Somalia: Economics and Finance Updates - September 2024

Somalia: Economics and Finance Updates September 2024

Table of Contents 1.

Forging Strategic Horizons: The Strengthening Economic and Diplomatic Partnership Between China and Somalia

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2.

Unlocking Somalia's Hydrocarbon Potential: Strategic Partnerships, Geopolitical Complexities, and the Road to Energy Independence

05

3.

Driving Somalia's Economic Renaissance: Key Reforms and Strategic Partnerships Highlighted at 2nd IMF's Extended Credit Facility Review Meeting in Turkey

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4.

Strengthening Somalia's Financial Foundations: African Development Bank Group's $6.6 Million Grant to Foster Inclusive Economic Growth

10

5.

Fractured Governance and Corruption: The Crisis in Somalia's Healthcare Sector

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6.

Navigating the Security Shift: Evaluating the ATMIS Drawdown and Somalia's Path to Self-Reliance

13

7.

Critical Analysis of Terrorism Financing and Financial Oversight Challenges in Somalia: The Osman Prosecution as a Step Forward, but Far from Victory

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8.

Strengthening Somalia's Digital Future: Integrating National Identification with Telecommunications for Economic Growth and Compliance.

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9.

Somaliland's Budgetary Roadblock: Examining the Economic Impacts of Delayed 2024 Budget Approval Amid Growth Prospects and External Challenges

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Somalia: Economics and Finance Updates

September 2024

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 The September 2024 Somalia Economics and Finance Report provides a comprehensive overview of the key developments in Somalia's economy, focusing on its strategic partnerships, energy sector, financial reforms, and governance challenges. The report opens with an analysis of the deepening relationship between China and Somalia, highlighted during the Forum on China-Africa Cooperation (FOCAC). This partnership mainly focuses on Somalia's blue economy, with China committing $28 million towards infrastructure development, food security, and climate resilience.

While this collaboration holds promise for economic recovery, the report underscores the importance of robust institutional frameworks to ensure transparency and effective implementation.

September's report then shifts to Somalia's hydrocarbon potential, where renewed interest from international energy companies such as Türkiye's State Oil & Gas Exploration Agency and Liberty Petroleum marks a turning point in Somalia's offshore oil and gas exploration. These partnerships could lead to significant economic growth, with potentially vast oil reserves. However, the report warns of geopolitical challenges, including territorial disputes with Somaliland and corruption risks, which could jeopardize the successful development of these resources. The energy sector presents substantial opportunities, but careful management will be necessary to ensure its benefits are fully realized.

In the financial sector, September's report highlights ongoing reforms to strengthen public financial management and enhance revenue collection, supported by international partners like the IMF and the African Development Bank. These reforms are crucial for addressing food insecurity and promoting sustainable growth. Despite these efforts, the report also points to continued governance challenges, particularly in the healthcare sector, where mismanagement and corruption have led to the suspension of key projects. Somalia must prioritize improving institutional capacity and tackling governance issues to achieve long-term stability and growth.

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Somalia: Economics and Finance Updates

September 2024

1. Forging Strategic Horizons: The Strengthening Economic and Diplomatic Partnership Between China and Somalia Recent developments in the relationship between China and Somalia indicate a significant strengthening of ties, particularly in economic collaboration and strategic partnerships. The engagements during the Forum on China-Africa Cooperation (FOCAC) in September 2024 highlight a mutual commitment to enhance bilateral relations across various sectors, with a strong focus on Somalia's blue economy, security, and sustainable development. At the FOCAC summit in Beijing, Somali President Hassan Sheikh Mohamud and Chinese President Xi Jinping elevated their bilateral relationship to a strategic partnership. This decision underscores a shared commitment to supporting each other's core interests, particularly regarding Somalia's sovereignty and stability.

A key summit theme was the emphasis on Somalia's blue economy; in a side meeting chaired by President Mohamud, discussions centered on modernizing maritime infrastructure and managing Somalia's rich fisheries sustainably, which could provide vital economic opportunities for a nation grappling with significant food insecurity. The recent high-level visits and training initiatives further exemplify the growing dialogue between the two countries. For instance, Somalia's Director General of Fisheries visited Beijing to explore collaborative opportunities in sustainable fisheries and coastal development. This visit and a month-long training program for Somali fisheries officials in Beijing highlight China's commitment to building local capacity in Somalia, particularly in improving fishing management and safety protocols. Regarding financial support, China announced a substantial $28 million grant to Somalia to address immediate priorities, including economic development, food security, and climate resilience.1 This assistance is crucial given that approximately 4 million Somalis face food insecurity, underscoring the urgency of international aid in the region.

The Somali delegation met with senior Chinese officials on discussions to strengthen the two countries longstanding cooperation and enhance collaboration in infrastructure development, fishing, energy, and other mutual interests with a focus on Somalia's potential in resources aimed for sustainable development coupled with its strategic maritime gateway in the Horn of Africa. Equally, President Hassan Sheikh chaired a crucial side meeting on Blue Economy Cooperation between China and Somalia, which focused on advancing Somalia's fisheries and modernizing maritime infrastructure with China's support. The President emphasized Somalia's commitment to harnessing its blue economy through strategic partnerships with global allies like China.

President Hassan Sheikh visited Huawei Headquarters in Beijing and discussed with senior tech giant figures how to foster ties and investments between Somalia and Huawei in line with Somalia's Millennium Vision 2060 for long-term prosperity and signal new opportunities for technological advancement and collaboration.2

China's Investment in Africa 2023 The implications of this strategic partnership are manifold. Firstly, the focus on the blue economy has the potential to transform Somalia's economic landscape, providing sustainable livelihoods through enhanced fisheries and coastal tourism. By leveraging China's technical expertise, Somalia may bolster its resilience against ongoing economic challenges. Moreover, China's commitment to supporting Somalia's peace and stability, including financial backing for international peacekeeping efforts, signifies a deepening security relationship that is particularly relevant as Somalia continues to confront issues related to terrorism and regional instability. The reaffirmation of Somalia's commitment to the one-China policy also strengthens diplomatic ties, aligning Somalia more closely with China's geopolitical strategy in Africa.3

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Somalia: Economics and Finance Updates

September 2024

This alignment could influence Somalia's foreign policy, positioning it within the broader framework of China's Belt and Road Initiative (BRI). However, while the renewed relationship presents numerous opportunities, challenges such as governance, corruption, and local capacity remain significant hurdles. Effective implementation of collaborative projects will require robust institutional frameworks and transparency to ensure that aid translates into tangible benefits for the Somali population.

The renewed relationship between China and Somalia represents a strategic pivot toward more profound economic and diplomatic collaboration. With a focus on sustainable development, security, and capacity building, this partnership holds the potential to address critical challenges facing Somalia. Nevertheless, careful management and oversight will be essential to maximize the benefits and ensure this partnership fosters long-term stability and growth.

2. Unlocking Somalia's Hydrocarbon Potential: Strategic Partnerships, Geopolitical Complexities, and the Road to Energy Independence In recent years, Somalia has emerged as a focal point for renewed interest in oil and gas exploration, a significant development considering its tumultuous history of conflict and instability. After decades of war, international energy companies are reassessing the country's potential, particularly with energy security becoming a pressing political priority. Historically, major players like Chevron, Eni, ExxonMobil, and Shell ventured into Somalia in the 1970s but withdrew following the civil war erupted in 1991.

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Somalia: Economics and Finance Updates

September 2024

The backdrop of rising global energy security concerns, mainly due to geopolitical tensions like the Russian invasion of Ukraine, has further fueled interest in Africa's hydrocarbon resources. Somalia's strategic location along critical shipping routes adds to its allure. Additionally, substantial oil discoveries in neighboring countries such as Mozambique, Tanzania, and Uganda have heightened investor interest in the East African region.

The Federal Government of Somalia (FGS) has recently embarked on significant partnerships to explore its offshore oil and natural gas resources, marking a transformative moment for the nation's energy sector. The key agreements signed with Coastline Exploration, Türkiye State Oil & Gas Exploration Agency TPOA, and Liberty Petroleum, as well as the geopolitical implications and ongoing controversies surrounding oil exploration in Somalia. According to 2D seismic conducted

by TGS in 2014, there could be 30 billion barrels of crude across 15 blocks initially offered by Somalia's government.

Türkiye-Somalia Exploration Agreement On the 7th of March, 2024, Türkiye and Somalia signed an inter-governmental cooperation agreement to explore and develop offshore oil and gas resources.4 This agreement, facilitated by Türkiye's Minister of Energy, Alparslan Bayraktar, and Somalia's Minister of Petroleum and Mineral Resources, Abdirizak Omar Mohamed, signifies a comprehensive approach to resource management that includes not just exploration but also transportation, distribution, refining, and sales of petroleum products. The deal grants Türkiye exclusive rights to explore and produce hydrocarbons in three designated blocks, [Blocks] each spanning 5,000 square kilometers, located off the Somali coast. The exploration phase will commence with advanced seismic surveys conducted by the Turkish vessel Oruc Reis, expected to arrive by early October 2024. This initiative illustrates Türkiye's commitment to strengthening its strategic presence in the Horn of Africa while potentially unlocking substantial hydrocarbon reserves that could benefit Somalia economically.

The partnership is underpinned by Türkiye's longstanding investments in Somalia, which date back to President Recep Tayyip Erdo?an's landmark visit in 2011. As Somalia navigates its complex geopolitical landscape, the energy cooperation and the maritime defense agreement represent a critical step toward economic growth, energy independence, and maritime security.

Liberty Petroleum & Coastline Exploration Agreements The former Soma Oil & Gas, which is now reportedly affiliation to Coastline Exploration, a Houstonbased firm, is at the forefront of this resurgence, having acquired seven offshore blocks [ 129, 130, 141, 143, 191, 192 & 205 ] from the Somali federal government in 2022.5 5.1 5.2 This marks a pivotal shift as the country reopens its doors to foreign investment in its resource exploration sector. Coastline's recent $7 million investment and plans for 3D seismic surveys signal a determined effort to explore what could potentially be vast reserves, with estimates suggesting recoverable oil could reach into the tens of billions of barrels. Coastline's CEO, Richard Anderson, has emphasized that the areas under exploration hold significant upside potential, aiming to begin drilling as early as mid-2025.

Simultaneously, Somalia has entered an oil exploration deal with Liberty Petroleum, a prominent American firm. Signed on the 8th of March, 2024, this agreement involves three offshore blocks [ 131, 190, and 206 ] within Somalia's Deepwater zone, focusing on responsible exploration to boost government revenues for vital public services such as security, education, and healthcare.6 Liberty Petroleum has also signed three production-sharing agreements (PSAs) with the Somali government, facilitating a structured exploration approach over an initial five-year term. This partnership is significant for the potential financial benefits and for fostering job creation in Somalia's nascent oil and gas sector. Liberty's commitment to responsible development is underscored by its emphasis on maximizing benefits for the Somali people.

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Somalia: Economics and Finance Updates

September 2024

Liberty Petroleum & Coastline Exploration Agreements Have Not Been Without Conflict In February 2022, Somalia's government faced a dramatic upheaval shortly after signing an oil exploration deal with Coastline Exploration.6.1 The Minister of Petroleum and Mineral Resources, Abdirashid Mohamed Ahmed, heralded the agreement as a monumental step for Somalia's potential as a significant oil producer. However, within hours, President Mohamed Abdullahi and Prime Minister Mohamed Hussein Roble swiftly nullified the deal, citing a Presidential Decree prohibiting such agreements during election periods to protect public resources from exploitation.

This cancellation highlighted the fragile dynamics within Somalia's leadership, particularly the strained relationship between the president and prime minister. Despite their typical discord, both leaders united in rejecting the deal, with Roble labeling it "illegal" and vowing to safeguard national resources.

Fast forward to March 2024, Prime Minister Hamza Abdi Barre once again voiced concerns over a subsequent oil deal with Liberty Petroleum, questioning the legitimacy of the process followed by the Minister of Petroleum. He emphasized the necessity of adhering to proper procedures, including obtaining approval from the Inter-Ministerial Committee on Contracts before signing.6.2 The prime minister's scrutiny reflects ongoing tensions regarding the governance of Somalia's natural resources and the need for transparency and due diligence in resource management. This situation highlighted the complexities of Somalia's political landscape, where economic aspirations collide with governance challenges and the imperative to protect national interests. However, a few months later, the tension between the Prime Minister and the Minister of Petroleum was resolved behind closed doors, and the situation seems to have ended without further concrete steps concerning the agreement's validity.

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Somalia: Economics and Finance Updates

September 2024

Geopolitical Context and Challenges The burgeoning interest in Somalia's oil and gas potential must be viewed within the broader context of East Africa's growing prominence as a hydrocarbon-rich region following discoveries in neighboring countries like Kenya and Uganda. However, Somalia's oil landscape remains fraught with challenges, including past disputes over permits, notably with Genel Energy, which Somalia recently deemed illegal. This underscores ongoing territorial claims and resource ownership tensions, particularly with Somaliland, a region that has declared independence but lacks widespread international recognition. The January 2024 MoU between Ethiopia and Somaliland over the lease of a 20km coastline has further deepened regional tensions.

Furthermore, allegations of corruption have surfaced, with critics pointing to possible misconduct involving senior government officials and foreign companies. A recent scandal implicating President Hassan Sheikh and his administration highlights concerns over underhanded dealings that could undermine international partnerships and investor confidence. A controversial Oil & Gas deal with GulfSom Energy affiliated with a Qatari company, Gulf Petroleum, to explore the AfgoyeQoryooley basin has surfaced.7 Surprisingly, another oil brokerage company, Amsas Consulting, linked to an Australian company, sent a cease and desist letter to the Somalia Minister of Petroleum.

AMSAS claims they initially signed a renewed oil and gas deal with the federal government in 2013.

This specific block was one of three blocks awarded to GulfSom Energy in September of 2024 in Doha.

The Somali federal government is collecting signing bonuses from the deals signed with exploration arrangements that are well underway despite unclear specifics of the Production Sharing Agreement with the different entities. The potential for corruption poses risks to the sustainability of the frontier energy sector, prompting calls for greater transparency and accountability.

Conclusion Somalia's President Hassan Sheikh Mohamud has framed the energy sector's revival as a crucial step toward economic independence and foreign investment, stating that the exploration efforts will substantially benefit the Somali population. The government has expressed its commitment to supporting these initiatives, hoping to increase tax revenues and enhance economic growth for the country. However, the path forward is fraught with challenges. The burgeoning oil sector in the future could become a target for militant groups like al-Shabaab, which control significant territories within the country.

Furthermore, tensions exist in Somaliland, where Genel Energy has sought to explore oil independently, leading to disputes with the federal government in Mogadishu.8 Despite these challenges, the recent ratification of production-sharing agreements with multinationals marks a significant milestone in Somalia's energy landscape. With exploration set to commence, the potential for oil discoveries could transform the region's geopolitical dynamics, presenting an opportunity that many believe should not be missed. As Somalia navigates this complex terrain, its ability to attract and sustain foreign investment will be critical to realizing its energy ambitions.

The agreements signed with Türkiye and Liberty Petroleum mark a pivotal moment in Somalia's energy journey, offering economic growth and stability prospects. However, the success of these initiatives will depend on addressing geopolitical complexities, ensuring equitable revenue distribution, and curbing corruption. As Somalia embarks on this ambitious path, it stands at a crossroads where the potential for prosperity must be balanced with the imperative for governance and integrity in resource management. The international community, particularly investors and partner nations, will watch as Somalia navigates these challenges and realizes its hydrocarbon potential.

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September 2024

Somalia: Economics and Finance Updates

3. Driving Somalia's Economic Renaissance: Key Reforms and Strategic Partnerships Highlighted at 2nd IMF's Extended Credit Facility Review Meeting in Turkey On the 21st of September 2024, The Ministry of Finance of the Federal Government of Somalia concluded a four-day conference on Somalia's financial reform and economic development held in Istanbul, Turkey, in collaboration with various government agencies, the International Monetary Fund (IMF), the World Bank focused on economic issues. The purpose of the meeting was to address the challenges facing the Somali government in its economic development efforts, with a particular emphasis on reforms to strengthen macroeconomic stability and growth.

Representatives from the following entities attended the meeting: Ministry of Finance, Ministry of Planning, Ministry of Petroleum, Ministry of Justice, Central Bank of Somalia, and Office of the Prime Minister of Somalia.

Mr. Iman Ige, the Minister of Finance of the Federal Government of Somalia, officially opened the conference. Minister Ige highlighted the importance of collaboration between the Somali government and international partners in addressing the ongoing challenges to economic development.

The key reforms include the following: ● Modernizing customs and implementing the new income tax law. Strengthening public financial management remains critical, focusing on advancing payroll integration, improving expenditure controls, and enhancing debt management capacity. ● Promoting financial deepening and inclusion continues to be a priority, alongside advancing reforms to strengthen the AML/CFT framework and governance. ● Authorities are prioritizing capacity-building in the petroleum sector and implementing its legal framework. ● Addressing food insecurity, building climate resilience, and improving trade integration are essential for ensuring Somalia's sustainable long-term development.

Takeaways from the Conference Commitment to Reforms

Revenue Growth A notable achievement discussed was the significant increase in government revenue attributed to modernized tax collection systems and tighter public spending management. This revenue growth is pivotal for Somalia, as it lays a foundation for funding public services and investments essential for national development.

The conference emphasized the Somali government's dedication to advancing financial and economic reforms. High-level officials from various ministries, including Finance, Planning, Petroleum, and Justice, engaged in constructive dialogue about the progress of negotiations with the IMF and outlined plans for sustainable economic growth.

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Inclusive Growth and Resilience A holistic approach to economic development was emphasized, focusing on building capacity in the petroleum sector and implementing its legal framework. Addressing food insecurity, enhancing trade integration, and building climate resilience were highlighted as central themes for ensuring longterm development.

Central Bank Reforms The ongoing efforts to strengthen the central bank's institutional capacity were recognized as commendable. These reforms are essential for carefully formulating monetary and exchange rate policies, particularly considering planned currency reforms.

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TAKEAWAYS FROM THE CONFERENCE

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National Transformation Plan

03 04

Finance Minister Bihi Iman Egeh highlighted the National Transformation Plan's nearing completion, which is poised to drive further economic progress. This plan represents a comprehensive approach to revitalizing Somalia's economy, emphasizing the need for public cooperation in tax compliance as a cornerstone of successful implementation.

IMF Support and Strategic Reforms Somalia's Extended Credit Facility (ECF) arrangement, initially approved in December 2023, supports the government's reform strategy following its completion point under the Heavily Indebted Poor Countries (HIPC) initiative. The focus is on strengthening economic institutions and promoting macroeconomic stability.

Public Financial Management Enhancements The conference highlighted the importance of reforms to bolster public financial management. Initiatives include customs modernization and the introduction of a new income tax law, crucial for enhancing revenue mobilization and ensuring efficient expenditure control.

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September 2024

Somalia: Economics and Finance Updates

The Istanbul conference was vital for dialogue among key stakeholders in Somalia's economic development space. The Federal Government of Somalia is firmly dedicated to addressing its challenges while modernizing its financial framework in partnership with international allies. These initiatives reflect a broader vision for stability, growth, and resilience, positioning Somalia toward sustainable economic development. The commitment to reform and active engagement with the IMF and other partners signals a positive trajectory for the nation's financial future.9 10 11

4. Strengthening Somalia's Financial Foundations: African Development Bank Group's $6.6 Million Grant to Foster Inclusive Economic Growth On the 16th of September 2024, The African Development Bank Group has recently taken a significant step to support the FGS by approving a grant of $6.6 million aimed at strengthening the country's financial architecture. This initiative is designed to foster inclusive and equitable growth within Somalia, which has faced numerous challenges in building a stable economic environment.

The Somalia Financial Sector Development Project will focus on enhancing the capacity of key financial institutions, including the Central Bank of Somalia, the Somalia Development and Reconstruction Bank, and the Financial Reporting Center (FRC).

The project aims to address several critical areas: 1.

Efficient Credit Delivery: Improving the processes and systems that enable financial institutions to provide credit effectively and fairly to individuals and businesses.

2.

Anti-Money Laundering and Counter-Terrorism Financing Measures: Implementing robust frameworks to combat illicit financial flows, which are crucial for national security and stability.

3.

Capacity Building: Providing targeted training and technical assistance to enhance the skills and expertise of financial sector personnel.

Expected Outcomes

Enhanced Stability

Attracting Private Investment

The project aims to build trust among citizens and investors by fortifying financial institutions and promoting a stable economic environment.

A robust financial system will create a more inviting landscape for local and international investors, which is crucial for economic expansion.

Increased Financial Inclusion Ensuring that more individuals and small businesses have access to financial services is essential for fostering economic growth.

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Somalia: Economics and Finance Updates

September 2024

Analysis and Final Thoughts Somalia has long been plagued by security threats from armed groups that rely on illicit financing, making the strengthening of financial institutions imperative. The lack of intermediary and correspondent banking services has further isolated Somalia from the global financial network, restricting vital remittance inflows that many families depend on.

Addressing these challenges is essential for Somalia's integration into the international financial system. By enhancing the country's response to Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT), the project will align Somalia's financial practices with international standards, facilitating its re-entry into the global financial system.

By fostering private sector growth through improved regulations and financial sector development, the project aims to establish robust national economic systems that ensure increased availability of long-term finance, reduced intermediation costs, and an improved financial infrastructure. The Somalia Financial Sector Development Project represents a vital step towards building a resilient economy that can thrive despite its challenges. Through collective efforts and commitment, Somalia can pave the way for a brighter, more stable economic future.12

5. Fractured Governance and Corruption: The Crisis in Somalia's Healthcare Sector The healthcare sector in Somalia is experiencing a profound crisis marked by significant governance challenges and allegations of corruption. Recently, Federal Member States (FMS) health ministries suspended cooperation with the Federal Ministry of Health (FGS), citing severe grievances regarding mismanagement and obstruction of critical healthcare initiatives. This report analyzes the implications of these developments for healthcare delivery and governance in Somalia, contextualizing the crisis within broader political and economic challenges.

The suspension of cooperation by health ministers from Southwest, Jubbaland, Galmudug, Hirshabelle, and the Banadir Regional Administration represents a critical juncture for Somalia's healthcare system.13 Allegations against the FGS indicate a pattern of obstruction regarding key healthcare projects, raising concerns about the central authority's commitment to effective health governance. Regional ministers have expressed frustration over the lack of support from the federal level, which has hindered essential initiatives aimed at improving healthcare services nationwide.

The decision to halt collaboration is not merely administrative; it carries significant implications for healthcare service delivery. Limited resources, ongoing security challenges, and the legacies of protracted conflict already plague Somalia's health sector. The fragmentation of healthcare governance could exacerbate existing inequities and further complicate efforts to provide uniform health services nationwide.

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September 2024

Somalia: Economics and Finance Updates

Transparency International 2023 corruption index of EAC Member states Scoring 180 countries around the world, the corruption index perception index is the leading global indicator of public sector corruption and In 2023, Somalia was ranked 180/180

177 141

180

49

126

158 162

87

Allegations of Corruption and Suspension of Cooperation Alarming allegations of corruption within the Federal Ministry of Health have further fueled the crisis. Regional health ministers accused federal authorities of gross mismanagement, particularly concerning misappropriating funds for crucial projects. A recent scandal involving the Damal Caafimaad project, a World Bank-funded initiative, exposed potential misuse of funds, including a suspicious office rental agreement that raised red flags regarding financial transparency.13.1 These allegations reflect a broader issue of systemic corruption that undermines public trust and hampers effective healthcare delivery. The diversion of funds meant for critical health services highlights a failure of governance, leading to the cancellation of crucial projects and the loss of millions in potential funding. As documented in the ministers' letter, the cessation of collaboration with international partners has already resulted in significant financial losses, further endangering Somalia's healthcare landscape.

Impact on Healthcare Projects ● Loss of $25 million from World Bank projects due to halted collaborations. ● Cancellation of the Damal Caafimaad Project, with no tangible benefits accrued. ● Premature termination of the COVID-19 project, which had a budget of $48 million. ● The suspension of the Global Fund project for nine months critically affected healthcare services. ● Termination of the CHASP project, leading to widespread employee dismissals.

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September 2024

These failures not only undermine ongoing healthcare improvements but also exacerbate the vulnerabilities faced by the population, especially in rural and underserved areas. The lack of response from the Federal Government to the regional ministers' grievances manifests a deepseated governance crisis. Effective coordination and reconciliation between federal and regional authorities are critical to addressing the urgent health needs of the Somali population and restoring trust in public health institutions. Without immediate intervention and a commitment to accountability, the healthcare system risks further deterioration, with dire consequences for the Somali population. To navigate this crisis, the Federal Government must prioritize transparency, restore cooperation with regional authorities, and engage international partners to rebuild the fractured healthcare framework as the health of the Somali population hangs in the balance amidst the unfolding crisis.

6. Navigating the Security Shift: Evaluating the ATMIS Drawdown and Somalia's Path to Self-Reliance Overview of Drawdown The African Union Transition Mission in Somalia (ATMIS) has undertaken a significant phased drawdown of its peacekeeping mission in Somalia, marking a pivotal transition in the nation's security landscape. This report analyzes the completed phased drawdown, the subsequent ongoing Phase Three, and the implications of these developments for Somalia's security and governance.

On the 2nd of February, 2024, ATMIS completed its Phase Two drawdown, reducing its troop levels by 3,000 soldiers and transferring seven Forward Operating Bases (FOBs) to the Somali Security Forces.15 The bases transferred included strategic locations such as the State House and Parliament, Bio Cadale, Raga Ceel, Qorillow, Burahache, and Old Airport. Additionally, two bases—Sarille and Old Kismayo Airport were closed. The official transfer of control was marked by a ceremony in Mogadishu, where Ambassador Mohamed El-Amine Souef, the African Union Special Representative, and Somalia's National Security Advisor, Hussein Sheikh Ali, signed the Land Release Title Agreement.

This agreement signifies a formal handover of operational responsibility from ATMIS to the FGS, and the United Nations Support Office in Somalia (UNSOS) facilitated the gift of UN-owned equipment.

UNSOS's commitment to the FGS included transferring essential equipment such as generators, solar panels, and water treatment plants, all aimed at ensuring the sustainability of operations at the transferred FOBs. This transfer is crucial for enhancing the operational capacity of Somali security forces, who will receive technical training to maintain the newly acquired equipment.

Phase Three, on the 16th of June 2024, commenced with the handover of the Bariire FOB to the Somali National Army (SNA). This base holds strategic significance as a buffer zone against AlShabaab in the Lower Shabelle region, emphasizing the critical nature of the drawdown process.

Brig. Gen. Anthony Lukwago Mbuusi from Uganda articulated that the transfer symbolizes the collaborative progress in stabilizing Somalia.

Despite these positive steps, the Somali government's recent decision to defer the previously scheduled drawdown raises concerns about the actual readiness of its security forces. This postponement is driven mainly by the potential security vacuum and the persistent threats posed by Al-Shabaab.

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Somalia: Economics and Finance Updates

ATMIS Withdrawal phase Forces Withdrawn

FOBS handed over/closed

PHASE

Date Completed

AMISOM Peak strength - 2017

0

0

22,126

0

87

AMISOM to ATMIS (2018 onwards)

March 2022

3,500

18,626

17

70

ATMIS Phase I

June 2023

2,000

16,626

6/1

63

ATMIS Phase II

February 2024

3,000

13,626

7/2

54

ATMIS Phase III

June 2024

2,000

11,584

5

~49

ATMIS - AUSSOM

January June 2025

500

11,146

26

23 (14 MOB /9 TOB)

Remaining force strength

FOBS remaining

Troop Countributing Countries

Kenya

Uganda

Burundi

Ethiopia

Djoubti

Security Transition and Adoption of UN Security Council Resolution 2478 (2024) On the 27th of September, 2024, the United Nations Security Council unanimously adopted Resolution 2478 (2024), extending the authorization of the African Union Transition Mission in Somalia (ATMIS) until the 31st of December, 2024.16 This decision highlights the ongoing security challenges in Somalia, particularly the persistent threat posed by the militant group Al-Shabaab, which remains a critical concern for both Somalia and the broader region.

The resolution follows a brief technical rollover on the 12th of August 2024, which extended ATMIS's mandate by a mere three months. The unanimous adoption of Resolution 2478 signifies the international community's recognition of the urgent need for sustained support for Somalia's security framework as it navigates a complex transition from conflict to peace. The AU Peace & Security Council endorsed a proposal to establish a new AU Support and Stabilization Mission in Somalia (AUSSOM) that will take over from ATMIS.17 Swiftly, the UN Security Council authorized the deployment of up to 12,626 uniformed personnel, including 1,040 police officers, to maintain stability and assist Somali security forces. This authorization underlines the importance of international military support in combating Al-Shabaab and facilitating the development of an integrated Somali security force capable of assuming greater responsibility for national security.

The resolution explicitly encourages traditional and new donors to continue supporting ATMIS and the UN Support Office in Somalia (UNSOS). It also requested the Secretary-General to provide a comprehensive report by the 15th of November 2024, detailing the design of a proposed successor mission to ATMIS, which is anticipated to begin in January 2025. This report will include a proposed mission structure, transition plan, and exit strategy, ensuring alignment with international human rights standards. Furthermore, the resolution emphasizes the need for a coordinated response to security threats, particularly regarding the illegal arms flow to Al-Shabaab, which regional tensions and the smuggling of weapons from neighboring countries have exacerbated.

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Strategic Implications The drawdown marks considerable progress in Somalia's journey towards self-reliance in security matters. Dr. Alhadji Sarjoh Bah, the African Union Commission Director for Conflict Management, commended the bravery of Somali security forces in combating Al-Shabaab. This acknowledgment underscores the increasing responsibility that Somali forces assume in their national security framework. The Somali Federal Government expressed gratitude to the African Union and international partners for their support, highlighting the ongoing transition towards a future where Somalia can sustain its security without reliance on ATMIS. This sentiment reflects a broader optimism within the Somali government regarding its capability to manage security independently. The increased force generation and specialized training provided

by Somalia's strategic partners, such as Turkey, the United States, the United Arab Emirates, and the United Kingdom, signifies the growing capability of Somali Security Forces to take over from ATMIS. The first of its kind, the extensive ground offensive against al-Shabaab led by the joint Somali National Army, SNA, and local community forces in central regions has further cemented the country's commitment to the fight against the militants and their extremist ideologies.

Challenges and Future Considerations While the extension of ATMIS's mandate represents a critical step forward, significant challenges remain. The United States, in its remarks, pointed to the necessity of a two-year interim bridging period for the successful implementation of resolution 2719 (2023), highlighting concerns over budgetary accountability and human rights frameworks.

This caution reflects a broader apprehension about prematurely transitioning to a new peacekeeping mandate without adequate preparations and support structures. The Somali representative to the United Nations reinforced the necessity of technical assistance and logistical support for the Somali security forces, emphasizing that these capabilities are essential for a successful transition. The ongoing high-tempo offensive operations against Al-Shabaab underline the urgency of this support. Additionally, tensions with troop-contributing countries, particularly between Somalia and Ethiopia, could complicate the operational environment. These dynamics necessitated careful coordination among international partners to minimize disruptions during ATMIS's eventual drawdown.

The postponement of troop reductions and the ongoing need for support indicate that while progress has been made, significant challenges remain.18 The security landscape in Somalia remains precarious, and the government's requests for adjustments to the drawdown timeline reflect a cautious approach to ensure stability and deter the fallback of key strategic strongholds liberated from al-Shabaab. The recommendations from a joint assessment conducted by the African Union and the Somali government further emphasized the need to evaluate security conditions before proceeding with troop withdrawals in the third phase drawdown.

Conclusion The Security Council's commitment to engaging with the African Union and Somalia during upcoming discussions in October is crucial. These conversations are expected to address the critical issues surrounding the successor mission's mandate and financing, ensuring that the transition process is both sustainable and reflective of the needs and aspirations of the Somali people. In significance, the unanimous adoption of Resolution 2478 (2024) represents a significant commitment by the international community to support Somalia during a pivotal moment in its history.

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September 2024

The ATMIS drawdown represents a complex interplay between progress toward self-sufficiency in security and the realities of the ground in Somalia. While the transfer of FOBs and equipment signifies a step forward, the decision to delay further troop reductions illustrates the ongoing challenges the Somali government faces in ensuring a secure environment. The effective collaboration of international stakeholders, alongside the continued engagement of Somali forces, will be vital in countering the threats posed by Al-Shabaab and fostering a peaceful transition in the country. As the situation evolves, ongoing assessments and adaptations to strategies will be necessary to achieve lasting stability in Somalia and the broader region.

7. Critical Analysis of Terrorism Financing and Financial Oversight Challenges in Somalia: The Osman Prosecution as a Step Forward, but Far from Victory The conviction of Hassan Osman and his family on the 23rd of September 2024, for channeling over $12 million to Al-Shabaab through multiple bank accounts marks a significant, though symbolic, victory in Somalia's ongoing efforts to combat terrorism financing. While this case is a step forward, it also highlights Somalia's severe challenges in Countering the Financing of Terrorism (CFT). The country's financial infrastructure and regulatory frameworks are still developing, and private sector compliance remains inadequate to address the complexity of these illicit activities.

Hassan Osman, a real estate broker, exploited regulatory gaps by opening 12 bank accounts under the names of his wife, daughter, and ex-wife, transferring millions of dollars to support Al-Shabaab's operations. Osman was sentenced to 13 years in prison, with his family members receiving two-year sentences, signaling a strong stance against terrorist financing. However, this case underscores how terrorist organizations continue to exploit Somalia's vulnerable financial systems.

The prosecution of the family began on the 3rd of September 2024, before the Banadir Regional Court, exposing how Al-Shabaab recruited Osman, who acted as an informant for the group while facilitating their financial transactions. Osman deceived the banks by claiming that the accounts were meant to help sick relatives in remote villages. For each account opened, he received a nominal fee of $25. In total, Osman personally managed $6,026,307 across two bank accounts, while his ex-wife, Hasna Qasim, transacted $2,747,208.80 through two accounts, and his current wife, Amina Abdullahi Abanur, handled $113,194. His daughter, Fatima Hassan Osman, operated two additional accounts, transacting $3,728,399.90.19

Mechanisms of Terrorist Financing and Exploitation of Regulatory Gaps This case highlights a critical tactic used by Al-Shabaab: exploiting both the formal and informal financial sectors by leveraging weaknesses in Somalia's banking system. The family was able to launder over $12 million by opening multiple accounts, maintaining relatively low transaction values, and frequently avoiding the $10,000 reporting threshold. This common strategy of "smurfing" shows how easily financial oversight mechanisms can be circumvented, particularly in jurisdictions like Somalia, where financial institutions are still adapting to global compliance standards.

The complexity of this scheme also shows that terrorist financing in Somalia is not limited to cashbased transactions or informal systems like hawala networks. Al-Shabaab's financial sophistication includes significant use of the formal banking sector, where real estate and other high-value industries present high risks of exploitation. The lack of comprehensive oversight in these sectors allows terrorist financiers to integrate illicit funds into legitimate markets.

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Somalia: Economics and Finance Updates

September 2024

Regulatory Framework: Progress and Limitations Somalia's AML/CFT framework has seen gradual improvements, particularly with the enactment of the AMLCTF Act. However, the fact that Osman's operations went undetected for so long is a stark reminder that these regulations remain poorly enforced. Despite the establishment of the FRC and recent efforts to crack down on terrorism financing, gaps in enforcement and under-resourced regulatory bodies continue to hamper progress.

The limited reach of Somalia's regulatory system, exacerbated by a developing institutional framework and ongoing political instability, allows terrorist financiers to exploit these gaps.

Furthermore, the case exposes how financial institutions still struggle with compliance, particularly in performing adequate due diligence and meeting their obligations to identify and report suspicious activities.

Challenges in the Private Sector: Compliance Remains a Significant Issue.

Somalia's private sector, especially financial institutions, is still far from being fully compliant with international AML/CFT standards. The Osman case is a clear example of how terrorist organizations are exploiting banks and other financial institutions due to inadequate KYC (know-your-customer) procedures and weak internal controls. Somali banks struggle to balance risk management and profitability, often prioritizing short-term gains over long-term compliance.

The lack of a stable security environment also hinders banks operating in high-risk environments like Somalia. Financial institutions are often reluctant to engage fully in compliance efforts out of fear for their security or due to pressure from local actors who may have ties to illicit networks. In the Osman case, the banks involved did not catch the warning signs of suspicious activity—such as the opening of multiple accounts in the names of family members with little justification—pointing to significant lapses in monitoring and reporting.

Additionally, the private sector's broader engagement in AML/CFT compliance remains superficial.

Many businesses, particularly in sectors like real estate, do not fully understand their obligations under the AML/CTF Act 2016. This lack of awareness, coupled with the absence of meaningful enforcement, allows terrorist financiers to continue exploiting Somalia's weak regulatory environment.

Impact on National Security: A Long Road Ahead While the conviction of Hassan Osman and his family is a positive outcome, it is unlikely to impact Al-Shabaab's financial operations in the long term significantly. This case represents just a small piece of the broader network of terrorist financing in Somalia. Al-Shabaab's resilience stems from its ability to adapt to enforcement efforts and shift its financing methods to evade detection.

The ability of groups like Al-Shabaab to continue securing funds-whether through illicit trade, taxation in controlled territories, or exploiting weaknesses in the financial system-means that Somalia's national security remains at high risk. Disrupting one financing network is an important achievement, but it is unlikely to impact the group's operational capabilities. If the underlying systemic issues in Somalia's financial and regulatory systems persist, terrorist groups will continue to find ways to finance their activities.

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September 2024

Somalia: Economics and Finance Updates

Recommendations: A Realistic Path Forward

Strengthening Regulatory Enforcement and Capacity Building:

01

Somalia's government must prioritize capacity building for regulatory bodies like the FRC. The FRC and other regulatory bodies cannot effectively monitor transactions or enforce compliance without the necessary financial and technological resources. Increased international support, whether through direct funding, training, or technical assistance, is crucial to enhance the FRC's capabilities. This includes implementing more rigorous KYC procedures and improving oversight of high-risk sectors such as real estate and banking.

The private sector must engage more actively in AML/CFT compliance efforts.

This requires stricter enforcement of existing regulations and a concerted effort to raise awareness and provide training on AML/CFT responsibilities.

Financial institutions and businesses in high-risk sectors should be incentivized to adopt more robust internal controls, and failure to comply should result in penalties severe enough to deter non-compliance.

Security Sector Reform and Risk Mitigation for Financial Institutions:

03

05

Addressing Private Sector Compliance Gaps:

The government must improve the security environment for banks and businesses that comply with AML/CFT regulations. The threat of reprisals from terrorist groups or corrupt actors discourages many financial institutions from fully complying with regulations. Strengthening the rule of law and providing security guarantees for businesses could encourage more robust compliance practices.

Continued international collaboration is vital for Somalia's success in combating terrorist financing. Partnerships with organizations like the Financial Action Task Force (FATF) can provide Somalia with the technical expertise and guidance needed to improve its regulatory framework. Furthermore, more robust international monitoring of financial flows into and out of Somalia could help close some of the gaps that terrorist financiers exploit.

Expanding Community Engagement and Reporting Mechanisms:

02

04

International Collaboration and Monitoring:

Somalia's efforts to combat terrorism financing would benefit from greater community engagement. Local communities often have firsthand knowledge of illicit financial activities but lack the channels to report them. Establishing more accessible and anonymous reporting mechanisms could empower citizens to assist in identifying terrorist financiers.

Final Thoughts While the conviction of Hassan Osman and his family for terrorism financing is a meaningful step forward, Somalia still faces a long and challenging road in fully combating the financing of terrorism. The weaknesses in its regulatory framework, the compliance gaps within the private sector, and the fragile security environment all present significant hurdles. Unless these issues are addressed in a systematic and sustained manner, Somalia will continue to struggle with terrorism financing and the broader challenges of national security.

This case serves as a reminder that despite progress, Somalia's financial system remains vulnerable to exploitation by terrorist groups. Moving forward, a more coordinated approach—one that includes stronger regulatory enforcement, increased private sector compliance, and enhanced international collaboration—will be essential for Somalia to counter the financing of terrorism and secure long-term stability effectively.

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Somalia: Economics and Finance Updates

September 2024

8. Strengthening Somalia's Digital Future: Integrating National Identification with Telecommunications for Economic Growth and Compliance.

On the 8th of September 2024, The National Identification and Registration Authority (NIRA) in intensifying its efforts to engage with the private sector, particularly the telecommunications industry. In collaboration with the National Communications Authority (NCA), NIRA recently convened a productive meeting with leading telecommunications providers. The focus of this meeting was to showcase NIRA's significant milestones in legal and governance frameworks and its technological capabilities to implement a robust and inclusive national identification system in the country. This meeting follows NIRA's recent partnership with the Somali Bankers Association, which underscores the necessity of a National Digital ID for accessing banking services.

The importance of integrating the National Identification System with telecommunications services—such as SIM card registration and mobile money transactions—was emphasized during the discussions. This integration is crucial for ensuring compliance with the National Communications Law, which mandates that these services be linked to the National ID. NIRA is dedicated to assisting telecommunications companies in identifying their customers through the KYC process and ensuring compliance with local and international regulations. This initiative is expected to significantly enhance the connection between Somalia's economy and the global financial system.

With approximately 80% of the Somali population engaged in electronic mobile transactions, the National ID is vital for economic growth. The widespread adoption of a digital ID will play a crucial role in fostering economic transformation and promoting inclusive growth, potentially unlocking significant economic value, as highlighted in the McKinsey report on digital inclusion (2019).

A notable outcome of the meeting was the agreement to establish technical committees comprising representatives from NIRA, NCA, and the telecommunications companies. These committees are committed to linking National ID with telecom services, strengthening legal and regulatory frameworks, and enhancing Customer Identification and Data Protection. These committees will collaborate to draft a Memorandum of Understanding (MoU) to facilitate the integration of the Somalia National ID for SIM card activation and other telecommunications services, ensuring adherence to customer due diligence requirements.

Analysis of this partnership: 1. Collaborative Approach: The meeting showcased a strong willingness among key stakeholders to collaborate, indicating a unified front toward enhancing the regulatory framework.

2. Clear Objectives: The focus on integrating the NIS with telecom services provides a clear and actionable goal that can lead to improved customer identification and regulatory compliance.

Analysis of this partnership: 3. Implementation Challenges: While the discussion was promising, the actual implementation of the integration may face challenges such as technical compatibility, data privacy concerns, and the need for significant investment from telecom companies.

4. Awareness and Education: There is a potential gap in public awareness regarding the NIS and its implications for telecom services, which may hinder the system's overall effectiveness.

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September 2024

Somalia: Economics and Finance Updates

Technical Infrastructure: There may be discrepancies in the existing technical infrastructure of various telecommunications companies, which could impede the seamless integration of the NIS.

Stakeholder Engagement: Further engagement with other stakeholders, such as financial institutions and civil society organizations, may be necessary to ensure a holistic approach to the NIS implementation.

Regulatory Framework: While the National Communications Law mandates linking telecom services to the NIS, gaps in enforcement and oversight mechanisms may need to be addressed.

01

02

GAPS IDENTIFIED 03

04

Public Awareness Campaigns: A strategic communication plan is needed to educate the public about the NIS, its benefits, and the processes involved in linking it to telecom services.

Recommendations: 1. Conduct a Technical Assessment: Initiate a comprehensive assessment of the existing technical systems within telecom companies to identify compatibility issues and necessary upgrades for integration.

2. Develop a Comprehensive MoU: The technical committees should prioritize the development of a detailed MoU that outlines specific roles, responsibilities, and timelines for the integration process.

3. Launch Public Awareness Initiatives: Implement targeted campaigns to educate the public about the NIS and its importance in enhancing security and trust in telecom services.

4. Strengthen Regulatory Oversight: Enhance the regulatory framework to ensure compliance with the integration process and establish clear consequences for non-compliance.

Final Thoughts The consultation meeting marked a significant step towards integrating the National Identification System with Somalia's telecommunications sector. While the commitment from all stakeholders is commendable, addressing the identified gaps and implementing the recommendations will be crucial to successfully realizing the integration. Continued collaboration and proactive engagement will ensure that the NIS is a robust foundation for enhancing customer identification and regulatory compliance in the telecommunications industry.20

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September 2024

Somalia: Economics and Finance Updates

9. Somaliland's Budgetary Roadblock: Examining the Economic Impacts of Delayed 2024 Budget Approval Amid Growth Prospects and External Challenges Somaliland's failure to approve the 2024 budget due to disagreements among Members of Parliament (MPs) has forced the government to continue operating under the 2023 budget, approved in November 2022. While this offers short-term financial stability, it raises serious concerns about the government's ability to address new fiscal challenges and plan for emerging economic realities. Key government programs, infrastructure projects, and essential services that require expanded funding in 2024 remain in jeopardy, making it imperative for Parliament to resolve budgetary disagreements. With global economic pressures, such as the ongoing Russia-Ukraine war, impacting inflation, trade, and supply chains, Somaliland must find a fiscal consensus to avoid further strain on its fragile economy.

The continued reliance on the 2023 budget limits the government's ability to respond to pressing issues like inflation, population growth, and sector-specific needs. Critical sectors like health, education, and infrastructure, which depend on international aid and local resources, are especially vulnerable to delays and funding cutbacks. The lack of flexibility in adjusting financial priorities hampers Somaliland's ability to implement reforms and address emerging challenges. As the government prepares to craft its FY2025 budget, developing a financial plan that accurately reflects current economic conditions and aligns with national development goals, ensuring long-term resilience and growth is vital.

Moreover, the delay in approving the FY2024 budget, coupled with the urgent need to prepare and approve the FY2025 budget before the 1st of January 2025, could further erode investor confidence.

Investors demand fiscal stability and clear financial policies, and prolonged uncertainty in budgetary planning could result in reduced foreign direct investment (FDI) and slowed economic growth. Local governments and parastatal agencies, which rely on timely disbursements from the central government, may face significant financial strain if new funds are not allocated. Thus, MPs must urgently develop and approve the FY2025 budget to ensure continuity of services, maintain investor confidence, and support sustainable economic development in Somaliland.21 22 23

Exchange rate (SISH to USD)

10200

9800

9400

9000

8600 0

YEAR 2022

2023

2024

21

September 2024

Somalia: Economics and Finance Updates

Somaliland's Budget Analysis and Fiscal Balance: The approved budget for 2023 (being utilized for 2024) outlines the government's financial plan, including revenue projections, expenditure allocations, and strategic priorities.

DESCRIPTION

2022 BUDGET

% IN CHANGE

% OF TOTAL

Central govern budget

2,410,452,894,335

2,530,336,471,862

119,883,577,527

5%

71%

Local gov't budget

528,878,259,786

589,899,197,085

61,020,937,299

12%

16%

Autonomous & Parastatal agencies

276,986,730,707

277,792,895,534

806,164,827

0%

8%

World Bank-funded Projects

51,889,758,410

31,434,732,990

-20,455,025,420

-39%

1%

Somaliland Development Fund

96,854,072,980

77,146,510,000

-19,707,562,980

-20%

2%

JPLG

19,894,061,320

18,069,907,869

-1,824,153,451

-9%

1%

GIZ (RDRM Project)

27,132,000,000

16,800,000,000

-10,332,000,000

-38%

0%

ILED (Iled Project)

35,714,728,000

21,760,991,000

-13,953,737,000

-39%

1%

UN HABITAT Berbera Project

0

18,200,000,000

0

0

0

0

3,447,802,505,538

3,581,440,706,340

115,438,200,802

TOTAL

2023 BUDGET

DIFFERENCES

The 2023 Somaliland budget reflects several key priorities, focusing on security, infrastructure, and domestic production to promote economic growth and resilience. The total budget amounted to SLSHs 3.58 trillion, representing a 4% increase from 2022. Central government expenditure takes up the majority share at 71%, while local governments and parastatal agencies receive 16% and 8% of the allocation, respectively. The budget shows a slight increase in allocations to areas like health, education, and water, which are critical for long-term development. However, significant underfunding remains in international development projects and areas critical for rapid recovery, such as climate resilience and disaster management.

Despite growth trends in revenue collection, Somaliland continues to rely heavily on customs duties, which account for the bulk of government revenues (75%), compared to the inland revenue system, which only contributes 22%. This over-reliance on customs duties presents risks, particularly given the fragile nature of trade and the reliance on livestock exports. Any external shocks, such as continued trade disruptions due to geopolitical tensions or droughts, could significantly impact revenue generation. The budget aims to diversify by strengthening inland revenue performance, though the effectiveness of these efforts remains to be seen.

The government's continued investment in digitizing financial management systems, such as the Somaliland Financial Management Information System (SLFMIS), marks a forward-looking approach to improving transparency and accountability. However, challenges remain in addressing inflation and ensuring that vital sectors like agriculture and fisheries receive the support needed to mitigate the effects of recurring droughts.

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