Somalia Expects 3.1 percent GDP Growth, Rebounding from Drought and Commodity Price Shocks

NAIROBI — Somalia’s economy is expected to grow at 3.1 percent in 2023 up from 2.4 percent in 2022. This rebound in growth was driven by improved weather conditions and policy reforms instituted by the government to reach the Heavily Indebted Poor Countries (HIPC) Completion Point.

The latest Somalia Economic Update notes that the medium-term growth outlook will remain modest, with growth projected at 3.7 percent in 2024 and 3.9 percent in 2025. While this growth faces significant risks, including persistent climatic shocks, security threats, and global economic shocks, the Federal Government of Somalia (FGS) continues to maintain broad-based fiscal stability. Inflationary pressures have also eased, driven by declining food prices, improved weather, and easing of global commodity prices.

“Addressing climate challenges and risks is essential for sustainable and resilient economic growth,” said Kristina Svensson, World Bank Country Manager for Somalia. “There is an urgent need for the Government of Somalia to support sustained and long-term growth, anchored on macroeconomic stability, broad-based structural reforms, and longer-term resilience to climate change at the whole-of-economy level.”

Growth overall has been supported by favorable rains in 2023 that led to a stronger-than-expected rebound of the agriculture sector. Similarly, the livestock sector also recovered quickly, with livestock exports increasing significantly. The FGS also registered robust growth in domestic revenue, although it is still too low to finance increasing expenditure needs. Additionally, improved performance by Somalia’s banks signals increasing confidence in the financial sector.

The special focus section of this economic update examines how climate action can help drive economic growth for Somalia. The report finds that Somalia needs to get ahead of the impacts of acute climate disasters – investing in resilience and preparedness, rather than spending on humanitarian aid continuing to consume the bulk of external assistance. This will require investments in disaster risk management, social protection, and more resilient rural livelihood systems.

The report projects modest medium-term growth outlook anchored on continued political stability and reduced security risks. The government will also need to gradually scale-up its public spending in energy, transportation, education, and health sectors to maintain this growth path. Outlook prospects would also depend on macroeconomic stability and government policies.

External trade will continue to improve, assuming favorable weather conditions continue, and the global environment strengthens. Financial sector reforms and related institutional capacity building are expected to continue increasing confidence, integrity, and financial deepening. Reforms to tax policies and administration are expected to mobilize additional domestic revenue. The wage bill, together with goods and services expenditures, will continue to drive spending, both accounting for two-thirds of the budget in 2024. Higher domestic revenues will make room for greater spending on public investment and social services. The government will need to keep inflation low, and cushion household incomes.

“Somalia’s economic outlook remains positive, with economic growth set to accelerate, albeit at modest pace,” said Abdoulaye Ouedraogo, World Bank Economist and author of the report. ”Completing the HIPC process and accession the to East African Community should boost investors’ confidence and support regional integration. Economic reforms and increased public investment should also boost investor confidence and attract foreign direct investment, encouraging increased broad-based private sector activity and investment.”

The report offers some policy recommendations for the post-HIPC Environment. Budget deficits should be manageable through prudent fiscal policy -strengthening domestic resource mobilization, containing the wage bill and security spending, and advancing public finance management reforms. It is imperative for government to further strengthenen debt management legislation and functions including prioritizing concessional financing sources. Advancing discussions on federalism can help to improve the stability of the state, which can enhance the overall environment for doing business and strengthenen public systems to deliver services. Overreliance on external grants can put macroeconomic stability at risk, especially if there are any shocks in the flow of grants. There are substantial risks of re-accumulating debt arrears.