Cablegate: Embassy Mogadishu

R 310531Z JAN 85
FM AMEMBASSY MOGADISHU
TO SECSTATE WASHDC 2011
DEPTOTREAS WASHDC
INFO AMEMBASSY NAIROBI
AMEMBASSY ROME

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:
-
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.
-
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.
-
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.
-
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.
-
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.
-
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.
-
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.
-
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
-
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.
-
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.
-
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.
-
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.
-
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.
-
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
-
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.
-
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.
-
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.
-
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.
-
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.
-
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.
-
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.
-
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

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