 2008 has increased by 14% compared to the previous two years and air cargo had increased by almost 22%. In addition there is growing number of people from the Diaspora who are visiting their country every year. Investment is therefore required for this sector which is likely to grow at least at 9-11% per year for the next few years.

Conclusion
There is no doubt that the economic prospects of Somaliland is improving and the engine behind that has been the private sector which requires the government to continue creating the positive and enabling environment through sound regulatory policies and mechanisms with a view to encourage further investment to all sectors and achieve sustainable economic development and improve the future prospects of the country and its population. In order to attain its goal of establishing and implementing a legal and regulatory framework capable of ensuring the efficient and equitable operation of a market economy the government has to expedite the passing of all relevant legislations including the Commercial Code and the Public Finance Management (PFM) which are all fundamental to the management of the economy and promoting investment in the country.

 

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