Somalia: Economics and Finance Updates - August 2024

Somalia: Economics and Finance Updates August 2024

Table of Contents 1.

Implications and Challenges of Enforcing the 5% VAT on Digital Payments in Somalia: Balancing Economic Recovery and Public Sentiment Amidst Revenue Reforms

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2.

Addressing Economic Equity: President Mohamud's National Appeal for Tax Reform Amidst Federal-Regional Tensions in Somalia

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Strengthening Fiscal Governance: Somalia's Strategic Move to Centralize Government Revenue and Enhance Public Finance Management.

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4.

Strengthening Financial Governance in Somalia: The Role of the Treasury Single Account (TSA) in Enhancing Transparency, Accountability, and Public Trust.

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Somalia's Strategic Preparation for the MENA-FATF Mutual Evaluation: Enhancing AML/CFT Frameworks Amid Security Challenges and MultiSectoral Collaboration.

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Strategic Partnership for Sustainable Fisheries: Somalia and Oman Collaborate to Transform Somalia's Blue Economy and Infrastructure.

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Modernizing Somalia's Financial Sector: An In-Depth Analysis of the National Digital Identification System Initiative and Its Implications.

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Status Of Significant Bills and Draft Laws at Various Stages of the Legislative Process- Critical In Enabling Regulatory Reforms.

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Somalia's Transition to Universal Suffrage: Evaluating the Impact and Challenges of the Elections Act and Political Parties Act in the Path to Democratic Reform

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Strategic Shifts and Controversies: The Impact of the New Port of Gara'ad on Somalia's Maritime Infrastructure and Regional Dynamics

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10.

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Product Overview The Somalia Economics and Finance Update report comprehensively analyses Somalia's licit and illicit economic activities. It covers critical areas, including GDP growth, major sectors like agriculture and industry, investment climate, and regulatory developments. The report also delves into emerging markets such as the fishing/blue economy, mining, and oil and gas sectors. It provides updates on currency stability, new legislation, national ID implementation, and financial sector reforms. Additionally, the report addresses criminal activities like IUU fishing and trafficking alongside AML and CFT developments. The report's insights are designed to empower embassies, international organizations, NGOs, investors, financial institutions, and other stakeholders, fostering timely, informed decision-making in the dynamic economic landscape of Somalia.

Executive Summary Somalia is undergoing a series of significant economic and governance reforms aimed at stabilizing the nation and fostering long-term growth. The government's recent decision to enforce a 5% Value Added Tax (VAT) on digital payments is a key aspect of this reform agenda, aiming to increase domestic revenue generation. However, this move has sparked widespread controversy and resistance, particularly among the business community, who fear that it may stifle economic activity in an already fragile market. The government must navigate a delicate balance between boosting its fiscal capacity to support national development and managing public discontent that risks driving more economic activity into the informal sector. This challenge is further complicated by the ongoing need to demonstrate fiscal responsibility to international partners like the International Monetary Fund (IMF), which has linked continued financial support to improved revenue collection measures.

In tandem with these economic reforms, Somalia is also focusing on strengthening fiscal governance through the centralization of government revenue collection under a Single Treasury Account (STA). This initiative, endorsed by the Office of the Auditor General, is intended to enhance transparency, reduce corruption, and improve the efficiency of public finance management. The successful implementation of this centralized system is crucial for restoring public trust and aligning Somalia with international financial management standards. Additionally, Somalia is preparing for the MENA-FATF Mutual Evaluation, which will scrutinize the country's anti-money laundering and counter-financing of terrorism frameworks. This process is critical for Somalia's international standing and its ability to attract foreign investment. Finally, the strategic partnership with Oman to develop Somalia's fisheries sector underlines the broader efforts to diversify the economy and leverage the country's substantial marine resources. However, these ambitious reforms and initiatives face significant challenges, including political resistance, security concerns, and the need for extensive capacity building, all of which will require careful management to ensure the long-term success of Somalia's economic and governance transformation.

In an effort to streamline governance, attract foreign direct investment, improve on workers rights, increase revenue and adopt fiscal policy, set standards and safey, Somalia's government is is pushing for the legislation of various bills, and laws and in the previous parliamentary sessions, several significant bills and draft laws are progressing through various stages. Among them, the Draft Bill on Labor and Employment is currently in its first reading in the Upper House, while the National Disability Act is awaiting Presidential Assent. The Investment Bill and the Accountants Authority Bill are under review in their second readings in the House of People and the Upper House, respectively. Additionally, the Control of Agricultural Chemicals Bill is also at the second reading stage in the House of People.

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The Council of Ministers has approved several draft laws and memoranda of understanding (MoUs).

These include the National Higher Education Act, aimed at regulating higher education institutions, and the Income Tax bill, which seeks to enhance government revenue. Noteworthy is the Draft Bill for the Establishment of the Independent National Electoral and Boundaries Commission, designed to streamline electoral management, and the Draft Election Act, which supports the implementation of 1P1V elections.

Implications and Challenges of Enforcing the 5% VAT on Digital Payments in Somalia: Balancing Economic Recovery and Public Sentiment Amidst Revenue Reforms The Somali government's recent decision to enforce a 5% Value Added Tax (VAT) on digital payments has stirred significant nationwide concern, prompting a mixed response from the public, business community, and government officials. Initially introduced in 1984, this tax remained dormant for decades due to the lack of appropriate infrastructure and the political instability that plagued Somalia. However, with technological advancements and the increasing use of mobile money services, the government has moved forward with its implementation.

Finance Minister Bihi Iman Egeh justified the tax, noting that the 5% rate is comparatively lower than that of neighboring countries, a strategic choice to encourage compliance and minimize economic disruption. This tax explicitly targets mobile money transactions, a critical component of the Somali economy, where cashless transactions have become ubiquitous due to the widespread adoption of mobile banking services without a robust traditional banking system.

The implementation of this tax has not been without controversy. Since its enforcement on August 18, significant unrest has been observed, particularly in major commercial hubs like Mogadishu's Bakara market. Protests have led to widespread store closures as traders vehemently demand either a reduction in the tax rate or its complete withdrawal. The underlying fear among the business community is that this additional tax burden could stifle economic activity, particularly in a market environment that is still fragile and recovering from decades of civil conflict.

The government, however, finds itself in a precarious balancing act. On the one hand, there is an acute need to increase domestic revenue generation, especially as Somalia looks to rebuild its wartorn economy and counter the persistent threat posed by extremist groups like al-Shabaab. On the other hand, the government must manage public sentiment and ensure that the tax does not exacerbate existing economic hardships, potentially driving more transactions into the informal sector, where they cannot be easily taxed.

This move comes on the heels of Somalia securing a $100 million loan from the International Monetary Fund (IMF), which has stipulated improved revenue collection as a key condition under its extended credit facility agreement. The IMF's involvement adds another layer of pressure on the Somali government to demonstrate fiscal responsibility and ensure that the tax policy is not only implemented but also effective in bolstering the nation's revenue streams.1 2

The 5% VAT charged has several implications on businesses and these incudes. ● Increased cost for businesses: The new tax will raise operational costs for businesses that rely on electronic transactions, particularly those in the mobile money sector. This could lead to reduced profit margins, especially for small and medium-sized enterprises that may struggle to absorb the additional costs.

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Impact of consumer prices: Businesses may pass the tax onto consumers by increasing prices for goods and services. This could lead to decreased demand, particularly among lower-income consumers who may be more sensitive to price changes:

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Protests and unrest, as seen in Mogadishu's Bakara market, indicate significant public discontent with the tax. Continued protests could disrupt business operations, deter investment, and harm the overall economic climate.

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Compliance Challenges: Businesses will need to adapt to the new tax system, which may involve investing in accounting systems, training staff, and ensuring compliance with tax regulations. This could be burdensome, especially for smaller businesses with limited resources

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Since mobile money services are widely utilized in Somalia, the tax could lead to a decline in usage if consumers and businesses seek to avoid the additional charges. This could hinder the growth and development of digital financial services in the country

Enhanced Public Communication: The government must launch a comprehensive public awareness campaign to explain the rationale behind the tax and how the revenue generated will be utilized to improve public services. Transparency in revenue allocation can play a crucial role in garnering public support.

Incremental Implementation: The government could consider a phased approach to fully implementing the tax, allowing businesses and consumers time to adjust while monitoring the economic impact.

Targeted Support for Vulnerable Groups:

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Special provisions or temporary relief measures could be introduced for small businesses and vulnerable populations to ease their tax burden and prevent a shift to informal markets.

RECOMMENDATIONS:

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To mitigate the negative impact and build public trust, the Somali government should consider the following:

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Strengthened Tax Administration: Investing in the capacity of the tax administration to ensure effective enforcement and reduce opportunities for evasion will be key to the success of this policy.

Addressing Economic Equity: President Mohamud's National Appeal for Tax Reform Amidst Federal-Regional Tensions in Somalia On Saturday, August 17, 2024, President Hassan Sheikh Mohamud delivered a nationally televised address to reassure the Somali population regarding the government's impending tax reforms. He made it clear that the adjustments to the tax system, including the 5% Value Added Tax (VAT) on commercial transactions, are not introducing new taxes but are part of a broader effort to ensure fair and equitable contributions from all citizens toward national development.

President Mohamud emphasized that the 5% VAT would apply specifically to commercial transactions and exclude personal remittances, a vital income source for many Somali households.

By excluding personal money transfers, the government aims to protect the most vulnerable segments of the population from additional financial strain.

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In addressing concerns raised by various groups, including Bajaj (tuk-tuk) drivers who play a crucial role in urban transport, the President highlighted ongoing government initiatives to simplify licensing processes for small businesses and service providers. He reassured the public that the revenue generated from these taxes would be channeled into essential services, infrastructure development, and bolstering security operations, particularly in the fight against al-Shabaab.

Despite these assurances, regional administrations' resistance to the new tax policy has emerged, most notably in Jubbaland.

The Jubbaland administration has rejected the federal government's directive, advising local businesses to continue adhering to regional tax laws. This pushback underscores the ongoing tensions between Somalia's federal and regional governments, which could complicate the uniform implementation of the tax across the country.3

Incentivizing Compliance:

Federal-Regional Coordination: To ensure the success of the tax policy, the federal government must engage in constructive dialogue with regional administrations like Jubbaland. Establishing a cooperative framework where both levels of government can align on tax policy and revenue-sharing mechanisms will be crucial.

Monitoring and Feedback Mechanism: Establishing a robust monitoring system to track the economic impact of the new tax and collecting feedback from businesses and consumers will help the government make necessary adjustments to the policy in real time.

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02 RECOMMENDATIONS

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The government could explore offering incentives such as tax credits or deductions for early compliance or investments in sectors critical to national development. This could encourage voluntary compliance and reduce resistance from the business community.

Public Service Improvements: To build trust and justify the tax, the government should ensure that the tax revenue is visibly used to improve public services, particularly in infrastructure, healthcare, and education. Tangible benefits will help counter the narrative that the tax is an undue burden on the populace.

Strengthening Fiscal Governance: Somalia's Strategic Move to Centralize Government Revenue and Enhance Public Finance Management.

In a decisive move aimed at enhancing financial oversight and bolstering the integrity of public finances, the Cabinet of Ministers of the Federal Government of Somalia, under the leadership of Prime Minister Hamse Abdi Barre, has enacted a comprehensive resolution to centralize the collection and management of government revenue. This resolution, which mandates consolidating all government revenue into a Single Treasury Account (STA) managed exclusively by the Ministry of Finance, marks a significant step toward establishing a more transparent and accountable fiscal system in Somalia.

The resolution's key provisions are designed to tighten control over the flow of public funds, reduce opportunities for mismanagement, and ensure that all government revenue is utilized to support national priorities. By centralizing revenue collection, the government seeks to streamline processes, improve financial reporting accuracy, and enhance public finance management's overall efficiency.

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Key Aspects of the Resolution: Article 1: Prohibition on Managing Government Revenue Outside the Unified Treasury Account (TSA) 1. In alignment with Articles 2(1)(r) and 4 of the Public Financial Management Act, 2019, the resolution stipulates that all Federal Government of Somalia revenue must be deposited exclusively within the Unified Treasury Account (TSA). This centralization is crucial for maintaining strict oversight and preventing the diversion or misuse of public funds.

2. The prohibition extends to holding or managing government revenue in any bank account outside the TSA, as per Articles 4(2) and 42(4). This measure aims to eliminate fragmented financial management practices that have historically contributed to inefficiencies and reduced the government's ability to track revenue streams accurately.

3. The definition of government revenue, as outlined in Article 4(3) of the Public Financial Management Act, 2019, encompasses all funds collected by government agencies, including taxes, fees, and fines under various laws and regulations. This broad definition ensures that all financial inflows are captured and managed centrally, enhancing transparency.

Article 2: Government Agency Responsible for Revenue Collection 4. The Ministry of Finance, as specified in Article 8(2) of the Public Financial Management Act 2019, is designated as the sole authority responsible for collecting, managing, and monitoring all Federal Government revenue. This centralized authority is vital for ensuring consistency in revenue collection practices and minimizing the risk of financial mismanagement across different government agencies.

5. To further reinforce this centralized system, all other government agencies, whether civilian or military, are prohibited from independently collecting or managing revenue. This provision aims to prevent duplication of efforts and ensure that all revenue collection activities are conducted under the supervision of the Ministry of Finance, thereby enhancing accountability.

Article 3: Setting Tariffs 1. Under Articles 6(b) and 108 of the Revenue Administration Act 2019, the Minister of Finance is vested with the exclusive authority to set and amend all tariffs related to government revenue, including taxes, fees, and fines. This centralization of tariff-setting authority is critical for maintaining a nationwide uniform and coherent fiscal policy.

2. Prohibiting other government agencies from setting or amending tariffs ensures that revenue policies are not subject to arbitrary changes or regional variations, which could undermine the central government's revenue collection efforts.

3. To ensure that tariffs remain aligned with the country's economic conditions, the Ministry of Finance is tasked with conducting a comprehensive review of all current tariffs. This proactive approach is essential for ensuring that the fiscal policies are effective and responsive to the dynamic economic environment in Somalia.

Article 4: Review of Non-Compliant Contracts and Agreements 1. The resolution mandates a thorough review of all such agreements to align all financially impactful agreements with the National Procurement Act 2016 and the Public Financial Management Act 2019. This review is intended to ensure legal compliance and mitigate financial risks, particularly in contracts with international companies.

2. The resolution also requires that all international agreements with financial implications be reviewed and brought into compliance with the law before their renewal. This step is crucial for safeguarding the government's economic interests and ensuring that all agreements serve the nation's long-term development goals.

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3. To avoid legal penalties and maintain the government's credibility, the Ministry of Finance is instructed to prioritize and regularly disburse payments arising from contracts between the government and private companies. This provision highlights the importance of honoring contractual obligations while maintaining fiscal discipline.

4. The annulment of specific agreements, such as those for electronic container tracking services and sanitation with the local government, indicates a shift toward more efficient and legally compliant contractual arrangements. This move is intended to eliminate redundant or non-compliant contracts that do not align with the government's broader financial management objectives.

Article 5: Miscellaneous Provisions 1. The resolution includes a directive to reduce the fee for scanning goods arriving at Mogadishu Port by 50%, with the revenue generated from this fee to be deposited into the Unified Treasury Account. This reduction is aimed at easing the financial burden on traders while ensuring that the revenue collected contributes directly to the national treasury.

2. Somali traders importing goods through ports must obtain a quality assurance certificate from Veritas, the entity designated by the government for quality control. This measure is intended to enhance the quality of imported goods and protect consumers while generating additional revenue for the government.

3. Abolishing unlawful facilitation fees charged to traders at the port and airport is a significant step toward improving the business environment and reducing corruption. The government is working to create a more transparent and predictable trading environment by eliminating these fees.

4. The prohibition on officials and staff of Alport Mogadishu, customs officers, and other security agencies from imposing restrictions or delays that incur additional costs on goods at the port aims to improve the efficiency of port operations. This measure is expected to reduce the cost of doing business and enhance the competitiveness of Somali ports.

5. The resolution also mandates developing a plan to streamline services at Mogadishu Port.

This plan is crucial for addressing existing bottlenecks and improving the overall efficiency of port operations, which are vital for Somalia's trade and economic development.

6. The reduction of the Port Access Permit fee from $110 to $40, along with the abolition of all costs associated with container-breaking activities, is intended to reduce the cost of trade and stimulate economic activity. The government's commitment to enforcing these reductions underscores its focus on improving the business environment.

7. The Ministry of Commerce is tasked with investigating complaints and disputes among traders and presenting recommendations to the Council of Ministers. This proactive approach to dispute resolution is essential for maintaining a fair and competitive marketplace.

8. The Ministry of Transport and Civil Aviation is instructed to develop a plan to address complaints about transporting goods from Mogadishu Port and present recommendations to the Council of Ministers. This directive highlights the government's commitment to improving the logistics infrastructure, which is critical for the smooth functioning of the economy.

Challenges and implications: The centralization of revenue collection in Somalia through the establishment of a Single Treasury Account (TSA) has several implications, both positive and negative:

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Positive Implications

Negative Implications

Enhanced Control and Oversight: 01 Centralizing revenue collection allows the Ministry of Finance to have better oversight of all government funds, reducing the risk of mismanagement or corruption. It provides a clearer picture of the government's financial health.

01 Risk of Bureaucratic Delays:

Improved Accountability: 02 With a single account, it becomes easier to track revenue sources and expenditures, leading to greater accountability among government officials and agencies.

02 Limited Flexibility for Local Entities:

Streamlined Processes: 03 A TSA can simplify financial processes, making it easier to manage funds, allocate resources, and ensure compliance with financial regulations. This can lead to more efficient government operations.

Better Financial Planning and Forecasting: 04 With all revenues collected in one place, the government can more accurately forecast cash flow, allowing for better planning and allocation of resources to meet public needs.

Boosted Investor Confidence: 05 A transparent and accountable financial system can enhance investor confidence, attracting both domestic and international investment into the country.

Centralizing revenue management could lead to bureaucratic inefficiencies, where decision-making processes may slow down due to the concentration of authority in the Ministry of Finance.

Local governments and agencies may find it challenging to access funds quickly for urgent needs, as they may have to go through the central authority for disbursements.

03 Resistance to Change: Implementing a TSA may face resistance from various stakeholders who are accustomed to existing systems or who may be concerned about losing autonomy over their financial operations.

04 Capacity and Resource Challenges: The Ministry of Finance may face challenges in terms of capacity and resources to effectively manage a larger volume of transactions and ensure compliance with new regulations.

05 Dependence on a Single System: If the TSA encounters technical issues or mismanagement, it could disrupt the entire revenue collection process, affecting government operations and services.

Analysis and Recommendations: This resolution represents a significant milestone in Somalia's ongoing efforts to strengthen financial governance and enhance the efficiency of public finance management. The Federal Government lays the groundwork for a more transparent, accountable, and effective fiscal system by centralizing revenue collection and management. However, the success of this initiative will depend on several critical factors: 1. Capacity Building: The Ministry of Finance must invest in building the capacity of its staff and systems to manage the increased responsibilities associated with centralized revenue collection. This includes upgrading technology systems, training staff, and ensuring that all government agencies are adequately supported during the transition to the new system.

2. Stakeholder Engagement: Effective implementation of this resolution will require extensive engagement with stakeholders, including regional administrations, government agencies, and the private sector. By fostering a collaborative approach, the government can ensure that all parties are aligned with the new policies and that potential challenges are addressed proactively.

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3. Monitoring and Evaluation: The government should establish a robust monitoring and evaluation framework to assess the impact of the resolution and make necessary adjustments. This framework should include regular audits of the Unified Treasury Account, performance reviews of the Ministry of Finance, and stakeholder feedback mechanisms.

4. Public Communication: Transparency and communication are crucial to building public trust in the new system. The government should launch a public awareness campaign to inform citizens and businesses about the changes, their rationale, and their expected benefits. Clear communication will help mitigate resistance and ensure broader support for the reforms.

5. Risk Management: The centralization of revenue collection also introduces new risks, including the potential for bureaucratic delays and increased opportunities for corruption.

The government must implement stringent controls and oversight mechanisms to mitigate these risks and ensure the system operates efficiently and transparently.

Conclusion: The establishment of a Single Treasury Account in Somalia represents a significant step towards enhancing financial management and accountability within the government. While it offers many potential benefits, careful implementation, adequate training, and resources will be essential to mitigate the risks and ensure the system operates effectively for the benefit of the country's public finance management.

By addressing these critical areas, the Federal Government of Somalia can maximize the benefits of its centralized revenue collection system, paving the way for improved financial oversight, enhanced public service delivery, and sustainable economic growth.4

Strengthening Financial Governance in Somalia: The Role of the Treasury Single Account (TSA) in Enhancing Transparency, Accountability, and Public Trust.

The Office of the Auditor General of Somalia has expressed unequivocal support for the recent resolution by the Council of Ministers to centralize the collection and management of all government revenues through the Treasury Single Account (TSA). This initiative, as endorsed by the Auditor General, is seen as a critical advancement in Somalia's ongoing journey toward enhancing transparency, accountability, and governance within public financial management.

In a statement released on its official X (formerly Twitter) account, the Office of the Auditor General underscored the importance of the Council of Ministers' directive, describing it as a pivotal move that strengthens the integrity of Somalia's financial architecture. The directive mandates that all government revenues, encompassing taxes, fees, and fines, must be deposited exclusively into the TSA, a centralized account managed by the Ministry of Finance. This consolidation is designed to curb financial mismanagement, reduce inefficiencies, and ensure that all public funds are subject to rigorous oversight.

Analysis and Implications: The Auditor General endorsement highlights this directive's alignment with Somalia's broader objectives under the Public Financial Management (PFM) Law of 2019 and the newly enacted Law of the Office of the Auditor General of 2023. These legal frameworks are foundational to Somalia's efforts to institutionalize best practices in financial management, ensuring that federal income is managed with the highest standards of integrity and that financial practices across government agencies adhere to strict accountability measures.

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The Auditor General's statement emphasized the broader impact of this move on Somalia's financial governance, noting that it represents more than just a procedural adjustment-it is a strategic effort to instill a culture of transparency and good governance across all levels of government. By centralizing revenue collection, the government improves its ability to track and manage public funds and sends a strong signal to international partners and investors about its commitment to reform.

Strengthening Governance through Centralized Revenue Management: This directive is particularly significant in Somalia's ongoing efforts to strengthen its public institutions and rebuild trust in government. For decades, the lack of a centralized and coherent system for managing public finances has contributed to widespread corruption, inefficiencies, and a general lack of accountability. Establishing the TSA as the sole repository for government revenue is a decisive step toward reversing these trends.

Key Benefits and Strategic Recommendations: 1. Enhanced Financial Oversight: The TSA enables the Ministry of Finance to have real-time visibility over all government revenue streams, which is crucial for accurate budgeting and financial planning. This centralized system also allows for more effective monitoring of expenditures, ensuring that public funds are used as intended.

2. Reduced Corruption and Mismanagement: By prohibiting other government agencies, including civilian and military bodies, from collecting or managing funds outside the TSA, the directive significantly reduces the opportunities for financial mismanagement and corruption. This is a critical step in restoring public confidence in government institutions.

3. Alignment with Economic Conditions: The directive's provision granting the Ministry of Finance exclusive authority to set and revise tariffs related to government revenue is particularly important in the current economic climate. By centralizing this function, the government can ensure that tariffs and fees are responsive to the country's economic conditions, promoting fiscal stability and encouraging economic growth.

4. Strengthening Institutional Capacity: The successful implementation of the TSA will require significant capacity-building within the Ministry of Finance and other related institutions. It is recommended that the government invest in training programs, technological upgrades, and process improvements to ensure that these institutions can effectively manage the increased responsibilities of a centralized revenue system.

5. Public Communication and Transparency: To maximize the benefits of this reform, the government should prioritize transparent communication with the public about how the TSA will improve financial management and public service delivery. Regular reports on the performance of the TSA, including how funds are allocated and spent, will be essential in building public trust and ensuring ongoing support for these reforms.

The Office of the Auditor General's strong endorsement of the Council of Ministers' directive to centralize revenue collection through the TSA reflects a shared commitment to enhancing financial governance in Somalia. This reform is a cornerstone of the country's broader strategy to enforce transparency, accountability, and good governance in public financial management.

As Somalia continues to implement these reforms, the success of the TSA will be a critical indicator of the government's ability to manage its finances effectively and build a stable, prosperous future for its citizens.5

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Somalia's Strategic Preparation for the MENA-FATF Mutual Evaluation: Enhancing AML/CFT Frameworks Amid Security Challenges and MultiSectoral Collaboration.

Somalia is preparing for the MENA-FATF (Middle East and North Africa Financial Action Task Force) Mutual Evaluation. This comprehensive assessment will scrutinize the country's Anti-Money Laundering and Counter Financing of Terrorism (AML/CFT) frameworks. Originally scheduled for August 2024, this evaluation has been postponed to December 2024 due to ongoing security threats, giving the Somali government additional time to bolster its readiness. This section delves into the concerted efforts, strategies, and collaborations the Somali government and various stakeholders employ to ensure a successful outcome.

Political Commitment and High-Level Support The success of Somalia's preparations for the MENA-FATF Mutual Evaluation is heavily reliant on unwavering political commitment from the highest levels of government. The active involvement of both the Presidents and Prime Minister's offices signifies the importance of this evaluation on the national agenda. Prime Minister H.E. Hamze Abdi Barre has consistently highlighted the significance of this evaluation, urging all government ministries to engage fully in the preparatory process. His public statements stress the necessity of collaboration with the Financial Reporting Center (FRC), the principal body coordinating AML/CFT initiatives.

This high-level political backing is symbolic and essential for mobilizing resources and enforcing accountability across all sectors. By prioritizing AML/CFT measures, the government creates a robust environment conducive to reform and international compliance. The political will demonstrated by the Somali leadership is a strong indicator of the country's determination to meet international standards and fortify its financial systems against abuse.

Role of the Financial Reporting Center (FRC) The Financial Reporting Center (FRC) is at the forefront of Somalia's efforts to prepare for the MENA-FATF evaluation. As the central coordinating body, the FRC ensures that financial and non-financial entities comply with AML/CFT reporting requirements. Recognizing the complexities of meeting MENA-FATF standards, the FRC has established specialized task forces that include representatives from various sectors. These task forces are integral to the preparation process, handling critical activities such as data collection, legal reforms, capacity building, and training.

The FRC's strategic approach includes regular presentations to the Somali cabinet, which is crucial for disseminating guidelines and expectations for mutual evaluation. This proactive communication ensures that all stakeholders are informed and aligned with the evaluation's objectives. Moreover, the FRC's efforts in building a collaborative framework among government entities highlight its role as a catalyst for institutional coordination, which is vital for a unified national response to AML/CFT challenges.

Collaboration Across Sectors The preparation for the MENA-FATF evaluation is inherently a multi-sectoral endeavor, requiring the integration of efforts across various domains, particularly the judicial and security sectors.

These sectors are indispensable for enforcing AML/CFT laws, and their readiness to handle related cases is crucial to the evaluation's success. The formation of task forces ensures a coordinated approach, allowing for a comprehensive assessment of the country's AML/CFT readiness.

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The Office of the Prime Minister (OPM) plays a pivotal role in overseeing and monitoring the preparation process, ensuring that accountability is maintained, and all stakeholders work together. The OPM's commitment to this oversight role is critical for fostering an environment of transparency and collaboration. Regular updates and open lines of communication between the OPM and the FRC further reinforce this collaborative spirit, ensuring that progress is tracked, and challenges are swiftly addressed.

Challenges and Recommendations While significant strides have been made, Somalia faces several persistent challenges as it prepares for the MENA-FATF Mutual Evaluation. Addressing these challenges will be crucial for a successful evaluation outcome.

Security Threats: The ongoing security situation in Somalia presents a substantial risk to implementing AML/CFT measures effectively.

The government must continue prioritizing security stabilization efforts, as a secure environment is foundational for consistently applying AML/CFT laws.

Enhanced collaboration with international partners to improve security measures, particularly around financial institutions and regulatory bodies, is essential.

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Capacity Building: Although training and capacitybuilding initiatives are currently in progress, there is a pressing need for a more expansive and inclusive framework. This framework should extend to smaller financial institutions and non-financial entities, ensuring they are adequately equipped to meet the stringent compliance requirements. The government should consider leveraging international expertise and partnerships to enhance training programs and provide technical assistance.

RECOMMENDATIONS Data Management: Effective data collection and analysis are cornerstones of a robust AML/CFT framework. The current systems need significant upgrades to handle the complex data requirements of the evaluation. Investments in advanced technology and data management systems are necessary to ensure accurate reporting and analysis, which are critical for demonstrating compliance with MENA-FATF standards.

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Public Awareness:

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Building a culture of compliance requires more than just institutional efforts-it necessitates public buy-in. Enhancing public awareness through targeted outreach programs can foster broader support for AML/CFT measures.

These programs should aim to educate the public, especially in the informal sectors, about the importance of compliance and the broader benefits of a robust AML/CFT framework. Engaging with civil society organizations and the media can amplify these efforts, ensuring the message reaches all population segments.

Somalia's preparation for the MENA-FATF Mutual Evaluation reflects a holistic and collaborative approach, underscored by high-level political commitment and strategic coordination across sectors. The leadership of the FRC and the establishment of specialized task forces are central to these efforts, ensuring that all facets of the AML/CFT framework are addressed. However, to achieve a successful evaluation, Somalia must confront its challenges head-on—particularly in security, capacity building, data management, and public awareness.

By maintaining a steadfast commitment to transparency, accountability, and continuous improvement, Somalia can meet the demands of the MENA-FATF evaluation and strengthen its financial systems against future risks. These efforts will contribute significantly to national and international efforts to combat financial crimes, ultimately enhancing Somalia's economic stability and global standing.6

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Challenges and Implications of the Delay in Somalia's MENA-FATF Mutual Evaluation The postponement of Somalia's MENA-FATF Mutual Evaluation from August 2024 to December 2024 due to security threats carries significant implications for the country's efforts in combating money laundering and financing of terrorism (AML/CFT). Below are the key implications of this delay 1. Extended Preparation Time: The delay provides Somalia with additional time to enhance its preparedness for the evaluation. This extended period allows the government and relevant stakeholders to: 2. Strengthen Legal and Institutional Frameworks: More time can be utilized to refine laws and regulations governing AML/CFT, ensuring they align with international standards.

3. Improve Capacity Building Initiatives: The extra months can facilitate more comprehensive training programs for law enforcement, judiciary, and financial institutions, thereby enhancing their ability to tackle financial crimes effectively.

4. Increased Security Focus: since the reason for the delay was due to security threat the government may need to prioritize stabilizing the security environment, coordination with security forces to enhance collaboration between AML/CFT stakeholders and security agencies may be necessary to ensure that financial crimes are addressed comprehensively, especially in conflict-affected areas.

Impact on International Relations and Reputation The MENA-FATF evaluation is not only a measure of compliance but also an indicator of Somalia's commitment to international financial standards: 1. Perception of Somalia's Commitment: The delay may raise concerns among international partners regarding Somalia's commitment to combating financial crimes. This could impact foreign investment and aid, as countries and organizations may be cautious in their dealings with Somalia until the evaluation is successfully completed.

2. Potential for Increased Scrutiny: The delay may lead to increased scrutiny from international bodies, which could demand more transparency and accountability in Somalia's AML/CFT efforts.

3. Access to Financial Systems: A successful evaluation could improve Somalia's access to international financial systems, while a negative outcome may hinder economic recovery efforts and foreign investment.

4. Risk of Grey-listing: If the evaluation reveals significant shortcomings, Somalia could face the risk of being placed on a grey list, which could further hamper economic activities and lead to increased compliance costs for local businesses.

Conclusion: While the delay in Somalia's MENA-FATF Mutual Evaluation poses challenges, it also presents opportunities for strengthening the country's AML/CFT framework. By leveraging the additional time to address security concerns, enhance capacity building, and engage stakeholders, Somalia can improve its readiness for the evaluation. The implications of this delay are critical not only for Somalia's immediate AML/CFT efforts but also for its broader economic and diplomatic landscape.

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August 2024

Somalia: Economics and Finance Updates

Strategic Partnership for Sustainable Fisheries: Somalia and Oman Collaborate to Transform Somalia's Blue Economy and Infrastructure.

The MoU, signed on May 24, ensures that both nations would work closely to develop the fisheries sector in Somalia. Specifically, they will focus more on improving the infrastructure for a thriving sector. According to insiders, Oman will help enhance the infrastructure that enables Somalia to process and market its fish and fishing products. Ahmed Hasan Aden, the Minister of Fisheries and Blue Economy, signed the MoU on Somalia's behalf.

Minister Adan believes the partnership will stimulate Somalia's fishing industry by improving infrastructure and capacity building. Somali policymakers believe this MoU will attract foreign investment and foster a sustainable economic ecosystem, ultimately leading to economic selfsufficiency by harnessing Somalia's abundant marine resources.

The MoU aligns with Somalia's strategic focus on its "blue economy"-which includes economic activities in the ocean and coastal areas such as fisheries, aquaculture, tourism, shipping, and offshore energy extraction. This sector is seen as a crucial engine for future economic prosperity.

Somalia has the longest coastline in continental Africa, approximately 3,333 kilometers, and a substantial Exclusive Economic Zone. Despite this, the country's marine resources are largely untapped. Essential fish resources include large migratory species like tuna and smaller fish, crustaceans, and reef species.

OVER

200,000

ABOUT

ESTIMATED

METRIC TON OF FISH

METRIC TON OF FISH

6,000

13,000

Somalia has a potential to harvest over 200,000 metric ton of fish annually

In 2022 local artisanal fisher caught about 6000 of metric tons.

In 2022, foreign vessels harvested an estimated 13,000 metric tons of fish

METRIC TON OF FISH

However, Somalia's fisheries sector also faces significant challenges. Illegal, unreported, and unregulated (IUU) fishing is a major issue, with commercial foreign vessels often exploiting Somali waters without proper authorization. This depletes fish stocks and undermines local fishers' efforts and the country's economic potential.7 The partnership with Oman could improve responsible fishing practices, post-harvest management, and job creation in the sector. Industry experts believe this collaboration will benefit Somalia's export capabilities and overall economic health as a model for future deals. In recent years, Somalia has taken steps to regulate its fisheries sector, including issuing licenses to major fishing companies.

The MoU with Oman is Somalia's first partnership since signing a 10-year maritime security pact with Turkey, which officials say will strengthen Somalia's naval capabilities and reinforce its efforts to protect its territorial integrity.8 9 10

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August 2024

Somalia: Economics and Finance Updates

Modernizing Somalia's Financial Sector: An In-Depth Analysis of the National Digital Identification System Initiative and Its Implications.

On August 26, 2024, the National Identification and Registration Authority (NIRA) and the Somali Bankers Association (SBA) formalized their collaboration through a Memorandum of Understanding (MoU) to develop a National Digital Identification System in Somalia. This partnership represents a significant effort to modernize the country's financial sector, aligning it with international best practices and addressing longstanding issues in identity verification and financial security. However, while the initiative has ambitious goals, a critical examination reveals potential benefits and areas of concern that must be addressed to ensure its success.

Banks that signed MOU with NIRA

Objectives of the Initiative The National Digital Identification System is designed with two primary objectives: 1. Simplification of Customer Identification: Introducing a Unique Identification Number (UIN) linked to each citizen's National ID is intended to streamline verifying customer identities within the banking system. This is a crucial step toward reducing the inefficiencies and errors plaguing identity management in Somalia. The centralized identification process is expected to eliminate redundancies and create a more coherent and accessible financial infrastructure.

2. Enhancement of Security: The system addresses persistent security issues such as identity theft and money laundering, which have been significant challenges in Somalia's financial sector. By providing a robust and secure means of identity verification, the initiative seeks to fortify the security of financial transactions and enhance consumer confidence. However, the extent to which this system will effectively combat these issues depends heavily on its implementation and the robustness of the underlying technology.

Key Features of the National Digital Identification System 1. Unique Identification Number (UIN): Central to the initiative is allocating a UIN to every Somali citizen. This number will be used across all financial institutions, ensuring consistent and reliable identification. While the concept of a UIN is not new and has been successfully implemented in various countries, its success in Somalia will depend on the system's ability to be universally adopted and integrated across all sectors of society, including those in remote and underserved regions.

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Somalia: Economics and Finance Updates

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2. Integration with National ID: Integrating the UIN with the National ID promotes data accuracy and reduces operational costs associated with managing fragmented identity systems. This integration is expected to create a reliable source of truth for identity verification across the banking sector. However, this raises concerns about data privacy, security breaches, and the potential misuse of centralized identity data. Safeguarding against these risks will require stringent data protection measures and a robust legal framework.

Expected Outcomes The National Digital Identification System is expected to yield several positive outcomes, but a critical evaluation highlights both potential benefits and challenges: 1. Improved Data Accuracy: By consolidating identity management, the system aims to enhance the reliability of customer data within the banking sector. Accurate data is crucial for making informed financial decisions, reducing fraud, and improving service delivery. However, achieving this goal will require not only the successful implementation of the system but also continuous updates and maintenance to ensure that the data remains accurate and relevant over time.

2. Mitigation of Financial Risks: The system is designed to lower risks associated with financial transactions by addressing challenges like identity theft and money laundering. While the centralized identification system could significantly reduce these risks, its success will depend on how effectively it is integrated with existing anti-money laundering (AML) and counter-financing of terrorism (CFT) frameworks. The system must be adaptable and resilient to evolving threats, and its effectiveness must be regularly assessed and improved.

3. Fostering Economic Growth: The initiative aims to stimulate economic activity and attract investment by increasing trust in the banking system. A more secure and reliable banking system will likely encourage greater participation in the formal financial sector, increasing savings, investments, and overall economic growth. However, for this to materialize, the system must be accessible to all citizens, including those in marginalized and rural areas, to avoid deepening existing financial exclusion.

Considerations and Recommendations While the National Digital Identification System presents a promising step forward, several critical considerations must be addressed to ensure its success: 1. Inclusivity and Accessibility: One of the significant challenges will be ensuring that the system is accessible to all citizens, particularly those in remote areas or those with limited access to technology. The government and SBA must work together to develop strategies that include mobile-based solutions, outreach programs, and support services to ensure that no population segment is left behind 2. Data Privacy and Security: The risk of data breaches and misuse increases with the centralization of sensitive personal data. It is essential that the system is built on solid encryption standards and that there are clear regulations governing data access and usage. The government must also establish an independent oversight body to monitor compliance with data protection laws and respond to any security incidents

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3. Legal and Regulatory Framework: The successful implementation of the National Digital Identification System will require a robust legal framework that defines the roles and responsibilities of all stakeholders, sets out clear guidelines for data protection, and outlines penalties for non-compliance. The government should prioritize the development of such a framework in consultation with legal experts, civil society, and international partners.

4. Public Awareness and Trust: Building public trust in the new system is critical. The government and SBA should launch a comprehensive public awareness campaign to educate citizens about the system's benefits, how it will work, and measures to protect their data. Transparency in the system's implementation and operation will be vital to gaining public confidence.

5. Continuous Monitoring and Improvement: The success of the National Digital Identification System should not be judged solely on its initial rollout. Continuous monitoring, feedback collection, and system improvements will be necessary to adapt to changing needs and challenges. Regular audits and evaluations should be conducted to ensure that the system remains effective, secure, and inclusive.

The collaboration between NIRA and the Somali Bankers Association to develop a National Digital Identification System represents a critical opportunity for Somalia to modernize its financial sector and align with global standards. While the initiative has the potential to significantly improve data accuracy, enhance security, and foster economic growth, its success will depend on how well it addresses critical challenges such as inclusivity, data privacy, and public trust. By taking a proactive and comprehensive approach to these issues, Somalia can ensure that the National Digital Identification System becomes a cornerstone of its financial infrastructure, driving sustainable development and economic resilience.

Collaborative Efforts and Support with UNDP On 26th of August, debriefing session was held in Nairobi, Kenya, between NIRA and UNDP Somalia underscored the ongoing commitment to developing a robust National Identity and Digital Public Infrastructure governance framework.

Discussions focused on: ● The preliminary findings of a joint NIRA-UNDP mission assessing the current state of identity governance. ● Challenges in implementing an inclusive, transparent, and rights-based digital identity system.

The session was chaired by H.E. Abdihakim Hassan Ashkir, Deputy Minister of the Ministry of Interior, Federal Affairs & Reconciliation, and attended by Abdiwali Ali Abdulle, Director General of NIRA. UNDP has pledged to continue its support for NIRA by: ● Facilitating consultations to gather stakeholder insights. ● Strengthening institutional capacity to ensure effective governance. ● Enhancing civic education to promote citizens' awareness and understanding of the new system.

The collaboration between the National Identification and Registration Authority (NIRA) and the Somali Bankers Association (SBA) to establish a National Digital Identification System presents several challenges and implications that must be addressed for successful implementation. Here are some key considerations:

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Challenges Data Privacy and Security:

Infrastructure Limitations:

Protecting the sensitive information of citizens is paramount. There are risks associated with data breaches, hacking, and unauthorized access to personal information. Establishing robust cybersecurity measures will be essential to safeguard the integrity of the system.

01

02

Gaining the trust of the public is critical:

CHALLENGES

Inclusivity and Accessibility: Ensuring that marginalized communities, including women and people with disabilities, have equal access to the digital identification system is crucial for inclusivity.

Somalia may face challenges in terms of technological infrastructure, particularly in rural areas where access to reliable internet and digital devices may be limited.

Ensuring that the system is accessible to all citizens, regardless of their geographical location, will require significant investment in infrastructure.

05

03 04

Citizens may be apprehensive about sharing their personal information due to concerns about privacy, misuse of data, or government surveillance.

Developing a comprehensive legal framework to govern data protection, identity verification, and financial transactions will be necessary.

Implications Improved Governance and Accountability:

Financial Inclusion: A successful National Digital Identification System could enhance financial inclusion by enabling unbanked individuals to access banking services, thereby fostering economic development.

A more reliable identification system can enhance governance by providing a framework for accountability in financial transactions and reducing corruption.

01

02 Enhanced Economic Activity:

IMPLICATIONS

Impact on Social Services: A digital identification system may streamline access to social services, such as healthcare and education, by providing a reliable means of verifying individuals' identities.

05

03 04

By building trust in the banking system and improving transaction security, the initiative can stimulate economic growth and attract foreign investment.

Regional Collaboration: The establishment of a digital identification system could foster collaboration with neighboring countries on cross-border financial transactions and identity verification.

Key Recommendations Stakeholder Engagement: Engage with all relevant stakeholders to ensure broad support and smooth implementation of the new system.

Public Awareness Campaign: Launch a civic education campaign to inform citizens about the benefits and operations of the new National Digital Identification System.

Ongoing Evaluation: Establish a framework for ongoing evaluation and feedback to refine the system based on user experiences and emerging challenges.

This report serves as a foundation for understanding the collaborative efforts between NIRA and the SBA in establishing a National Digital Identification System, and it emphasizes the importance of stakeholder engagement and public education in the successful implementation of the initiative.11 12

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August 2024

Somalia: Economics and Finance Updates

Status Of Significant Bills and Draft Laws at Various Stages of the Legislative Process- Critical In Enabling Regulatory Reforms.

In the latest parliamentary session, several significant bills and draft laws are progressing through various stages. Among them, the Draft Bill on Labor and Employment is currently in its first reading in the Upper House, while the National Disability Act is awaiting Presidential Assent. The Investment Bill and the Accountants Authority Bill are under review in their second readings in the House of People and the Upper House, respectively. Additionally, the Control of Agricultural Chemicals Bill is also at the second reading stage in the House of People.

The Council of Ministers has approved several draft laws and memoranda of understanding (MoUs).

These include the National Higher Education Act, aimed at regulating higher education institutions, and the Income Tax bill, which seeks to enhance government revenue. Noteworthy is the Draft Bill for the Establishment of the Independent National Electoral and Boundaries Commission, designed to streamline electoral management, and the Draft Election Act, which supports the implementation of 1P1V elections.

Other important drafts include the Draft Political Parties Act, the Public Private Partnership (PPP) Bill, and the Bill on the Legal Regulations of the Office of the Auditor General, each addressing various aspects of governance and financial management. Additionally, new regulations are being introduced for debt policy and the issuance of securities, while amendments to the Contract Management Law are also under consideration.

The 2024-2027 National Strategy for Preventing and Combating Extremist and Violent Ideologies, submitted by the National Center for Prevention and Countering Violent Extremism - Tubsan, outlines the federal government's approach to countering extremist ideologies. MoUs have also been established, including one between the Ministry of Fisheries and the Blue Economy and the Ports Company of Abu-Dhabi Ports Group, and another between Somalia and Saudi Arabia for anticorruption cooperation.

BILLS UNDERGOING PARLIAMENTARY READINGS Bill Title

Stages

House

The Draft Bill on Labor and Employment

First reading

Upper house

The National Disability Act

Presidential Assent

Office of the President

The Investment Bill

Second reading

House of People

The Accountants Authority Bill

Second reading

Upper house

The Control of Agricultural Chemicals Bill

Second reading

House of People

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August 2024

Somalia: Economics and Finance Updates

SOMALIA'S DRAFT LAWS AND MOU APPROVED BY THE COUNCIL OF MINISTERS Title

Comments

The National Higher Education Act

The new higher education act established management and regulation of higher education institutions

The Income Tax

The bill is aimed to streamline the governments' focus on maximizing revenue

Draft Bill for the establishment of the Independent National Electoral and Boundaries Commission

The bill establishes a new unified electoral management that will oversee elections, political parties in the country

Draft Election Act

In line with the new momentum for implementing 1P1V elections in the next upcoming elections. The new election bill outlines election models and requirements

Draft Political Parties Act

The political parties act establishes the formation, regulations and management of political parties across the country

Public Private Partnership (PPP) Bill

This bill aims to rejuvenate the Public Private Partnership as the government seeks to strengthen engagements with the private sector

Bill on the Legal regulations of the Office of the Auditor General

The bills is aimed to strengthen the enforcement of the law of the office, with a focus on the maintenance of the country's financial management system

Regulation on General Financial Management on Debt Policy, the Lending Process and the Issuance of Securities

The new regulations is aimed at regulating the federal government debt policies and issuance of securities

Amendments to the Contract Management Law

The law is aimed at reviewing management of government contracts as part of the governments' accountability efforts

2024-2027 National Strategy for preventing and combating extremist and violent ideology

The strategy outlines the federal governments' approach in combating violent extremist ideologies. The strategy was submitted by National Center for Prevention and Countering Violent Extremism - Tubsan

Memorandum of Understanding between the Ministry of Fisheries and the Blue Economy and the Ports Company of AbuDhabi Ports Group

The two countries are set to cooperate on Fisheries and Blue Economy.

• No specific details on the agreement

Memorandum of Understanding on AntiCorruption Cooperation between Somalia and Saudi Arabia's supervisory bodies

The MoU with Saudi Arabia was entered to facilitate cooperation, capacity building and support for the independent federal institutions in combatting corruption and malpractices

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Somalia: Economics and Finance Updates

August 2024

Somalia's Transition to Universal Suffrage: Evaluating the Impact and Challenges of the Elections Act and Political Parties Act in the Path to Democratic Reform On August 8, 2024, Somalia's Council of Ministers, led by Prime Minister Hamsa Abdi Barre, approved two pivotal pieces of legislation—the Elections Act and the Political Parties Act. These laws represent a significant departure from Somalia's historical system of indirect elections and mark a notable step toward establishing a more democratic electoral process. This brief examines the implications of these legislative changes, the aspiration of President Hassan Sheikh Mohamud's administration to push for the controversial changes to the constitution and the implementation of the first universal suffrage election in the country, and the broader context of Somalia's evolving political landscape.13

Legislative Changes The Elections Act introduces a framework for a nationwide, one-person-one-vote system, replacing the previous indirect voting model that had been in place since the establishment of the third republic in early 2000 following the collapse of the military regime in 1991. This reform aims to enhance direct citizen participation in selecting leaders, fostering greater democratic legitimacy. On the other hand, the Political Parties Act outlines the operational parameters for political parties, aiming to ensure greater transparency and fairness in the electoral process.

The Act promotes accountability and reduces electoral malpractices by setting clear guidelines for party conduct and competition. However, the process remains contentious, with key opposition figures and FMS presidents not entirely convinced of the one-sided approach taken by the government in pushing for election reforms despite political differences among the political elite. Government spokesperson Farhan Mohamed Jimale highlighted the significance of these reforms, noting that they represent a historic shift from the longstanding indirect electoral system. The implementation of these laws, however, is contingent on parliamentary approval and Presidential assent, which remain pending.14 President Hassan Sheikh Mohamud has pushed Somalia towards a more democratic electoral process. Since assuming office in 2022, Mohamud has focused on transitioning from a clanbased power-sharing arrangement to a direct electoral system. Mohamud advocated for an expanded delegate system to enhance representation and inclusivity. His administration's continued advocacy for direct elections reflects a commitment to advancing democratic principles. Mohamud's vision for a "true democracy," where every Somali citizen can vote directly for their leaders, has been a central theme throughout his presidency. The recent legislative changes culminate his efforts to overhaul the electoral system. Coupled with the ongoing controversial constitutional changes that have been stalled for a decade, the political climate has remained highly charged and polarizing the public in the face of security and economic challenges that have tested the limits of the government. The shift to direct voting had initially been planned for 2020. Still, it was delayed due to heightened insecurity following political disputes between President Farmaajo's administration and opposition figures against term extension. 15

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Somalia: Economics and Finance Updates

August 2024

The electoral model presents a mixed method for the different electoral levels. The presidential elections will be conducted using the First Past The Post model, in which three main national political parties will contest for the top seat. The election for the federal parliament's House, the House of People, and the Upper House will be conducted using a proportional representation and open list by the three main national parties. The election of the House of Representatives for the regional state and Mogadishu City Council will be conducted using a proportional representation model and a close list of candidates presented by the political parties.

Challenges and Implications The transition to direct elections presents several challenges. Somalia's political landscape remains complex, with persistent clan rivalries and ongoing insecurity due to Islamist insurgencies. The indirect system allowed clan leaders to elect lawmakers, who elected the President. This method was a compromise during severe instability, intended to balance power among Somalia's various clans while avoiding the logistical and security challenges of direct elections. The indirect voting system had been maintained partly due to these challenges, which have also contributed to delays in the planned shift to direct voting.

The recent legislative approval is a significant step, but successfully implementing the new electoral system will require overcoming substantial obstacles. These include securing parliamentary approval, addressing regional disparities, particularly the resistance from Puntland, whose leader has been at odds with the federal government in Mogadishu, and ensuring a secure environment for conducting elections.

Political analysts have emphasized the need for the government to engage with opposition groups to prevent unrest and ensure a smooth dialogue and negotiations on the most contentious issues. The uncertainty surrounding the upcoming FMS elections and possible term extensions further underscores the complexities of implementing a uniform electoral system nationwide. Despite the push for direct elections by President Hassan Sheikh, the southern states of Jubaland and South West are reported to pivot to holding indirect elections without the involvement of the federal government, which could derail the consensus between the FGS and FMS.16 Somalia's move towards a direct electoral system is a landmark development in the country's political evolution. It represents a significant shift towards greater democratic engagement and accountability. President Hassan Sheikh Mohamud's leadership has been crucial in advancing this transition, reflecting a broader commitment to democratic reform. However, the success of these reforms will depend on navigating the inherent challenges and ensuring broad-based support across Somalia's diverse political and regional landscape.

The forthcoming parliamentary and presidential endorsements will be pivotal in determining the trajectory of Somalia's democratic transition. However, the success of this transition will heavily depend on addressing the security challenges and ensuring that the new system genuinely enhances democratic participation rather than reinforcing authoritarianism. As Somalia navigates these complex changes, it must balance the promise of democratic reform with the practical realities of its current political and security landscape.

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Somalia: Economics and Finance Updates

LEGISLATIVE BRANCH

EXECUTIVE BRANCH

Proposed Electoral Model

PRESIDENTIAL

STATE PRESIDENTS & VICE PRESIDENTS

MOGADISHU CITY MAYOR & DEPUTY

MAYORS & DEPUTIES FOR DISTRICTS IN THE STATE

First Past the post and open list

First Past the post and Closed list

First Past the post and Closed list

First Past the post and Closed list

SOMALIA PARLIAMENT UPPER AND LOWER HOUSES

STATE PARLIAMENT

MOGADISHU CITY COUNCIL

DISTRICTS COUNCIL IN MOGADISHU & STATES

Proportional representation and Open list

Proportional representation and Closed list

Proportional representation and Closed list

Proportional representation and Closed list

Strategic Shifts and Controversies: The Impact of the New Port of Gara'ad on Somalia's Maritime Infrastructure and Regional Dynamics Somalia is set to enhance its maritime infrastructure by opening the new deep-water port in Garacad. This $531 million project aims to bolster food security, diversify trade routes, and provide landlocked Ethiopia with an additional outlet to the sea. Recent developments, including a controversial investment deal with an Emirati company, are shaping the port's trajectory. Puntland State is poised to significantly enhance its strategic and economic profile with the anticipated investments into the Port of Gara'ad, a vital maritime route. This initiative arrives amid a broader regional context of shifting political and economic alliances, infrastructure developments, and geopolitical maneuvers.17 The Port of Gara'ad aims to establish itself as a central hub in Somalia's maritime network. With the capacity to dock 40,000-ton container ships and plans to expand to deeper berths by the end of 2024, The Port of Gara'ad is set to offer advanced facilities, including modern loading equipment and refrigerated storage. These developments are expected to facilitate the import of essential food supplies into Somalia, a nation frequently affected by droughts, desert locusts, and conflict. The investment will include road construction, port improvements, and the development of additional facilities like a fish processing factory.

A 305 km road connecting Garacad to Goldogob via Galkacyo is underway. However, poor connectivity from the Ethiopian border remains a challenge, although feasibility studies for the road have been completed. The port is strategically positioned to serve the landlocked Ethiopian regions.

It provides an alternative maritime route to reduce Ethiopia's dependency on the Djibouti port,

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which currently handles the bulk of its trade. Furthermore, the potential shift in the maritime security landscape in Somalia also enhances the port's attractiveness. The International Chamber of Shipping's proposal to remove the Gulf of Aden from piracy hotspot lists could lead to lower insurance and security costs, potentially boosting traffic through Somali ports.

Controversies surrounding the deal Recent developments have introduced complexities in the port's future. On July 28, 2024, it was announced that the management of the Port of Gara'ad would be transferred to an Emirati company, with 60% of the port's shares sold to Abu Dhabi-based investors. This agreement includes a 30-year management contract and encompasses plans for infrastructure improvements, including constructing the Garacad-Goldogob Road and establishing a dry port.18 However, this investment has not been without controversy. Puntland MP Abdirahman Gablax has voiced opposition, criticizing the deal for lack of local consultation. Additionally, there are reports of internal disagreements within Puntland, including allegations of financial incentives linked to the agreement and the implications of Emirati control over regional security forces.

These issues underscore the broader tension between local stakeholders and external investors and the geopolitical ramifications of UAE involvement in Puntland.

Regional Dynamics Amidst the shifting political dynamics with the federal government, Puntland has strengthened ties with Ethiopia, diverging from the federal Somali government's stance. Recent meetings between Puntland and Ethiopian officials in Addis Ababa focused on enhancing trade, investment, and infrastructure cooperation. This includes plans to construct a road connecting Gara'ad to a planned dry port at Galdogob, which would significantly facilitate trade between Puntland and Ethiopia. This regional engagement reflects a strategic pivot by Puntland and Ethiopia, influenced by strained relations between Somalia and Ethiopia. The contentious Somalia-Ethiopia relationship, exacerbated by disputes over territorial access and federal political changes, has driven Puntland to seek closer alignment with Ethiopia despite the growing tensions between the neighbors.19

Final Thoughts The Garacad port represents a pivotal development in Somalia's maritime strategy, offering substantial economic growth and strategic benefits. However, the controversial UAE investment, regional political dynamics, and infrastructure challenges pose significant risks and uncertainties. The successful integration of the port into regional trade networks will depend on resolving these issues and balancing local interests with broader economic goals. The management transfer to UAE investors and the regional political complexities underscore the need to navigate local and international interests carefully. As Puntland continues to cultivate its relationship with Ethiopia and address internal and external challenges, the future of Gara'ad will likely play a critical role in shaping the economic and geopolitical contours of the Horn of Africa.

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