ECONOMIC POLICY PROFILE: SOMALIA

UNCLAS SECTION 01 OF 08 MOGADISHU 01175



TREASURY FOR OASIA/IDN DEBORAH ROCHA

STATE FOR EB/IFD/ODF FOR CHARLES ENGLISH

AID/PPC/EA FOR KEN KAUFMANN

ROME ALSO FOR MFO/MILLIKEN



E.O. 12356: N/A

TAGS: EFIN, ECON, EAID, SO

SUBJ: ECONOMIC POLICY PROFILE: SOMALIA



REFS: A) 84 STATE 369917 B) 84 MOGADISHU 1091



1. ECONOMIC PROSPECTS AND POLICIES:

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2. RESOURCES AND INFRASTRUCTURE: SOMALIA IS A LARGE,

SPARSELY SETTLED COUNTRY OF 5 MILLION PEOPLE, WHOSE

MAJOR RESOURCES ARE ITS LAND AND LOCATION. SITUATED

ADJACENT TO THE MARKETS OF THE PERSIAN GULF, AND

WITHIN EASY SHIPPING RANGE OF EUROPE, SOMALIA POSSESSES

A LAND AREA OF APPROXIMATELY 64 MILLION HECTARES.

OF THIS, ABOUT 8.2 MILLION HECTARES ARE ARABLE, BUT,

WITH WATER AND AGRICULTURAL LABOR LIMITING FACTORS

ONLY ABOUT 900,000 HECTARES ARE UNDER CULTIVATION. OF

THE REMAINING LAND, ABOUT 60 PERCENT IS SUTIABLE FOR

GRAZING WITH THE BALANCE WASTE. ITS FISHING POTENTIAL

AND MINERAL RESOURCES REMAIN LARGELY UNKNOWN AND UN-

EXPLOITED, THOUGH SIX FOREIGN OIL COMPANIES ARE

CURRENTLY ENGAGED IN SURVEYS AND EXPLORATION. THE

NATIONAL INFRASTRUCTURE BASE IS WEAK, WITH ONLY TWO

MAJOR URBAN CENTERS (MOGADISHU AND HARGEISA),THREE

DEEPWATER PORTS (MOGADISHU, KISMAYO AND BERBERA),A

POORLY DEVELOPED INTERNAL ROAD NETWORK, AND NO RAILROAD.

PUBLIC UTILITY, EDUCATIONAL AND HEALTH SERVICES ARE

LARGELY CONFINED TO THE MAJOR CITIES. THE HUMAN

RESOURCE BASE IS ALSO WEAK, WITH MANAGERIAL AND

TECHNICAL SKILLS PARTICULARLY SCARCE.

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3. STRUCTURE OF THE ECONOMY: THE ECONOMY IS DOMINATED

BY THE AGRICULTURAL SECTOR, AND WITHIN AGRICULTURE BY

LIVESTOCK PRODUCTION. OVERALL GDP (AT CURRENT MARKET

PRICES) WAS ABOUT US DOLS 1.3 BILLION IN 1983; WITH A

POPULATION (INCLUDING REFUGEES) OF 5 MILLION, PER

CAPITA GDP WAS ABOUT US DOLS 260. LIVESTOCK PRODUCTION

NORMALLY ACCOUNTS FOR ABOUT 38 PERCENT OF GDP; 50-60

PERCENT OF TOTAL EMPLOYMENT AND 80 PERCENT OF EXPORT

EARNINGS. CROP PRODUCTION CONTRIBUTES ABOUT 7-10

PERCENT OF GDP, WITH BANANAS THE ONLY IMPORTANT EXPORT

CROP, AND SORGHUM, MAIZE AND SESAME GROWN FOR LOCAL

CONSUMPTION. THE MANUFACTURING SECTOR IS SMALL

(7 PERCENT OF GDP),INEFFICIENT, AND DOMINATED BY

38 PUBLIC CORPORATIONS, WHICH NOW ACCOUNT FOR 80 PER-

CENT OF ALL VALUE ADDED IN MANUFACTURING. DESPITE

CHANGES UNDERWAY, SERVICES ARE STILL DOMINATED BY

PUBLIC CORPORATIONS, WITH BANKING, INSURANCE AND

PORTIONS OF IMPORT AND EXPORT TRADE THE PROVINCE OF

PUBLIC SECTOR MONOPOLIES. REMITTANCES REMAIN AN

IMPORTANT FACTOR IN NATIONAL INCOME, WITH TRANSFERS

FROM 100,000 SOMALIS NOW WORKING IN THE GULF ACCOUNT-

ING IN PAST YEARS FOR UP TO ONE-THIRD OF SOMALIA'S

TOTAL FOREIGN EXCHANGE EARNINGS. THE GOVERNMENT IS

RELATIVELY STABLE. IN PLACE FOR 15 YEARS, WITH THE

SECURITY SERVICES UNDER FIRM CONTROL, IT HAS THUS FAR

WEATHERED SUCCESSFULLY DROUGHTS, WARS AND REFUGEE

CRISES, AND, MORE RECENTLY, ETHIOPIAN MILITARY

PRESSURES ON THE BORDER AND ATTACKS ON NORTHERN

TERRITORIES BY DISSIDENT GROUPS BASED IN ETHIOPIA.

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4. RECENT ECONOMIC DEVELOPMENTS: SOMALIA'S OVERALL

ECONOMIC PERFORMANCE HAS DETERIORATED BADLY OVER THE

PAST TWO YEARS AS A SERIES OF BLOWS TO ITS EXTERNAL

ACCOUNT HAVE COMBINED WITH BURGEONING FISCAL DEFICITS

TO RECREATE THE LOW GROWTH, HIGH INFLATION ENVIRONMENT

THAT HAD PREVAILED IN THE LATE 1970S. WITH EXPORT

EARNINGS CUT TO LESS THAN HALF THEIR 1982 LEVEL

(LARGELY AS A RESULT OF SAUDI ARABIA'S 1983 BAN ON

CATTLE IMPORTS FROM AFRICA) AND FOREIGN AID FINANCING

DOWN 18 PERCENT FROM ITS 1982 PEAK, SOMALIA CLOSED

1984 WITH ITS SEVENTH CONSECUTIVE OVERALL BALANCE OF

PAYMENTS DEFICIT, A NEGATIVE NET FOREIGN ASSETS

POSITION AND GROSS FOREIGN EXCHANGE RESERVES EQUAL TO

BARELY SIX WEEKS OF CASH FINANCED IMPORTS. DEPRESSED

BY IMPORT SHORTAGES AND WEAK RAINS, REAL GDP GROWTH

IN 1983 SLIPPED TO ONLY 1 PERCENT AND SEEMS IN 1984

LIKELY TO HAVE TOTALLED NO MORE THAN 1 TO 2 PERCENT,

EVEN WITH STRONG RAINS AND RECORD CROP PRODUCTION.

INFLATION, MEANWHILE, HAS SOARED, RISING FROM AN

AVERAGE ANNUAL RATE OF 24 PERCENT IN 1982 TO 36 PER-

CENT IN 1983 AND 93 PERCENT IN 1984.

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5. LOOKING AHEAD TO 1985, PROSPECTS FOR GROWTH AND

PRICE STABILITY WILL DEPEND UPON THE WEATHER,

SOMALIA'S SUCCESS IN MUSTERING INTERNATIONAL AID

SUPPORT FOR ITS PROPOSED IMF STAND-BY ARRANGEMENT,

AND THE GOVERNMENT'S CAPACITY TO MAINTAIN ITS

COMMITMENT TO THE ECONOMIC REFORM PROCESS. IF THE

POLITICAL COMMITMENT IS FIRM, THE RAINS ADEQUATE,

AID SUPPORT SUFFICIENT, SOMALIA MAY BE ABLE TO WORK

THROUGH ITS PROPOSED STAND-BY ARRANGEMENT TOWARDS

CONSISTENT, EXPORT LED GROWTH. IF NOT, SOMALIA

COULD WELL REMAIN TRAPPED WITHIN THE LOW GROWTH,

HIGH INFLATION VORTEX INTO WHICH IT STUMBLED IN

1983 AND 1984.

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6. ON THE DEVELOPMENT SIDE, A WORLD BANK SPONSORED

CONSULTATIVE GROUP MEETING ON SOMALIA IN OCTOBER

1983 PROVIDED THE STIMULUS FOR AN INITIAL REVIEW OF

SOMALIA'S PUBLIC INVESTMENT PROGRAM, WHICH THE WORLD

BANK HAS SINCE FOLLOWED UP WITH STAFF VISITS

THROUGHOUT 1984. AS OF THE BEGINNING OF 1985, THE

RESULT OF THESE REPEATED REVIEWS IS A PUBLIC INVEST-

MENT PROGRAM LARGELY FREE OF THE WHITE ELEPHANTS

THAT HAD PLAGUED PREVIOUS DEVELOPMENT PLANS, BUT

STILL OUT OF PROPORTION TO THE COUNTRY'S REAL FISCAL

AND PROJECT MANAGEMENT RESOURCES. RETURNS ON IN-

VESTMENT HAVE BEEN ABSURDLY LOW OVER THE PAST 13

YEARS (BELOW 6.7 PERCENT PER ANNUM ON AVERAGE TO JUDGE

FROM GDP GROWTH AND NATIONAL INVESTMENT RATES) AND

LIKELY WILL REMAIN LOW IN COMING YEARS, IF MORE CARE-

FUL CONTROL IS NOT EXERTED OVER THE DISTRIBUTION AND

USE OF INVESTMENT FUNDS. A SECOND CONSULTATIVE GROUP

MEETING NOW TENTATIVELY SCHEDULED FOR OCTOBER 1985

WILL PROVIDE DONORS WITH A SECOND OPPORTUNITY TO IN-

FLUENCE THIS PROCESS.

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7. POLICY FRAMEWORK: SOMALIA HAS TAKEN SIGNIFICANT

STEPS OVER THE PAST THREE YEARS TO ESTABLISH THE

INCENTIVES, OPPORTUNITIES AND FREE OPERATING

ENVIRONMENT THAT ARE CRUCIAL TO THE SUCCESS OF A

MARKET-ORIENTED ECONOMIC SYSTEM. IT HAS ENDED

PRICE CONTROLS, VIRTUALLY ABOLISHED IMPORT AND EXPORT

LICENSING, DEVALUED REPEATEDLY (BY A TOTAL OF 83 PER-

CENT IN FOREIGN CURRENCY TERMS),AND, IN JANUARY 1985,

ESTABLISHED A DUAL FOREIGN EXCHANGE MARKET WITH A

FREE AND LEGAL PARALLEL MARKET FOR MOST FOREIGN EX-

CHANGE TRANSACTIONS. IT HAS ALSO BOOSTED BANKING

SYSTEM LOAN AND DEPOSIT RATES BY 8 TO 10 POINTS (IN

TWO STAGES OVER THREE YEARS),AND COMPLETELY LIBERAL-

IZED INTERNAL FOODGRAIN MARKETING. HOWEVER, IT HAS

NOT BEEN ABLE TO CONSISTENTLY BACK THESE REFORMS

WITH THE REQUISITE FISCAL AND MONETARY DISCIPLINE.

REAL INTEREST RATES REMAIN NEGATIVE, AND THE EFFECTS

OF PAST DEVALUATIONS HAVE BEEN REPEATEDLY WIPED OUT

BY EXCESSIVE MONETARY EXPANSION. THE GOVERNMENT HAS

ALSO BEEN SLOW TO ATTACK INTERNAL MONOPOLY POSITIONS.

WHILE IT HAS ENDED MOST PUBLIC SECTOR TRADING MONO-

POLIES, IT HAS LEFT IN PLACE MONOPOLIES IN BANKING,

INSURANCE, MANUFACTURING, AND OTHER SECTORS OF THE

ECONOMY. IT HAS ALSO LEFT IN PLACE AN UNREALISTIC

(THOUGH LARGELY UNENFORCED) LABOR CODE WMICH OFFICIALLY

DEPRIVES EMPLOYERS OF THE RIGHT TO HIRE AND FIRE AS

THEY PLEASE. OVERALL, THEREFORE, WHILE SOMALIA HAS

TAKEN MANY OF THE BASIC AND MOST CRITICAL STEPS TOWARDS

A FREELY OPERATING MARKET ECONOMY OVER THE PAST THREE

YEARS, IT STILL NEEDS TO COMPLETE THE TASK WITH

ADJUSTMENTS IN INTERNAL MARKET CONDITIONS, AND IMPROVE-

MENTS IN GENERAL PUBLIC SECTOR MANAGEMENT.

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8. PERFORMANCE INDICATORS (AVERAGE ANNUAL GROWTH RATES)



- 1972-1980 1981-1983



REAL PER CAPITA INCOME (1) - 2.7 2.4

MONEY (M1) 23.0 14.6

SAVINGS AND TIME DEPOSITS

- (QUASI-MONEY) 25.6 23.0

TAXES/GDP 12.7 14.2

CONSUMER PRICES 17.7 34.7



- (1) REAL PER CAPITA GDP AT MARKET PRICES FOR

- NON-REFUGEE POPULATION

-

9. POLICY INDICATORS



10. MONEY SUPPLY: FISCAL DEFICITS, ONLY PARTIALLY

OFFSET BY CONSEQUENTIAL DECLINES IN NET FOREIGN ASSETS,

HAVE PROVIDED THE MAJOR IMPETUS FOR MONEY SUPPLY

GROWTH IN SOMALIA OVER THE PAST TWELVE YEARS.

THE ONLY EXCEPTION TO THIS PATTERN WAS DURING THE 1981

TO 1983 PERIOD, WHEN, UNDER THE GUIDELINES OF A SERIES

OF IMF PROGRAMS, NEW NET CREDIT TO THE PRIVATE SECTOR

ACCOUNTED FOR VIRTUALLY ALL MONEY SUPPLY GROWTH. WHEN

SOMALIA'S IMF PROGRAMS LAPSED IN 1984, HOWEVER,

GOVERNMENT DEMAND FOR CREDIT REASSERTED ITSELF, ALONE

ACCOUNTING FOR TWO-THIRDS OF A 72 PERCENT INCREASE IN

NET DOMESTIC CREDIT DURING THE YEAR'S FIRST NINE

MONTHS.

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11. MONEY SUPPLY DETERMINANTS: CHANGE IN OUTSTANDING

- STOCKS (SO.SH. MILLIONS)



- 1972-80 1981-1983



M1 2342.7 1526.3

NET DOMESTIC CREDIT TO

- THE GOVERNMENT 1927.2 - 97.4

NET DOMESTIC CREDIT TO

- PUBLIC ENTERPRISES 1513.0 - 388.1

NET DOMESTIC CREDIT TO

- THE PRIVATE SECTOR 111.0 1866.7

NET FOREIGN ASSETS - 156.1 -2372.4

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12. MONETARY POLICY INSTRUMENTS: SOMALIA OPERATES

A RELATIVELY SIMPLE FINANCIAL SYSTEM CONSISTING OF

A CENTRAL BANK, A COMMERCIAL BANK, A DEVELOPMENT

BANK AND A SINGLE INSURANCE COMPANY, ALL GOVERNMENT

OWNED. THE CENTRAL BANK TENDS TO RELY UPON QUANTI-

TATIVE CONTROLS ON CREDIT ALLOCATIONS TO CONTROL

THE MONEY SUPPLY. THE CENTRAL BANK ALSO HAS POWERS

TO FIX INTEREST RATES AND ADJUST COMMERCIAL BANK

RESERVE REQUIREMENTS (NOW 10 PERCENT). HOWEVER, IT

HAS NOT ADJUSTED RESERVE REQUIREMENTS SINCE 1972,

AND INTEREST RATES, WHILE ADJUSTED UPWARDS IN RECENT

YEARS, REMAIN NEGATIVE IN REAL TERMS AND INEFFECTIVE

IN CONTROLLING THE MONEY SUPPLY. THERE IS NO MONEY

MARKET OR OPEN MARKET OPERATIONS IN SOMALIA.

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13. FOREIGN EXCHANGE RATE AND MARKET POLICIES:

SOMALIA NOW OPERATES A DUAL FOREIGN EXCHANGE

MARKET. THE OFFICIAL MARKET, WHICH IS FUNDED

BY GOVERNMENT GRANTS AND LOANS AND 35 PERCENT OF

ALL EXPORT EARNINGS, PROVIDES FINANCING FOR ALL

DEBT AND OTHER OFFICIAL SERVICE PAYMENTS AND FOR

ALL PUBLIC SECTOR OIL IMPORTS. THE EXCHANGE RATE

IN THIS MARKET IS NOW 36:1 (SHILLINGS TO DOLLARS)

AND IS ADJUSTED UPWARDS MONTHLY BY HALF A SHILLING

PLUS THE DIFFERENTIAL BETWEEN SOMALIA'S CONSUMER

PRICE INDEX AND THE WEIGHTED AVERAGE OF THE IN-

FLATION RATES OF THE FIVE SDR BASKET CURRENCIES.

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14. ALL OTHER FOREIGN EXCHANGE TRANSACTIONS; I.E.,

ALL TRANSACTIONS NOT SPECIFICALLY ASSIGNED TO THE

OFFICIAL MARKET, ARE COVERED IN A LEGAL PARALLEL

MARKET, WHICH IS FUNDED BY PRIVATE TRANSFERS AND

RETAINED EXPORT EARNINGS (65 PERCENT OF ALL EARN-

INGS). ALL TRANSACTIONS IN THIS MARKET TAKE PLACE

THROUGH FOREIGN AND LOCAL CURRENCY ACCOUNTS OF THE

COMMERCIAL AND SAVINGS BANK, WHICH CAN BE OPENED

BY ANY RESIDENT (FOREIGNER OR NATIONAL) OF SOMALIA.

THE EXCHANGE RATE IN THIS MARKET FLOATS, WITH THE

COMMERCIAL AND SAVINGS BANK SETTING A DAILY RATE

FOR ITS OWN TRANSACTIONS AT THE AVERAGE OF THE

PREVIOUS DAY'S MARKET TRANSACTIONS. STARTING AT

75:1 (SHILLINGS TO DOLLARS),THIS BANK RATE HAS

MOVED TO 82 IN THE THREE WEEKS SINCE THIS NEW

MARKET WAS ESTABLISHED ON JANUARY 2, 1985, AND WILL

EVENTUALLY APPROACH THE REAL CURRENT PARALLEL MARKET

RATE OF 93 TO 95:1.

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15. EXCHANGE CONTROLS IN SOMALIA INCLUDE DIRECT

RESTRICTIONS ON REMITTANCES OF PROFITS, EARNINGS

AND CAPITAL, AND A LICENSING REQUIREMENT FOR ALL

CAPITAL INVESTMENTS. UNDER SOMALIA'S CURRENT

INVESTMENT LAW, REGISTERED INVESTMENTS WHICH ARE

DEEMED "PRODUCTIVE" ARE ENTITLED TO REMIT ANNUALLY

EARNINGS EQUIVALENT TO 30 PERCENT OF INVESTED

CAPITAL; "NON-PRODUCTIVE" INVESTMENTS ARE PERMITTED

NO REMITTANCES FOR THE FIRST SEVEN YEARS, AND

REMITTANCES ANNUALLY EQUIVALENT TO ONLY 10 PERCENT

OF INVESTED CAPITAL. WAGE EARNINGS OF FOREIGN

WORKERS, SIMILARLY, ARE RESTRICTED TO 50 PERCENT

OF ANNUAL INCOME. ALL OF THESE RESTRICTIONS

REMAIN IN EFFECT UNDER SOMALIA'S NEW DUAL FOREIGN

EXCHANGE MARKET SYSTEM. HOWEVER, BECAUSE OF ACCOUNT

ARRANGEMENTS AT THE COMMERCIAL BANK, THESE RESTRIC-

TIONS EFFECTIVELY APPLY ONLY TO THOSE FUNDS WHICH

ORIGINALLY ARRIVED IN COUNTRY AS EXPORT PROCEEDS.

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16. GOVERNMENT BUDGET OPERATIONS: CENTRAL GOVERN-

MENT OPERATIONS HAVE ABSORBED A HIGH AND INCREASING

PERCENTAGE OF GDP IN SOMALIA. BETWEEN 1972 AND 1980,

CENTRAL GOVERNMENT EXPENDITURES ABSORBED AN AVERAGE

OF 22.6 PERCENT OF GDP ANNUALLY, A PERCENTAGE WHICH

ROSE TO 26.3 PERCENT BETWEEN 1981 AND 1983. REVENUES,

HOWEVER, HAVE NOT KEPT PACE, AVERAGING 15.3 PERCENT

OF GDP IN BOTH PERIODS. DEFICITS IN BOTH PERIODS

WERE FINANCED PRIMARILY BY FOREIGN GRANTS AND LOANS.

IN THE EARLIER PERIOD, HOWEVER, THIS FOREIGN

FINANCING WAS SUPPLEMENTED BY SIZEABLE BANKING

SYSTEM CREDITS, A REQUIREMENT THAT WAS ELIMINATED

BETWEEN 1981 AND 1983 BEFORE REAPPEARING IN 1984.

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17. CENTRAL GOVERNMENT BUDGET OPERATIONS (AS A

- PERCENT OF GDP)



- 1972-80 1981-83



EXPENDITURES 22.6 26.3

REVENUE 15.3 15.3

DEFICIT 7.3 11.0



18. CENTRAL GOVERNMENT DEFICIT FINANCING BY

- SOURCE (AS A PERCENT OF TOTAL DEFICIT)



- 1972-80 1981-83



DEFICIT 100.0 100.0

DOMESTIC FINANCING 38.0 - 2.0

- BANKING SYSTEM 38.0 - 1.5

- OTHER - - .5



FOREIGN FINANCING 62.0 103.1

- GRANTS 17.4 40.7

- LOANS 44.6 62.4



DISCREPANCY - - 1.1

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19. TAXATION: SOMALIA RAISES THE VAST MAJORITY

OF ITS CENTRAL GOVERNMENT REVENUE FROM TAXES ON

TRADE AND TRANSACTIONS. ACCORDING TO PRELIMINARY

GOVERNMENT ESTIMATES, TAXES ON INCOME AND PROFIT

IN 1983 ACCOUNTED FOR ONLY 4 PERCENT OF TOTAL

REVENUE; PROPERTY TAXES CONTRIBUTED 5 PERCENT; WHILE

LEVIES ON PUBLIC ENTERPRISES AND DEPARTMENTAL

SURPLUSES ACCOUNTED FOR 17 PERCENT. THE BALANCE

WAS COVERED BY TAXES ON IMPORTS (51 PERCENT OF TOTAL

REVENUE),EXPORTS (3 PERCENT),EXCISE TAXES (12

PERCENT) AND STAMP TAXES (6.8 PERCENT). RATES

VARIED BY SOURCE. ON PERSONAL INCOME EARNED FROM

EMPLOYMENT, TAX RATES RANGED FROM ZERO FOR EARNINGS

LESS THAN US DOLS 6 PER MONTH TO 18.9 PERCENT FOR

EARNINGS ABOVE US DOLS 42 PER MONTH. FOR OTHER

PERSONAL INCOME, RATES RANGE FROM ZERO FOR EARNINGS

LESS THAN US DOLS 67 PER YEAR TO 30 PERCENT FOR EARN-

INGS ABOVE US DOLS 835 PER YEAR. PRIVATE CORPORATE

PROFITS ARE TAXED AT A FLAT 35 PERCENT RATE.

SPECIFIC EXCISE TAXES ARE LEVIED ON SUGAR, TOBACCO,

MATCHES, BEVERAGES, MINERAL WATER, SOAP AND SHAMPOO;

A GENERAL 5 PERCENT SALES TAX HAS ALSO BEEN DEVELOPED

WHICH WILL APPLY TO ALL BUT ESSENTIAL GOODS.

CUSTOMS DUTIES AVERAGE 60-65 PERCENT OF THE VALUE OF

DUTIABLE MERCHANDISE AND ARE APPLIED AT RATES THAT

RANGE FROM ZERO TO OVER 100 PERCENT ON 120 PERCENT

OF THE L/C VALUE OF IMPORTED COMMODITIES VALUED

AT AN ADMINISTRATIVE RATE OF 60:1 (SHILLINGS TO

DOLLARS). EXPORT TAXES ARE APPLIED ON ALL MAJOR

EXPORTS AT RATES RANGING UP TO 30 PERCENT OF FOB

VALUE. ADMINISTRATIVE AND STATISTICAL TAXES ARE

ALSO APPLIED AT A 10 PERCENT AD VALOREM RATE TO ALL

IMPORTS AND EXPORTS. TAXES ON PUBLIC ENTERPRISES

INCLUDE A TURNOVER TAX (APPLIED AT A RATE OF 50

PERCENT ON NET PROFIT),A PROFIT TAX (APPLIED AT A

35 PERCENT RATE AFTER DEDUCTION OF THE TURNOVER TAX)

AND A 50 PERCENT GOVERNMENT SHARE IN ANNUAL DEPRECIA-

TION ALLOWANCES.

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20. PRICING POLICIES: CONSUMER PRICES: SOMALIA

OFFICIALLY ENDED ALL CONSUMER PRICE CONTROLS IN

JANUARY 1985. OIL PRODUCTS WHICH ARE IMPORTED BY

A GOVERNMENT TRADING AGENCY OPERATING AT THE OFFICIAL

(36:1) EXCHANGE RATE, ARE STILL AVAILABLE AT WHAT

AMOUNTS TO SUBSIDIZED PRICES (E.G., 17 SHILLINGS PER

LITER OF GASOLINE). ALL OTHER PRICES, HOWEVER,

INCLUDING PRICES FOR ELECTRICITY AND WATER, HAVE

BEEN ADJUSTED TO REFLECT FULL COSTS AT THE PARALLEL

MARKET RATE OF EXCHANGE.

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21. PRODUCER PRICES: AGRICULTURAL MARKETS AND PRICES

WERE LARGELY DECONTROLLED BY SOMALIA IN JANUARY 1984,

AND, IN THE YEAR SINCE, BASIC FOOD PRICES HAVE RISEN

TO MARKET RATES. THE AGRICULTURAL DEVELOPMENT

CORPORATION, THE GOVERNMENT TRADING AGENCY WHICH

PREVIOUSLY HELD A MONOPSONY ON ALL GRAIN PURCHASES

IN SOMALIA, STILL HOLDS THE LEGAL RIGHT TO PURCHASE

UP TO 5 PERCENT OF EACH YEAR'S CROP, BUT HAS NOT

EXERCISED THAT RIGHT IN RECENT YEARS. BANANA EXPORTS

FROM SOMALIA ARE ENTIRELY UNDER THE CONTROL OF A

PRIVATE/PUBLIC JOINT VENTURE, WHICH, OBLIGED IN THE

PAST TO OPERATE AT THE OFFICIAL EXCHANGE RATE, HAS

NOT ALWAYS OFFERED COMPETITIVE PRICES FOR EXPORT

QUALITY FRUIT. NOW FREE TO OPERATE AT THE PARALLEL

MARKET RATE OF EXCHANGE, IT SHOULD BE ABLE TO OFFER

COMPETITIVE PRICES IN THE FUTURE.

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22. STATE ENTERPRISE PRICES: THE PRICE DECONTROL

INTRODUCED IN JANUARY 1985 HAS LEFT ALL PUBLIC

ENTERPRISES WITH FULL FREEDOM TO SET INPUT AND

OUTPUT PRICES AT LEVELS THAT WILL FULLY COVER

COSTS. MANY, HOWEVER, ENJOY MONOPOLY POSITIONS IN

THE ECONOMY, AND HAVE NOT BEEN FORCED BY COMPETITIVE

PRESSURES OR PRICE DEVELOPMENTS ELSEWHERE IN THE

ECONOMY TO MOVE THEIR PRICES TO ECONOMIC LEVELS. IN

THIS CLASS OF PUBLIC AND PRIVATE MONOPOLIES ARE THE

COMMERCIAL AND SAVINGS BANK; THE STATE INSURANCE

COMPANY OF SOMALIA; THE NATIONAL PETROLEUM AGENCY,

WHICH CONTROLS OIL IMPORTS; THE SOMALI COOPERATIVE

MOVEMENT,WHICH CONTROLS IN-COUNTRY OIL DISTRIBUTION

AND, THROUGH THE FRANKINCENSE AND MYRRH AGENCY, EX-

PORTS OF AROMATIC GUMS; THE SOMALI LEATHER AGENCY,

WHICH CONTROLS EXPORTS OF HIDES AND SKINS, ASPIMA,

WHICH CONTROLS IMPORTS OF VETERINARY DRUGS;

SOMALFRUTTA, WHICH CONTROLS EXPORTS OF BANANAS;

THE SOMALI SHIPPING AGENCY, AND THE SOMALI CLEARING

AND FORWARDING AGENCIES.

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23. SAVINGS AND INVESTMENT POLICIES: THE PUBLIC

ENTERPRISES: THERE ARE NOW 51 PARASTATAL CORPORATIONS

OPERATING IN SOMALIA, INCLUDING FIVE FINANCIAL, 33

NON-FINANCIAL AND EIGHT NON-COMMERCIAL PUBLIC ENTER-

PRISES, WHICH TOGETHER DOMINATE MOST BANKING,

INSURANCE, AND MANUFACTURING INDUSTRIES IN SOMALIA.

DURING THE 1970'S THESE ENTERPRISES WERE NOT TREATED

PRIMARILY AS PROFIT-MAKING COMMERCIAL OPERATIONS,

BUT OFTEN AS SOURCES OF FUNDS FOR THE CENTRAL

GOVERNMENT AND INSTRUMENTS FOR THE PURSUIT OF SOCIAL

WELFARE POLICIES. SURPLUSES WERE TAXED AWAY BY HIGH

PROFIT TAXES AND GOVERNMENT CLAIMS ON DEPRECIATION

ALLOWANCES; WAGES AND EMPLOYMENT WERE DISTORTED BY

CENTRAL GOVERNMENT POLICIES, AND PRICES FOR BOTH INPUTS

AND OUTPUTS MAINTAINED AT UNREALISTICALLY LOW LEVELS.

BEGINNING IN 1981, SOMALIA HAS TAKEN SOME STEPS TO

ADDRESS THESE PROBLEMS. THREE PUBLIC ENTERPRISES

HAVE BEEN CLOSED; OTHERS HAVE BEEN PROVIDED WITH

FOREIGN MANAGERIAL ASSISTANCE. THE REST ARE BEING

REVIEWED TO DETERMINE WHICH TO RETAIN AS SERVICE

INSTITUTIONS ON PUBLIC SUBSIDIES, WHICH TO DIVEST

OR CLOSE, AND WHICH TO ESTABLISH AS COMMERCIAL

ENTERPRISES IN COMPETITIVE MARKETS. DECISIONS HAVE

ALSO BEEN TAKEN TO GRANT ALL PUBLIC ENTERPRISES

AUTONOMY IN REGARD TO WAGE, EMPLOYMENT AND PRICING

DECISIONS, AND WHERE POSSIBLE, TO ELIMINATE THE

REMAINING PUBLIC SECTOR MONOPOLIES IN TRADE, BANKING

AND SERVICES. PROGRESS IN IMPLEMENTING THESE DECISIONS,

HOWEVER HAS BEEN SLOW.

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24. PRIVATE INVESTMENT: INCENTIVES: SOMALIA'S

CURRENT INVESTMENT LAW OFFERS NEW INVESTMENTS TAX

HOLIDAYS ON ALL INCOME, IMPORT, EXCISE AND PROPERTY

TAXES FOR PERIODS OF UP TO FIVE YEARS. IT ALSO

GUARANTEES REMITTANCES AT THE RATES OUTLINED ABOVE.

IN ADDITION, J FHE NEW FOREIGN EXCHANGE MARKET

ARRANGEMENTS, FACILITIES FOR REMITTANCES ABOVE THE

RATES DEFINED IN THE LAW ARE AVAILABLE IN THE NEW

LEGAL PARALLEL MARKET. SOMALIA HAS NEGOTIATED A

BILATERAL INVESTMENT TREATY WITH THE FEDERAL REPUBLIC

OF GERMANY, WHICH PROVIDES FOR MOST FAVORED NATION

OR NATIONAL TREATMENT FOR GERMAN INVESTORS, PROMPT

AND ADEQUATE COMPENSATION IN CASE OF EXPROPRIATION,

AND FREE TRANSFER OF CAPITAL, DIVIDENDS, INTEREST

AND EARNINGS. IT ALSO HAS UNDER CONSIDERATION TWO

DRAFT BILATERAL INVESTMENT TREATIES WITH THE UNITED

STATES AND GREAT BRITAIN.

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25. DISINCENTIVES: DISINCENTIVES TO PRIVATE INVEST-

MENT INCLUDE THE COUNTRY'S GENERAL INFRASTRUCTURAL AND

INSTITUTIONAL WEAKNESSES, THE CONTINUING THREAT OF

POLITICAL OR ECONOMIC INSTABILITY, THE PRE-EMPTION

OF INVESTMENT OPPORTUNITIES BY PUBLIC AND PRIVATE

MONOPOLIES, A CONTINUING UNCERTAINTY REGARDING

MARKET FREEDOMS, THE CONTINUING RESTRICTIONS ON

WAGE AND CAPITAL REMITTANCES, THE LACK OF A WELL

DEFINED BODY OF COMPANY AND COMMERCIAL LAW, AND AN

ONEROUS (THOUGH UNENFORCED) LABOR CODE WHICH OFFICIALLY

DEPRIVES THE EMPLOYER OF THE RIGHT TO HIRE AND FIRE

FREELY, MANDATES AN UNECONOMICALLY HIGH LEVEL OF WORKER

BENEFITS, AND RESTRICTS THE EMPLOYMENT OF FOREIGN

NATIONALS. A REVIEW OF INVESTMENT LAW NOW UNDER WAY

MAY ELIMINATE SOME OF THE RESTRICTIONS NOW IMPOSED

ON REMITTANCES, AND PROVIDE A FULLER SET OF PROPERTY

RIGHTS FOR NEW INVESTORS.

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26. LEVELS OF PUBLIC AND PRIVATE INVESTMENT: THERE

HAVE BEEN WIDE FLUCTUATIONS IN PRIVATE SECTOR

SAVINGS AND INVESTMENT OVER THE PAST 13 YEARS, AS

WEATHER INDUCED FLUCTUATIONS IN INVENTORY ACCUMULATION

IN THE ALL-IMPORTANT LIVESTOCK SECTOR OVERWHELMED

RELATIVELY LOW LEVELS OF PRIVATE SECTOR FIXED CAPITAL

FORMATION. PUBLIC SECTOR SAVINGS AND INVESTMENT HAVE

ALSO VARIED WIDELY AS WARS, DROUGHTS AND REFUGEE

CRISES HAVE REPEATEDLY SWELLED RECURRENT EXPENDITURES.

OVERALL, DOMESTIC INVESTMENT TOTALLED APPROXIMATELY

18 PERCENT OF GDP (10 PERCENT PUBLIC, 8 PERCENT PRIVATE)

BETWEEN 1972 AND 1980, RISING TO 21 PERCENT (10 PERCENT

PUBLIC, 11 PERCENT PRIVATE) BETWEEN 1981 AND 1983.

SAVINGS LAGGED, TOTALLING ONLY 3 PERCENT OF GDP (MINUS

7 PERCENT PUBLIC, 10 PERCENT PRIVATE) IN 1972 TO 1980,

AND 4 PERCENT OF GDP (MINUS 10 PERCENT PUBLIC, 14

PERCENT PRIVATE) BETWEEN 1981 AND 1983. THE BALANCE

OF INVESTMENT EXPENDITURES WERE COVERED BY FOREIGN

GRANTS AND LOANS, AND REMITTANCES, WHICH TOGETHER

AVERAGED 15 PERCENT OF GDP BETWEEN 1972 AND 1980,

AND 18 PERCENT OF GDP BETWEEN 1981 AND 1983. FOR 1984

TO 1986, SOMALIA HAS PROPOSED A PUBLIC INVESTMENT

PROGRAM WHICH WOULD RAISE NATIONAL INVESTMENT TO 23

PERCENT OF GDP (16 PERCENT PUBLIC AND 7 PERCENT

PRIVATE) FINANCED ENTIRELY BY FOREIGN GRANTS AND LOANS

(25.5 PERCENT OF GDP). WITH FOREIGN FINANCING AND

THE PUBLIC SECTOR'S OWN ABSORPTIVE CAPACITY SETTING

LIMITS TO PUBLIC SECTOR ACTIVITIES, HOWEVER, ACTUAL

PUBLIC SECTOR INVESTMENT TOTALLED ONLY ABOUT 9 PERCENT

OF GDP IN 1984 - A RATE THAT LIKELY WILL HOLD FOR THE

NEXT TWO TO THREE YEARS.



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27. SAVINGS AND INVESTMENT (AS SHARES OF GDP):



- 1972-80 1981-83



INVESTMENT 18.4 21.1



- PUBLIC 10.0 10.1

- PRIVATE 8.4 11.0



DOMESTIC SAVINGS 3.0 3.6



- PUBLIC - 7.2 - 10.2

- PRIVATE 10.2 13.8



REMITTANCES 1.6 1.8



FOREIGN GRANTS AND LOANS 13.8 15.7

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28. AID ASSISTANCE: DISBURSEMENTS OF GRANTS AND

LOANS TO SOMALIA FROM ALL OFFICIAL SOURCES FOR

ALL USES (REFUGEE, DEVELOPMENT AND BALANCE OF

PAYMENTS ASSISTANCE) HAS INCREASED RAPIDLY OVER

THE PAST NINE YEARS, RISING FROM SLIGHTLY OVER

US DOLS 120 MILLION IN 1975 TO APPROXIMATELY US

DOLS 300 MILLION IN 1983, BEFORE DROPPING OFF

SLIGHTLY IN 1984 TO APPROXIMATELY US DOLS 260

MILLION. GRANTS ACCOUNTED FOR A GRADUALLY IN-

CREASING PROPORTION OF THIS ASSISTANCE (ABOVE 50

PERCENT IN 1984),AND LOANS, INCLUDING LOANS

FROM THE IMF AND ARAB MONETARY FUND, FOR THE

BALANCE. MAJOR DONORS AND LENDERS INCLUDED SAUDI

ARABIA, KUWAIT, THE UNITED STATES, ITALY, THE

FEDERAL REPUBLIC OF GERMANY, THE EEC, THE IBRD,

THE IMF, THE ARAB FUND FOR ECONOMIC DEVELOPMENT AND

THE ISLAMIC DEVELOPMENT BANK. FOR 1985 AND 1986,

SOMALIA HAS PROJECTED FURTHER GRANT AND LOAN DIS-

BURSEMENTS OF APPROXIMATELY US DOLS 900 MILLION,

THOUGH ACTUAL DISBURSEMENTS MAY FALL SOMEWHAT

SHORT OF THIS TARGET.

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29. PARALLELING THE RAPID INCREASE IN AID DIS-

BURSEMENTS HAS BEEN AN EQUALLY RAPID RISE IN SOMALIA'S

EXTERNAL DEBT. BETWEEN YEAR END 1979 AND YEAR END

1984, SOMALIA'S TOTAL EXTERNAL DEBT ROSE TO APPROX-

IMATELY US DOLS 1445 MILLION, UP US DOLS 848 MILLION

FROM THE US DOLS 597 MILLION LEVEL WHICH HAD PRE-

VAILED AT THE CLOSE OF 1979. THANKS TO EXTENSIVE

REFINANCING ARRANGEMENTS, (WITH MIDDLE EASTERN

CREDITORS, IN PARTICULAR),OVERALL DEBT SERVICE

PAYMENTS HAVE REMAINED MANAGEABLE (50 PERCENT OF

GOODS AND SERVICE EXPORTS IN 1984). WITHOUT

FURTHER RESCHEDULINGS, HOWEVER, DEBT SERVICE PAY-

MENTS WILL RISE TO, AND MAY EXCEED, THE TOTAL OF

SOMALIA'S GOODS AND SERVICE EXPORTS OVER THE NEXT

THREE YEARS.

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30. SOURCES: THE PRIMARY SOURCES USED IN COMPILING

THIS REPORT WERE THE WORLD BANK'S PRELIMINARY

ESTIMATES OF NATIONAL ACCOUNT AGGREGATES PUBLISHED

IN AUGUST 1984, THE IMF'S REVIEW OF SOMALIA'S STAND-

BY ARRANGEMENT PUBLISHED IN APRIL 1984, THE IMF'S

DRAFT FINANCIAL PROGRAM FOR SOMALIA'S PROPOSED

1985 STAND-BY ARRANGEMENT, WHICH WAS DEVELOPED IN

NOVEMBER 1984, AND THE IMF'S GOVERNMENT FINANCIAL

STATISTICS YEARBOOK FOR 1983, INTERNATIONAL FINANCIAL

STATISTICS YEARBOOK FOR 1984, AND REPORT ON EX-

CHANGE ARRANGEMENTS AND EXCHANGE RESTRICTIONS FOR

1984. THE BALANCE OF PAYMENTS AND CENTRAL GOVERNMENT

FISCAL DATA FOR 1983 AND 1984 ARE PRELIMINARY. THE

MONETARY DATA IS RELIABLE THROUGH THE CLOSE OF 1983.

THE NATIONAL ACCOUNTS DATA ARE RELIABLE THROUGH THE

CLOSE OF 1982.



BRIDGES